Government Supervision of Polished Diamonds? Maybe So

What will happen if the U.S. decides to place barriers on polished diamond imports? What if Canada or the European Community decide that to let a polished diamond cross their border, it needs to first carry some sort of proof that it meets an ethical standard? Is it at all possible that these consumer markets and leading members of the Kimberley Process (KP) decide to ban some of the polished diamonds manufactured in key centers such as India and China?

The U.S. is an extreme proponent of capitalism and a big believer in letting free market forces dictate the market's direction with as little government intervention as possible. In such a market, it is the market forces that dictate demand, which in turn determines supply.

There is a chance that some governments, even the U.S., will decide to place trade barriers on polished diamond imports into their countries. This is one possible outcome if current efforts to change the definition of “Conflict Diamonds” in the KP basic document fail. In fact, this could possibly happen even if the definition DOES change.

So why is the U.S. government, with such a deep-rooted free market economic philosophy, so determined to change the definition of conflict diamonds. After all, if consumers won't want to buy diamonds because they are concerned about ethical issues, they will simply vote with their wallets – and refrain from buying them, won't they?

I recently spoke with KP Chair, Ambassador Gillian Milovanovic, and asked her about this. Milovanovic is not denying that this is a possibility. She didn't state this directly, but other U.S. State Department people warn that if the KP does not update the definition of conflict diamonds, the U.S. may decide to place their own regulations, banning the import of goods that don't meet their “standards.”

The U.S., as well as Canada, Australia and the EC, may decide to place stricter regulations, on top of KP. This is a subtle threat posed by them to some countries – mainly manufacturing countries – that are hesitant to change KP.

Manufacturers vs. Consumers
This raises a couple of questions like how much government intervention should exist in the diamond market? And, is it a positive intervention? Milovanovic warns of a reputational issue, saying, "Once you have a negative image, you have to roll it back before you can promote it again."

Understandably, business does not appreciate government intervention. Industries try to avoid it either by deploying lobbyists to modify the wording of a law, or by setting their own business self-regulations. One such example is the broadcast industry in the U.S., which set it's own standards in the early days of radio. The motion picture industry took it even further with excessive self-regulation.

Local regulation does not have to be a threat. Maybe retailers should set their own regulations – with the associated costs. If you can meet the standards, you can then supply them. If you don't, sell your diamonds elsewhere. This way, manufacturers that are hesitant to endorse changes to the KP because they don't want to carry the extra burden it would inevitably entail will be spared the cost.

This is an important issue, and as Milovanovic says, it won't go away. Retailers may set very strict standards in one country, and lesser ones in another. Manufacturers may find that this is tougher to manage and will need to think of how they want to proceed. Retailers interested in such regulation should consider the cost – and their willingness to bite the bullet on this one and adjust their margins to make room for this. And maybe, KP should just evolve.

However this matter unfolds, a future where polished diamonds, not just rough, is regulated is possibly right around the corner.

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