Welcome to Trade Secrets. This week there’s a big summit between the EU, Latin America and the Caribbean in Brussels, just as Spain takes over the rotating six-month presidency of the European Council of member states. Today’s first piece looks at the new relevance of the EU-LatAm relationship in the context of critical minerals, the obsession of the moment. The second looks into how the WTO might deal with carbon border taxes and the future of the organisation itself. Charted Waters has more on minerals, in this case the rocketing price of the metal gallium after China imposed export controls.
Colonialism and critical minerals
Hey look, here come some Spanish-led European emissaries pitching up in Latin America wanting precious metals. Haven’t we been here before? Didn’t it end really, really badly for the locals?
Europe’s colonialist past may have given it linguistic and cultural links with the region, but it also feeds a line of rhetoric about the EU trying to exploit its trading power to strip Latin America of its basic commodities. I wrote a while back about how the EU had tried to soften that approach a bit when it updated its trade agreement with Chile, allowing Chile to build a downstream lithium processing industry rather than just sending the basic raw material abroad.
You can largely ignore whatever hand-waving stuff the summit comes up with about geostrategic EU-LatAm partnerships. You can also discount fairly heavily the EU’s various initiatives on minerals such as the Critical Raw Materials Club, which have neither legal force nor a big centralised procurement budget to give them much force.
There is, however, one obvious substantive prize, which is ratifying the preferential trade agreement between the EU and Mercosur (Brazil, Argentina, Uruguay and Paraguay). The deal was signed in 2019 but has languished since in the face of European opposition based on fear of deforestation in the Amazon, plus concerns from Argentina and Brazil that if will further hollow out their manufacturing base. Agreement to move forward won’t get done at this summit, but we’ll at least see where the conversation has got to.
The original shorthand for EU-Mercosur was a cars-for-beef deal. But the critical minerals issue, as Oscar Guinea and Vanika Sharma at the Brussels think-tank ECIPE point out, has given it a new imperative. Brazil in particular is already the EU’s fifth-biggest source of strategic raw material imports by value, including battery-grade nickel and silicon, and they reckon it could do a lot more, allowing the EU to diversify from China.
As in the Chile deal, EU-Mercosur contains some restrictions on countries preferentially choosing one trading partner over another and creating export monopolies. But Brussels needs to tread carefully. A sense that Europe is just after the minerals risks provoking indignant opposition.
Dissing dispute settlement
I don’t propose to make a habit of using this newsletter to add footnotes to the previous week’s Trade Secrets column, but I wanted to add a point to my argument that the WTO dispute settlement wing, weakened though it is, might be able to spread carbon pricing around the world.
To recap the potential sequence of events: the EU will unilaterally introduce its carbon border adjustment measure (CBAM). A bunch of countries led by India will take WTO cases against it. If CBAM survives, perhaps with some tweaks, it will encourage trading partners to adopt similar carbon pricing to avoid tariffs, and the EU emissions trading scheme will be internationalised. Ta-da!
One obvious problem: some countries aren’t entirely respectful of WTO dispute settlement. The EU has felt compelled to invoke its new enforcement regulation in a case involving Indonesia, where Brussels won a case on nickel export restrictions but Jakarta then put it in limbo by appealing to the non-functioning Appellate Body. And the US is positively rude, saying WTO dispute settlement isn’t fit for purpose and keeping the AB in the deep freeze by refusing to appoint new judges.
Washington circulated a note on AB reform recently: reading it felt like wading waist-deep through a tepid sludge of inert truisms, and it concluded by saying the US wanted changes but wouldn’t be proposing any. It’s not looking good for progress on the subject at the next big WTO ministerial meeting, in the United Arab Emirates in February/March next year.
A more co-operative route than litigation has been suggested by Jim Bacchus, former chair of the AB. and a former Democratic congressman. Bacchus is sympathetic to Brussels’ aims but is concerned that litigation will be messy. “Our friends in the EU, I think, have the best of motives and are acting in good faith. But despite their protestations to the contrary, they’re very much at risk from WTO dispute settlement.”
He suggests instead the “mediation and conciliation” procedure, in which the WTO’s director-general or another appointed person tries to broker a deal. It’s a suitably touchy-feely non-confrontational approach for these “woke” times. But it’s never yet been used in dispute settlement. It seems a long shot that developing countries would choose to launch its maiden voyage on such a pivotal issue.
Charted waters
Look at those prices go. Strong demand, inelastic short-run supply, a load of production suddenly removed from world markets: Mission Control, we have lift-off. This chart shows what happened after China imposed export controls on gallium, a metal used in electronics and other high-tech manufacturing. (No word yet on iodine and thorium and thulium and thallium.)
Bad news for big importers. Conventional geological-economic wisdom says it should be relatively straightforward for other countries to increase gallium production in the medium term, which the EU for one is urgently investigating. In that case, if China is trying to damage the European green industrial machine it will merely have exhausted a single-use trade weapon, as Russian president Vladimir Putin did with gas, only on a smaller scale.
Trade links
The UK formally signed the Asia-Pacific CPTPP deal this weekend, potentially adding 0.08 per cent to British gross domestic product in the long run. Here’s an entertaining possible scenario: the UK acts as a human shield for the other members by volunteering to veto China’s application, attracting ferocious flak from Beijing. Then in a few years economic realism returns to the UK, it rejoins the EU and leaves the CPTPP (paying compensation to Australia and New Zealand for the lost agricultural market access on the way out). Job done for the rest of the CPTPP, like subbing on a goalkeeper for a penalty shootout, or perhaps recruiting a martyr to throw to the Colosseum lions.
The German government has published its long-awaited new comprehensive strategy towards China. Its tone bears the clear hallmark of the Greens in the coalition and is notably more sceptical than Angela Merkel’s accommodating approach, including suspending German support for the Comprehensive Agreement on Investment with China.
Adam Posen of the Peterson Institute warns of the dangers of zero-sum industrial policy in one of the FT’s Economists Exchange conversations with Tej Parikh.
The Biden administration’s supposedly less confrontational new approach to China won’t go as far as lifting tariffs on its exports, officials said over the weekend.
Trade Secrets is edited by Jonathan Moules
Source: Economy - ft.com
