Welcome to Trade Secrets. The spotlight’s off the economics and trade policy area this week, with the big international event being the Nato summit in Vilnius. Mind you, the fact that US policymakers sound keener on Ukraine acceding to the EU than joining Nato intensifies the debate about how the union can incorporate a corrupt low-income country that also happens to be globally competitive in agriculture, Europe’s most sensitive sector. Today’s newsletter is mainly about the great global hunt for critical minerals, plus a note on the EU’s new trade deal with New Zealand and what it tells us about Brexit and the Asia-Pacific. Charted waters looks at the sorry state of Russia’s currency.
Calming the commodities commotion
The global tussle for minerals needed for the green transition was always likely to be a pretty exciting spectator sport for trade types. Fortunes made in the (literally and politically) dirty business of mining; importing countries coaxing, bullying and bribing exporters to supply them first; the riveting spectacle of an EU bilateral trade agreement being tweaked to relax restrictions on preferential domestic supply: it’s all there.
There have been some juicy new developments. China last week announced it was restricting exports of the metals gallium and germanium which European, Asian and US manufacturers used to make various high-tech goods. (As noted by Karthik Sankaran, veteran markets guru and inexhaustible source of globalisation-related gags, it’s rather embarrassing for the EU to run short of elements named after France and Germany.)
On Friday the EU, which won a World Trade Organization ruling against Indonesia’s export controls on nickel only to see Jakarta put the case into limbo by appealing to the WTO’s non-functioning Appellate Body (AB), unsheathed a shiny new trade dispute weapon, the “enforcement regulation”. The legal instrument enables Brussels to impose compensatory trade sanctions without an AB hearing.
The conventional wisdom is that export controls defeat themselves by stimulating supply elsewhere. The best cure for high prices is high prices, cartels contain the seeds of their own destruction, you know the drill.
It’s certainly true that there’s a big push on to increase output. Precedents and habits are being overturned. Germany, a country with Greens running the economy ministry, is now reopening mines that closed a quarter of a century ago.
It’s also true that previous attempts to corner markets were self-correcting. In 2010, China imposed export quotas to divert its rare-earth supply to domestic manufacturers, but reversed course in 2015 after a combination of mines being opened up elsewhere, minerals being smuggled out of China and losing a WTO case to the US.
Thing is, though, it still gave Chinese manufacturers a few years of preferential supply, and in fast-moving green tech sectors that might be all you need to get a global edge in technology and process. How can importing countries respond? Jennifer Harris, who recently left her White House post as senior director for international economics, said in last week’s FT that one common suggestion, the EU, US and Japan explicitly or implicitly setting up a “buyers’ club” to control prices and ensure supply, was likely to provoke exporters into forming a counterbalancing cartel.
A better solution, she reckoned, was an agreement with exporting and importing countries to stabilise prices and supply. Nice idea, but the Biden administration isn’t exactly renowned for its rock-solid commitment to good faith international co-operation, as I wrote last week about its proposed green steel climate club. And of course there’s always the spectre of a second term for Donald Trump, and God only knows what he thinks of the matter. It looks to me like the entertaining critical minerals free-for-all has a while to run.
Europe cuts a deal with the Kiwis
By contrast, the EU signing a preferential trade deal with New Zealand, as it did yesterday, doesn’t immediately look like a crowd-pleasing spectacular. Apart from its small size, New Zealand is a pretty open economy anyway, so no huge gains for the EU. Also, Brussels, not being politically desperate for a deal, conceded fewer tariff cuts on agriculture than the UK did in its New Zealand agreement.
There are a couple of interesting aspects, though. One is the importance of the EU’s sheer economic heft to trading partners like New Zealand. The EU opened up less than the UK did, but its massively bigger economy means that, for example, New Zealand’s tariff savings just for kiwi fruit will be bigger than all the gains from the entire UK deal. The UK just isn’t big enough to matter that much.
Certainly any Brexiters’ ideas that Brussels negotiators were panicking about being outflanked by London are pretty delusional. Brexit didn’t deliver a huge gain for New Zealand (or the UK) despite what some British Commonwealth sentimentalists would like to believe. Oh yes, and New Zealand also just joined the EU’s Horizon research network, the one that the UK has embarrassingly tried to haggle over the price of rejoining.
Second, while the EU’s trade initiatives in the Asia-Pacific are unlikely to rival the Trans-Pacific Partnership (CPTPP), the New Zealand agreement does mean it has concluded a deal in the region with an advanced economy CPTPP member with some of Brussels’ favourite stuff about shared progressive values and regulatory co-operation. The EU’s having difficulties in negotiations with another CPTPP member, Malaysia, thanks to its policies on palm oil and deforestation, but it’s certainly not absent from the region. Nor, evidently, is its model trade agreement entirely alien to the US-inspired approach of the CPTPP.
Charted waters
The Russian rouble last week hit its lowest level since the invasion of Ukraine. That should have caused some satisfaction to the rich countries trying to deprive Russia of oil revenues through price caps and diversifying suppliers.
Only some satisfaction, though, because while Russia’s oil and gas revenues have dropped by a quarter from a year ago, its imports have rebounded as traders have found ways of evading sanctions. Capital flight and falling export earnings are weakening Russia’s ability to fight the war, but it’s still managing to buy more from abroad than its opponents would like.
Trade links
The latest Global Trade Alert report on protectionism argues that attempts to restrict critical minerals supply don’t necessarily work and that countries have in fact reduced their rare earths sourcing from China already.
The European Commission has proposed a co-ordinated EU withdrawal from the Energy Charter Treaty, the overbroad provisions of which it says threaten the green transition. This has been coming for a while, not least because some hardline signatories to the ECT, notably Japan, have resisted reform that might constrain its reach. There’s a 20-year sunset clause though, so this is a long game.
Another big economy lines up to join the race to produce semiconductors, with India saying they will be rolling off the production line in 18 months. (Just in time to add to the global glut, if they’re unlucky.)
More subsidy race news as Canada decides it’s going to go for its own version of Joe Biden’s green handouts to revive its flagging plans for battery plants.
The Wall Street Journal reports on what happens when industrial policy goes wrong — the massive underperformance of a huge factory built with public money by New York state and then leased to Tesla supposedly to create the Western Hemisphere’s biggest solar panel plant.
Trade Secrets is edited by Jonathan Moules
Source: Economy - ft.com
