The EU plan to live in a raw materials world


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Hello from Brussels, where the Brexit talks, believe it or not, haven’t yet been resolved. Whatever the real deadline is (agreement on this point is itself elusive), it’s rapidly approaching. Again. Next week is apparently a crunch point, though to be fair Brexit has had more crunch points than a barrelful of Golden Delicious apples, and with similarly little flavour.

Meanwhile, our Christmas list of trade policy buzz-phrases continues to expand. “Patriotic globalism”, which we mentioned last week after we spotted a former deputy US trade representative using it, got another shout-out over the weekend from Liz Truss, UK trade secretary, boasting about Britain’s new bilateral deal with Canada. (See also Tall Tales below.) Also, New Zealand’s formidable top trade negotiator, Vangelis Vitalis, reminded us via Twitter that the Kiwis and their Asia-Pacific pals including Chile and Singapore got in the game a while back with “strategic resilience”, and a real corker, “concerted open plurilateralism”. Lovely ring to it, though we’re not sure how you can have plurilateralism without acting in concert. Maybe it’s as opposed to disconcerted plurilateralism, of which there is lots.

Anyway, a big-up to the concerted guys from Wellington, Santiago and Singapore, and a strategically resilient festive season to you all. Keep them coming — we’re envisaging a range of Christmas cards, maybe an advent calendar. Today’s main piece is on the EU’s valiant attempts to diversify its access to the critical minerals the economy needs, while our chart of the day shows how coronavirus vaccine hopes have set off a rush for emerging markets.

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The Aussies come to Europe’s rare-earth rescue

OK, so enough with the rarefied EU rhetoric about open strategic autonomy and resilient supply chains and what have you. Let’s get down to cases. Specifically, if Europe is to break its dependence on inputs from China, where will all the raw materials to make the magnets that run electric vehicles come from?

Tricky one. The EU this week launched one of the more substantive initiatives of its supply chain strategy, a “raw materials alliance”. The partnership of companies, business associations and governments wants to secure access to a total of 30 critical inputs by increasing domestic production and recycling and looking abroad for friendly suppliers. The list of sensitive materials has more than doubled over the past decade, familiar suspects including rare earth elements lately joined by lithium, titanium and bauxite.

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Even for instinctive free-traders like us, this seems fair enough: the risk of relying on spot sourcing on world markets is obvious. China supplies 98 per cent of the EU’s rare earths, and has exploited that bottleneck in the past by putting on export controls, diverting output to its own manufacturers and driving up global prices.

A worker at the site of a rare-earth metals mine in Jiangxi province, China © Reuters

But it’s going to be a struggle. Some of the problems are obvious and longstanding, such as the EU’s environmental and social regulations deterring mining. The EU’s largest known deposit of rare earth materials, Norra Karr in Sweden, was declared off-limits to further exploration by the Swedish supreme administrative court in 2016 because of environmental risks, and reversing that decision would be difficult.

Other problems reflect the peculiarities of the materials involved. Supply chains for rare earths and the like are particularly hard to diversify. It’s not like finding a new source of crude oil. The materials have multiple stages — mining, concentrating, separating and processing — which are expensive, complex and dirty. It’s politically and economically cheaper to outsource the nastier bits to Chinese producers, but a monopoly over even one link in the chain gives China leverage over the whole thing.

So when the EU goes looking for supplier countries to produce materials to feed into its manufacturing, it wants stable, environmentally sensitive and economically advanced allies capable of replicating the whole value chain. Several sets of ears around the world prick up at this, but few as eagerly as those in Canberra. Australia has rich rare earth deposits, and while its green record is not exactly perfect — the climate change denialism of some of its politicians is unhelpful — in terms of environment and labour standards it’s certainly not China.

Spotting an opportunity, Australia’s famous high-performance export promotion engine has purred into action. The government created a “critical minerals facilitation office” in January to position Australia as a reliable supplier of said commodities, and is doing outreach. The office’s head, Jessica Robinson, told a seminar including European officials and business types last week that the processing, separation and mining of minerals all needed to be brought on stream to give advanced manufacturing economies such as the EU a full-range service. “It really takes a co-ordinated collective effort,” Robinson said. “There is a need to help the private sector appreciate the sense of urgency in needing to invest in raw materials that are going to be needed to support downstream activity.”

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But a patched-together network of companies in Australia and the EU with limited public support is going to struggle to compete against Chinese producers. China already has an entire “mine-to-magnet” value chain for the components, and its own advanced manufacturing in sectors such as electric vehicles to boot. People in the materials industry say China is also capable of maintaining its dominant position by indefinitely subsidising costly parts of the process, deterring competitors. The US and others won a World Trade Organization case against China in 2014 against export controls on rare earths, but other companies in the business reckon China manages to manipulate quantities and prices along the supply chain nonetheless.

We wish the EU, and indeed Australia, luck. The bloc has identified a genuine problem and is mobilising what tools and alliances it can. But it’s up against Beijing in a game of low costs, lax standards, managed prices and state handouts in a mass-production industry with a dominant position in strategic commodity markets at stake. China tends to win those most of the time.

Charted waters

The coronavirus crisis sparked a record flight out of emerging market assets, with more than $90bn leaving bonds and stocks in March alone, according to the Institute of International Finance. But now the asset class is making a comeback. And as Wall Street sets out its big ideas for 2021, EM is top of the list.

Line chart of MSCI emerging markets indices, rebased showing emerging markets are back in the black

Tall tales of trade

Liz Truss
UK trade secretary Liz Truss says the UK can become ‘the ideas factory of the world’ © Henry Nicholls/Reuters

Sometimes you come across a tall tale that’s disappointing because it conceals a more interesting truth. Last week the UK and Canada announced they had successfully rolled over the EU-Canada bilateral deal for the moment and would negotiate a full new trade agreement next year. UK trade secretary Liz Truss went straight off into Tall Tales territory with a newspaper column claiming that the deal showed the two countries were moving forward together as “free trade pioneers” and that the UK could become “the ideas factory of the world”.

The grandiosity was duly ridiculed: a not-quite-entire rollover of an existing agreement originally negotiated by someone else isn’t exactly the repeal of the Corn Laws. But it also rather unfairly hides the fact that Britain’s civil servants have actually done pretty well to get the deals with big trading partners such as Korea, Japan and Canada replicated before the cliff-edge of leaving the EU trade regime at the end of the year.

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We’ve been sceptical that the UK’s trade negotiating set-up is conducive to making the trade-offs required to deliver big new agreements, a judgment which remains to be tested. But given what a shambles most of Brexit has been, it’s good to see that Britain’s famously smart technocratic civil servants can ameliorate at least some of the damage done by ideologue politicians. Let’s just focus on that, and leave becoming the ideas factory of the world for another day.

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Tokyo talk

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