Author: Samuel Goodman, Washington DC
The disruptions caused by the COVID-19 pandemic have limited the supply and increased the cost of semiconductors. One of the clearest impacts of the chip shortage has been on the automotive sector. Re-establishing some semblance of normality within the semiconductor supply chain has, as a result of this and similar shortages, moved from theoretical discussions to a sharp-edged policy question.
The semiconductor value chain is simultaneously global and highly concentrated. Fabs — the large factories that create chips out of semiconductor wafers — exist in only a handful of countries. South Korean firms and the Taiwanese company, TSMC, account for most leading-edge chip manufacturing. Companies that don’t manufacture their own chips feel the effects of disruptions to the global value chain because of that market concentration. Natural or other issues that create disruptions can have outsized effects on firms up the supply chain.
Many countries have now moved to increase chip supply chain security by onshoring more semiconductor production capacity. China has long aimed to increase domestic manufacturing, while the US 2022 CHIPS Act contains provisions aimed to bolster domestic capacity. It will take years for the planned capital investments to bear fruit, and risks will remain even then.
Fabs are the single greatest expression of semiconductor production, but they are wholly dependent on other parts of the global supply chain. No fab can operate without access to specialised and often esoteric inputs. The concentration in Japan of suppliers of several critical chemicals used in semiconductor manufacturing led Tokyo to try to exercise leverage over Seoul in a political confrontation over wartime reparations in 2019.
The war in Ukraine has similarly threatened the global supply of several critical materials used to make chips. The response by some firms has been to diversify their supplies, but the necessary natural resources are not evenly distributed across the planet. The same constraints exist among the suppliers of semiconductor capital equipment. Only a few companies — primarily in Japan, Europe and the United States — produce the machines used at different stages of chip production.
There is precedent for the criticality of these nodes. The Soviet electronics industry lagged behind its competitors because there was a coordinated effort to keep them from accessing internationally state-of-the-art equipment. By the end of the cold war, the USSR was about a decade behind technologically.
Chip manufacturing requires myriad designers with access to libraries of intellectual property (IP). Some of the largest semiconductor companies don’t make any physical items themselves but send their IP to be made by fabs owned by other firms, often in other countries. Without this, firms can’t manufacture the leading-edge chips that power smartphones and other advanced devices.
Chinese firms ZTE and Huawei felt the impact of this once they lost access to US IP. Replicating these resources is difficult, as it requires a pipeline of talent from universities into the industry that feeds into an ecosystem of state-of-the-art research and development.
The urge felt by governments to invest in domestic semiconductor manufacturing is a natural instinct. But it will prove difficult, if not impossible, for the vast majority of countries to achieve complete independence based on their material limitations. Semiconductor investments take years, if not decades, to pay off.
Top-to-bottom onshoring is unlikely to mitigate supply issues in the short term, nor would it be feasible for all but the wealthiest states to even attempt. For most countries, a cost-effective way to reduce risk across supply chains could be to form more robust multilateral partnerships. A constellation of states with similar policy goals might be better positioned to shore-up shared bottlenecks and deficiencies.
Participation in such arrangements would require giving up their virtual monopolies over aspects of the supply chain. New sources of raw materials and additional manufacturing capacity spread across multiple countries would help prevent a disruption in one part of the world from shutting down manufacturing elsewhere. Enabling such diversification would require greater standardisation to ensure materials are compatible across the group.
Individual states could also analyse their supply chains for the points of greatest vulnerability. Such analysis would show where the requisite materials, capital and…
Australia’s troubled EU trade deal still second best
The proposed trade agreement between Australia and the EU is in trouble due to EU protectionism, particularly in agriculture. This offers lessons for both parties and poses a potential threat to the Asia-Pacific region’s trade diplomacy.
Trouble in the Australia-EU Preferential Trade Agreement
Author: Ken Heydon, LSE
After five years of intense negotiation, the proposed preferential trade agreement (PTA) between Australia and the European Union is in trouble. On 29 October 2023, talks were suspended, with little immediate prospect of resumption. This setback, plus other recent developments in EU preferential trade policy, offer some broad lessons — for both Australia and the region.
Issues and Challenges
The failed negotiation is, in part, a victim of current times. With liberal trade policy in retreat, government-fuelled industrial policy is on the rise, and, according to the Eurobarometer Poll of July 2022, the majority of Europeans now view protectionism positively. The immediate cause of breakdown in the talks was, unsurprisingly, agriculture. This is the sector that, given EU intransigence, was a key factor in the failure of the Doha Development Round of multilateral trade talks.
Implications and Lessons
Australia’s particular concerns during negotiations with Brussels arose from EU resistance to opening up its market to Australian beef and sheepmeat, and protective geographical indications that would restrict the labelling of Australian feta cheese and prosecco. As highlighted by the WTO Trade Policy Review of the EU, the number of products subject to EU ‘geographical indication protection’ continues to rise. Looking ahead, there are still some broad strategic factors that might favour a deal. For the European Union, this includes gaining secure access to Australia’s critical minerals, such as lithium and copper.
New US–China working groups bridging bilateral gaps
US-China economic and financial working groups established in September 2023 aim to stabilize relations and prevent economic decoupling, addressing trade imbalances and fostering dialogue between the world’s largest economic powers.
US–China Economic and Financial Working Groups
The establishment of the US–China economic and financial working groups in September 2023 marked a significant turning point in the often uneasy relations between Washington and Beijing. In the midst of increasing tensions due to great power rivalry, these working groups have the potential to promote greater stability between the world’s two largest economic superpowers.
Challenging the Notion of ‘Decoupling’
While ‘decoupling’ has become a popular term representing the United States and China’s efforts to separate their economies, the establishment of the working groups challenges this idea to a certain extent. Policymakers on both sides understand the risks associated with complete economic decoupling, as bilateral economic ties are characterized by intrinsic interdependence.
Promising Benefits and Potential Challenges
The working groups, supported by high-level officials from both countries, offer a structured channel for ongoing dialogue. They have the potential to promote trust, transparency, and direct communication while also addressing challenges such as structural trade imbalances and intense rivalry in high-tech competition.
Rethinking Indonesia’s nickel policies to power economic growth
Indonesia is a major player in the global nickel market, but may face challenges as the EV battery industry shifts away from nickel-based batteries. Cultivating relationships with the US and EU is crucial.
Author: Cullen Hendrix, PIIE
Calling Indonesia ‘the Saudi Arabia of nickel’, one of the metals underpinning global steel production and ambitions to decarbonise energy and transport systems, would be an insult to Indonesia’s market dominance.
Indonesia’s mines accounted for nearly half of global nickel production in 2022. It has banned raw nickel exports since 2020 as the country pushes to move up global value chains for renewable energy. Indonesia is a G20 member, a developing democracy and has an enormous potential home market for both steel and electric vehicles (EV).
But despite the seeming centrality of nickel to net-zero ambitions, Indonesia may find itself in a situation eerily similar to that of Saudi Arabia and its oil reserves — sitting atop plentiful resources whose value is set to wane as the EV sector booms. The challenge lies in navigating two landscapes, one geopolitical and one chemical.
In a shifting geopolitical environment, Indonesia is attempting to secure a more prominent place in the EV battery supply chain. This involves moving beyond mining ore and benefaction to battery assembly at a time when major EV battery importers like the United States and the European Union (EU) are onshoring battery assembly.
In the United States, these attempts include enticing tax credits in the Inflation Reduction Act (IRA). In Europe, they include government loans via the InvestEU program, independent member-state initiatives and an anti-subsidy investigation into Chinese automakers. The investigation aimed to prevent Chinese EV makers who source nickel from Indonesia from flooding the European market with cheap imports. In both instances, Indonesia’s reliance on Chinese manufacturers and finance in the nickel sector creates vulnerabilities for its EV ambitions.
The second challenge is more fundamental. Indonesia’s nickel reserves and industrial ambitions are at risk of being rendered less valuable by changes in battery chemistry, or the combination of materials and technologies used in the batteries themselves. Nickel is a key component in nickel-manganese-cobalt (NMC) batteries, which currently dominate the market due to advantages in range and power-to-weight. But this dominance may be fleeting.
As with most things EV-related, Tesla is the bellwether. In 2021, Tesla adopted lithium iron phosphate (LFP) batteries, with nearly half of its production models using them by the first quarter of 2022. In August of this year, Tesla CEO Elon Musk announced that the company would be transitioning most of its entry-level vehicles — Model 3 and Model Y — and its shorter-range semi-trucks to using LFP batteries. For a regional hub, Tesla chose to set up shop in neighbouring Malaysia rather than in the nickel giant.
Tesla did not invent or even bring to market the first EVs, but it popularised and democratised them. Its move toward LFP batteries is one major reason that S&P Global forecasts that after 2030 the dominance of NMC batteries will wane in favour of LFP batteries. LFP batteries offer less range and high-end performance. But they are also less prone to catching fire and are made of much more globally abundant and cheaper raw materials. For most EV users, LFP batteries provide more than enough range and power.
This forecast does not include the effects of potentially market-disrupting frontier technologies like sodium-ion and solid-state batteries, upon which Toyota has placed a heavy bet. These technologies would further depress the relative demand for nickel. There will still be a market for NMC batteries in performance-oriented EVs offering pavement-wrinkling torque and acceleration. But the global market in the future may be smaller than the current one – and with technology, disruption is rarely linear. The market may change even more quickly than S&P anticipates
For Indonesia to sustain nickel as an engine for growth and development within these landscapes, its priority should be to cultivate closer relationships with the United States and the EU. These markets and their comparatively affluent consumer bases will drive an appetite for higher-performance, NMC-based EVs. Indonesia’s relationship with the EU is seemingly on track to expand, with shared ambitions to conclude negotiations on a comprehensive Indonesia–EU free trade agreement (FTA) before Indonesia’s 2024 election.
The outlook regarding the United States is less straightforward. In September, Indonesian President Joko Widodo proposed a critical minerals trade agreement with the United States during talks with Vice…
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