Author: Editorial Board, ANU
Like it or not, the structure of global trade in green technologies and the raw materials required for their manufacture is being decided in an era when geopolitics trump markets, and the WTO’s credibility to check the abuse of national security exceptions is near rock bottom.
The upshot, as Mari Pangestu explains in this week’s lead article, excerpted from the upcoming edition of the East Asia Forum Quarterly, is that the green transition is greasing the political skids for a resurrection of inward-looking industrial policy.
‘Achieving net zero carbon emissions will require an estimated seven-fold increase in demand for transition-critical minerals between 2021 and 2040’, Pangestu highlights. Yet because of China’s dominance in the processing of these minerals, and in the production of the batteries that need them, ‘developed countries have introduced industrial policies such as reshoring the sourcing of transition-critical minerals and the production of low-carbon technologies’.
Nowhere is this more apparent than in the electric vehicle (EV) sector. The decarbonisation agenda has dovetailed with a resurgent scepticism of trade and free markets that cuts across left–right divides in the United States. The Inflation Reduction Act’s measures to make EVs built with Chinese inputs uncompetitive in the US market, along with efforts by Japan and Europe to force carmakers to diversify their sources of EV inputs away from China, could artificially bifurcate the global automotive industry as the shift away from petrol-powered cars accelerates.
Is the huge advantage China has developed in industries key to the green transition a market failure or security threat that justifies ‘resilience’-boosting interventions on the part of other economies?
The idea that China has form in weaponising the critical minerals trade for political ends is prompted by memories of Chinese restrictions on the export of rare earths to Japan in 2010, a move that is often attributed to China’s anger over the detention of a Chinese national by Japanese authorities during a clash over the disputed Senkaku/Diaoyu islands.
But whether political, as opposed to economic, imperatives drove the 2010 restrictions are less clear upon closer inspection. China backtracked on the ban not long after, recognising the economic and reputational damage it entailed, and it lost a case brought against it through the WTO’s (now semi-defunct) dispute settlement mechanism by Japan, the United States and the European Union. Given that the importance to the Chinese economy of the minerals processing and battery industries has only grown since then, we can’t be sure at all that China would cut off its nose to spite its face by restricting the export of minerals or batteries in a crisis — at least, not sure enough to pre-empt such a scenario with a brazen attempt to build out Chinese inputs from EV supply chains, as the Biden administration is trying to do.
Ultimately the climate doesn’t much care who makes batteries, solar panels, or electric vehicles — the interests of the environment, and the vast majority of national governments and consumers, is in green technologies that are abundant and cheap. The problem, as Pangestu writes, is that ‘current industrial policy has the potential to disrupt or raise the cost of access to critical minerals and transition technologies, especially among developing countries’.
This point is even more important given the questions about which green technologies will triumph as technical innovation moves more quickly than industries can be restructured — witness the uncertainty about the future of the battery industry as new types of battery less dependent on metals like nickel and cobalt grow more competitive. That uncertainty should be at the front of policymakers’ minds in countries rich in newly-‘critical’ minerals, who might be tempted to follow Indonesia’s example and force investment in downstream industries by banning the export of unprocessed minerals now central to battery production.
‘Keeping trade open and predictable is as vital to resource-rich countries as it is to resource-poor economies. It is also essential for the diversification of refining and processing capacity to reduce dependence on China’, Pangestu says.
Yet this goal lies in want of a platform for its achievement, with the WTO largely out of commission and neither of the major plurilateral free trade agreements in Asia — RCEP and the CPTPP — offering a forum for the…
Policy failure with Italian characteristics?
Italy’s participation in China’s Belt and Road Initiative may end in 2024. The decision to join in 2019 led to political and economic costs that have not been offset by expected benefits.
Italy’s Withdrawal from the Belt and Road Initiative
Italy’s participation in the Belt and Road Initiative (BRI) may soon come to an end, as the country entered China’s initiative in March 2019. A Memorandum of Understanding (MoU) was signed in Rome by former Italian prime minister Giuseppe Conte and Chinese President Xi Jinping. Less than five years later, the whole BRI story risks becoming a major foreign policy failure for Italy.
Debating Italy’s Participation in the BRI
The MoU will be automatically extended in March 2024, unless terminated by either party at least three months in advance. As the deadline approaches, the government of current Prime Minister Giorgia Meloni is expected to announce its decision soon. In 2019, the Conte I government’s decision to sign the MoU was made amid a heated yet highly ambiguous political debate.
The Downside of Italy’s BRI Gamble
Italy’s gamble in joining the BRI has not paid off as expected. Critics have scrutinized Italy’s involvement in the BRI, and the COVID-19 pandemic has affected anticipated economic benefits. As a result, Italy has been unable to fully leverage the MoU and engage effectively with Chinese stakeholders, leading to a shift away from emphasizing its involvement in the BRI.
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.
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