Europe returns to hunting for precious metals in Latin America – 07/17/2023 – Market

This week there is a major summit between the European Union, Latin America and the Caribbean in Brussels, as Spain assumes the six-month rotating presidency of the European Council of EU member countries.

The first part of this text analyzes the new relevance of the EU-LatAm relationship in the context of critical minerals —the current obsession. The second part looks at how the WTO (World Trade Organization) can deal with carbon frontier taxes and the future of the organization itself.

In the topic “Mapped Waters” there’s more on minerals, in this case the skyrocketing price of gallium after China imposed export controls.

COLONIALISM AND CRITICAL MINERALS

Look, here come some European emissaries led by Spain to Latin America looking for precious metals. Haven’t we seen this before? Didn’t it end really badly for the locals?

Europe’s colonialist past may have given it linguistic and cultural ties to the region, but it also fuels a strand of rhetoric about the EU’s attempt to exploit its commercial power to strip Latin America of its basic raw materials.

I wrote some time ago about how the EU tried to soften this approach a bit when it updated its trade agreement with Chile, allowing the country to build a downstream lithium processing industry rather than just shipping the basic raw material abroad. .

You can largely ignore anything the summit puts out about EU-LatAm geostrategic partnerships. You can also heavily discount the various EU initiatives on minerals, such as the Critical Raw Materials Club, which have neither legal force nor a large centralized procurement budget to give them much traction.

There is, however, an obvious substantial prize, which is the ratification of the preferential trade agreement between the EU and Mercosur (Brazil, Argentina, Uruguay and Paraguay). The deal was signed in 2019 but has since languished in the face of European opposition linked to fears of deforestation in the Amazon, as well as concerns from Argentina and Brazil that it would further deplete their manufacturing base. The agreement to move forward will not be made at this summit, but at least we will see where the conversation has gone.

The original abbreviation for EU-Mercosur was a car-for-meat deal. But the critical issue of minerals, as pointed out by Oscar Guiné and Vanika Sharma, from the Ecipe group of thinkers in Brussels, gave it a new imperative. Brazil, in particular, is already the EU’s fifth-largest source of imports of strategic raw materials by value, including nickel and silicon for batteries, and they think it could do much more, allowing the EU to diversify beyond China.

As in the Chilean agreement, the EU-Mercosur contains some restrictions on countries that preferentially choose one trading partner over another and create export monopolies. But Brussels needs to tread lightly. The feeling that Europe is only after minerals risks provoking angry opposition.

CRITICIZING THE RESOLUTION OF DISPUTES

I do not intend to make a habit of using this bulletin to add footnotes to the “Secrets Commercials” from the previous week, but I would like to add a point to my argument that the dispute settlement wing of the WTO, while weakened, may be able to spread carbon pricing around the world.

To recap the potential sequence of events: the EU will unilaterally introduce its carbon frontier adjustment measure (CBAM). A group of countries led by India will file WTO lawsuits against it. If CBAM survives, perhaps with some tweaking, it will encourage trading partners to adopt similar carbon prices to avoid tariffs, and the EU emissions trading scheme will be internationalised. Ta-da!

One clear problem: some countries do not fully respect WTO dispute settlement. The EU felt compelled to invoke its new implementing regulation in a case involving Indonesia, where Brussels won a case on nickel export restrictions but Jakarta put it in limbo by appealing to the inoperative Appellate Body. And the United States is positively rude, saying the WTO dispute settlement is not fit for purpose and keeping the body in the freezer, refusing to appoint new judges.

Washington circulated a note on Appellate Body reform recently: reading it felt like walking waist-deep in a lukewarm slush of inert truisms, and concluded by saying that the US wanted changes but would not propose any. Things do not look good to move forward on the subject at the next major WTO ministerial meeting, in the United Arab Emirates, in February/March next year.

A more cooperative than judicial route has been suggested by Jim Bacchus, a former chairman of the Appellate Body and a former Democratic congressman. Bacchus sympathizes with Brussels’ goals but fears the litigation will be complicated. “I think our friends in the EU have the best of motives and are acting in good faith. But despite their protests to the contrary, they are taking a lot of risk with WTO dispute settlement.”

Instead, he suggests the “mediation and conciliation” procedure, in which the WTO director general or another designated person tries to mediate a settlement. It’s a carefully sensitive and non-confrontational approach to these woke times. But it was never used in dispute resolution. It seems like a long shot that developing countries would choose to launch their maiden voyage on such a crucial issue.

MAPPED WATERS

Look for prices going up. Strong demand, short-term inelastic supply, a production load suddenly removed from world markets: Mission Control, we lift off. China has imposed export controls on gallium, the metal used in electronics and other high-tech manufactures. (no word yet on iodine, thorium, thulium and thallium).

Bad news for the big importers. Conventional geological-economic wisdom says it should be relatively simple for other countries to increase gas production in the medium term, which the EU is urgently investigating. In that case, if China is trying to damage Europe’s green industrial machine, it will have just exhausted a single-use commercial weapon, as Russian President Vladimir Putin did with gas, only on a smaller scale.

COMMERCIAL LINKS

The UK formally signed the CPTPP agreement with Asia Pacific this past weekend, potentially adding 0.08% to UK Gross Domestic Product over the long term. Here’s an amusing possible scenario: the UK was like a human shield to the other members, offering to veto China’s request, drawing fierce criticism from Beijing.

Then, within a few years, economic realism returns to the UK, it rejoins the European Union and leaves the CPTPP (paying Australia and New Zealand compensation for the loss of agricultural market access on leaving). Job done for the rest of the CPTPP, like replacing a goalkeeper for a penalty shootout, or maybe recruiting a martyr to play lions in the Coliseum.

The German government has published its long-awaited new comprehensive strategy towards China. Its tone bears the clear stamp of the Greens on the coalition and is notably more skeptical than Angela Merkel’s accommodating approach, including the suspension of German support for the Comprehensive Investment Agreement with China.

Adam Posen of the Peterson Institute warns of the dangers of zero-sum industrial policy in one of the Financial Times’ conversations with Tej Parikh.

The Joe Biden administration’s new, supposedly less confrontational approach to China will not go as far as lifting tariffs on its exports, officials said over the weekend.