Most Favoured Nation: OPEC ... But For Critical Minerals

Critical minerals club for producers, duty suspensions, CPTPP and China and CPTPP and Ukraine

Welcome to the 99th edition of Most Favoured Nation. The post is for paid subscribers only, but you can sign up for a free trial below.

---

The US’s response to anyone criticising its embrace of subsidy-heavy-protectionism tends to be, “why not do the same?”.

This is kinda annoying as far as responses go, given that doing the same and being effective, at least on the subsidy side, would, in many instances, require outspending the US. Which not many, if any, countries can actually do.

But on the protectionism side, some options are available, I guess. Take the USIRA provisions, which condition the receipt of EV tax credits on the critical minerals used to make the batteries being sourced or processed either in the US or its FTA partners. This is designed to force companies to build up processing capacity and jobs, in the US, its allies [and outside of China].

But what if you are the economy minister of a country that has lots of minerals but doesn’t have an FTA with the US? Ideally, you would like the processing, high value, work to be done locally too. Why shouldn’t your citizens benefit from the green transition too?

One option is to restrict the export of raw materials, forcing firms that want access to do some of the processing locally. This is exactly what Indonesia has been doing, since December 2020, in respect of nickel. And while this can be disputed, it seems to kinda be working — with foreign firms investing heavily in the country in response.

Of course, this isn’t very fair and probably breaches some sort of WTO commitment. But if the US doesn’t care about its international obligations anymore, why should other countries? And also, it gives you some leverage. “You want our critical minerals, what’s in it for us?” Etc.

Also, as the chart below demonstrates — taken from a fascinating new report by Simon Evenett and Johannes Fritz, ‘The Scramble for Critical Raw Materials: Time to Take Stock? The 31st Global Trade Alert Report’– there’s a fairly high correlation between having critical minerals and having poor governance, which points to less of a concern for abiding by rules anyhow.

Indeed, just this week, China has introduced new export licensing requirements for the export of gallium and germanium, two metals used to produce semiconductors.

But if you’re not China, taking on the US, EU and others can still be quite daunting. So why not do it as a group?

Just as the G7 and developed world is talking about climate clubs and critical minerals clubs – why can’t the countries that actually have much of the resources do the same thing?

Returning to the chart above, Bolivia, Argentina, China, Congo, Peru, DR Congo etc could group together to form their own critical minerals club of sort, or even a critical minerals OPEC-esq equivalent. They could, say, collectively refuse to export raw materials to countries outside of the club. If you want to do processing, either join the club or invest in processing capacity in club members.

Obviously, this is extreme and would be really bad for the green transition, but where America leads …

---