Most Favoured Nation: The Most Resilient Newsletter (£)

Self-sufficiency does not equal security.

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Resilience. The trade world can’t get enough of it.

Governments have looked at the disruption caused by Covid, and more recently Russia’s invasion of Ukraine, and started questioning whether it is sensible to rely on imports from one single country for paracetamol [India], on a potentially hostile country for electric vehicle batteries [China], on an actually hostile country for energy [Russia], etc.

This of course has led to some people jumping up and down and claiming that self-sufficiency is the answer, duh. But self-sufficiency does not equal security – if you produce all of your wheat at home, but it gets wiped out by disease, you’re in just as much of a pickle as if you imported all of your wheat from a country that decided to stop selling to you. And self-sufficiency is only really an option if you are a massive country with abundant national resources, energy and food … and even then you’re unlikely to have everything you need.

If you want to be truly resilient, the most sensible approach is to make sure you have as many options available as possible. Which is a logic that underpins the UK’s approach to free trade agreements.

The US is going a step further and trying to embed resilience in specific natural resources — for example rare earth — into bilateral agreements with other countries.

In her testimony to Congress, USTR Katherine Tai said:

President Biden also recognizes that our ability to defend against unfair PRC economic practices requires that market economies act in concert to confront policies and practices that are fundamentally at odds with the modern global trading system.  That is why we have also brought a renewed focus to engagement with our partners and allies, who also are negatively impacted by the PRC’s unfair trade and economic practices.
 
At the same time, we are also working towards innovative arrangements with our allies and like-minded partners to strengthen our resilience. 

But how would you actually go about doing that?

I have a couple of ideas. Well, actually one idea, but framed in two different ways.

The first is that two countries could agree to something like:

In the event of severe disruption and/or shortages, country A will give priority to exports of *important things* to country B

The problem with this approach is that you run the risk of annoying all of the countries you don’t actively prioritise.

A more benevolent phrasing could be:

In the event of severe disruption and shortages, country A commits not to restrict the export of *important things” to country B

The outcome here is obviously the same — with the subtext being that country A would impose export restrictions vis-a-vis other countries – but it is a little less overt.

Now you might argue that doing deals to prioritise your own country’s access to important things over and above another country’s is a little bit selfish. And against the spirit of the rules based trading order, which prioritises equal treatment. And you would be right.

But I don’t think the US cares so much about that. And to be fair, you already have this sort of language built into commercial contracts.

For example (h/t George Riddell), it looks like the US is trying to lay claim to all of Australia’s rare earth, in return for putting up the cash to finance its processing:

Secretary of Commerce Gina Raimondo and Minister for Trade, Tourism, and Investment Dan Tehan met on March 30 in Washington D.C. for the inaugural Australia-U.S. Strategic Commercial Dialogue (AUSSCD).

…

Critical minerals and supply chain resilience

The coming energy transition will depend in large part on securing a resilient and diversified supply of critical minerals – for use in everything from electric vehicle chargers and batteries to solar panels, wind turbines, and semiconductors. The Secretary and Minister discussed cooperation on critical minerals, and the strengthening of resilient and secure supply chains across the United States, Australia, and the Indo-Pacific. They highlighted the importance of developing shared approaches to ESG and traceability standards, as well as working with other like-minded partners to build resilient supply chains. They noted the executive-level roundtable on critical minerals held on March 30 highlighted the commercial potential for both Australian and U.S. industries and underscored the need to strengthen capabilities across all segments of the supply chain, including extraction and downstream processing. Australia and the United States will look at how their respective financing mechanisms could be better coordinated and leveraged to support private investment in supply chains.

Anyhow, I think something like this is the direction of travel for most rich countries. But not everyone can be *the* priority. So the race is on …