William Krist's Blog, page 17

Digital Trade 2023: The Declaration, The Debates and The Next Global Economy

In the single generation since the launch of the internet, a generation’s worth of scientific research and technological innovation, infrastructure deployment, and generally good policymaking has taken a small set of computer networks operated by academics, business researchers, and government scientists, and turned into a global digital world of 5.3 billion people. Associated with this has been an enormous leap forward in individual liberty, in global prosperity, and in new policy challenges. Looking ahead with its allies and partners last year, the Biden administration helped produce a vision of the future. This is the “Declaration on the Future of the Internet,” which, in a brief two and a half pages, illuminates a possible version of the next the digital world: one of freer flows of information, higher-quality consumer protection, enhanced economic growth, and liberty preserved.

Their vision is right, but it is highly contested — in part by authoritarian governments seeking to restore or strengthen controls over their publics (or even, at least in part, other countries’ publics), and in part by often friendly countries mistakenly believing that their own technological leadership might depend on diminishing that of the U.S. tech industry. The administration can help achieve its vision, and in doing so contribute to the realization of the Declaration’s vision, through four steps: 

1. An idealistic and ambitious approach in the 15-country “Indo-Pacific Economic Framework” (IPEF), that provides a future vision more attractive than authoritarian alternatives resting on free flows of data, opposition to forced localization of server and data, strong consumer protection, non-discriminatory regulation, anti-spam and anti-disinformation policies, cyber-security, and broad-based growth through encouragement for open electronic commerce.

2. A strong response in the U.S.-EU Trade and Technology Council (TTC) to European Union attempts to create discriminatory regulations and taxes targeting American technologies and firms.

3. Defense of U.S. values in the U.N., WTO, and other venues against “digital sovereignty” campaigns by China and others that endanger the internet’s multi-stakeholder governance, normalize large-scale censorship and firewalling, and generally place the political fears and policy goals of authoritarian government above the liberties of individuals.

4. Supporting responsible governance of technology and politely but firmly pushing back on attempts either at home or internationally to demonize technological innovation and American success.

Digital Trade 2023. The Declaration, The Debates and The Next Global Economy

 

Ed Gresser is Vice President and Director for Trade and Global Markets at Progressive Policy Institute (PPI).

To read the full summary, please click here.

To read the full report, please click here.

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How to Cut Emissions Through Agricultural Trade

U.S. maize, beef, and chicken have a smaller carbon footprint than any other major producer. Exporting more could help mitigate climate change.

In many ways, 2022 was a bad year for U.S. agricultural trade. Russia’s invasion of Ukraine cut off exports of wheat, sunflower, and other products from both countries. Mexico proposed banning imports of GMO corn from the United States. And the Office of the U.S. Trade Representative and the U.S. Department of Agriculture (USDA) were both left trying to operate without anyone in charge of agricultural trade until late December when the Senate finally confirmed two highly qualified nominees. Although total agricultural exports did rise in 2022 to record levels, so did imports, which nearly exceeded exports. USDA projects that imports will fully overtake exports in 2023, which has only happened twice before in the past 50 years. These trends shape the costs of farm inputs and outputs, including food, fiber, livestock feed, and biofuels, and affect where and how agricultural production occurs. That, in turn, not only affects farmers’ bottom line and consumers’ pocketbooks, but the climate as well.

Every country and region produces agricultural goods with a different carbon footprint—that is, the quantity of greenhouse gas emissions generated per pound, bushel, or other unit of agricultural production. This is due to factors like fertilizer use, irrigation, and other farming practices; domestic policy support for agricultural innovation and production; and environmental conditions such as climate and soil quality. If trade policies shift production from a country with a high carbon footprint to one where production is more efficient, total global emissions could decrease, and vice versa. In fact, concentrating global crop production in optimal locations with high yields could decrease its carbon and biodiversity footprint by 71% and 87%, respectively.

Yet trade has not been a major focus of U.S. policy debates about how to decarbonize agriculture or otherwise improve environmental sustainability. Policy proposals have generally focused on other areas such as how to increase domestic adoption of no-till farming and other practices, limit agriculture’s land use footprint, and sustainably manage livestock operations. Only recently has Congress considered agricultural trade’s potential role in decarbonization. The 2021 FOREST Act, for instance, would limit U.S. imports of beef, soy, and other commodities originating from illegally deforested land. We show that agricultural trade and trade policy can play an even larger potential role in cutting agricultural global carbon footprint.

By analyzing data from the Food and Agriculture Organization of the United Nations (FAO) on five of the world’s top agricultural exports—maize (corn), wheat, beef, pork, and chicken—we find that the United States produces several key commodities with a lower carbon footprint than other major exporters (defined as the countries that accounted for 80% of global export quantity for each product from 2015-2019). However, many countries with higher carbon footprints export more than countries with lower emissions. In many cases, exports are also growing most quickly in high-emissions countries. For example, while the United States produces beef and chicken with a smaller carbon footprint than Brazil, exports are growing at a much faster rate in Brazil than in the United States.

These findings suggest that policy makers should consider policies that concentrate production in countries with the lowest rates of agriculturally-driven deforestation and other land-use change, which is a large contributor to agriculture’s carbon footprint. In the United States, for example, Congress could pass policies, such as the FOREST Act, that require imports to be deforestation-free or to meet other minimum standards. The executive branch can act too, for instance by developing trade agreements that increase exports of goods the United States produces with a relatively low footprint.

What goods does the United States produce with the lowest relative carbon footprint?

For most agricultural goods examined, the carbon footprint per unit of production in the United States is below the average of other top exporting countries. For example, maize (corn) production in other top exporting countries is, on average, more than two and half times more emissions-intensive than in the United States. Although the other countries do better when it comes to emissions from input use (synthetic nitrogen fertilizer, organic fertilizer, fuel use, and crop protection), they generate eight and a half times more emissions from land-use change. This is in part because yields in the other countries are lower than in the United States—about 1/3 lower—meaning that more land must be converted from forest, grassland, and other native vegetation to farmland. It is also partially due to less strict land use restrictions in some other countries, including Brazil, and to the high carbon content of forestland converted to maize in some other countries, such as in Argentina.

For beef and chicken production, emissions from production and land use per kilogram (kg) of meat produced are substantially lower in the United States than in the other top exporting countries. On average, the carbon footprint of beef or chicken in other top exporting countries is more than two and three times higher, respectively. One key reason, as with maize production, is that production in the United States is generally more efficient than in other countries, raising animals to slaughter weight quickly so that less feed and thus less pasture, cropland, and land conversion is required to produce each kg of meat. The picture is different, however, for pork production. The United States, despite negligible land-use change emissions, produces pork with slightly (4.5%) higher emissions than the other top exporting countries.

International competitiveness and carbon footprints are not aligned

Although the United States has a relatively low carbon footprint for many agricultural exports, other countries with higher emissions often export more. If production and exports of agricultural products were concentrated in the countries with the smallest carbon footprints, total global emissions could be minimized. But export quantities and emissions intensities are not always aligned.

When it comes to the production of beef, chicken, and pork, the largest exporters from 2015-2019—Brazil (beef), Brazil (chicken), and the United States (pork)—don’t have the lowest carbon footprints. In fact, of the top exporting countries, Brazil’s beef production has the second highest emissions intensity when emissions from deforestation and other types of land-use change are accounted for. The emissions intensity of beef production in Brazil is over 50% higher than in Australia and almost two and half times greater than in the United States, the second and third largest exporters, respectively.

Brazil is also the largest exporter of chicken, despite having an emissions intensity that is almost 80% higher than chicken production in the United States, the second largest exporter. Ignoring land-use change emissions, chicken production in Brazil is relatively efficient and low-emitting. However, emissions from land-use change involved in producing soy and other feed for chicken far exceed those in the United States.

Of the top seven pork-exporting countries, which account for over 80% of global pork exports, the United States is the largest exporter and the fourth most emissions-intensive producer. For every kilogram of pork protein produced, the United States emits nearly 30% (or 12 kilograms carbon dioxide-equivalent) more than Germany, the second largest exporter, and over 82% (~23 kilograms carbon dioxide-equivalent) more than Canada, the third largest exporting country. This is partially due to high levels of methane emissions from the lagoons and pits predominantly used to store manure in the United States, as well as differences across countries in the crops used for feed.

Russia and the United States are the top two exporters of wheat but also have the highest rates of emissions from production among major exporters and some of the highest when including land-use change. Synthetic fertilizer use is largely responsible for the United States’ high carbon footprint; it is the source of over a third of U.S. wheat emissions, but only accounts for about 10% of Russia’s.

The picture is less clear for maize since just five countries—the United States, Brazil, Argentina, Ukraine, and France—made up over 80% of global exports from 2015–2019, but emissions data from FAO-LEAP is unavailable for Brazil and land-use change data is unavailable for France. Nevertheless, the United States, which is the world’s top maize exporter, has a substantially lower carbon footprint than Argentina and Ukraine. Despite having the most emissions from inputs, particularly synthetic fertilizers, emissions from land-use change are relatively low in the United States. This is partially due to the high yields that fertilizers and other inputs and factors enable; U.S. maize yields in 2021 were more than twice as high as Brazil’s and about 50% higher than Argentina’s.

However, land-use change emissions for corn and other products in the United States are also generally low because the primary methods used by FAO and others to calculate emissions from land use change only consider recent land use-change. For instance, while Argentina has cleared land for corn and other crops recently, most U.S. farmland was cleared decades ago if not longer. Further research into the carbon footprint of agriculture and trade’s potential to reduce it must address this methodological shortcoming, for instance by estimating the marginal impact of new agricultural production.

The average emissions intensity of global agricultural trade is on track to increase

Unfortunately, export data from 2000 to 2019 reveals that, for many agricultural products, exports from countries with high emissions intensities are increasing more quickly than exports from countries with low emissions intensities. For example, compared to the United States, exports from Brazil have increased almost three times as quickly for beef, nearly three times as fast for chicken, and more than 22 times more quickly for maize. Likewise, growth in pork exports from the United States have outpaced exports from Germany and Canada.

To be clear, exports aren’t becoming more emission-intensive for all products. U.S. wheat exports fell from 2000 to 2019, while exports grew relatively quickly in countries with lower emissions intensities such as Russia, Canada, France, and Ukraine. Although Russia’s invasion of Ukraine dramatically affected agricultural production and trade, its 2022 wheat exports were estimated to be near record-high levels while U.S. exports have continued their long-term downward trend.

Nevertheless, the growth in exports from countries with relatively high carbon footprints could lead to a global rise in emissions. If this growth continues, the average carbon footprint of maize, pork, and beef exports in 2040 would be 18%, 3%, and 10% higher, respectively, than if current export patterns remained constant. The average emissions per unit of wheat and chicken, on the other hand, would decrease by around 11% and 7%. Total emissions embodied in these exports would lead to an increase in emissions of about 63 million tonnes CO2-equivalent. This is greater than all agricultural emissions from major farm states like Texas, Iowa or California.

Next steps: Policy and research to reduce the emissions from agricultural exports

Ultimately, location matters. Concentrating production and export of agricultural goods in countries with relatively low emissions intensities could reduce global agricultural emissions. But currently, the largest exporters are rarely the most climate-efficient exporters. And recent export trends don’t provide much reason for hope that international trade will correct course without several types of interventions.

First, trade officials, advocates, and other experts should raise awareness about the climate mitigation potential that lies in agricultural trade policy.

Second, researchers should examine several questions about the environmental impacts of agricultural trade that are key to informing policy. These include:

What are the impacts of increasing export of relatively low-carbon products on importing countries’ food systems? Increasing exports can affect the course of agricultural development in importing countries in a variety of ways including by undercutting domestic production.

What is the marginal climate impact of increasing exports? Our analysis relies on the estimates of the average carbon footprint of production in different countries. However, it is possible that in any given country, the next unit of production would be substantially more or less emissions-intensive than the average e.g. if new production involves deforestation or other land-use change.

How can subnational differences in emissions be leveraged? For instance, if one region of a country produces beef with a lower footprint than other regions, are there ways to concentrate future export growth in that region?

What are the non-climate tradeoffs of increasing exports? While reducing GHG emissions is critical, other types of environmental impacts such as nutrient pollution and resource use such as water use must be considered too.

Third, policy makers should consider different trade policies to shift agricultural production and exports from high emissions to low emissions countries. One option is to incorporate agricultural products into a renewed WTO Environmental Goods Agreement that aims to reduce tariffs for environmentally beneficial products. Countries should also examine how reducing trade barriers through bilateral or multilateral agreements could lower emissions. For instance, China applies a greater tariff on U.S. beef than on beef from Australia and several other countries with more emissions-intensive beef than the United States. Negotiating reductions on the tariffs on U.S. beef could therefore reduce the carbon footprint of Chinese beef imports. It could, however, also spur increased beef consumption, negating some of the climate benefits. These calculations, therefore, warrant careful study.

Likewise, the United States and other major exports should examine how trade promotion programs can be used to expand international demand for exports that replace higher-carbon products. For example, promotion of U.S. beef could reduce global agricultural products if it displaces other countries’ imports of higher-carbon beef. Providing additional support to companies and industries seeking to export goods produced using climate-smart practices could further enhance the climate benefits. Currently, U.S. Department of Agriculture trade programs, such as the Market Access Program (MAP) and Foreign Market Development Program (FMD), do not take into account the carbon footprint, or other environmental impacts, of products.

Finally, governments should continue aiming to reduce the carbon footprint of production within countries using a wide variety of policy instruments. For example, public investment in agricultural research is critical to developing technologies and practices that cut emissions and boost yields, which is important for reducing land use change. Reducing trade barriers for productivity-enhancing and emissions-reducing technologies can also help producers across the world adopt more climate-friendly practices. Likewise, investments from high-income countries in international research and other agricultural development efforts in lower-income countries can enhance their productivity and environmental footprint.

Ultimately, reducing the agricultural sector’s greenhouse gas emissions is a pressing challenge, and, given the interconnectedness of our food system, it demands global solutions that can account for international trade. To achieve global agricultural emissions reductions, policymakers should consider a wide range of trade policy options and researchers should aim to provide them with the data, analysis, and tools needed to make more informed decisions.

To read the full report, please click here.

Dan Blaustein-Rejto is the Director of Food & Agriculture at the Breakthrough Institute. His work examines how public policy can support environmentally and socially beneficial agricultural innovations such as methane-reducing cattle feeds and alternative proteins. Dan has led multi-stakeholder projects to identify technical options to decarbonize agriculture, assess federal policy gaps and opportunities, and build coalitions to advance climate-smart agriculture.

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Why the Proposed Brussels Buyers Club To Procure Critical Minerals Is a Bad Idea

The European Commission has announced draft legislation that would establish a centralized purchasing mechanism for critical minerals (“critical raw materials,”in European Union [EU] parlance), such as bauxite, cobalt, lithium, and nickel. These materials are critical inputs to green energy infrastructure, electric vehicles, and military technology. Their availability and cost will determine in large part how rapidly crucial climate change mitigation technologies can be adopted. The European Union is deeply dependent on imports of both raw and processed critical minerals and materials and thus highly exposed to global prices and price volatility.

The door appears to be open for the United States or other EU trading partners and like-minded countries to join, although the term club is also being applied to negotiations over trade deals—such as the limited US-Japan free trade agreement—designed to manage trade between major economies that are also critical mineral importers. But many of the top producers of critical minerals are not developed economies. Countries like Bolivia, the Democratic Republic of the Congo, Guinea, and Indonesia are key exporters and/or have massive exportable mineral resources.

Decarbonization is not the only impetus behind the proposed Brussels buyers club. Both the European Union and United States view China’s dominance of critical mineral supply chains as a national security issue, because these minerals are key inputs to modern military technology. Access to strategic resources—the resources necessary to field modern militaries and the economies that sustain them—has always informed national security strategy; the issue has been given increased urgency by disruptions of energy supply chains stemming from Russia’s invasion of Ukraine and weaponization of its oil and gas exports and reports that China is considering banning certain rare earth mineral and magnet exports in response to US and Dutch export controls on leading-edge semiconductors and fabrication equipment to China.

The proposed buyers club could yield several benefits for the European Union, including preventing outbidding between EU-based purchasers, sending more accurate and transparent demand signals, and facilitating coordination with broader economic and security priorities. But for reasons ranging from intra-EU politics to challenges inherent to running cartels, such a buyers club may be politically and economically unworkable. And if successful, it would shift an important share of the economic benefits of green energy transitions from mostly developing and middle-income economies to the European Union, undermining putative commitments to just energy transitions at the global level.

Supply chains for critical minerals desperately need widening to meet projected global demand and tackle climate change mitigation. A purchasers club would not be a step in the right direction.

pb23-6

Cullen S. Hendrix is senior fellow at the Peterson Institute for International Economics (PIIE), nonresident senior research fellow at the Center for Climate & Security, and a specially appointed research professor with the Network for Education and Research on Peace and Sustainability (NERPS) at Hiroshima University.

To read the full policy brief, please click here.

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Chips Are Up: 10 Top Trade Trends in Semiconductors

The strategic geopolitical battle over semiconductors, the key ingredient in computers and phones, is ramping up, as the U.S., China and other countries boost investments in domestic production, protect their internal markets and aggressively monitor rivals’ capacities. As the U.S. and China disengage with each other’s most strategic supply chains, other countries, such as Germany and Thailand, are picking up the slack and gaining market share in global trade. The European Union in particular is poised to benefit the most from the current battle over this crucial 21st century resource, while the U.S. is importing more and exporting less. Here are top 10 crucial trade trends to watch in semiconductors: 

In the first quarter of 2023, China was the world’s top exporter of semiconductors, shipping out $49.4 billion, down 9.7% from the same period in 2022, followed by Taiwan, Singapore, Malaysia and South Korea.
The U.S. was only sixth in global export rankings, selling $12.9 billion worth, down 14.1%. If U.S. companies do take advantage of the Inflation Reduction Act, which includes $39 billion for domestic manufacturing, and boost production, it will likely be for domestic markets.
Overall, as countries become more protectionist, there’s been a retrenchment from global trade. Five of the top six exporters in the world reported declines in exports.
As a bloc, the European Union was China’s top export market for semiconductors, buying $7.8 billion, up 36% from the same period in 2022. The next biggest importers from China were South Korea, Taiwan, Netherlands, Vietnam, Malaysia, India, Singapore, Brazil and Japan. Meanwhile, the U.S., in ninth place, bought $842.4 million worth. That was up 31.6%, a less meaningful increase because of the smaller amount.
U.S. semiconductor exports fell 14.1% to $12.9 billion in the first quarter. Its top customer was Mexico, which bought $3.4 billion, 0.7% higher than in 2022. Shipments to China, its second biggest buyer, fell 43.4% to $1.49 billion.
U.S. exports to the EU increased 6.6% to $1.46 billion. It’s the EU that is poised to benefit the most from the current shakeup in global trade. The third biggest importer from the U.S. is Taiwan, followed by South Korea and the Philippines.
German exports of semiconductors increased 14.9% to $7.9 billion. Another new upstart player is Thailand, which hiked exports 16.2% in the first quarter.
China is also the world’s number one importer of semiconductors, buying $85.1 billion worth in the first quarter. However, that number fell 26.2% compared to the same period in 2022.
The U.S. was one of the only major economies that increased imports of semiconductors in the first quarter of 2023. It imported $15.4 billion worth, up 13.1% from the same period in 2022.
The U.S.’s top supplier of semiconductors was Malaysia. It imported $3.3 billion worth, down 32.3% from the same period in 2022. The next biggest exporter to the U.S. was Taiwan, which shipped $2.2 billion, up 8.1%, in the first quarter of 2022. The biggest increases came from Vietnam, up 62.7% to $1.7 billion, and Thailand, up 91% to $1.5 billion.

John W. Miller is Trade Data Monitor’s Chief Economic Analyst, in charge of writing TDM Insights, a newsletter analyzing key issues through trade statistics. John is an award-winning journalist who’s reported from 45 countries for the Wall Street Journal, Time Magazine, and NPR.

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How to Make EV Subsidies Work

Subsidies to support electric vehicle purchases are a long-standing means of reducing carbon emissions. Since the 1990s, for example, the Norwegian government has actively encouraged the adoption of electric cars using tax exemptions and other measures, including permission to use HOV lanes, exemption from regional road tolls, access to half-price parking, and more.

Over the past two decades, the United States has pursued a similar—albeit less generous—approach. For example, the “qualified plug-in electric drive motor vehicle credit,” which resulted from legislation first established by the Energy Improvement and Extension Act of 2008, offers up to $7,500 in financial relief for going electric. Although the recently passed Inflation Reduction Act of 2022 has changed the qualification criteria for the credit (and changed the name of the program), the premise remains the same: if you go electric, Uncle Sam will support you.

It’s a nice idea. Electric cars are less polluting than gasoline autos. Less pollution means cleaner air, and cleaner air makes for a healthier planet. So why not use public funds to back EVs?

In a new study, the Breakthrough Institute’s Ashley Nunes, along with two co-authors, scrutinizes the economic efficiency of such subsidies. Emissions reductions are important, of course, but what matters even more (particularly as the national debt sits in the trillions of dollars), is how much these vehicles are driven and how often EV batteries must be replaced. Both factors influence how much emissions are reduced for each dollar of government spending. Nunes’s work finds that:

Offering blanket EV subsidies can be an economically inefficient means of reducing emissions.
Replacing an EV’s battery detracts from the vehicle’s emissions advantage.
Cleaning up the national electric grid only does so much to make EVs less polluting on a per dollar basis.

None of these findings imply that EV subsidies are a universally bad idea. In fact, subsidies can maximize emissions reductions per dollar spent under specific conditions. Namely, when subsidies are targeted at high utilization vehicles (e.g., taxis and single-vehicle households), the expenditures are far more likely to reduce both emissions and produce net financial benefits. Offering subsidies for those who drive high utilization vehicles has particular significance for communities of color who are disproportionally represented in the taxi and mobility-on-demand industry.

As Congress debates whether EV subsidies should endure and, if so, for how long, Nunes’s study highlights the need to ensure these programs are targeted in ways that do the most good. His findings suggest that will mean moving away from universal subsidies for anyone interested in buying an EV and limiting subsidies to those who use EVs enough to realize the vehicle’s emissions advantage. Moreover, given that those who drive high utilization vehicles also have lower average incomes, offering EV subsidies as refunds, rather than nonrefundable tax credits, likely promotes greater EV adoption among the households that would maximize EVs’ emissions benefits.

To read the full summary, please click here.

To read the full original report, please click here.

Ashley Nunes is the Director of Federal Policy, Climate and Energy, at the Breakthrough Institute. His work examines the economics of clean technology adoption, with a focus on socioeconomic impact assessment. Previously a research scientist at the Massachusetts Institute of Technology, Ashley holds academic appointments in the Department of Economics, at Harvard College, and in the Labor and Worklife Program, at Harvard Law School.

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The Power of Control: How the EU Can Shape the New Era of Strategic Export Restrictions

In January 2023, the United States and two of its closest allies, the Netherlands and Japan, concluded a ground-breaking agreement – but took pains not to draw attention to it, or even to call it an agreement. They held no press conference and released no joint statement. Yet the subject of their deal goes to the heart of the growing strategic competition between the US and China. And it encapsulates some of the critical challenges facing the European Union at the intersection of international security, the world economy, the technological revolution, and strategic competition.

The agreed non-agreement between the three states pertains to some of the most complex machinery and most miniscule components humankind has ever produced. With their accord, the countries effectively restricted the export to China of the most advanced microchips and the tools to produce them. These items have become a focal point in international power politics because of their use in developing artificial intelligence and their centrality to many of the 21st century’s most important technologies.

As news on the matter emerged, the Dutch prime minister confined his remarks to saying: “Those talks have been going on for a long time and we’re not saying anything about it.” The reason for reticence was clear; in response to their decision, China threatened retaliation against the Netherlands and Japan.

The move followed on from measures unilaterally implemented by the US in October 2022 to restrict the trade of advanced semiconductor technologies with China for reasons of international security. And it now appears that the Dutch national measures could soon be followed by a decision by the German government to restrict the export to China of chemicals needed for chip production.

As these sorts of incidents mount amid the escalating US-China strategic technology competition, the EU and its member states will find themselves increasingly caught in the crossfire. Washington will maintain pressure on its allies to align with its China policy. China’s military build-up will continue to change the balance of power. And Beijing’s willingness and ability to weaponise trade will likely continue to grow – it will no longer be possible for the EU to keep its pursuit of free trade separate from these powerful currents. If a rules-based order is to remain, the rules will need to change to take account of the ways in which economic security forms part of this wider competition.

To steer a course according to its own interests in this new era of strategic trade controls, the EU must urgently develop its own strategy and upgrade its tools to deliver on it. If it is to promote and defend its own sovereignty, it must start to draw its own red lines in technology engagement with China and upgrade its export control policy.

The-Power-of-Control-How-the-EU-can-shape-the-new-era-of-strategic-export-restrictions

Tobias Gehrke is a senior policy fellow at the European Council on Foreign Relations, based in the Berlin office. He leads ECFR’s Geoeconomics Initiative. His area of focus includes economic security, European economic strategy, and great power competition in the global economy.

Julian Ringhof is a policy fellow with the European Power programme at the European Council on Foreign Relations. His research focuses on the implications of digital and emerging technologies for international affairs, including the topics of EU digital diplomacy and EU technological sovereignty.

To read the full policy brief, please click here.

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The Return to Trade Protectionism

Excerpt from pages 3-5.

The Road to Protectionism

A series of global shocks over the past 15 years have upended the post-World War II framework for international economic cooperation and set in train a widespread reassessment of how trade should be conducted and with whom. The old rules of the game no longer apply.

The global financial crisis of 2008-09, the heavy-handed application of tariffs by Donald Trump, the Covid pandemic, China’s remarkable economic rise, and now the war in Ukraine have skewed international trade and investment policies in ways rarely seen before. Governments continue to apply high tariffs to restrict imports and screen inward flows of investment. But in recent years they have begun to use tools that were far less frequently employed before, including restrictions on exports and reviews of outward flows of investment.

As troubling as this may be, of even greater concern is how the events of recent years have inured politicians—and the wider public—to the dangers of closing markets. A series of dramatic trade events have shifted the paradigm of what is acceptable and cleared the way for ever more restrictive policies.

The normalization of invoking national security

Since the 2008 global financial crisis, governments have steadily embarked on increasingly protectionist policies, though it has not been a mad dash. Trade facilitating measures were implemented during this time and the rules-based multilateral trading system had some success in restraining the 164 members of the World Trade Organization (WTO) from a full-fledged flight to protectionism.

In response to the financial crisis, the WTO began to monitor trade policy interventions more closely to gauge the reaction of its members. Trade restrictive measures were higher in some years than others, but overall the accumulation of trade restrictions has steadily expanded in coverage of global commerce. WTO economists estimated that the cumulative stock of import restrictions—mainly tariffs—last year up to mid-October impacted merchandise imports worth US$2.07 trillion or 9.3% of the global total, up from US$234 billion or 1.3% of the total in 2011.1

Since the multilateral trading system began operating in 1948, the invocation

of national security as a rationale to restrict trade was extremely rare. This is because governments were aware of the tenuous balance to be struck between a government’s sovereign right to determine what is in its national security interests and the possibility that national security exceptions to global trade rules would be used carte blanche to simply avoid following the rules. During the past 10 years, these fears have been realized. What was once the exception has become common.

The pandemic and the rising global rivalry between the United States and China have induced a new wave of restrictions, including the hoarding of vaccines and respiratory masks, curbing the transfer of technology, and more recently, efforts to review, slow, or prohibit outward flows of investment to certain markets. Despite the clearly adverse impact of these actions (export restrictions on Covid vaccines led to severe vaccine shortages in Africa, for instance) policymakers show little appetite for changing their ways.

The pace and scope of these actions are upending long-established trade patterns and, if left unchecked, are likely to accelerate and deepen the economic fragmentation that is already underway.

WTO economists estimate that fragmenting the global trading system into two rival blocs would drain 5% of global GDP, with developing countries taking an even bigger hit.2

The International Monetary Fund (IMF) projects that a deep and wide fracture would cost 7% of global output, or the combined annual GDP of Japan and Germany. The Fund warns that if a technological decoupling takes place, some countries would see their national income contract by 12%.3 The risk of such a decoupling is increasing.

A convergence of flashpoints

Despite these warnings, the forces driving this fragmentation not only remain present, they are growing more pronounced. Restricting trade and investment is not new. Governments have been imposing restrictive measures in one form or another for hundreds of years. The difference is the motivation behind these measures.

Take tech, for example. The ostensible rationale for tightening trade and investment policies is two-fold: to protect the privacy of citizens through restrictions on handling data and to hobble rivals’ ability to employ cutting-edge technologies. Such dominance promises not only economic prosperity but also military supremecy.

The pandemic and US-China trade war have prompted a new wave of restrictive trade policies that threaten to deepen economic fragmentation and drain global GDP.

Such is the link between technology and military prowess that Washington has ratcheted up its restrictions on exports of high-tech products and is now prepared to establish specific laws to prohibit inward investment and mechanisms for monitoring outflows of US investments as well. These measures are largely viewed as an effort to contain China. Furthermore, the United States is applying intense pressure on its allies to do the same.

The United States’ place at the center of this conflagration is no small irony given that Washington was the driving force in creating the global institutions and processes that provided the guardrails for globalization. Today, the United States is less concerned with enhancing or even preserving, multilateral processes or institutions than with assuring its continued preeminence on the global stage.

The catalyst for Washington’s change of heart on global cooperation on trade

and investment has been the rise of China. A key driver of important legislation in Washington has been the fear that China may soon usurp the United States as the world’s leading superpower and rulemaker. The passage of both the US Inflation Reduction Act and the CHIPS and Science Act in 2022 was spurred by bipartisan support for countering China.

The war in Ukraine has prompted the West to put economic sanctions on Russia. But there is a fundamental difference in the US appraisal of the European giant: Russia is largely an exporter of resources and armaments; it boasts military might but is an economic backwater. Many military analysts see next-generation semiconductors and artificial intelligence as critical components in advancing military power throughout the next decade. Few believe Russia will be at the forefront of developing such technologies. But China is a very different story.

The return of trade protectionism - Hinrich Foundation - Keith Rockwell - May 2023

 

Keith M. Rockwell is a Senior Research Fellow at the Hinrich Foundation. Prior

to his retirement in June 2022, Keith served as a Director at the World Trade Organization (WTO) and spokesperson for the organization for more than 25 years. He also is Global Fellow at the Wilson Center.

To read the full paper, please click here.

 

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Trade Integration in Africa: Unleashing the Continent’s Potential in a Changing World

Executive Summary

The creation of the African Continental Free Trade Area (AfCFTA) in 2018 established the world’s largest free trade area by population (1.3 billion) and with a combined GDP of $3 trillion as of 2022. The AfCFTA presents its members with an opportunity to take advantage of expanding trade to lift growth and living standards across the entire continent. This departmental paper examines the prospects for African trade integration in the context of a changing world amid climate change, risks of geopolitical fragmentation, technological progress, and Africa’s prospective demographic boom. It discusses policies to underpin successful imple- mentation of the AfCFTA that, when combined with complementary reforms, would maximize the potential gains from enhanced trade integration in Africa.

Africa’s recorded cross-border trade has grown relatively modestly in recent decades, with limited growth in merchandise trade and an unchanged share of services trade in GDP. The continent’s exports to the rest of the world are dominated by commodities, while trade within the region is more diversified and includes a larger share of processed goods. These trade patterns are consistent with the continent’s limited inte- gration in global value chains (GVCs), reflecting its fragmented trade policy landscape marked by multiple regional economic communities, a challenging trade environment with gaps in structural factors such as transport networks, customs and border processes, and access to finance. At the same time, there appears to be significant informal cross-border trade although it is hard to measure. These patterns, including the more diversified nature of intra-African trade, reflect the potential for significant gains for African trade from building regional value chains, unifying the trade policy landscape, and strengthening the trade environment.

AfCFTA implementation will entail large reductions in tariff and nontariff trade barriers among African countries. These reductions could increase the median merchandise trade flow between African countries by 15 percent and median real per capita GDP by 1.25 percent. If the reductions in tariff and nontariff barriers are combined with substantial improvements in the trade environment, the payoff to countries would be significantly higher. The paper finds that comprehensive reforms combined with the AfCFTA implemen- tation could increase the median merchandise trade flow between African countries by 53 percent and with the rest of the world by 15 percent, and as a result raise the real per capita GDP of the median African country by more than 10 percent. This result resonates with findings in the literature that trade reforms could help reduce extreme poverty by an additional 30–50 million people across the continent.

The creation of the AfCFTA comes at a time when a changing global environment creates both opportu- nities and challenges for Africa. Greater trade integration can help the continent take advantage of the opportunities provided by technological change and demographic trends and enhance its resilience to shocks such as climate change and geopolitical fragmentation. In particular, greater trade openness would help countries adapt to climate change and to strengthen food security, including by improving the avail- ability and affordability of food supplies. More diversified and broad-based trade would reduce the impact of disruptions in specific markets and products that could result from shifts in global trade patterns. Trade is the principal means through which the emergence of new technologies and digitalization, in combination with a rapidly growing labor force, could create new and higher paying jobs.

Seizing these opportunities will require investment in physical and human capital, a robust macroeconomic and business environment conducive to private sector-led growth, and a modernized social safety net that supports the most vulnerable during the transition to a higher growth trajectory.

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To read the full departmental paper, please click here.

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Friendshoring Critical Minerals: What Could the U.S. and Its Partners Produce?

In the wake of the Russian invasion of Ukraine and amid heightened tensions with China, the United States and its key partners are making a concerted effort to diversify and friendshore clean energy supply chains, relocating them to countries with shared interests or values. G7 countries are focusing especially on the critical minerals that are needed for renewable electricity production and batteries.

In June 2022, the United States and its G7 partners launched the Partnership for Global Infrastructure and Investment (PGII) to build clean energy supply chains. They also signed the Minerals Security Partnership to produce, process, and recycle critical minerals. Subsequently at Davos, in January 2023, European Commission President Ursula von der Leyen announced that a key pillar of the EU’s new industrial strategy will be global partnerships to access inputs needed for industry. This builds on existing EU initiatives, such as the European Battery Alliance and the Critical Raw Materials Act, which both aim to onshore and secure supply chains.

These initiatives mark the emergence of a phenomenon we call “joint industrial policy:” when states coordinate their industrial strategies at the international level and build supply chains collaboratively. Joint industrial policy entails states working together to secure supplies of needed technologies and create markets in support of net-zero industries in their home countries.

The push for collaborative strategies for critical minerals raises important questions: how much critical minerals could the United States and its partners produce, and where should they focus efforts to diversify and rebalance clean energy supply chains?

In a new study of these issues, the Net Zero Industrial Policy Lab at Johns Hopkins University finds that partnerships among democratic states would be able to produce enough minerals to enable the world to limit warming to 1.5 degrees Celsius, the more ambitious target in the Paris Agreement. However, producing enough metals to meet these targets would require extraordinary technological and financial cooperation.

EXAMINING CRITICAL MINERAL RESERVES IN DEMOCRATIC COUNTRIES

This study begins by estimating the amount of various critical minerals needed for solar, wind, and electric vehicle (EV) battery supply chains. These minerals include the copper used in electrical wiring, the nickel and lithium used in many batteries, and the zinc used in protective coatings for solar panels and wind turbines. Demand was indexed to deployment levels in 1.5-degree-Celsius scenarios by the International Renewable Energy Agency (IRENA) and the International Energy Agency (IEA).

The study then compares the estimated need to the mining reserves of various groups of countries. Table 1 and table 2 look at what a proposed democratic friendshoring partnership could produce. Table 1 compares the minerals needed to the mining reserves of all democratic countries, as classified by the Varieties of Democracy (V-Dem) Institute’s Liberal Democracy Index. This group has ample reserves to meet 2030 targets in all but one metal: tellurium, which is a key input for innovative American solar panels.

However, table 2 shows that shortfalls in graphite, silver, and tin emerge when dropping countries coded as fragile democracies—including Argentina, Brazil, Bolivia, Indonesia, Mexico, Poland, and South Africa, which all have large reserves. Graphite is a major component of lithium-ion batteries, silver is an important resource for solar photovoltaic cells, and tin is used in solder to create electrical connections.

Although there appears to be ample nickel in both democratic groups, this is misleading because nickel is also needed in the steel sector, so thin reserves will create a global squeeze. Moreover, Indonesia maintains an export ban on raw nickel, and Chinese companies dominate processing in the Southeast Asian nation. As table 2 shows, dropping Indonesia, and therefore conceding the production of nickel to Chinese supply chains, would create a major liability.

This liability emerges despite the fact that the Johns Hopkins Net Zero industrial Policy Lab’s model reduces nickel-rich batteries to 50 percent of world battery supply, with the world relying on iron-phosphate batteries for the other 50 percent. Further action to reduce reliance on nickel, such as prioritizing hydrogen fuel cells for long distance trucking, may be required. Table 2 also suggests that nickel projects in friendly countries and a processing project inside Indonesia should be urgent priorities for the U.S.-led global partnerships.

Table 3 focuses on U.S. free trade partners, which are favored by the U.S. Inflation Reduction Act of 2022 (IRA). More shortfalls emerge in this scenario for cobalt, chromium, and selenium.

FROM RESERVES TO PRODUCTION

Reserves data doesn’t tell the whole story. Reserves include only measured and indicated deposits that have been deemed economically viable. Many countries have large mineral resources not currently considered to be reserves. These resources may become economically viable in the future, at which point they would be converted into reserves. Moreover, new discoveries can create new reserves. With these additions, the pattern has tended to be that reserve levels stay stable over time despite ongoing extraction.

We need to look at mineral production to examine what can be realistically achieved by 2030. Table 4 compares current and projected annual production numbers. Production here includes only the extraction of the minerals; it does not include processing capacity, where China leads the world.

To project 2030 production, we chose an ambitious growth curve based on the increase in mining during the last commodity supercycle (1995–2010), when rising Chinese demand drove a major expansion in mining. At the peak of the boom, annual growth reached 6.5 percent. Table 4 scales production using the same growth curve.

In table 4, the demand column focuses on the demand of democratic countries, estimated at 54 percent of global demand.

To assess which metals are likely to be supply-constrained, we analyzed democratic countries’ projected demand for critical minerals in 2030 as a percentage of production in 2021 and projected production in 2030. High percentages mean that major increases in production capacity are needed.

Demand as a percentage of 2021 production (the fifth column of table 4) presents the scale of the challenge. On this indicator, anything over 25–30 percent is cause for concern. If 2030 demand requires supply chains 2,500 percent of the current size, as is the case of graphite, then a massive build-out is required.

The last column of the table can be read as the shortfall that would remain after a major build-out of the mining sector in democratic countries. It shows the demand for clean energy supply chains as a percentage of the additional capacity produced by a hypothetical supercycle mining boom. Assuming existing production is needed for other parts of the economy, most of what will be available for clean energy supply chains will be in the additional volumes created by a mining boom. Here, any number over 100 percent represents a shortfall.

In brief, this production-focused analysis presents the same list of trouble minerals as the reserve analysis: cobalt, graphite, lithium, nickel, silver, tellurium, and tin. Even after a projected boom, significant shortfalls remain in these metals. Copper shortfalls are also likely, as production may struggle to ramp up despite ample reserves.

The scale of the challenge is incredible. Even aggressive growth in the mining sector would leave democratic countries drastically short on critical minerals supply. Thus, while all democratic countries could achieve critical minerals independence in most areas based on reserves, increasing production to achieve clean energy targets for 2030 would require unprecedented action.

China’s ability to restrict the export of solar inputs and critical minerals demonstrates that crucial clean energy technologies and inputs could become unavailable to the G7 and its allies. At the same time, excluding China from supply critical minerals is simply not possible in the short term. Therefore, a clear and coherent strategy for focusing and aligning joint industrial policies among the United States and its partners is needed.

CONCLUSIONS

The cautiously optimistic conclusion of this study is that, given existing reserves, it is possible for the United States and its key partners to significantly friendshore production. However, given current production in democratic countries, it would require an unprecedented build-out of the mining industry to achieve 2030 clean energy targets.

The implication is that critical minerals development must follow the ethos that led the development of COVID-19 vaccines: the United States and its partners must work faster than ever thought possible. This would require an extremely focused and targeted approach—nothing less than a highly coordinated joint industrial strategy. However, the ability to achieve the necessary build-out of the mining industry is subject to significant financial, social, environmental, and political risks. For example, major protests and legal challenges designed to halt mining development could serve as a hard brake.

This study could be used to underpin joint industrial policy by identifying priorities for initiatives such as the PGII and the Minerals Security Partnership. First, it could be used to set focused targets for U.S. diplomatic and economic efforts. Since the build-out of these supply chains needs to happen so rapidly, a targeted, strategic approach is necessary.

Second, the study highlights linchpin countries that should be engaged to ensure they remain U.S. partners or remain nonaligned. Indonesia (which has large reserves of nickel and tin), Peru (silver), Brazil (graphite), and Türkiye (graphite and chromium) are all critical. These countries already partner with the United States and other democracies on security and economic challenges, and the United States should double down on these partnerships. The key will be making sure that the governments of these countries see value for themselves in being part of a resilient supply-chain partnership.

Third, the study has implications for the coordination of domestic industrial strategies, highlighting potential technology choices. As noted above, for example, nickel demand can be reduced in a variety of ways, including by incentivizing hydrogen use for some road applications or decreasing demand for EVs. Graphite has potential substitutions such as silicon, and targets could be adjusted accordingly. More ambitious policy proposals, such as drastically reducing car usage and sales, would also reduce the need for battery metals and potentially lower demand for solar panels and turbines through reduced electricity demand.

Finally, this analysis has a number of limitations. The most important is that it looks at reserves and not resources and that it scales only at historically observable rates. Both of these assumptions could be varied in future work.

Bentley Allan is a nonresident scholar in the Sustainability, Climate, and Geopolitics Program. He is also the director of the Net Zero Industrial Policy Lab and an associate professor of political science at Johns Hopkins University.
 
Noah J. Gordon is acting co-director of the Sustainability, Climate, and Geopolitics Program and a fellow in the Europe Program at the Carnegie Endowment for International Peace in Washington, DC.
 
Cathy Wang is a research associate in the Net Zero Industrial Policy Lab and is pursuing an undergraduate degree in international studies and applied math at Johns Hopkins University.

To read the full article, please click here.

 

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Of Bytes and Trade: Quantifying the Impact of Digitalisation on Trade

Introduction

Digitalisation is thought to have played a key role in reducing the costs of engaging in international trade, giving rise to new opportunities for firms and consumers to benefit from trade (WTO (2018) and López González and Ferencz (2018)). However, little is still known about the nature and evolution of digital trade. While some studies have explored the trade-enabling effects of digital connectivity, the empirical literature has mostly overlooked a more in depth and holistic analysis of the quantitative impact of digitalisation and digital trade policies on trade and trade costs.

This is, in part, due to data limitations – coverage of trade data or of measures of digital trade policies has not overlapped in a way that enables robust analysis. However, recent updates in existing trade databases and the emergence of new data sources mapping the digital trade policy environment provide opportunities to undertake new analysis.

This paper has two main parts. The first uses available statistics to map the nature and evolution of digital trade and related policies. The second uses a structural gravity model to identify the quantitative impact of digital connectivity and digital trade policies on trade costs and trade flows. The aim of the paper is to provide a robust evidence-base that can feed into ongoing digital trade discussions, whether under the WTO Joint Initiative on e-commerce, in relation to digital trade provisions in regional trade agreements (RTAs), or in the context of emerging digital economy agreements (DEAs). The work is also important in the light of the COVID-19 recovery which has led to a ‘new normal’ that is more digital than before (Pew Research Center, 2021).

The paper is structured as follows. The next section offers an overview of the evolving digital trade environment, providing preliminary estimates of the value and structure of digital trade and mapping the underlying policy environment in which digital trade is unfolding. Section 3 provides an econometric assessment of the impact of digital connectivity and digital trade policies on trade and trade costs. Section 4 concludes, providing some preliminary policy implications.

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Javier López González is a senior economist at the Trade and Agriculture Directorate of the OECD. His recent work is focused on digital trade.

Silvia Sorescu is an Economist/Policy Analyst in the Emerging Policy Issues Division of the OECD’s Trade and Agriculture Directorate, which she joined in 2010.

Pınar Kaynak is an independent researcher. 

To read the full paper, please click here.

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