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Environment

Opinion: Improve trade regulations to curb resource squeeze

A new global challenge is threatening the German economy: many raw materials are in short supply. It's not because deposits are empty, but because international trade mechanisms are outdated, writes Juergen Wiemann.

A worker walks past a stack of rolled steel on a dock at Guangzhou, in south China's Guangdong province (Photo: Greg Baker/ AP)

"China uses unconventional methods to secure access to raw materials in Africa"

Industrial companies in Germany are complaining about the rising prices of rare minerals and metals needed for electromobility and photovoltaics. One in two, according to a poll conducted by the German Chamber of Industry and Commerce (DIHK), even worries whether it will get the critical raw materials at all. Yet, geologists say all metals will be available in sufficient quantities in the earth's crust for the foreseeable future. At worst, oil may become scarce.

Geology is, however, responsible for the concentration of deposits on just a few of the world's regions and countries. This leaves the way open for the formation of cartels and for monopolistic behaviour, especially as global production of raw materials is below the "geological production possibility".

This is due to a political environment in many developing countries with major reserves which is anything but inviting for mining investment. And that is no coincidence: rare and strategically important natural resources simply attract war and civil war.

Demand on the rise worldwide

Solar panels (Photo: juwi Holding AG)

"If one raw material is not available, the whole value chain is in danger"

German industry's acute fear of a resource squeeze is aggravated by the coincidence of rising world demand and the reluctance shown by a number of countries to supply their natural resources: high-tech industries are processing more and more new minerals and rare metals.

If only one of these substances is not available in sufficient quantity, the whole value chain is in danger. But that is exactly what is likely to happen, because with their rapid industrialisation, emerging economies, too, are developing a growing need for industrial raw materials. It is no wonder that they are inclined to limit exports of their raw materials or to impose export taxes on them so as to give their own industries a competitive edge. Only recently, China has demonstrated this kind of self-assertive industrial policy with its restrictions on the export of rare earths, startling the old industrialised countries.

Furthermore, the emerging economies are trying to secure direct access to the raw materials of other developing countries, especially in Africa. In the process, they are using some quite unconventional instruments. Chinese state-owned enterprises, for example, are providing development assistance for complementary infrastructure development.

Thus, the concern about the supply of raw materials is entirely justified. Consequently, the German government and the European Commission are taking the matter seriously. A report by the European Commission judges the supply situation to be critical in the case of 14 materials.

Governments get involved

General view of the conference room of the WTO General Council at the World Trade Organization, WTO, headquarters in Geneva, Switzerland (Photo: Denis Balibouse/ AP)

The WTO headquarters in Geneva, Switzerland

With its 'Raw Materials Initiative', the Commission intends to face up to the emerging supply risks and to encourage joint action by the EU Member States to reduce dependence on external raw materials through increased materials efficiency, recycling and a search for alternatives.

The German Economics Minister, too, is suggesting that a 'German Raw Materials Corporation' should act as a demand cartel and challenge the supply power of China and other commodity exporters. For a liberal economics minister, this is anything but a matter of course. According to his 'Weltanschauung', it is best left to the individual enterprise to worry about its supplies of raw materials, while government takes responsibility for the functioning of open world markets in compliance with the rules of the multilateral trading system.

Yet it must be asked whether invoking the WTO rules against aggressive trade policies will be effective in the case of China. The WTO itself does not have any 'hard power' to impose sanctions for infringements of its rules; it can do no more than award the victor in a dispute settlement the right to take retaliatory measures with a similar effect to that of the infringement committed by the loser. But as China's economic weight in the world grows and its industries become increasingly integrated into international value chains, the leverage exercised by punitive European tariffs on imports from China dwindles.

Subsidies in developed nations

A farmer harvests winter barley at a field near Endingen, southern Germany (Photo: Winfried Rothermel/ AP)

European countries protect their agricultural products through subsidies

Yet, through the sheer existence of the multilateral trading system, WTO members tend to follow the rules most of the time, even without formal dispute settlement. When referring to the 'soft power' of the WTO, member states such as Europeans and Americans, however, have felt no compunction in defending their agriculture against imports from more competitive developing countries and to subsidise their own agricultural exports.

Therefore, not only notorious critics of globalisation discern an asymmetrical distribution of power in the world economic institutions between industrialised and developing countries, which should at least have been corrected in the WTO during the current development round. But after nearly ten years of negotiations in the Doha (development) Round the promise has still not been kept.

Beyond ritualised commitments in every G7/G8/G20 summit communiqué, neither the EU nor the U.S. has made a convincing effort to cut the Gordian knot of the mutually obstructive agricultural interests of industrialised and developing nations with a general offer to open their markets and reduce their export subsidies.

Improved management and trade regulations

Further evidence of the half-hearted nature of the Europeans' commitment to the world trade order, with its implications for the trade and economic policies of all the member countries, is the little attention paid to this year's 'World Trade Report' of the WTO on 'Trade in Natural Resources' . Based on the state of art in economic theory and citing numerous empirical examples, the 'World Trade Report 2010' describes the specific mechanisms and perils of natural resource markets and the exploitation of natural resources in a finite world.

In his foreword, WTO Director General Pascal Lamy even questions the “standard prescriptions for greater trade openness” for natural resources markets, according to which free trade will always produce the best result for all participating countries. He argues that the developing countries' management of natural resources should be improved to prevent over-exploitation and that the WTO should adopt further and more precise rules on the world trade in natural resources with a view to defusing the emerging conflicts between producing and consuming countries.

Lamy therefore rightly calls for a “prompt closure of the Doha Round”, so that the new challenges and conflicts in the international natural resources trade may be dealt with under the WTO umbrella.

Dr. Juergen Wiemann

Dr. Jürgen Wiemann is head of the research project 'Multilateral Trading System and Development Cooperation' at Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) and former Deputy Director of the German Development Institute (DIE). DIE is one of the leading think tanks for development policy world-wide. DIE draws together the knowledge of development research available worldwide, dedicating its work to key issues facing the future of development policy. The unique research profile of the DIE is the result of the cooperation between research, consulting and professional training. DIE is building bridges between theory and practice and works within international research networks.

Editor: Nina Haase/ Anke Rasper

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