The era of ‘reglobalization’

Marianne Schneider-Petsinger

Hello, and welcome to this event on reglobalization. Despite all the talk about globalization being dead, the world really is not deglobalization – deglobalizing. Rather what we’re seeing is reglobalization, or perhaps put differently, a pattern of economic fragmentation among certain geographies and certain sectors. But that is going hand-in-hand with economic integration among different players, regions, and a reconfiguration of supply chains away from just efficiency towards much more resilience.

And so again, these different patterns really are about reglobalization, in the words of Dr Ngozi Okonjo-Iweala, Director-General of the World Trade Organisation, and some of the efforts to reach this new era are perhaps defensive steps towards taking supply chains away from China, reducing excessive dependencies. But on the other hand, some of the recent efforts that we’ve seen are much more in the offensive bucket, if you will, efforts to strengthen the transition to green and digital economies, for example, with the Inflation Reduction Act in the United States, perhaps being a most prominent example. But at the same time, we’re also seeing subsidies for semiconductors in the US and Europe and around the world.

So, key questions really around, are we seeing a new subsidies race? Are we seeing perhaps more trade fragmentation? Are we seeing green trade wars and increased protectionism? And to help us answer some of these questions, I’m really thrilled to be joined by a stellar panel. Cecilia Malmström, Senior Advisor at Covington, but also a non-resident Senior Fellow at the Peterson Institute for International Economics, and in her prior life EU Trade Commissioner for Trade.

We’re joined online by Hirohide Hirai, Vice Minister for International Affairs in the Ministry of Economy, Trade and Industry, from Tokyo. I have to say, he’s joining us very, very late or perhaps rather early in the day in Tokyo, so thank you very much, at this point, for joining us online.

In the room with us is Andrew Mitchell, who is the Director-General at the Department for Business and Trade, and last, but certainly not least, Tim Figures, he’s an Associate Director for EU and Global Trade and Investment at Boston Consulting Group.

My name is Marianne Schneider-Petsinger. I’m a Senior Research Fellow here at Chatham House in the Global Economy and Finance Programme, and also the Project Director for the Global Trade Policy Forum, under which this event is taking place. And we’re really grateful for our partners, AIG, Boston Consulting Group and Diageo.

Before we get started, a couple of housekeeping points. The event is on the record and being recorded, so please feel free to tweet using the #CHEvents. There is going to be a chance for you to ask questions or share comments and perspectives, towards the end of our one-hour long discussion. So for those in the room, please just raise your hand, I’ll come to you, and then please briefly introduce yourself. For those online, there is a Q&A box at the bottom of your screen, so type your question there, and I’ll bring you into the discussion by reading out your question.

And again, we are very delighted that we are joined by this extraordinary panel, and to kick us off, Cecilia, let me turn to you. How do you view the trajectory of globalization? What do you make of the myth and realities perhaps of globalization, deglobalization, and given your transatlantic experience and background, where do you think the US,-EU and perhaps also UK, in that context, trade and investment relationship, is heading?

Cecilia Malmström

Yes, I wish I knew. Good evening, everybody, thank you so much for inviting me, it’s a true honour to be here. Well, I can start with good news; globalization is not dead. There are actually very few signs that it is dead, if you consider trade for instance, global trade. Global trade is higher than in many years, and actually EU – US-China trade is also all-time high. And we saw a unique international co-operation in the development of vaccines, for instance. So, there’s lots of things happening, but of course, globalization has changed, and you outline much of it, and we can call that reglobalization, if we want. There are many – reglobalization, deglobalization, slow globalization, bi-America, bi-European, polycrisis, I mean, there’s so many things that are describing the world, so it’s good to try to get some order to that.

But – and this is something we have seen, since a couple of years ago, of course, the big globalization boom in the early 90s where trade really took off under liberalisation and co-operation, and strong international multilateral organisations. That era is maybe not gone, but at least has gone down. But what we have seen, last years, is of course, the trade wars initiated by former President Trump who said, “Trade wars are good, they’re easy to win,” and he, sort of, initiated this trade war with China. Then came COVID where we saw how dependent we were on some issues and where ports closed and a really hiccup in supply chains. But remarkably quick they recovered, and global chains – global trade actually worked throughout the pandemic.

Then we saw – we see every day the terrible atrocities happening in Ukraine, Russia’s invasion, that affects trade as well, and it’s splitting the world. And then we see that President Biden has actually not changed much from Trump’s more protectionist trade policy, rather developed on it, even if it’s in slightly different terminology. And this all has led to a geopoliticization of trade, that if it – and maybe you can comment on that later, but if we saw just in time, before now we have just in case, or maybe even just with friends, as friendshoring, it’s come – it’s becoming a very important term in the US debate.

And this is, of course, changing trade patterns. We see diversification, we see a more focus on resilience, on flexibility, and U – the US, who was instrumental in building up the modern trading system and setting international institutions, they are actually more – disengaging from the world. We see a more isolationalist US. We see that they turn away from international organisations, such as the WHO, the World Trade Organization, and we see a focus on industrialisation, subsidies, a trade policy that is worker-centric, but does not open for, sort of, trade agreements in the terms of market access, or getting rid of tariffs and things like this.

And then, of course, EU trying to follow this a little bit, coping with how do we deal with IRA? How do we deal with this emerging subsidy race in parts of the world? Also having a lot of trade instruments enforced and inventing new ones, but also, at the same time, keeping good trade relations, deepening trade agreements that exist, trying to finalise those who are in the making, and hopefully, ratifying others who’s been laying there for quite some time.

Lessons learnt from very early stages of the – Russia’s war in Ukraine, how bad it is to be dependent on gas, and now Europe, US and many others are seeing that we are also very dependent on the new currency of the future, which is critical minerals, rare earth, and 80/85% of that extraction or processing, or the process, is owned by China.

And this is where the derisking, another of these terms, trade nerds have had a lot of new words to deal with in the dictionary this year. So derisking comes in, which is a way to see how the – so all this is of course taking place. The EU and the US have, I would say, exceptional good relations on the security side, with Ukraine and co-ordinating all the Russia sanctions. But there are tensions in the trade side, but trying to find ways forward with the Trade and Tech Council, which is a talking shop, but a useful talking shop, where there are discussions and a way to try to cement relations, also in light of the possible change in the White House in a little bit more than a year.

And to further paint the picture, just two mentions, and then I’ll be quiet, the weakening of international organisations. The WTO is very weak, and both US and China and others are not respecting the rules. Other countries are struggling to modernise, to make up, there are small baby steps forward, which is good, but it’s not far enough. And then we have, and I hope we can come back to that, we have a new, sort of, potential conflict on the greening of trade. I mean, IRA is supposed to – not to be confused by Irish Republican Army, is of course there to launch the big transition to the green economy, which is great, but – and other countries are trying to do that at the same time. And the EU is doing – has – in a short time, will be implementing their Carbon Border Adjustment Mechanism, the CBAM, which is a fantastic idea, but which risks to create quite a lot of trade tensions as well. So, that’s the gloomier picture, then we’ll come back to the solutions later, I hope.

Marianne Schneider-Petsinger

Think on an optimistic note, but thank you so much for setting the scene and pointing out the many, many challenges and the changing global trade landscape. And I think one of the things that you mentioned is derisking and diversification rather than decoupling, which I think brings us perhaps to the topic of economic security, an emerging concept here where Japan has certainly taken the lead, in recent years, and it’s also a big topic of Japan’s G7 Presidency. Mr Hirai, what is the view from Tokyo?

Hirohide Hirai

So, good evening all in – you know, all the people and participants in London. My name is Hirohide Hirai, Vice Minister for Economy, Trade and Industry for Japan, and it is a honour to participate in this panel today. So, I want to start off by saying that, you know, while some people may think that strengthening the resilience of supply chains or putting a focus on economic security is incompatible with globalization and free trade, I don’t agree with this. With the geopolitical tensions we can say that these efforts are complementary if we do it right. I like to talk about two aspects of this problem.

First, of course, there are issues in being overdependent on specific countries for certain materials and products. A well-planned diversification is needed. Japan learned this lesson through painful experience as energy security. Back in 1973, the oil crisis taught us that being dependent on a specific energy source from specific exporters, brought us severe economic as well as social confusion. What did we do?

We didn’t even think of digging our own soil, but instead, created an energy mix by diversifying source of energy, an exporting country, understanding the geopolitical risks that comes with that. The same lesson can be applied today to products and material like critical minerals, which are key resources for our green transformation. So, another point is how a country chooses to react to the situation, whether it chooses to act unilaterally, or in co-operation with the other likeminded countries.

Some people may think that economic security is, in theory, a euphemism for nationalism or protectionism, or that the IRA is the answer to economic security, but I don’t agree with that either. And even the EU’s critical Raw Mineral Act is not ideal either, as it seems to aim to accomplish its goal of own strategic autonomy by itself, and not the overall performance of likeminded countries.

From this perspective, I’ll like to talk about G7 Hiroshima. The main theme of this year’s G7 was to confirm the solidarity of the G7 and strengthen its role in realising the co-operative gover – global society, rather than division and the confrontation. The Heads of eight invited countries and seven international organisations gathered, including President Zelenskyy.

The setting of Hiroshima linked well with the message of peace, and we have received many positive feedbacks. Through the summit and its outcomes, the G7 was able to show that we were willing to work together, instead of going our separate ways, including with the Global South. Coming back to my comments on critical minerals, there were discussions among the G7 countries on improving the situation, where countries are overdependent on certain country. We decided to ask IAEA to set a common goal of ours, rather than each country setting its own goals and actions, and to propose actions that likeminded country can take collectively.

Another example of discussion on supply chain is that the trustworthiness and reliability was recognised as an important factor in supply chains, along with transparency, diversity, safety and sustainability. Japan intends to work together with trusted partners inside and outside of G7 to promote free, fair and mutually beneficial economic and trade relations, in compliance with international law, and not to use economic interdependency as a weapon.

Other topics regarding new market policies and practices, economic cohesion, and security lexis associated with the exports and investments in advanced technologies, were also discussed as part of economic security. The G7 Trade Ministers’ meeting is scheduled for October, where these items will be further discussed.

I’ll end my opening remarks by adding that since the trade environment is not only about choosing the most efficient or cost-reductive option, the private sector also has a role to play in concerning their esta – risks in businesses. It doesn’t make sense to reduce costs and quit every insurance that you have in case of unexpected accidents, but it makes just as little sense to pay too much for insurance and run out of businesses.

It is natural to have redundancy in case of risks, such as unexpected market disruptions, and reckless not to tolerate redundancy at all in the name of rationality. This is the core of the discussion on our economic security, and the argument as if politics is trying to override economic rationality is unreasonable. On the other hand, it is also unwise to enforce an economic security policy that ignores costs. So, let me stop here and I look forward to further discussion with everyone today. Thank you very much for your attention.

Marianne Schneider-Petsinger

Thank you very much. Lots of points there that I’m sure we’ll come back to, and I think quite clear by now that the global trade landscape is quite complex and evolving and, Andrew, turning to you, how does the UK navigate this landscape, and particularly its global free trade agenda, having recently successfully acceded to the CPTPP, but also in the face of, you know, the subsidies, how does the UK position itself and what are the tools available?

Andrew Mitchell

Terrific questions, Marianne, thank you very much indeed, and I’ll endeavour not to answer them. I’m joking by the way, just so we’re clear. I mean, I think the first thing to say, from the perspective of somebody sitting at the Department for Business Trade in the UK Government, notwithstanding the challenges that we’re discussing here this evening, and they are significant, nonetheless, over the course of the last few years we’ve been on a journey to execute an independent trade policy for the first time in 40 years. And essentially to use the tools of trade to build a new set of relationships with countries around the world.

You’ve talked about the CPTPP, we’re very proud to have negotiated and concluded accession to CPTPP, because fundamentally, of course, all trade is strategic in its nature, and we can see that growth in the global economy – the opportunities are absolutely enormous in that region for a country such as ourselves. A combination of trade agreements with Australia, New Zealand, with Japan, and now CPTPP, constitutes that strategic shift towards the Indo-Pacific region, which is not about a choice between Europe and the Indo-Pacific region. It is about, however, understanding import demand growth, over the course of the decades to come, the competitive and comparative advantage of UK products and services, and then using the opportunities of trade to negotiate new access to those markets.

So, you would be fundamentally, relatively, at least optimistic about the opportunities because we see the demand, actually, in the context of negotiations and relationships with markets in regions around the world to want to do business. I think, you know, at any given moment in time of course a trade strategy, but also a, sort of, political sta – strategy more generally, is trying to balance and reconcile the quest for security, of course, against the quest for economic growth. And Cecilia described some of the challenges that exist in the world today, those are dynamic, and so, because they are dynamic we’re all anticipating and seeking to anticipate where they might materialise next.

From our perspective, you know, what does that mean in terms of technology, and we can see that there’s a fundamental shift towards digital and, sort of, technology as a big driver of growth in the global climate, but also, the growth in the clean growth economy, you know, to the point that we’re discussing here. To what extent does that genuinely constitute a discrepancy or a contradiction? It absolutely does not. And the quest for green growth is absolutely reconcilable with economic security, but also, with a powerful global economy. Affordable and plentiful energy, as we know, is critical to the growth of our economies. It makes our businesses more competitive, and it’s going to generate jobs and growth. And done right, to the Minister’s point, this really will unlock the next stage of growth in our economies.

We’ve cut our emissions, actually, between 1990 and 2021 by 48% and grown our economy by 65%, and I think that is testament to the fact that this is indeed reconcilable for any country. £24 billion worth of new investment committed to the UK economy, over the last couple of years, in low carbon sectors. So, the aspiration has to be there, the opportunity certainly is, but I mean, I’ll finish perhaps by saying that let’s not, in this discussion, create false opposites. Actually, what we’re looking for, is a balance between security and growth, and frankly, the open international trading system remains our best hope.

Marianne Schneider-Petsinger

So, lots of tensions, but they are manageable, and I guess as part of that strategy to manage those tensions, I think co-operation with the business sector, absolutely key, as Vice Minister Hirai already alluded to.

Tim, let me bring you into the discussion. What is the business perspective, and ultimately, you know, what are going to be the key drivers for how businesses take the decisions that ultimately, again, particularly for supply chain resilience, are happening at a level of firms, rather than the state level?

Tim Figures

Thank you, Marianne, and of course that is the critical point, isn’t it, that whether these shifts or changes happen, whether supply chains become more resilient, whether trade becomes less global or more regional, is ultimately down to businesses making decisions to change their behaviour from the way they probably done things for quite a significant period of time. That’s why it’s quite fascinating to be someone who works with boards of multinationals, these days, to help them think through these questions. And it’s certainly true that geopolitics, a few years ago, would only really have been on the agenda of a few niche sectors like natural resources, or aviation, or sectors like that. Now it is front of mind in most boardrooms, given the sequence of events that we’ve seen, but particularly from a European perspective, the war in Ukraine.

And so, as businesses think about what to procure, where they should export, what their supply chain should look like, where they should invest, and what their manufacturing footprint should look like, and so on and so forth, how many people they should hire, these geopolitical questions and future geopolitical evolutions are now very much part of the mix, in a way they weren’t before. And I think, ultimately, this comes down to changes in cost or incentives, regulation, including things like sanctions or import bans or so forth, and then investor and consumer pressure, which we see particularly in developed economies around ESG-type factors, and is partly why we’re seeing an increased linkage between trade and those things.

See the recent European deforestation regulation is a good example of that sort of thing. And that’s probably not surprising then, that three of the most impactful policies, from a business perspective, we’ve seen, or we are seeing. One, the US Section 301 tariffs on certain imports from China, where imports into the US, for those specific product lines, are down around 25%. Whereas imports for all other products from China are up by 50%. So clearly having a 25% tariff on your products leads you, if you’re a US retailer, to resource those products from somewhere other than China. To the scale and generosity of the subsidies being made available under the US Inflation Reduction Act. Particularly the production subsidies, where Europe’s rela – finds it hard to compete with those ‘cause Europe doesn’t generally do production subsidies. And we’ve seen around $200 billion of new – potential new investments announced already as a consequence of the Inflation Reduction Act.

And thirdly, coming back to this side of the Atlantic, the Carbon Border Adjustment Mechanism, starting in October, the first time an economy has tried to apply carbon pricing as a concept to imports, while it’s too early to see that absolutely shifting trade, I can tell you, in boardrooms, again in Europe and across the world, people are thinking very much about how to comply with that. But also, what the strategic implications might be if, you know, your product, a tonne of steel, goes up in price by 15 to 20%, then you need to think about how to respond to that.

But that’s perhaps some of the more impactful shifts we’re seeing. It’s also true that it is a mixed picture. I don’t believe we can see evidence for a general global decoupling. What we are seeing are businesses responding to policies like the ones I described, which are quite specific, either in terms of sectors or geographies, or products that they focus on. Anything to do with the energy transition, semiconductors, the aerospace and defence sector, these kinds of areas is where we will see these geopolitical shifts happen most, we think.

Now, we’ve tried at BCG to also predict what might happen next, and we have a clever big data model, which we use to try to predict global trade flows out to 2031. And what that tells us, when we look both at GDP and economic data, and also these geopolitical factors, we think overall global trade growth will be relatively sluggish, probably around 2% a year. But what we will see are very significant shifts in who is trading with whom and what they are trading, and we envisage key trade flows, like US-China, to probably decline in value terms. China-EU to stagnant, not to decline, but not really to grow in line with GDP. Russia’s trade with the West obviously to largely disappear, due to sanctions, but that trade to be rerouted to other trading partners, as indeed we’re seeing happening, like China and India.

But what’s really interesting is we’re, sort of, seeing the emergence we think of a multipolar world in trade, where we shouldn’t really think in terms of a Western bloc or an – and an Eastern bloc alone. But also a range of other countries, and Marianne, as you discuss in your paper, mainly in the Global South, who will try to maintain friendly trading relationships with both the developed economies of the West, and the developing economies of the East. And try to carve out a new comparative advantage for themselves through that stance.

And perhaps the most obvious example today is India, currently, you know, seeking to negotiate free trade agreements, including with the UK, and successfully doing so with some Asia-Pacific partners, becoming a very attractive inward investment location for businesses looking to diversify away from China and adopt a China Plus One strategy, but doing that in part quite explicitly on the back of discounted Russian oil, which they’re buying because the West has cut itself off from that market through sanctions. And so, as we go into the next phase of this geopolitical evolution, kind of, economically, I think we need to look very carefully at the Global South and these types of economies to see what role they will play and how they will influence how our trade system and our trade flows will look in five to seven years from now.

Marianne Schneider-Petsinger

Wonderful, and thank you a lot for bringing in developing countries as well, and I think that is a point, again, that’s often made in the discussion around friendshoring. It’s, like, where does that leave those countries that are not currently your friends? But let me pick up that point that you made around, you know, fragmentation or not of the global economy into those two blocs, if you will, one that’s the US, EU or probably G7 + bloc, versus a China, including Russia bloc, where do others on the panel see that happening, and is there a risk that we are seeing this fragmentation?

The IMF recently published a paper saying that this fragmentation through the trade channel alone could potentially reduce global GDP by up to 7%. So the risks are real, but what do you think the likelihood is of a widespread fragmentation? Cecilia, your views.

Cecilia Malmström

Well, I think the risks are real, indeed. The World Trade Organization have similar figures, that it could be between five and 7% of global GDP on average, which means for Africa, for instance, it could be much higher, and lots of African countries are asking themselves, “Are we friends? Are we – if we’re not friends, are we then foes, and where are we in this global trend?” And excluding them or making it more difficult to accede on the global trade arena is, of course, something that would very badly affect their economies. So we need to think about what that risk’s doing to the world. And similarly, they are – on the CBAM, that really risks to influence some of the developing countries a lot more as well, that has a lot of exports, for instance, Mozambique could – it could hurt their GDP quite a lot.

Now, as from October, there will be discussions and starting to see – identify how CBAM will affect different countries. But we risk to see further fragmentation, and this is, of course, something that we have seen also with, what was mentioned earlier, with the political side. That countries do not want to choose between China and the West because they might feel closer to one or another, but they need to trade and have good relations with both partners. And that goes also – many countries who have refused to openly condemn Russia’s invasion of Ukraine, for instance. There is a fragmentation of the North and then the South – Global South, or what you want – and that could be potentially very damaging, and we need to take that into consideration. And if global institutions are weak, that segment is that even more.

Marianne Schneider-Petsinger

And I guess, short of a fragmentation of the global economy, if there is limited decoupling, or to pick up the new language of derisking perhaps, and still lots of challenges on that front. Andrew, under, kind of, fragmentation, derisking, versus decoupling question, do you see that there is a difference between derisking and decoupling?

Andrew Mitchell

I think there absolutely is a difference to decoupling/derisking. I mean, essentially, when you’re derisking, you’re looking forensically at those areas of your own economy that have potential vulnerabilities and where you want to take legitimate measures that are compatible with your international obligations to protect those sectors of those economy. That is a limited and a proportionate measure. Decoupling, in a sense, is a proactive mechanism, you know, essentially reaching out into the international environment, taking steps essentially to create that fragmentation. And I think that’s a – that’s, in a sense, a, sort of, policy prospectus that is of a different order of magnitude. So, yes, there is absolutely a difference.

Marianne Schneider-Petsinger

Great, and we have seen, you know, push for industrial policy, not least in the form of the US Inflation Reduction Act and support for the semiconductor industry, are we seeing a subsidies race, and perhaps is that a good thing, is it a bad thing? If so, how do you mitigate that? Let me bring you into the discussion again, Mr Hirai. Your perspective, please.

Hirohide Hirai

Okay. So, as far as our semiconductor industry subsidy is concerned, especially you would know that the big subsidy toward the TSMC’s investment in our QC area. But – because I was in charge of that – the – that policy actions at the time, but if you see that the subsidy is based on the idea to we will like to react to secure the manufacturing capacity from TSMC, which would have been the ‘Made in Taiwan’, who, from the additional building capacity in Taiwan Island. But at the time I think TSMC have some problems about the securing the – enough water supply, and electricity supply, or engineering supply, so many problems and challenges they faced.

And for their understanding that would be wiser to – for building that capacity in Japan, because we had good water supply there, and also we have some capacity, extra capacity, to supply the engineering, so I think for TMC it made very good sense to have those investments here in Japan. And, of course, other companies are over instinct, they need some help from Japanese Government, and we thought it’s – it pays off or not. And we’ve – we calculate it, and what would be the economic impact of that investment, and that the subsidy will be or the economic benefit will be overweigh than the actual – our dispense on the subsidy.

So, if you suggesting that, kind of, the subsidy is a kind of a thing which you will incur all those – the compassion about the subsidy for quoting of those semiconductor giants, I would suspect that would be the results of those action. Because the – all those semiconductor giants is so carefully calculating of those investment makes sense or not. So, well, I think if – we have to carefully choose the topics when we talk about the industrial policy, what the industrial policy is, and then, of course, we also are simultaneously some – are doing some subsidy for promoting the R&D stuff for the next generation semiconductor stuff. And also, while we are also supporting the R&D stuff for power semiconductor, which would be the key device for the – our energy transition.

So, it is always the – we would think that is the – makes sense or not, for those maybe outcomes or the results of those R&D risks or R&D results, all those kind of things. So, I am not straightly linking of those subsidy is leading to overcapacity worldwide, or the – maybe down to the ground. But we have to be very careful ,of course, that the – we have to be very sensible and also – and then, to be careful calculating that it’s worth paying or not. That is as far as Japanese Government is thinking of that – the subsidy, especially on semiconductor.

Marianne Schneider-Petsinger

Thank you very much, and lots of excellent points there, and I think before I open it up for the audience for questions, Tim, all of you have essentially pointed out critical minerals are ultimately key, both for the green and for the digital transition, but neither Japan nor Europe really are meaningful producers or exporters of those relevant minerals. So, what strategy should be pursued, and again, what is perhaps the business perspective, as we’re seeing these discussions on various deals and, kind of, alliances to secure the supply of critical minerals?

Tim Figures

Well, I mean, the critical minerals question is a really good example of why you can’t actually have an energy transition without global trade, because we all need access to them. We don’t have what we need, and there’s no way developed economies are going to be able to meet anything like their domestic demand from recycling or domestic resources. And sequentially, if you look at the targets in the EU Critical Raw Materials Act, for example, that envisages, by 2030, only 10% of Europe’s requirements would be met from domestic sources, and that’s, kind of, on average, across a range of critical minerals. And some like lithium, the number will be higher, but others like rare earths, as Cecilia was saying, will be much lower ‘cause they simply don’t exist.

So, it’s just not possible to have an energy transition without global trade in critical raw materials. But as we’ve seen, particularly in the way the United States has framed some of the subsidies under the Inflation Reduction Act, particularly the ones for electric vehicles, that’s tried to make a distinction between good critical minerals, or bad, or friendly, or not friendly. And I think it’s no surprise that that’s caused perhaps some of the biggest international – that provision is the one that’s caused the most international diplomatic upset, as a consequence of the Inflation Reduction Act, and, kind of, why this new concept of critical raw materials agreement has been invented, which Japan is the only country so far to have signed, but UK and EU probably not further – not too far down the track.

Marianne Schneider-Petsinger

It is part of negotiations.

Tim Figures

Yeah, so commitments to negotiate are there with both of those groups as well. From a business perspective, you only actually get critical raw materials, or any other natural resource, if businesses make very big and expensive bets. Because mining or natural resource extraction requires an awful lot of capital expenditure upfront. It requires a lot of permitting and other environmental and local political issues to be dealt with, and then your product is, kind of, vulnerable to whatever global commodity markets do in terms of response. So, we’re only ever going to get the quantities of critical raw minerals we need if businesses feel they’re operating in a stable enough international trade environment to be able to commit the many, many billions of their own money that needs to be spent before we can get anywhere near these targets. And I would just ask policymakers to reflect on that, kind of, fundamental point of business economics, as they think through how they want to respond to these challenges.

Marianne Schneider-Petsinger

Wonderful.

Cecilia Malmström

And also, to make it sustainable, because of course a lot of the extracting today is done in a non-sustainable way. It’s quite dirty, it’s an industry that, you know, you could either invest in making that, for instance in Africa, cleaner, that industry, or you could do the other investments. We have, in the country I come from, Sweden, we have all these minerals, down, deep under, and to think that you can get them out in one and half year is totally unrealistic. It will not happen, because there are investment costs, you have the environmental impacts, you have the Sámi indigenous population, you have people who do not want to have this kind of processing in their territories as well. And the – so you really need some sort of global alliance, with massive investments, both where you potentially can get it up, but also, helping countries with infrastructure to make it more sustainable as well, because otherwise, I mean, there will be very – they would be more expensive, so you also need to take that into consideration.

Tim Figures

And we are seeing some interesting political responses in the light of that, in particular what’s going on in Chile, for example, which is where the European Union gets most of its lithium from at the moment. Where, despite the EU’s best efforts in agreeing a critical minerals chapter to its updated free trade agreement with Chile last year we’re seeing a government who – intervening in a way – in a very non-market way to try to control exports of that product.

Marianne Schneider-Petsinger

So, certainly a tension, also if you’re extrapolating this for energy, either get it cheap, or produce it domestically with, you know, more sustainable environmentally, but also labour standards. So, how do you navigate that? Andrew, did you want to come in on that point as well?

Andrew Mitchell

I mean, I’ll just make the obvious point that this is also a huge opportunity for the mining industry, which let’s be honest, has not had the best of reputations over their period of time. There is a massive demand, and we all understand this, and, you know, in a sense, competition in the market now for the right kind of product, one that actually obeys ESG principles and visibly demonstrates that it does. There’s no just green transition without the just part of that transition, and that involves a critical minerals provision and the strategy associated with that with all of the stuff that goes with sensible mining practices behind that.

Marianne Schneider-Petsinger

Audience, this is your chance, I’m already seeing a hand up over here and there, so we’ll work our way from the back to the front, and then to the side.

Dr Nadeau

Well, hi, I’m Dr Nadeau.

Marianne Schneider-Petsinger

And please introduce yourself.

Dr Nadeau

Yeah, I’m Dr Nadeau. I’m a member of Chatham House. I’d like the panel to spend a little bit more time on Africa, which is often the stepchild when we talk about globalization and trade, particularly since it’s the source of so many critical minerals and China’s been fairly proactive, shall we say, in, you know, creating partnerships with China and critical mineral rights. So, do you guys think the US, UK, EU are falling asleep at the wheel on this, or do you think we are keeping up in terms of our role and partnership with Africa, with the African Trade Union, in securing a partnership with getting critical minerals?

Marianne Schneider-Petsinger

We’ll take a number of questions and then I’ll bring in our speakers again. Gentleman over there.

Dr Gordon Perchthold

Hello, Dr Gordon Perchthold, Managing Worldwide. We’ve been having a good macro discussion, but let’s – how do we get to the next level, bring it down a bit more? UK, 80% of its economy’s driven by services, and yet, most of our discussion has been around physical extraction and products. So, the challenge with services is it’s much more impacted by the differences in culture, in institutions, business systems, and arguably, the UK had enough challenges just getting beyond its eight large economies in Europe to the rest of Europe when it was a single market. How are we going to get to Asia?

And I guess there’s two questions, then. One for Tim would be around, what are you seeing with businesses and is it – it isn’t just the big multinationals, the UK is really also driven by small and medium enterprises, how do you help those guys enter those foreign markets, which are quite different to anything they’ve realised before? And I guess that then takes to Andrew, what’s the – you know, they always go back to what’s the government doing? But if you look at, like, Singapore, they have a whole army of people helping their businesses, their small, medium enterprises, almost guiding them along, and it’s – you know, Singapore is not necessarily the type of economy of the UK, but they need the help. Yeah.

Marianne Schneider-Petsinger

Sorry to interrupt you there, but we have a lot of other questions that I am trying to bring in. Excellent points, and I’m sure lots of thoughts from the panel. The lady over here, and then I’ll take one more, and a chance for reflections.

Aurora

Thank you. Hi, I am Aurora. I wanted to ask, you mentioned quite a few different challenges or current issues that we’re facing. But I didn’t hear the climate crisis as being one of them, although you did mention a transition to a green economy. And one of the things that was said is that, you know, a growing economy is reconcilable with this green transition. But I just wonder if – you know, up to this point if the free market hasn’t been able to be – they haven’t had the foresight to see the consequences, or it was quite, sort of, shortsighted, I think, the extraction of minerals. So how can we incentivise businesses and the global trade, which is interconnected, just like our climate, to be more sustainable, to think in a way that – like, the extractions of materials that we did in a sustainable way, not only if it happens in Sweden, but also if it happens in Africa?

Marianne Schneider-Petsinger

And the final question is one online. I’m going to link that to the question around services because it is around digital trade and AI, “What are the expectations of economic security and competition in AI strategies and future geopolitical implications?” Any thoughts on that? Mr Hirai, perhaps I can come to you first for your thoughts on the whole range of questions, you don’t have to answer them all, pick and choose.

Hirohide Hirai

Okay, thank you. So, let me answer to the critical minerals question. Based on our experience what we have gone through, or the rare earth export banning from China in 2020 – 2011, or from 10, and my memory’s gone blurred, but it was a time when we had a somewhat dispute with the – our sea territory with China. And all of a sudden, China decided not to export their rare earth to Japan, and, yeah, we had, I think, more than 90% of dependence on China at the time. So, it was a very big blow to us and all of a sudden, we realised how we are vulnerable that the situation was. And we tried to give the – some cheap loan to Japanese companies to encourage them to extract – to go into the mines, and we find a good Australian partner and then they started to extract in the Australian mine in the rare earth.

But because that – the nature of the business, it requires such a long, long timeframe, and also, of course, it is a natural thing for a Chinese competitor to try to expel out all the new entrants. So we had to very, very patient and we have to be – and tenacious, to help the Japanese new entrants into – succeeding into – squeezing in that rare market. So, from that experience, we have to be very patient, whatever the critical mineral is, not only the rare earth, but the maybe other critical minerals we want to have for our energy transitions, that is the first thing.

And then also, in order to be differentiate of the existing bad nature of the extracting, the activities now occurring in some part of the world, we are – especially take the advantage of the importing power or purchasing power, we have to be careful to choose those minerals, which is mined as the way we’ll like to see, or the way we don’t want to see. And so, that’s the thing we will like to do more, and then that’s the thing we will like to explore, and then too, we like to discuss about how we can be united about those procurement policies, among the likeminded countries.

And those are the policy suggestion we expect from the IAEA’s recommendation for the answers of the – where our redress to the IAEA, and then based on those results of those IAEA’s recommendation, we will like to deepen our discussion. How we can react, how we can be united among the likeminded country to lessen the – our dependence on the certain countries of the processing or extraction. And that’s my answer to the critical minerals.

Marianne Schneider-Petsinger

Wonderful. Sorry for interrupting you, but again, just keeping an eye on the clock and we only have a couple of more minutes until we’re at the end of the hour discussion. But Andrew, thoughts from you, particularly on that question of services and what the UK government is doing.

Andrew Mitchell

Yeah, and it’s a really good question, and by the way, it’s a very big priority for us, for all the reasons that you’ve identified. It’s a significant part of our trade, it’s a very significant part of the UK economy, as you say, 80% of the UK economy, 47% of our external trade, but also has huge growth potential and indeed, the UK services export economy is growing rapidly.

The thing I’ll say about this is that, you know, as you embark on an independent trade policy, with that perspective in mind, you have to start to take significant steps towards, for example, data localisation, ensuring that you are tackling mobility, because that’s one of the other critical underpinning factors, you’re looking at mutual recognition of professional qualifications as a priority.

We are doing this as part of the trade agreements that we’re negotiating. We have, for example, a bespoke trade agreement. We negotiated a digital economy agreement with Singapore very specifically, because we can see that the future of our relationship with Singapore, in that particular context, is very largely about the services economy. So, having the tools for international trade in your hands, and having a sense of where growth will come from, in this particular context in services trade, gives you the capacity then to be able to target that kind of activity, but I absolutely agree with the premise.

As to what the government is doing, the government also published an export strategy in November 2021, 12-point plan, export academy, export support service, absolutely getting into supporting exporters to get into international markets. Because fundamentally, if you have an independent trade policy then the proof of whether it’s succeeding or not is whether you’re trading, and therefore you need, particularly as you’re changing the terms of trade by creating these new trade channels, you need businesses to know how to navigate the rules of the road. So, that’s emphatically what we’re about.

Marianne Schneider-Petsinger

Tim, on the point about SMEs versus the big multinationals.

Tim Figures

Well, I mean, I think Andrew, sort of, made the point, the reason why governments provide these kinds of services targeted at SMEs is precisely because they need a more – more support and the changes in – the UK’s changing trading relationships, particularly with Europe, make life quite difficult for SMEs in the short term because that – Europe was where they tended to trade. And the kind of initiatives that Andrew was talking about are the kind of things you would do to try to, I think, overcome those challenges and make sure SMEs can understand the benefits of exporting, and to do that.

Marianne Schneider-Petsinger

Cecilia.

Cecilia Malmström

Well, on your question on climate, of course that is the biggest challenge that we have, and trade can be helpful there by facilitating trade in green technologies, for instance. There is – there was an attempt to get away with tariffs on green technologies within the premises of WTO, that should be taken out of the freezer again, include services as well. On the – and on CBAM, for instance, I mean, many countries are trying to tax carbon or to price carbon in one way or another, and this is a very good way of achieving your Paris goals. You can do it in different ways, but the important thing is that you don’t punish countries who do it slightly differently than the EU, for instance, but that you try to find a moratorium or a mutual recognition agreement, so that you don’t enter into a race in that.

And also on green subsidies, I mean, I think subsidies is nothing new. We’ve seen it before in the world, but the new is the climate crisis. So, many people would agree that green subsidies make sense, but we need to sit down, in some sort of fora, a G7 maybe, or G20, ideally, WHO too, but what is a good subsidy and what is a bad subsidy? So that we don’t escalate tensions, because pockets are much deeper in some countries than in others and we don’t want this to be counterproductive. So, I think trade can help, but we need to sit down and figure out some rules.

Marianne Schneider-Petsinger

We have time for two more questions, please keep it very, very brief and succinct. Right here, and then over there. Question right here in the front.

Hugo Barker

Thank you. Hugo Barker from Imperial College. One of the core, kind of, narratives of the, kind of, populist discussion is an anti-globalist agenda, particularly pointing out, kind of, the loss of manufacturing jobs in developing coun – in developed countries. Do you think onshoring, that will take place with the derisking approach, will actually bring back these jobs, or will they just create jobs for the robots, and could that actually further inequality? Thank you.

Marianne Schneider-Petsinger

And final question in the room, over there, please.

Patrick Flynn

Hi, thank you very much for the interesting discussion there. Patrick Flynn’s my name. Yeah, just on the Middle East, we haven’t really discussed that at all, and there’s a real push for peace in the region, it seems to be, and it looks like they might be looking for a period of prosperity and maybe could be an up-and-coming, you know, regionalisation that we’re discussing. I just wanted to get your views on that.

Marianne Schneider-Petsinger

And perhaps on that last point of increasing regionalisation, to some extent, we’ve talked about minilateral, to some extent, we’ve talked about plurilaterals and working with likeminded partners. If you are looking at the future of trade, how optimistic are you that trade can still be an engine for economic growth and an area for co-operation, so that we can hopefully finish on a more positive note than the doom and gloom that I sensed at the beginning of the discussion. Tim, perhaps kick off with you.

Tim Figures

Oh, I am absolutely positive that trade will continue to grow and be a force for global growth, but that the changing rules of the game mean that both governments and businesses need to adapt the way they think about trade to make the most of those opportunities. And simply doing things the way they’ve always done them probably isn’t going to be a successful strategy five, ten years from now.

Marianne Schneider-Petsinger

Andrew.

Andrew Mitchell

Yeah, I mean, I think, yeah, there’s a big convulsion happening, isn’t there, in the global economy? We talked about the clean growth convulsion, because that’s what we’re experiencing, and we are about to see what happens when AI and digital technology start to really impinge to the question on domestic economies and on traditional sources of employment. I mean, actually, the job that we’ve got to do, and if we want to be optimistic about the future, is to navigate carefully through the conundrum that is the potential pressure towards protectionism, particularly in that context, because that’s the risk.

Ultimately, the, sort of, onshoring question is about the return to mercantilism and autarky is a consequence of the fact that we feel that we can’t manage the risks and we can’t manage our own populations through those risks. And that we turn inwards, as a consequence, and actually, as those who believe in free trade and the power of international markets actually to solve a lot of these problems, we have to then embrace the opportunities and negotiate and navigate new rules. I absolutely agree with what Cecilia said earlier on, you know, a part of this is – has to be a recommitment to multilateralism and to the international rules of global trade.

Marianne Schneider-Petsinger

Call for action. Mr Hirai, and very briefly from you for your final thoughts, at least in this discussion.

Hirohide Hirai

Okay, so I’m very confident about the trade is – will play a very important role for improving on the – especially on the lifestyles, the life level of the Global South countries, and then the economic power of those Global South country as a whole will outweigh on the current existing – the developing countries. So, as – so, their desire to improve their lifestyle is insatiable. So, in that sense, and from our developing countries’ point of view as well, we need to trade, of course, and without trade we cannot keep this living standard as well. So, in that sense, we’re – I’m very confident. I’m very positive about trade. Thank you.

Marianne Schneider-Petsinger

And Cecilia.

Cecilia Malmström

Well, on the very short-term basis I’m a little bit pessimistic, I have to say. The E – US-China tensions will remain for quite some time, and that – they are instrumental for the rest of the world. On a longer time basis, I think – I mean, we need to rethink and do more for the distributional problems when it comes to the benefits of trade. Trade will not distribute the benefits, but there needs to be policymakers who take a great responsibility to do that for the globalization and the robotisation of the labour market and so on. I think, for instance, what’s happening with CPTPP is a very good example. The EU should join, actually.

This is something that you see a new dynamism, you see rules, you see all over the world countries are signing up now to join this. This is a positive thing that we should do, and we must sit down, again, emphasising, to sort out some rules, not least for the developing world, because otherwise it would be the rule of the jungle and that is not good to – for trade or for anybody. So, on a medium-term basis, I’m optimistic, but on a short-term basis, I think it will get worse before it gets better.

Marianne Schneider-Petsinger

Cautious optimism. Thank you so much for sharing your time and insights. Thank you to the audience also for listening in, asking very, very relevant questions. It’s been a true pleasure, and as you can see by the range of questions that we had, but also questions I’m afraid I didn’t get to online and in the room, apologies for that. But clearly a sign that we need to continue the discussion and there is a lot to cover in the evolving landscape of global trade. Thank you very much [applause]