As world trade shifts to invitation-only clubs, Australia is facing tough choices

A profound shift is underway in global trade. Governments are moving beyond traditional free trade agreements open to all countries and embracing what are increasingly called “economic security agreements”.

This means the international trading system is moving from a club open to all^[1] prospective members who can meet the rules, to invitation-only clubs where security competition between nation states determines who can join or is excluded.

An example of this new type of economic security agreement is the US-led initiative to create a critical minerals trade bloc^[2] aimed at diversifying global supply of critical minerals currently concentrated in one country: China.

Critical minerals^[3] are hard-to-make niche metals^[4] essential to the production of smart phones, semiconductor chips, electric vehicle batteries and a wide range of high-tech military products.

The United States has invited more than 50 countries^[5] – including Australia – to discuss a club for critical minerals economic security. Only invited countries may participate, and China is not on the list.

Why are the US and partner countries building an exclusive minerals club? And what benefits and risks could it pose for the world?

The battle for influence

The US and China view each other as geopolitical rivals^[6] competing for influence over regional and global affairs. In my research^[7], I analyse how this competition plays out as reduced economic dependence and more strategic trade policies.

For example, the US has been limiting exports of advanced technology such as semiconductors^[8] and waging a trade war^[9] against China to reduce economic ties and maintain technological leadership.

China in turn has used its dominance over global critical mineral supplies to influence^[10] US policy. Last year, China reduced exports to world markets in response to trade tensions with the US, causing major global disruptions^[11] in advanced manufacturing.

China also banned^[12] critical mineral exports destined for the US defence sector, impacting defence production supply chains.

The impact on US industry was enough to persuade the Trump administration to reverse some of its restrictions on advanced semiconductor exports to China. This was in return for^[13] Beijing promising a one-year export control freeze on rare earths.

Realising the extent of its vulnerability on critical minerals, the US is now leading a new form of economic security trade agreement for these metals.

Look who’s back

Last week, the US hosted a Critical Minerals Ministerial^[15] meeting in Washington with representatives from 54 countries and the European Union.

Australia’s Minister for Resources, Madeleine King, was in attendance. The irony here is that after 14 months of ignoring trade agreements and levelling tariffs on most of the world, the US is now seeking the help of other nations to help diversify supply.

Despite this, many other countries share an interest in loosening China’s grip on critical minerals production, and are willing to cooperate.

The US-led club plans to use a variety of market intervention tools to boost new supply. These include measures such as subsidies^[16] and multi-year guaranteed purchases^[17] to encourage new investment.

Only businesses from member countries will be able to access these benefits. Meanwhile, businesses from outside the club will face tariffs on their exports.

These interventions are typical of the new economic security era of government control over markets. If successful, this strategy could ensure global manufacturing is not vulnerable to a single country’s decision to reduce supply for political reasons.

Yet it also risks sparking a new trade war in the short term, as China warns countries against cutting it out of the agreement.

A big opportunity for Australia

My research^[18] highlights the fact Australia has the resources^[19], mining capacity and government policies^[20] to play a major role in diversifying global mineral supplies.

The benefits of doing so include new investment, high-skilled jobs and geopolitical influence – all useful in an era of growing tensions.

Australian policies incorporate a production tax credit^[21] and funding support for major new rare earth refining operations^[22].

Australia was also the first country to strike a critical minerals deal^[23] with the US, last October. This promises major investment, putting Australia in pole position for developing a significant new industry.

Read more: Australia is betting on a new ‘strategic reserve’ to loosen China’s grip on critical minerals^[24]

A hard choice

However, risks remain. The US is proposing the US-led trade bloc should apply tariffs to mineral imports from outside the bloc. This would apply to China. Australia has publicly stated^[25] it supports diversification, but is against using tariffs to do so.

If Australia sticks to this position, it could end up outside the trade bloc. This would be disastrous for its critical mineral strategy.

But if Australia agrees with the tariff plans, it will create tension with China^[26], the biggest buyer of Australian exports.

This puts the government between a rock and a hard place. Nonetheless, it would most likely opt in to the agreement if it comes to an ultimatum.

In an economic security era, there are few easy choices. Australia will need to take risks to secure its critical mineral strategy.

References

1. ^{^} club open to all (www.wto.org)
2. ^{^} critical minerals trade bloc (www.reuters.com)
3. ^{^} Critical minerals (theconversation.com)
4. ^{^} niche metals (www.csis.org)
5. ^{^} more than 50 countries (www.state.gov)
6. ^{^} geopolitical rivals (www.foreignaffairs.com)
7. ^{^} my research (doi.org)
8. ^{^} such as semiconductors (www.congress.gov)
9. ^{^} trade war (www.piie.com)
10. ^{^} influence (www.csis.org)
11. ^{^} major global disruptions (www.reuters.com)
12. ^{^} banned (www.csis.org)
13. ^{^} in return for (edition.cnn.com)
14. ^{^} Matt Rourke/AP (photos.aap.com.au)
15. ^{^} Critical Minerals Ministerial (www.state.gov)
16. ^{^} subsidies (www.elibrary.imf.org)
17. ^{^} guaranteed purchases (www.reuters.com)
18. ^{^} My research (www.hinrichfoundation.com)
19. ^{^} resources (www.ga.gov.au)
20. ^{^} government policies (www.industry.gov.au)
21. ^{^} production tax credit (www.industry.gov.au)
22. ^{^} rare earth refining operations (www.pm.gov.au)
23. ^{^} strike a critical minerals deal (www.industry.gov.au)
24. ^{^} Australia is betting on a new ‘strategic reserve’ to loosen China’s grip on critical minerals (theconversation.com)
25. ^{^} publicly stated (www.afr.com)
26. ^{^} tension with China (www.reuters.com)