Not everybody can have all of the raw material

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The EU’s discussions with Australia over “double pricing” of raw materials during the negotiations for a free trade agreement (FTA) point to a conflict of goals in the EU’s approach to ensuring its supply of critical raw materials.

The FTA negotiations experienced a setback earlier this week when Australian trade minister Don Farrell deemed the agricultural market access offered by EU negotiators to be insufficient – and subsequently headed back to Canberra.

While the main point of conflict concerns agricultural market access, the disagreement around double pricing is highly significant for the EU’s critical raw materials policy.

The EU would like to have access to Australian raw materials under the same conditions as Australian consumers and therefore wants Australia to commit to a policy that would prohibit so-called double pricing that disadvantages EU companies compared to Australian ones.

One of these policies is the regional government of Western Australia’s policy of reserving 15% of liquified natural gas (LNG) production from each LNG export project for the domestic market, which reduces prices for domestic gas consumers.

From a European perspective, insisting on this issue makes sense. Even more so, given the fact that the European Commission proposed the EU build up the processing capacity of at least 40% of its need for processed strategic materials by 2030 in its Critical Raw Materials Act (CRMA).

The current number is far from this target, as the chart of the week below shows, and EU member states want an even higher target of 50% in their negotiating position for the CRMA.

If the EU is to build up this processing capacity and if this nascent European industry is to be competitive, it needs to be supplied with reasonably priced raw materials.

However, the EU Commission wants the CRMA to be more than just a policy to guarantee the supply of critical raw materials. The EU wants to be an alternative to other actors, who just extract valuable resources and leave the countries of origin with the problems that a dependence on mining entails.

The EU wants to help third countries develop their industries along the value chain, so that they can have more value-adding activities than just raw material extraction.

Already, it’s a bit difficult to see how the EU wants to combine a massive ramp-up of domestic processing capabilities with an additional escalation of processing capabilities in other countries. However, given that the idea of the CRMA is to be much less reliant on China, maybe it is possible to do both.

In practice, however, the tension between the two goals becomes evident in a debate like the one over double pricing.

Raw materials exporters often struggle to establish other industries.

The highly profitable raw materials sector attracts workers with highly competitive wages, which raises labour costs for industries across the board. Add to that the fact that raw materials exports push up the value of the domestic currency, and it gets even harder for any downstream manufacturers to be competitive in the global market.

Double pricing can make up for part of these disadvantages by reducing the input costs for businesses. It could therefore be one of the few policy options for these countries to help establish some more sophisticated industries next to their mining giants.

Instead of double pricing, the EU wants to help third countries with “strategic partnerships” that could involve European investments in local processing facilities.

Nothing is to be said against such strategic partnerships, but if they come at the price of third countries having to refrain from industrial policy actions like double pricing, then the EU is not so different from any other hard-nosed economic power after all.

The European Commission proposed 40% processing capacity for critical raw materials by 2030 as the EU’s self-sufficiency target in the Critical Raw Materials Act (CRMA).

As this week’s chart shows, this target is only reached or overshot by very few raw materials, e.g. cobalt, iron, and copper.

For many raw materials, the EU does not have any processing capabilities whatsoever, according to Eurostat data.

The list in the chart does not encompass all the critical raw materials but only the ones that the European statistical office Eurostat provides data for.

You can find all previous editions of the Economy Brief Chart of the week here.

EU Commission adopts implementing rules for Foreign Subsidies Regulation (FSR). On Monday (10 July), the EU Commission adopted the FSR’s implementing regulation, coming into force on Wednesday (12 July), and highly anticipated especially by international businesses. The implementing rules lay out which companies have to report which foreign subsidies and how. Businesses will have to start notifying the relevant information by 12 October this year.

Negotiations on EU due diligence rules are expected to pick up speed in September. The Spanish EU Council Presidency is expected to push on talks on the proposed corporate accountability rules starting in September, in order to strike a deal before the end of the current term. While negotiators of the European Parliament and member states agreed on some points of the draft law this week, they have yet to agree on most contentious aspects, such as company scope and level of harmonisation. Read more.

EU Council reviews proposed 2024 budget downwards. On Wednesday (12 July), ambassadors of EU member states reached a common position on the proposed EU budget for 2024, proposing downward adjustments in several headings, but increased spending for humanitarian aid in support of Ukraine. With an approach defined as “prudent and realistic”, EU ambassadors proposed €187 billion for 2024 (down from €189.3 billion), a decision that is likely to be opposed by the European Parliament in the upcoming negotiations.

Progress on Pillar 1 of OECD tax agreement. On Wednesday (12 July), 138 countries agreed on an “outcome statement”, saying that there was “significant progress” in the work towards agreeing on how pillar 1 of the OECD tax agreement from October 2021 should be implemented. Pillar 1 should allow a shift of a part of the income tax paid by large multinational companies away from its country of residence towards the country in which the income is generated, a central ask by many European countries who had begun implementing digital taxes to tax some of the income generated by American tech giants in Europe. However, not all details have been agreed upon yet. The OECD hopes to finish the work by January 2024.

Central bank digital currency and heterogeneous beliefs about bank stability: The role of public money as a store of value. Manuel Muñoz and Oscar Soons take a look at the risks to financial stability as a result of implementing central bank digital currencies (CBDC), arguing that CBDCs can increase social welfare despite the partial disintermediation of banks.

The Long Road to Pillar One Implementation: Impact of Global Minimum Thresholds for Key Countries on the Effective Implementation of the Reform. Very topical, given the recent OECD Pillar 1 breakthrough, this note by Mona Barake, Elvin Le Pouhaer, and Quentin Parrinello from the EU Tax Observatory examines the impact of the recent introduction of minimum thresholds for the global implementation of the Pillar 1 reform, arguing that implementation by the US will be crucial.

Additional reporting by Silvia Ellena.

[Edited by Nathalie Weatherald]

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