We look at CBAM, competing global systems, and invent a new acronym
Welcome to the 8th edition of our experiment in weekly Polycrisis dispatching! Please send us any feedback @asahay@gmail.com and/or kate@katemackenzie.net
First, some bookclub news: We have locked in the date and time for the zoom conversation:
It’s NEXT WEEK: Thursday June 27, 8am EDT, which is 2pm CET, and in Australia it’s 10pm the previous day. You can find your local time at this link.
The book is Brett Christophers’ “The Price is Wrong”, and we have been discussing it a bit over in our Discord – along with planning meetups and the like.
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First up, a bit about trade and, in particular, the carbon border adjustment mechanism being gradually rolled out by the European Union. The CBAM is a unique trade measure in that it is only attempting to control for the difference in carbon pricing between the EU and elsewhere. Certain goods (cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen products) imported to Europe from countries without pricing that matches European climate goals will be subject to a levy.
Decarbonizing the industries that produce that stuff is not cheap or easy. For many countries that might find their exports subject to CBAM levies, though, the grievances go beyond the penalties themselves. Although it’s only in the first year of a three-year rollout, with no actual penalties yet being applied, the administrative burden is daunting. Even the EU businesses who have to submit CBAM data on their imports are struggling with this, as noted by Alan Beattie (who, for his sins, seems to be one of the few journalists following the CBAM roll-out in depth). Complaints about spreadsheets are rife. Back in March the FT reported thatonly a tenth of the relevant German businesses had integrated the CBAM reporting into their operations. Low-income countries like The Gambia and Mozambique are expected to be the most affected, in terms of GDP by the CBAM rules.
Somewhat ironically, given the stand-off over electric vehicles between China and the EU, China will probably be fine; it has been implementing a carbon pricing system since 2015, with support from… the EU!
COMPETING SYSTEMS
Tim is developing a contribution for the Brown summer school on the Political Economy of Finance which builds and updates his “New Non-Alignment” essay published in late 2022. An excerpt:
What exactly do the countries flirting with a new non-alignment want?1. Core technologies to power future growth;2. Advanced military hardware for enhanced security;3. The upper hand in trade negotiations with Europe, the US, and the new Russia-China bloc;4. Essential commodities like food, energy, metals and fertilizers from the new Russian-Chinese bloc;5. Better terms to restructure their debt to Western and Chinese creditors during a punishing global dollar debt crisis that threatens their sovereignty.Today they are no longer just flirting with non-alignment. Even though the objectives and demands vary across a diverse group of countries, solidarity is building around a firmer, more granular set of expectations. Below, we start with the Global South, but it’s also Western and Eastern groups of countries that are seeking to entrench, reform or establish systems across finance, trade, manufacturing, diplomacy, development, and climate.
SOUTH: Coordination, consolidation
The foot-dragging from the west about the systems it controls haven’t stopped developing countries, however, from asserting more agency – increasingly in solidarity – along the themes are financial justice, tax, and green industrial strategy. Here’s are few examples from the tops of our heads:
Brazil: Under Lula, championing South-South cooperation; as the G20 chair, building momentum around a global wealth tax.
Barbados and Kenya: championing financial architecture reforms for a fairer system; (not easy in a world where every story about finance for developing countries in the international media is appended by reader comments about “corruption”). The Bridgetown Agenda helped get financial architecture reforms into headlines and higher up agendas. The two countries are - with France - leading a taskforce on “Global Solidarity Levies”.
Indonesia: successfully moving down the stream and up the value chain in nickel.
Africa: The AU now has G20 representation; the AfDB succeeded in getting the IMF board to allow SDR rechannelling to MDBs as leverage for loans; the union is even planning a credit ratings agency – and, perhaps, a borrowers’ club?
EAST: Reverse tech transfer, doubling down on export-led model
In the past, the west was the exporter of technology to the East. Now, the East has the IP and tech know-how, while the West and South are seeking tech transfer, catch-up growth.
EV and solar: the early tech originates in the West; production moves East. Eventually, all the dynamism takes place there. “Overcapacity” and dumping accusations, plus security fears (US) and carbon leakage policies (EU) lead to tariff-jumping cat and mouse game.
Zhu Min, a member of China’s five-year plan committee, told the Financial Times that
“[Perhaps some solutions would be] reverse investments: for China to invest more in Europe. And reverse technology transfer. I think Europe, and also the US, have a lot of technology in renewable energy. But China also [has] some. In the [past] 40 years, you know, it has been importing a huge amount of technologies and capital from Europe and the United States. But now we are also moving close to the frontier line.”
Expansion for China of its increasingly outbound and non-western capital investment flows. Trade barriers thrown up everywhere; does this even matter when Chinese exports can be so much lower in price (and often, better in quality)? Or will the trade barriers towards China - which are coming not only from the US and Europe, remember - be another argument for a “Chinese green Marshall plan”?
Japan, Korea, are still attached to their industrial export models; to older product lines and to fossil fuels — even though these are subject to market prices (they are heavily invested in both making things that burn fossil fuels, and in the idea that only fossil fuels or nuclear are “reliable”).
THE WEST: Not for thee, perhaps not even for me
The west is acknowledging limits of globalisation and neoliberalism, at least domestically. But the chasm between core and periphery, while looking somewhat more two-tiered, is still just as stubbornly exclusive as ever for a majority of countries.
Countries outside of the US are largely still pretty hung up on private finance. And when the west looks outside their own border it’s worse; elite support for ODA is anaemic and public support is assumed to be low (although, surprisingly little tested). “Foreign policy for the middle classes” (FPFTMC?) is a pragmatic concept, but are the trade-offs self-defeating in some areas? Tariffs on EVs slowing the decarbonisation of transport? Failure to reform debt architecture, reform MDBs and issue SDRs?
Pension fund money is an option. But western countries are not even using their own pension funds for nationally important ends. Should they be commandeered for national investment? For Canada, it’s something like 15 percent – their domestic ambition is apparently restrained by a tendency to benchmark against Canada’s 3% share in the MSCI World Index. Interestingly, almost half of all Canadian pension funds’ foreign investments into Asia Pacific over 2003 - 2023 went to Australia!
Meanwhile, an excellent report from the Overseas Development Institute (ODI) earlier this month (flagged in an earlier “Stuff We’re Reading”) looked at the question of whether European pension funds and insurers could invest in emerging and development economies. Their conclusion: if European pension funds increased their EMDE investments at the same rate that they’ve increased their allocations to alternative assets, it could amount to an extra $120bn a year; but even so, various regulatory, behavioural barriers mean it is unlikely to eventuate.
STUFF WE’RE READING
Lee’s piece on family offices looking for “philanthropic deal flow”
TAP on low-carbon leisure and the good life
A Jennifer Harris “Queen Bee of Bidenomics” profile in the NYT
Odd Lots on Indonesia’s nickel success
China’s perhaps contemplating a Green Marshall Plan? .. And in Bloomberg, why it should.
We hope you enjoyed this edition. See you at the bookclub, discord and/or the next newsletter!
Kate & Tim.