How commodity markets are defying the new cold war

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The idea that global trade is back to an era of great powers and geopolitics is now firmly entrenched in policymakers’ minds. Given the energy shock from the Ukraine war, the demand for critical minerals for the green transition and the fragility of agricultural production, there’s a specific fear that the world economy is being fragmented in a zero-sum battle for scarce raw materials and food.

Now, it’s certainly possible to scare yourself thinking about the risks to global prosperity of a new cold war between rival blocs centred on Washington and Beijing. But past experience and present observation suggest strategic attempts to corner commodity markets are often countered by adaptable companies and pragmatic governments.

The IMF, whose annual meetings are taking place this week, has long warned about geofragmentation. In their latest assessment, the fund’s economists estimate the impact of commodity markets splitting into geoeconomic blocs centred on the US and Europe on one side and China on the other.

For some raw materials, the shocks would be dramatic. Palm oil and soya bean prices in the China-centred bloc would rise by more than 500 per cent, with similar increases in the costs of refined minerals in the US-Europe area.

Even then, the overall global impact on output isn’t cataclysmic. Low-income countries, often dependent on food imports, would see a decline in gross domestic product of 1.2 per cent, but overall global GDP would fall just 0.3 per cent.

And to get these results requires wildly implausible political bipolarisation. The IMF modelling assigns countries to blocs based on their voting record at the UN. This, for example, puts Brazil in the US-Europe grouping — one of the reasons that soya bean prices in the China bloc rise so quickly in the simulation. In fact, Brazil, the world’s largest soyabean exporter, currently sells about 70 per cent of its output to China. The idea that Brazil would cut off sales to China — a fellow member of the Brics middle-income grouping — for political reasons merely underlines the lack of realism in this thought experiment.

In practice, commodity exporters are generally following an entirely sensible geoeconomic strategy of ruthless pragmatism. Governments that commit to one customer on political grounds leave themselves open to dependency and exploitation. Playing one off against another produces dividends.

Chile, the world’s second-biggest producer of lithium for electric batteries, was assigned to the US-Europe club in the IMF simulation. In reality, it sells much of its minerals to China. But the Chilean government has dangled the prospect of more exports to Europe to gain concessions in an EU-Chile trade deal, with the result that Brussels softened its usual hard line against favouring local producers to let Chile sell lithium cheaply to its own domestic processing industry. Indonesia, courted by both China and the US for its nickel, has used its strong negotiating position to compel trading partners to invest in processing plants.

In any case, the power imbalances behind geopolitical fragmentation are nothing like those of the first cold war. The US does not have the overwhelming financial or military power to help topple inconvenient governments in commodity-producing countries, as it notoriously did to Guatemala’s president Jacobo Árbenz in 1954 over his plans for land reforms in US-owned banana plantations.

Even if commodity markets are politically bifurcated, simple supply and demand mean price increases from trade restrictions will create their own long-run solutions. Simon Evenett, who runs the Global Trade Alert project at the University of St Gallen in Switzerland, notes that rising output of rare earths minerals — though admittedly not the refined product — has reduced China’s ability to control global supply to its adversaries. In 2015, China produced more than 80 per cent of the world’s rare earths. By 2021, massive expansion in mining elsewhere, including the US and Australia, had pushed its share down to 58 per cent.

Governments attempting to control commodity markets also often find the cost to themselves too much to bear. It’s now evident the G7’s price cap of $60 a barrel on Russian oil sales has not crippled Vladimir Putin’s war machine. Part of the reason is Russian circumvention, including running a “dark fleet” of oil tankers. But the effect of the policy was always going to be limited given the G7’s desire to prevent global oil shortages destroying their own economies. Similarly, when China imposed trade restrictions on Australia in 2020, Beijing was forced to exempt Australia’s lucrative iron ore exports, for which it did not have enough other sources of supply.

You hear a lot more from politicians about geoeconomic fragmentation than you see it in commodity markets and value chains. Of course, these are early days: governments can go a lot further to break up markets, and companies take time to adjust to new realities. But there’s thin evidence so far that we’re back in an era where great powers are carving up the world’s food and mineral riches between them.

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