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When it Comes to U.S. Trade (In?)exact Wording is Everything

Blog

When it Comes to U.S. Trade (In?)exact Wording is Everything

Two significant developments in American geopolitics occurred in the past week that you might have missed if you were understandably distracted by President Donald Trump’s COVID-19 hospitalization on Friday and his subsequent call for an “army” of “Trump election poll watchers.” Last Wednesday, President Trump declared a “national emergency” via executive order due to U.S. reliance on imports for critical minerals. According to the White House, this is also the first step in a process by which the U.S. government can use the Defense Production Act – the same act the Trump administration used to scale up production of much-needed medical equipment at the beginning of the global pandemic. Then, yesterday, the U.S. Bureau of Industry and Security (BIS) amended the Export Administration Regulations” such that BIS now has broad discretionary authority to restrict U.S. exports of any items on the Commerce Control List (CCL) on the basis of “human rights concerns.” Any product that BIS deems at risk of being used “in a violation or abuse of human rights,” defined broadly as “abuses involving censorship, surveillance, detention, or excessive use of force,” could be affected.

U.S. dependence on mineral imports is no secret, nor is the Trump administration’s desire to improve U.S. self-sufficiency for many of these minerals. President Trump issued a similar executive order to last week’s that called for a new federal strategy to secure U.S. supply chains for critical minerals. The U.S. Secretary of the Interior subsequently drew up a list of these “critical minerals,” publishing a list of 35 in May 2018. These included commodities like aluminum, arsenic, cobalt, and rare earth elements, to name just 4. We won’t bore you by typing out the full list here; you can read the Federal Register for yourself if you like, or just take our word for it. The U.S. is undoubtedly dependent on foreign sources of many of these minerals: according to the latest U.S. Geological Survey Minerals Commodity Report from 2019, U.S. net import reliance for the 4 aforementioned commodities were 22 percent, 100 percent, 78 percent, and 100 percent, respectively. (This, by the way, is yet another reason why it was and remains so patently absurd that the U.S. has or threatened to place tariffs on U.S. imports of Canadian steel, which the U.S. is far less dependent on imports for and has the ability to scale up domestic production if need be, but we digress).  

In a globalized economy, U.S. dependence on foreign imports of many of these critical minerals was seen as an unabashedly good thing. That’s how globalization is supposed to work: different countries produce the things they can produce the best or the cheapest, allowing producers to produce more efficiently and consumers to partake in the magic of lower priced goods. Rare earth elements (REEs) are a good example of how this worked. Rare earth elements are not rare, but they are a pain to mine, and expensive to mine in ways that are even minimally environmentally sustainable or safe. The reason the U.S. went from consuming its own REEs in the 1980s to becoming essentially dependent on Chinese exports of REEs (over 80 percent of U.S. REEs imports last year came from China) is simple. China was willing to do the dirty work of mining and processing them, and they were willing to do it cheaply and to hell with the environmental costs. One of the reasons the computer I’m typing on right now or the smartphone you might be reading this article on right now is not prohibitively expensive is because of the same globalized mineral supply chains that the U.S. just deemed a national emergency.

In a geopolitical economy, defined more by concerns of national security and self-sufficiency instead of corporate efficiency and mutual dependence, this equation breaks down. That is why the U.S. is looking to re-shore and near-shore its mineral supply chains as much as possible. It is difficult to exaggerate what a significant and fundamental shift this in the way the U.S. approaches the global economy and the potential ramifications. Geopolitically, it puts pressure on the U.S. to boost domestic production, or at least secure alternative sources of supply, as quickly as possible, lest China use its leverage to hurt U.S. industry in much the same way the U.S. has used its leverage in the semiconductor industry to hurt China’s economy. That is why if you look past the front page you’ll see a regular stream of stories like the U.S. International Development Finance Corporation announcing a $25 million investment in TechMet to develop a Brazilian nickel and cobalt project, or an Indonesian government official saying the Indonesian government is in early discussions with Tesla about investing in the country due to its need for new sources of nickel. It is also why the world is on the cusp of a new age of resource competition and modern imperialism, as major powers like Russia, France, China, and the U.S. seek to secure their access to resources.

The BIS announcement is more unexpected and harder to interpret. The announcement obviously has China in mind – the U.S. has been upping its criticism of China on its abysmal human rights record in Xinjiang and on the application of the new National Security Law in Hong Kong. (China, of course, continues to insist that it is working “to ensure long-term peace and stability for Xinjiang” to anyone who will listen, an impressively tone-deaf approach.) If the human rights bit hadn’t given it away, the bit about “reasons related to certain telecommunications and information security” does, since a major plank of U.S. foreign policy in the last few months has been to cripple Huawei, China’s (and arguably the world’s?) premier telecommunications company. The deeper question to us though is why the announcement is so broad and discretionary? If the U.S. is concerned with China’s human rights abuses…then it should probably stipulate that these abuses are the reason BIS is expanding its authority.

Instead, BIS left the wording vague and open to interpretation. “Human rights abuses” is an extremely malleable term and can easily be applied to actions by U.S. allies, such as India’s revocation and subsequent crackdown on Jammu & Kashmir (check out our latest podcast for a longer discussion on that) or the military coup d’état that brought current Egyptian President Abdel Fattah Al-Sisi to power which the U.S. has never called a military coup d’état because of the legal ramifications of calling it like it was, to name just two. Indeed if you go looking for “human rights abuses” you can probably find them present in just about any country, including our own (think of separating the families of illegal immigrants or even recent allegations of forced sterilization at the U.S. border, or of American drone strikes in Yemen and Afghanistan, or the pitiful state of Indian reservations throughout the country). This is neither the time nor the place to start trying to assess what kinds of human rights abuses might disqualify a country from a normal trading relationship with the U.S., nor is out our place to decide whether this interpretation of the Export Control Reform Act of 2018 is legal and whether it is a good policy. It is simply to make the point that BIS just gave itself the ability to paint with a broad enough brush so as to control U.S. exports with just about any country it wants, which in turn opens up U.S. exports to substantial government intervention based on prevailing winds in Washington.

There is a lot going on in the world and it can be hard to keep track of it all – and even if you can stay on top of it, watching CNN or MSNBC or Fox or whatever news junk food most fits your political persuasion can, like a double quarter pounder with fries and a coke, feel good in the moment without giving you the nutrition you need to succeed. Your brain is like your body in that sense. If you eat fast food and don’t exercise, you get fat and weak. If you read fast news and don’t engage your critical thinking faculties, you get shallow and self-righteous. In that sense, our free twice-a-week newsletter is like a free juice cleanse and our consulting engagements are essentially like hiring a personal trainer, one that can help you get the ground truth you need to craft strategies that give your business the best chance to succeed in a world that, while always in flux, is particularly crazy these days. As always, we extended the metaphor probably more than is helpful, but our parting thought it this: The information you consume shapes the thoughts that you have. Our job is to make sure you have the best information about politics available and to help you make sense of it so that you are ready for risks and opportunities alike. If we can help you, you know where to find us, and in the meantime, lay off the cheeseburgers for a bit.

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