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Fractured trade, inflation and prospects for climate action

17th November 2023

By: Saliem Fakir

     

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The world is in a very different place to where it was when the World Trade Organisation (WTO) came into being in 1995: geopolitics and geoeconomic fragmentation are on the rise, and we are seeing a shifting of the sands on multiple fronts. Key signposts of the changes taking place include the expansion of the Brazil, Russia, India, China and South Africa, or Brics, grouping. The bloc increasingly now looks like a counter forum to the Group of 7, or G7, as the Brics countries collectively boast a big proportion of the world’s population and gross domestic product, and are generously endowed with natural resources.

And in the amidst of the ongoing decarbonisation and net-zero talk, European political parties that are pushing for stronger climate measures are facing a backlash. Frans Timmerman, who has returned to Dutch politics, has decried this as a right-wing backlash, but he may be miscalculating the feelings of ordinary people. You just have to take a closer look at the Yellow Vests protest in France in 2018, as a result of fuel price hikes, where the movement quickly evolved as a grassroots, populist movement fighting for economic justice.

The movement may have become quiet, but the question of economic justice and inequality has not gone away.

Transitions are being seen as inflation catalysts, even though the reasons for inflation are multiple. The Ukraine crisis led to energy and food price increases, there has been price gorging by companies following the outbreak of Covid-19 (described by Isabella Weber as sellers inflation), and household energy prices and interest rates are rising. All these factors are contributing to the inflation surge.

The economist Charles Goodhart – who, with Manoj Pradhan, wrote The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival –made the compelling case that inflation is here to stay because the world is ageing.

Geoeconomic fragmentation, which one can read as a reorganisation of global production systems, will also bend the curve of inflation upward, at least in the short term.

Given that the WTO has no independent judiciary to arbitrate over disputes, countries are using other avenues, such as plurilateral mechanisms, as tools to shape trade outcomes outside the multilateral negotiation platforms. But, truth be said, behind the façade of free trade and multilateralism, the major powers and economies are pursuing unilateral forms of trade protectionism. The climate action space is not immune to these developments.

Political commentary in various forums and learned platforms is giving rise to a language that points to the need to grapple with the shifts. Experts speak of ‘reshoring’, friend- shoring, deglobalisation and minilateralism, and use other descriptors to seek to grasp and share insight on the world we are in rather than the world we were in before.

What does this mean for the globalisation of decarbonisation? Geoeconomic fractures, at best, water down the ability of the Paris Agreement to mobilise sufficient global capacity and action to solve the climate crisis. At best, the United Nations Framework Convention on Climate Change (UNFCCC) will gravitate towards the lowest common denominator in order to show success at the various Conferences of the Parties, while more strategic objectives and the hard-wiring of trade, energy security and new climate industrialism are being pursued outside the UNFCCC process.

Advanced economies and regional blocs such as the European Union (EU), with its European Green Deal and pursuit of the Carbon Border Adjustment Mechanisms, aim to boost new industrialism and, at the same time, are imposing nontariff-based measures to protect European industries that are decarbonising and those seeking to use the decarbonisation push to regain lost ground in key clean energy technologies and services.

The elephant in the room is, of course, China, which is the second-biggest economy after the US. China has built considerable industrial capability in the cleantech sector and has the largest share of processing capacity and resource inventories for critical minerals that span cleantech and other high-tech sectors, such as semiconductors and chips.

China recently restricted the export of germanium and gallium, which are needed in high-tech sectors; the move was a reaction to Western protectionism. The EU has, in turn, opened an investigation into Chinese subsidies for electric vehicles (EVs), as Chinese EVs are far more competitive than EVs produced in Europe.

A decarbonisation transition Cold War seems to be emerging between China and the West along the value chain of clean technology, artificial intelligence and semiconductors, not to mention fifth-generation, or 5G, technology and quantum computers. Each of the parties in this ‘war’ is seeking its own ‘universal’ standards and rules to give preference to its technology solutions and processes.

The fractures in geoeconomics come as 2023 has been the most unprecedented period for global warming and extreme weather events across the globe.

Transitions come with inflationary pain – with no improvements in wage income and let’s add the burden of potential job losses, especially in emerging economies that embark on transitions at a pace that can lead to unintended consequences.

Inertia in the transition process, such as resistance to having wind turbines on indigenous land, exemplified by the recent Swedish Sami protest, and possible mounting resistance, has implications for the pace of the transition and may eventually result in additional costs to the adoption of new technologies.

Other points of inertia for rapid mobilisation is the ability to align supply and demand within the value chain of clean technology, and the question remains whether geoeconomic fractures will smoothen this alignment or smother it. All these add to the cost of the transition. It is possible to say that those with control over different input costs, in a seamless manner, within the value chain, will win the race as preferred suppliers of technology. China appears to almost have perfected this.

What we are in at present is the throes of a set of inflection points that we cannot assume will not shape the pace, choices and nature of transitions around the world. We are back to the use of climate action measures as a means to an end: protection of new infant green industries and blocking markets for those already in the lead.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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