The problem with the current discussion about de-risking trade is that it tends to address the issue in general terms, even though various types of trade pose very different risks. A more nuanced approach would begin by distinguishing between inputs that the economy needs to function (for example, raw materials like natural gas or minerals) and inputs that are needed to build up future production capacity (such as solar panels).
There is one relatively straightforward way to de-risk trade in minerals: strategic stockpiles. Because minerals are generally easy to store, maintaining a stockpile – say, the equivalent of one year’s supply – would cost only as much as the interest on the initial investment. For example, at current interest rates, the European Union could store a year’s worth of rare earth minerals for less than €5mn ($5.5mn) annually, given that total imports in 2021 amounted to €120mn.
Natural gas costs far more to store. The EU panicked last year about possible winter gas shortages – owing to reduced supplies from Russia – because it could stockpile only 3-4 months’ worth of gas. Of course, the EU got through the winter without shortages, thanks to the limited but invaluable stockpile it did have and to unusually warm temperatures. (Russia thus lost the “energy war.”) Nonetheless, it is clear that stockpiles alone cannot de-risk trade in natural gas.
That is where substitution comes in. Almost every raw material has substitutes. For natural gas, oil can be employed in industrial activities, and coal (or renewables) in power generation. For rare earths, some other combination of metals might do the trick. The alternatives are usually somewhat costlier – otherwise, they would be the first choice – but some substitution can significantly ease supply constraints, including by reducing the price of the first-choice material.
Europe proved this over the past winter, when substitutes and a shift of production to less energy-intensive sectors enabled industry to maintain the same level of production, while using 15-20% less gas. This caused gas prices to fall back below pre-war levels.
In 2010-11, when China embargoed exports of rare earths to Japan as part of a geopolitical dispute, the price increased tenfold. Japan then scrambled not only to diversify its supplies of rare earths, but also to begin recycling or using substitutes. Prices fell rapidly back to their original level.
While a combination of substitution and stockpiling could significantly de-risk the supply of raw materials, investment goods are a different matter. China, which dominates production of solar panels, is known for using trade restrictions to apply political pressure on other countries, especially when it considers them to be interfering in Chinese affairs. So, one can imagine a scenario in which the Chinese authorities ban exports of solar panels to Europe.
Given this risk, Europe is under growing pressure to reduce its import dependency in solar panels. The European Commission recently announced the European Solar Photovoltaic Industry Alliance, which aims to scale up manufacturing technologies to establish a “Made in Europe” solar value chain.
But, because solar panels are not inputs for current solar-energy production, a Chinese embargo on exports to Europe would not have a significant impact on the European economy. Existing solar capacity would continue to provide the same amount of electricity at zero cost.
What a Chinese export ban would do is slow down – at least temporarily – the expansion of renewables in Europe. But this would not hurt Europe so much as the global community, including China, because it would impede European efforts to reduce emissions.
Moreover, the cost of insuring against this risk by substituting domestically produced supplies for cheap solar-panel imports would be considerable. Recent estimates suggest that European-made solar panels would cost about 35% more than imports from China. So, if EU imports of solar panels total €11bn, as they did in 2021, EU production of the same number would cost over €15bn annually. With demand rising – imports in 2022 likely significantly exceeded those in 2021 – costs would continue to increase.
It is also worth recalling that the EU’s anti-dumping duties on solar-panel imports from China – imposed more than a decade ago – were short-lived, owing to high costs for Europe and Chinese threats of retaliation. This episode illustrates how difficult it would be for the EU to limit solar-panel imports from China without violating global trade rules.
The official presentation of the European Solar Photovoltaic Industry Alliance gives no indication of how its ambitious production goals – a sixfold increase in annual output for each key solar component by 2025 – could be achieved. But it does hint at bending public-procurement rules to favour European producers, even if they are not cost-competitive. This, too, would be incompatible with World Trade Organisation rules.
All of this suggests that it is not advisable to de-risk trade in solar photovoltaic products and components by subsidising domestic production. Instead, Europe should channel the savings from cheap imports into research on the next generation of green technologies.
De-risking trade is clearly not a one-size-fits-all endeavour. The predominance of geopolitical considerations should not prevent policymakers from seeking economically sound solutions. — Project Syndicate
- Daniel Gros is Director of the Institute for European Policy-Making at Bocconi University.