By Michael Every of Rabobank
The
market ‘action’ today is watching US midterm votes roll in and US
celebrities roll out of Twitter. (Though new voices are apparently
appearing in record numbers - if you believe Tweets.)
— Elon Musk (@elonmusk) November 8, 2022
I would say that it would be reaction to the Wall Street Journal exclusive that China really is considering rolling back Covid-zero policies except: (i) the details of said story are that this decision is still riven with conflicting views - which assumes there are any camps, rather than just one camper; (ii) the most optimistic scenario is China reopens, with caveats, by end-2023; and (iii) the market doesn’t seem to care about facts anyway, and will do what it wants to do to try to place a fig leaf over portfolio allocation errors made year to date.
Meanwhile, COP27 started with the UN Secretary General saying,
“We are on a highway to climate hell with our foot on the accelerator… We are in the fight of our lives. And we are losing. Greenhouse gas emissions keep growing. Global temperatures keep rising. And our planet is fast approaching tipping points that will make climate chaos irreversible.”
Which is what makes the EU vociferously pushing back against the green provisions within the recently-passed US Inflation Reduction Act (IRA), one President Biden’s signature legislative achievements, so notable. The EU claims multiple IRA provisions with domestic content provisions/subsidies/tax credits for new green supply chains are in violation of WTO rules. The EU claims each of these measures are individually problematic, but collectively will produce an unlevel playing field that favors the US over the EU, and which will see supply chains shift West, turning a common global objective --fighting climate change-- into a “zero-sum game”.
Just take a step back and consider what is being said here:
- We are reportedly in an existential struggle for human existence;
- One of the world’s previously least-likely candidates for an industrial policy/green pivot to fight that has now introduced one;
- It has done so in a mercantilist manner because the global free-trade model it carved out with its own blood and treasure --saving Europe twice in doing so-- is fading against mercantilist economies which the EU has had no issues dealing with, and as the EU touts its own desire for “strategic autonomy”; but
- The US taking ‘war-time’ green measures to save the planet, and its own industrial base, is not acceptable if it means the global system the EU will not physically defend is harmed(!)
The question is, what does the EU really want: environmentalism or neoliberalism?
Of course, it wants both. Just as it wants rate hikes and QE.
It wants free trade; if that means it gets to be the net exporter of green tech; and to hold the commanding position in global value chains; and to save the world; and to get all the good jobs. It openly says so.
But guess what? So do others, including the US. And some of them have larger economies than Europe; and/or are selling it the LNG it needs to get through winter; and/or are protecting the EU from Russia. It may not be very nice to hear that, but it’s called life.
So what are the EU going to do about this?
Start a trade war into a recession, as the net exporter, to disincentivise the US from using the IRA? Just as Republicans who don’t like the green parts of the IRA anyway look to take control of Congress? Wouldn’t that perhaps risk stymieing the IRA into a 2024 election where it might even be rolled back? Is that a win? Couldn’t the US just push back more aggressively against Europe on other fronts: sending less LNG to push up energy prices, and encourage more non-green EU industry to flow to the States? Or withdraw US forces from Germany and encourage Poland to step in to fill the gap, shifting the real EU power balance from the West?
What really matters here - neoliberal fetishization of markets, or actually saving the planet?
Europe is smashing actual markets to pieces whenever it sees fit – see recent nationalisations, massive energy subsidies, longstanding tariffs on certain goods, and new emergency powers with the ability to ration goods or order changes to inventory levels or supply chains, alongside (empty) talk of “strategic autonomy”. Yet none of this is seen as overly problematic to EU neoliberals because the European ends justify the European means. Yet when somebody else does the same, even when they have their own real ends (see the comments from the Pentagon on the urgent need for more US production) it must be challenged.
Of course, this is why mercantilism ends in problems – because it IS zero-sum. Yet as regular Daily readers will know, that is also the sum total of world trade history, with the exception of 1945-2008 or 2016, and within a limited, not global, sphere from 1945-1991.
Global free trade of the model the EU is clinging to, while acting in the polar opposite direction, is the historical aberration. While it is not zero-sum, it relies on a global net importer to be sustainable – and Europe rejects playing that role instead of the US. Hence the paradigm is now over. As such, green supply chains as a new, more palatable form of mercantilism have been flagged here as a logical endpoint for many years. Would we rather have them or not, if the alternative is nothing?
And to point back to the US side, not just the EU, are you going to build a global green bloc, or just a fortress? Scale helps a lot.
Meanwhile, I include a quote from Bloomberg’s coverage of COP27 to conclude:
“Mohamed Adow, a prominent activist and director of the energy and climate think tank Power Shift Africa, accused the EU of using the continent as a “gas station” as it seeks to end its dependence on Russian fossil fuels…. Singling out German Chancellor Olaf Scholz in particular, Adow said that Europe’s dash for gas was threatening to lock Africa into polluting fossil fuels, rather than pursuing greener alternatives such as renewables. Germany and the EU have been trying to seek new gas supplies from countries like Algeria and Senegal, while Energy Commissioner Kadri Simson has encouraged the North African nation to conduct more gas exploration.
“Our continent is at a crossroads,” Adow said at a press conference alongside the Climate Action Network. “The message we want to send to Scholz as he comes here is that the days of colonialism are over. We won’t accept energy colonialism.””
Perhaps what everybody really wants is utopianism. Markets most so, given that’s how they keep trading right now. Everything will sort itself out shortly, they keep telling us (and themselves).
