Insights

Policy Preview: Return of the World Trade Organisation (WTO)
US President-elect Joe Biden will seek to rebuild the global trade infrastructure that Donald Trump has sought to dismantle – starting with the World Trade Organisation. Not too long ago, the body was the core international trade institution, but the Trump Administration effectively neutered its ability to hear disputes by refusing to support the appointment of new judges to its appellate body. Three are required to hear disputes, but currently just one is in office. Just before the election, the White House also blocked the appointment of Ngozi Okonjo-Iweala, a former Nigerian finance minister and World Bank economist, as the WTO’s director general.

Expect the Biden Administration to back Okonjo-Iweala’s appointment within weeks of the 20 January 2021 inauguration. It will also begin negotiations with the bloc’s other member – including China – about the appointment of new appellate judges. This will not be straightforward – Democrats and Republicans alike have long voiced concern over the WTO court’s handling of dumping issues as well as the slow nature of the process. The Obama Administration also blocked new appointments to the court in the second term as a result.

Biden has made it clear that he does not envisage new trade agreements as a priority – and as discussed in the previous Hawthorn Horizons, Republicans may still deny him the opportunity to pursue such pacts if expedited trade authority is not renewed before its June 2021 expiration. However, the past four years have highlighted the fragility the Western-led international institutions built up over the last seventy years are, particularly when they are under threat from within the West itself.

Reforming the WTO is likely a non-starter, the same challenges with expedited trade authority would still apply and Beijing’s ability to exert leverage over the other 162 members regarding the terms of any new deal is far greater than when it joined the bloc in 2001. But the Biden Administration will act on his comments to support the ‘rules based international order,’ and strengthening the WTO will prove essential to this agenda.

Ironically, Trump’s own tariff actions may have given the Biden Administration the leverage to also secure appointments it considers more favourable. If the appellate courts are reinstated, even the most US-friendly arbitrators would likely eventually find that these tariffs violate WTO rules. But China and other countries are keener to have them lifted than the Biden Administration will be. Removing these tariffs in exchange for appointing friendly appellate judges, restoring the WTO’s dispute-resolution function, is a bargain that Biden’s team will see as making sense for all sides.

Dollars and sense: Europe’s lithium litmus test
The European Union has for nearly a decade operated a ‘critical raw materials strategy’ aimed at shoring up access to and developing sources of key commodities. It has long been seen as ineffectual and now faces arguably its greatest challenge yet, following the inclusion this year of lithium for the first time. The increase in secure supply needed is drastic, EU Commissioner Maros Sefcovic in September decaled that the bloc “would need up to 18 times more lithium by 2030 and up to 60 times more by 2050”.

Lithium is the key to the battery and energy storage industries, hence the expectation for a rampant increase in demand. However, it has not been found in commercially-viable quantities within the EU anywhere other than Portugal’s Barroso mountains. Two mining concessions have been granted, one to UK-listed Savannah Resources and to Portugal’s own Lusorecursos. Yet the project has faced significant resistance from local residents and various Portuguese NGOs. They have also sought to block still-in-development plans to build lithium refineries in the region, necessary to enable the metal’s use in batteries.

Portugal’s government has repeatedly stated that it intends to get the approval of the lithium mines finalised, and Prime Minister Antonio Costa has endorsed the EU’s agenda wholeheartedly. However, after Costa’s Socialists won the 2019 election, securing 106 of the lower house’s 230 seats, they did not continue the support pact they previously struck with the Communists and Left Bloc.. Instead, these two far-left groups provide the government with support on a bill-by-bill basis. It is also occasionally backed by the environmentalist PAN and Green parties, which hold another five seats combined. To continue the development of the country’s lithium prospects, Costa will not be able to rely on these allies, who all oppose lithium extraction. And while the main opposition centre-right Social Democrats (PSD) do support lithium extraction, the extent of this does not extend to a willingness to support Costa.

Costa’s government is already facing challenges – it passed its 2021 budget on 26 November only after the Communists agreed to abstain; all other parties voted against, even after Costa agreed a new environmental review process, including for lithium projects, earlier in the week. Yet there is little chance the left will seek to a new confidence vote over the next six months, given Portugal’s assumption of the EU presidency in January. Costa’s priorities will be enacting reforms to the bloc’s fiscal and economic union that have dominated the past year, and the left will be unwilling to give these up. The EU’s critical resource strategy may remain ineffective in and of itself, but the fortuitous timing of the rotating presidency will give it a much-needed boost. Expect Lisbon to finalise a new law sharing revenues with municipalities and for ground on key projects to be broken by the end of 2021.

Power play: offshore national security
The 11 November publication of the UK’s National Security and Investment Bill (NSIB) laid out the processes by which the government will review inbound foreign investment, and the requirements for UK firms in certain sectors to notify the state about proposed foreign takeovers. Its passage through parliament is all-but assured, and it is expected to become law early next year. The new powers it grants the government will almost entirely be invested in the Secretary of State for Business, Environment and Industrial Strategy (BEIS), currently Alok Sharma. Unlike the US’ Committee on Foreign Investment (CFIUS), which provides a recommendation to the president who then makes the final decision, the NSIB in its present form grants this power to the Secretary of State, not the prime minister.

But even before the introduction of the NSIB, the government signalled its intention to take a more proactive stance on such interventions. In December 2019 then-Secretary Andrea Leadsom announced a review of the Chinese-owned Gardner Aerospace Holding’s attempt to purchase aerospace components manufacturer Impcross. Leadsom also reviewed US private equity firm Advent’s purchase of another defence firm, Cobham, though it was relatively swiftly approved. Gardner on the other hand abandoned its takeover in September, in response to the government scrutiny.

In other words, the new process and requirements for foreign takeovers contained in the NSIB are its most significant components.

The legislation does require such interventions consider acquirer risk, but also for firms in sensitive industries to pre-emptively disclose potential takeovers. Furthermore, the structure of the takeover has to be considered by the Secretary of State in any review.

In the debate over the bill, Sharma noted that “those who seek to do us harm have found novel ways to bypass our current regime by either structuring a deal in such a manner that it is difficult to identify the ultimate owner of the investment, or by funnelling investment through a UK or ally investment fund”. There is a growing recognition of the importance of the structure of any takeover, not just in the UK. The legislation underlining the US’ 2021 defence budget, the National Defense Authorization Act (NDAA), is set to pass in the coming weeks and sources close to the process have said it too will include expanded reviews for the offshore control of companies seeking to invest in the US.

Once NSIB becomes law, Sharma’s approach will set the precedent for how the legislation is applied. A loyal supporter of Prime Minister Boris Johnson, his approach will not stray far from the government’s messaging, yet the NSIB does grant the power for Sharma to review changes in ownership even before majority control is established, as well as after the fact. The extent to which he applies these powers over offshore ownership may have a great influence over sectors far beyond defence.