International trade: Increasing trade restrictions across the world

The Covid-19 pandemic, the war in Ukraine, the food security crisis, geopolitical tensions, the energy transition and climate change have all accelerated the pace of trade restrictions implemented worldwide since 2020. The number of trade barriers put in place per year has almost tripled since 2019, according to the IMF, and these protectionist measures continue to impact global trade since they constrain the volumes exchanged, increase costs for companies and hinder supply chains. Recent weeks in particular have seen new such restrictions – de facto or de jure – being implemented in various locations, in different sectors and for a variety of reasons across the world.

The tech sector at the centre of (geo)politically motivated restrictions

The tech sector has again been hit by measures affecting trade, in the light of tensions between the USA – and Washington’s bloc more broadly – and China. The former is willing to curb China’s ability to access or produce advanced chips utilised in sensitive fields, such as the military and artificial intelligence, and in this regard the USA has taken various measures in the last year to target the Chinese high-tech sector, ranging from export controls on advanced chips to a recent ban of investment by US firms in China related to advanced semiconductors. It now also requires US investors to notify investments in other types of semiconductors and artificial intelligence.

As a tit-for-tat measure after the Netherlands and Japan imposed controls on advanced chip-making machine exports, China placed export restrictions in early July on gallium and germanium, two metals used, among others, in chipmaking and communication equipment. And since the beginning of August, Chinese exporters have had to apply to the Ministry of Commerce to be allowed to export them. This measure comes in addition to China’s implementation of a ban on the use of US memory chipmaker Micron’s products in “critical national infrastructure”.

Gallium and germanium are metals used in the production of chips, fibre-optic cables, electric vehicles and a wide range of telecom products. They are also applied in the defence and renewable energy industries, including solar cells and LEDs. China is the leading producer of both, as it accounts for about two thirds of the world’s germanium production and about 80% of the global gallium production. Japan, South Korea, India and Taiwan are the main importers thereof.

The level of the impact will depend on to what extent export controls constrain effective exports. If the exports of gallium and germanium are only cut by a limited amount, then workarounds are possible, although it will take some time for companies to adjust. The alternative countries for sourcing include the USA, Canada and Belgium for germanium, and South Korea and Japan for gallium. Furthermore, in South Korea, large stockpiles of government inventory are available, which should soften the impact for chipmakers in the country, at least temporarily. If all exports are blocked, this becomes a serious problem because finding large alternative sources, for gallium in particular, will take many years, as well as being very expensive. In that eventuality, prices of the metals, which have increased little up to now, would rise sharply. In the meantime, export controls add a degree of uncertainty to client companies and they are a sign of the willingness of Beijing not to remain passive in its technology tensions with the West. This highlights the possibility that further measures could be applied to other products.

The move is also expected to come at a high cost for Chinese producers of those metals, mostly relatively small companies dependent on exports.

Another set of restrictions on the sector was put in place in early August, in a surprise move and with immediate effect by India, which placed restrictions on imports of laptops and tablets to support the “Make in India” plan and promote domestic hardware manufacturing. Companies will need a “restricted imports” licence to ship such devices to India. The prices of those products in the country could rise due to scarcity, with the measure primarily affecting companies that do not assemble their devices in India, such as Apple or ASUS.

Trade restrictions on critical raw materials accelerated by the energy transition

The rapidly growing demand for critical raw materials (CRMs) such as rare earth minerals, lithium, cobalt and nickel, which are crucial for the decarbonisation of the economy, goes hand in hand with an increase in the international trade of such products, given their concentrated supply. However, the development of their international trade is also accompanied by an increase in export restrictions, mainly taking the form of export taxes. The OECD database on export restrictions on raw materials shows that export restrictions on CRMs have seen a five-fold increase since 2009, with 10% of global trade in CRMs now facing at least one export restriction measure.

To illustrate this, an increasing number of countries are imposing export restrictions and bans to favour their domestic activity. Indonesia is one example, banning nickel ore exports since 2020 and then extending similar bans during the summer to other commodities such as bauxite and copper. Namibia was one of the latest countries to impose export bans, on unprocessed lithium and other critical minerals (cobalt, manganese, graphite and rare earth minerals) last June. There is indeed growing interest for its resources, since the country has significant deposits of lithium.

Rise in food protectionism due to price issues and food security

The rise in export restrictions on food, feed and fertilisers since the outbreak of the war in Ukraine has been particularly striking. While the World Trade Organization identified only one such restriction in force at the start of 2022, this number increased to 68 at the end of February 2023, and was still as high as 59 by mid-July 2023.

Since last May, a temporary ban on the import of Ukrainian agricultural products (including wheat and maize) was in place in the EU, because some countries (Poland, Slovakia, Hungary, Romania and Bulgaria) were concerned about slumping prices on their markets as cheaper Ukrainian products became stuck within their borders. Under the implemented restrictions, only the transit of these crops via these countries was allowed. Following the expiration of the agreement on 15 September, the EU decided to lift the ban, claiming that no market distortions were observed in those countries. However, Poland and Hungary said they would continue to unilaterally impose those restrictions.

Besides geopolitical factors, climate change also motivates trade restrictions in the food sector. On 20 July, India announced an export ban on non-basmati white rice and broken rice (representing about half of all Indian rice exports) with immediate effect, in order to protect its domestic supplies on the back of a price rise following heavy rain during erratic monsoons. Since India is the largest rice exporter, covering 40% of rice exports globally, this has a considerable impact on the international market and prices, which have risen by about 20% since the introduction of the ban. This is expected to incite other large exporters (mainly Thailand and Vietnam) to follow suit, in order to protect their own markets. This would amplify the price rise even more, in a context of an already tight market and shadowed by concerns related to the emergence of El Niño.

Meanwhile, the recent import ban taken by China on Japanese seafood after the country started to release radioactive water from the failed Fukushima nuclear plant is not expected to have a big impact on the international market, since Japan is only a small exporter. However, the loss of the Chinese market would be painful for Japanese producers, with China accounting for about a fifth of their revenues.

De facto restrictions on freight imposed by extreme climate events

Lastly, the international trade of goods has also been hit by transit restrictions in the Panama Canal, following a drought that affected the region. The current restrictions, which will be in place for several months, concern the maximum draft of vessels and how many are allowed to use the canal each day. This implies delays due to ship waiting times – sometimes over a week – and extra costs for shipping companies. However, so far this has not created major disruptions in traffic and, with excess container capacity available on the market, freight rate increases should remain contained. Container shipping freight rates between Shanghai and New York increased by 37% between the end of June and the end of August.

Analyst: Florence Thiéry – f.thiery@credendo.com