November 18, 2010 / 2:29 PM / in 7 years

ANALYSIS-Raw materials present EU with trade, growth conundrum

* EU struggling to shape policy on raw materials

* Scarcity of materials threatens to depress EU growth

By Juliane von Reppert-Bismarck

BRUSSELS, Nov 18 (Reuters) - To fuel its economic recovery, Europe needs raw materials. But its efforts to acquire them are being frustrated by a mistrust of foreign supplies and internal disagreement over what a raw material is.

The European Union, the world’s largest trading zone, has complained for years about non-EU countries restricting the export of essential materials used by European manufacturers to make products such as steel, semiconductors and light bulbs.

It has even taken China, one of the world’s largest raw materials exporters, to the World Trade Organization for inflating the cost of materials via steep export taxes, a challenge that has been joined by the United States and Mexico.

But its efforts have done little to increase access to the ingredients it needs, and now China is threatening an even more restrictive policy, with plans for ceilings on exports of rare earths -- sought-after raw materials used in most high-tech products and a driver of the global economy.

The situation has prompted European policymakers and industry to try to come up with measures that will encourage countries to be more open with their resources. But it has also led to a debate about what exactly constitutes a raw material, and how much the EU should be making or buying from abroad.

The EU now finds itself trying to create a market mechanism that will strike a balance between encouraging foreign suppliers to keep their exports coming, while at the same time stopping those same suppliers from flooding the EU market.

Simultaneously, the EU is trying to agree a clear definition of those raw materials it has a strategic interest in importing.

For EU industry, it has become a difficult juggling act.

“If we remove tariffs or demand an end to China’s export restrictions we run the risk of being flooded by these commodities again, endangering what is left of EU production,” said Ines Van Lierde, secretary-general of EuroAlliages, an industry group that represents Europe’s iron alloy producers.

Rising raw material prices depress profit margins for EU-based companies, which can lead to factory closures, lay offs and the relocation of industry to cheaper locations where the supply of raw materials is plentiful, such as China.

DEFINING RAW MATERIALS

One conundrum for the EU is defining strategically important raw materials so that it has clarity on which products its wants greater access to and can then work on increasing the supply.

The European Commission, the EU’s executive, this summer defined 14 raw materials as being critical to the EU economy, among them chemical elements, rare earths and platinum metals.

But the list did not address the profit squeeze experienced by EU firms that rely on vast supplies of heavy goods such as iron ore and copper, triggering the need for other initiatives.

Earlier this year, Italy, encouraged by its influential manufacturing sector, urged Europe to provide a leg-up for European production by suspending import tariffs on an entirely different set of critical raw materials -- including pig iron, silicon, cow hides and silk thread.

Backed by countries including Germany, that wishlist quickly swelled to 92 products, many of them intermediate products such as leather, cotton fabric and chemical compounds -- before it was put on ice because the issue was becoming too complicated.

“We couldn’t agree on what should be the definition of a raw material. For some of us it’s broader than what you dig out of the earth, and for others it’s very narrowly defined,” an EU diplomat told Reuters. “So we are not expecting this (Italian-led) initiative to go ahead any time soon.”

Tariff suspensions along the lines of the Italian plan are still possible, EU diplomats say, but they may have to travel through the slow-moving channels of EU customs legislation, meaning their impact on raw material imports will be delayed.

In the interim, an EU raw materials strategy to be unveiled this year, built on the narrow 14-product list, is likely to address looming shortages by calling for more efficient recycling and tighter controls on valuable metals and minerals that leave the EU in the form of scrap electronics and cars.

But EU controls on scrap exports will call into question the bloc’s publicly stated support for free trade. And recycling is not sufficient to meet demand, meaning the EU still has a pressing need to get hold of foreign raw materials at low cost.

FOREIGN SUPPLIES

Reflecting that need, a new EU trade policy unveiled this month threatens legal action against non-EU suppliers who restrict exports of critical goods.

Yet such threats are a blunt instrument and face strong opposition: even if the EU could agree internally on what raw materials supplies it should focus on acquiring, any concerted action is likely to prompt a row with trading partners.

For some countries -- Russia in particular -- export tariffs represent an important source of income and an attack on them would be a direct threat to national budget policy.

Powerful emerging economies intent on pushing their exports up the value chain may also balk at pressure to supply the EU with raw commodities that they themselves want to use.

China -- the most obvious target of the EU’s newly assertive approach -- insists its export restrictions reflect concerns for diminishing resources and the environment, not protectionism.

An alternative is for the EU to increase protection of its own struggling EU raw materials’ producers, rather than relying so heavily on cheaper foreign imports. But that risks increasing inefficiencies, potentially hurting powerful producers such as Germany, and is unlikely to go unchallenged.

For the EU, the raw materials puzzle is a long way from being unlocked. (Editing by Alison Williams)

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