After the fall of the Berlin Wall and the collapse of the Soviet Union, the international system witnessed a number of transformations like globalization of trade exchanges, de-industrialization of the Western World and the rise of new powers like China, Brazil and even post-Soviet Russia.
Before then the geo-economic analysis considered the enterprise as the center of the economic balance of power and was mainly focused on competition. At the present stage, this model appears not to be accurate enough to address the contradictions between power politics, market practices and territorial approaches. The chart elaborated by French strategist Christian Harbulot (PMT) allows considering other elements like power, market and territory that better address the complexity of this analysis.
The main challenge is finding a convergence between long-term business interests and state power politics strategies while taking an environmental friendly approach. The enterprises, for example, tend to have a preference for short-term policies, whereas state-led industrial policies are set on a long-term basis.
Nevertheless, there are indeed some cases in which coordination between corporate development strategies and state-led economic policies is successful: for instance, Russian state-led Gazprom as far as the choice of international markets for Russian gas supplies is concerned, and the American Boeing, that refused to open a branch for aircraft assembly in China, in order to avoid transferring sensitive technologies.
On top of business and state policies coordination problems, the economic needs of the territories do not necessarily merge with state-led or business practices, which refer to the logic of competition, like in the case of de-localizations.
The graph below (PMT) highlights the intersection between the three above-mentioned levels (power, market, territory). Its goal is providing a dynamic reading of different economic scenarios, not exclusively centered on the enterprise or on financial actors, whose decisions do not always take into account environmental contexts. This cross-referenced analysis facilitates the drafting of anticipation or corrective economic strategies.
The interpretation of power politics must take into account a political understanding of economic relations, which are promoted especially in developing countries. The interpretation of the market operations, mainly performed by entrepreneurs, must consider a certain amount of detachment from political objectives, especially in the Western world. Lastly, the interpretation of the actions of local stakeholders must consider the fact that the territory has always suffered from the aggressiveness of competition, to which territorial representatives tried to react through innovative management and appealing policies.
Another category that also influences economic decision-making is civil society that does not account to state, business or local stakeholders. Civil society’s stances are progressively boosting a broader reflection on market economy and advocating an ethical regulation of economic affairs through some forms of sustainable development.
The organization and management of strategic provisions is a fundamental feature of any discussion related to strategic economic development and the increase of state power. The strategic decision that are more often taken in order to increase strategic provisions security are: creating a special State-business committee, establishing partnership with other states, research and development investments, relaunching production capacity, adopting a recycle policy.
The creation of a State – Business commission on strategic provisions could better connect the public and the private sector so that services provided by the states in key sectors (defense, foreign affairs, industry, ecology, etc.) are available to the business sector. The Committee for strategic metals (COMES), established in France in 2011, is an example of this synergy even though its high level of specialization sometimes limits its broader efficiency.
Many of the OCSE countries, like the United States and Japan, set up a reserve of strategic raw material provisions to draw from in case of a block in supplies. However, this option presents some problematical aspects: 1) setting aside a certain amount of strategic raw materials to accumulate in the reserve can determine a lack of capital supplies for the entrepreneurs; 2) it is not really clear what is more convenient to fill the stockpile with. Accumulating low-alley materials or semi-finished products can be difficult for a country where the first transformation process of final products does not take place.
In order to keep supplies constant over time, the securitization of strategic provisions must rely on the partnership with foreign countries or companies as well. A good example of partnership could be setting up a mining site in a state possessing a given raw material and working on its production and transformation capacities through transferring capitals and know-how. In this regard – as many businessmen highlight – the choice of the partner countries depends on geopolitical risk factors. Argentine and Brazil, for instance, are more likely to attract foreign investment compared with the Democratic Republic of Congo that is not considered as a safe country.
Investing in research and development (R&D), instead, is fundamental to find alternative solution to the substances that are either too expensive or toxic, and to decrease the quantities that are needed without affecting the performance.
Relaunching domestic production capacity contributes to the requalification of the abandoned production sites or whose value for some reasons decreased over time. This option can be challenging for a number of reasons: reopening existing plants is expensive, sometimes the know-how of a given district disappeared over the years, and it is difficult to identify what is the best business opportunity to restore (mines, transformation chains, etc.). On top of a cutting waste practices, businessman prefer to adopt a material recycling policy, especially in the automotive and aeronautical sector. However, even recycling has its downsides, like expensive and polluting processes, and cannot be considered as a determined solution because there is still some waste percentage that cannot be fully eliminated.
Nevertheless, even in a context of perfect synergy between the investments, the policies presented so far are just the starting point for the securitization of strategic provisions. A successful strategy to address this issue requires an accurate assessment and forecast of the current and the future needs of both enterprises and people of a given community. Before pursuing any kind of policy in this field, the state must necessarily have a clear perspective on its own plan for strategic provisions.
An accurate forecast should envisage future needs and the kind and quantity of the materials that are necessary for the functioning of technologies of the future. Identifying supply chains is another aspect worth considering – especially as far as rare materials are concerned – in light of the possible risks for the industrial plants.
The French government in the early ’70 adopted a similar plan after the oil crisis: assessment of future energy needs, development of technologies to cope with it (nuclear power plants), and identification of uranium supply chains and implementation of a strategy based on a reduction in hydrocarbons provisions. The creation of the COMES is part of this plan.
The issue of provisions can be observed from two different angles. Strategic provisions are mainly raw materials of which the state needs constant supply: energy sources like oil, gas, uranium and rare earth elements that are indispensable for the functioning of information technologies and communication, to “green” energy and defense technologies. The Strategy of provisions, instead, consists in the policies to be adopted to guarantee a sufficient supply of strategic materials to sustain prosperity of the French socio-economic model over time.
The enterprise is the main actor of the economy and plays a significant role vis-à-vis the economic war that is relentlessly replacing traditional conflicts in the international arena at the present moment. An example of the combination between war and economics is the fight in the acquisition of post-war reconstruction contracts, like in Bosnia and Kosovo in the ‘90s but even more in Iraq or Libya. In Africa, especially in the Great Lakes region, great powers compete between each other for the control of strategic raw materials that are vital for the future of industrialized economies.
At this stage of globalization in which the future of the economy is mainly determined by non-state actors, the presence of the State is highly put into question. Nevertheless, it would be impossible to completely cut out the state from the economy because the roles it inevitably plays in a market: client, sponsor and producer all at the same time.
According to the definition provided by British historian and WWII expert Liddel Hart, setting up a “strategy” means coordinating and canalizing all the resources of a given state (political, military, diplomatic, economic, cultural) towards the outcome desired. With the end of the Cold War, the importance of the military element is progressively decreasing, while trade and economic resources became the main domain of competition between states.
This new setting of inter-state competition is also the result of the rise of new actors, the BRICS countries, alongside the West and Japan, which represent the traditional industrial powers. As far as European countries are concerned, there are some less evident elements to rely on in order to draft a more accurate plan for the future: ensuring state control on strategic sectors through providing incentives for domestic enterprises and, most importantly, aiming at economic growth, employment and gaining presence on foreign markets.
The United States and China are the major great powers that show how state support to the private sector – especially vis-à-vis the protection of strategic sectors and promoting domestic business abroad – is not only possible but also indispensable at power politics.
An interesting feature of the French economy is the difference of treatment – and sometimes the conflict – between multinational and small/medium enterprises. Multinational corporations are the driving force of the economy and although for a long time benefited from the national industrial policies, they are currently trying to weaken the ties with the state. Small and medium enterprises are instead more rooted in the national territory but are often struggling for financing, access to foreign markets, protection of their specific know-how and acquisition of new capacities that are indispensable for their survival. The state should then play a key role in coordinate public and private sphere. However, mutual mistrust between these two sectors – although understandable – turns out to be a hurdle for development in most European countries.
In the United States the situation is quite different: strong ties between public administration, private sector, academia and think tank built up a network that strongly favors communication and obtaining information. This aspect tends to get little attention in Europe, where state power is considered as a limit to overcome rather than an opportunity to take. It is true that public institutions have a significant advantage in terms of intermediation capacities and access to information compared to the private actors. However, if oriented towards the needs of the real economy, multi-level coordination between public and private sector can provide a competitive advantage for both multinational and small/medium enterprises.
Creating competitive clusters allows to use the networks at its full capacity, helps local sharing of good-practices with regard to economic intelligence, protection of intangible heritage of information, and know-how of the enterprises. The state cannot refuse to take this pressing challenge: it must promote the access to good practices especially for small enterprises following the rules of transparency.
In recent years, investment funds became a popular topic in the debate around economic power as possible threat to the survival of western corporation model, especially as far as middle-eastern and Chinese sovereign funds are concerned. However, Chinese investments in European companies are still quite low and mainly concentrated in sectors like raw materials, energy resources and other operations that does not lead to a real control the enterprise.
In some cases, however, some acquisitions are deemed to gain technological (or other) competences, without a real interest to invest in the local development of the acquired undertaking, as the cases of Intel (investment fund with CIA connections), Carlyle Group (in the aerospace industry) and TPG (that from 2006 controls the main French company producing smart cards) demonstrate. In this framework, there are several instruments aiming at protecting State’s sovereignty, which is threatened by massive purchasing of economic activities by sovereign funds. Firstly, a screening of foreign investment in strategic fields can be put in place, especially to protect Small and Medium Enterprises. Secondly, a change of attitude is needed, in order to accept that developing countries will control more and more European companies. In these cases, however, the principle of reciprocity shall be respected.
Particular relevance has to be granted to standard and rules, which are normally set out at the international level. Accordingly, lobbying within international organizations, as the United States knows very well, is of the highest importance. Otherwise States could elaborate their own standards or invest, for example, in the International Organization for Standardization, as China is doing.
In this subject matter, the European Union is not able to “speak with one voice”. In particular, the lack of a Union’s comprehensive strategy, and thus the predominance of national interests, is particularly evident. In accordance with the Treaties, in fact, in the internal market, the protection of competition takes precedence over an effective industrial policy. In light of the foregoing, new priorities should be set out, in order to enhance the coordination that could increase the penetration in non-EU markets (especially concerning some strategic sector, i.e. the defense one) and improve the existing competition. Nevertheless, it should be noticed that these changes might not be possible without the creation of real “United States of Europe”.
The current debate often focuses on energy security, not only from an economic point of view. The need to swift from “energy security” to the “energy supply” has been underlined, as well as the importance of securing the energy flows. This is demonstrated by the so-called “oil wars”, as the two Gulf wars, the war in Afghanistan and in Libya could surely be defined. However, despite the fact that the oil supply is one of the main causes of these conflicts, delicate international geopolitical balances are crucial elements to be take into account.
Along with the control of the “black gold”, the “gas issue” should be given a great importance for several reasons. Research demonstrates that the increasing in energy demand in the next years (from developing countries in particular) could not be satisfied by oil only. Furthermore, it is necessary to find alternative solutions in order to overcome difficulties stemming from extraction techniques in newly discovered oil fields.
Accordingly, States are trying to revise their energy policy, by reducing consumption and improving the quality of their infrastructures to avoid leaks, by diversifying their energy sources, especially by increasing the use of renewable energy (i.e. wind, sun and wave power), and by controlling the use of national resources (as France does with hydropower and nuclear energy).
Moreover, security of supplies is related to raw materials, where the interplay between economic and geopolitical aspects is evident. Agricultural products, minerals and rare earths elements are only few examples.
China holds more than 90% of rare earth elements and uses this monopoly to achieve its political purposes, against Japan for instance, towards which the Chinese government applies restrictions on exports in light of their territorial disputes. Furthermore, conflicts arise in relation to abundant resources, such as cultivable lands (as it happens with land grabbing) or common goods, such as water, air, biodiversity and the genetic heritage. In this framework, countries, in a globalized word, have to deal with the scarcity of resources, caused by demographic growth, as well as by the increasing of material and immaterial trade flows, flows of goods and people, information and money. In particular, supplies are granted only when flows are safe and this implies several economic and military consequences.
On the one hand, different economic elements shall be protected: the ownership of infrastructures, the technical control of the exploitation of resources, the choice of transport routes (such as pipelines for the European supply) and the control on access routes (such as harbours).
On the other hand, security depends on military capacity to oversee production and export areas, as well as on seaway’s extension and control. Examples are the protection of the Gulf of Aden by EU’s Atlanta and NATO’s Ocean Shield operations.
One of the main geopolitical issues in the current debate concerns rare earth elements These include 17 elements that are fundamental for high-tech industries, even though they are used in small quantities. For instance, lanthanum can be found in electric vehicle batteries and in sonar; samarium in some missiles’ elements; gallium in night vision devices; indium in flat panels. These specific Raw materials are actually at the center of the dispute between China and the United States, which are two of the main actors in international relations of XXI century. Evidence supports the predominance of China in this field: the country holds between 34 and 50% of world reserves and produced, in 2010, 95% of rare earth elements (130,000 tonnes out of 133,000). This was possible after having progressively abandoned the exploitation of western sites and the complete integration in the global economy system. Therefore, Pekin is able to use this leverage in its dialogue with western countries, by imposing very high prices or, even worse, by breaking their supply chain. There is no doubt, however, that a problem of dependence exists and that it is not clear how to solve it. Nevertheless, China’s position seems not to be so safe. The country should become an importer of rare earth elements by the end of the current decade.
Between 2006 and 2010 China reduced its export share of these metals from 5 to 10% per year. Furthermore, their production was limited, to avoid the depletion of reserves. However, China-Japan tensions of September 2010 (following the Japanese inspection of a Chinese vessel in “contested” waters) have worsened their relationship. As a result, the Chinese Trade Minister set 30% reduction of export share.
China was trying to use rare earth metals as an economic weapon, which led to a real embargo on its exports towards the European Union, Japan (representing one fifth of its final demand) and United States, whose diplomats were able to obtain by their Chinese colleagues full assurance concerning liability in the future. This demonstrated that Sino-US relations are of the highest importance in the American politics. Currently, 87% US imports of rare earth elements come from China, while the remaining 13% is from domestic reserves.
The Chinese embargo forced the United States to implement a strategic vision that was missing so far, because of the dependence of the country form external resources. Therefore, the US needed to undertake some measures stimulating mining, refining and transformation of this kind of raw materials.. As a result, the US pursued a policy of differentiation of trade partners.
Nevertheless, the exploitation of mines in order to obtain rare earth elements is rather difficult, both at the administrative (the re-opening of one of these mines takes 9 years) and at the political level (environmental organisations are often against these projects). Molycop case represents a successful story in this field. The enterprise, in fact, owned Mountain Pass mine, which is the biggest site of non-Chinese rare earth metals in the world, and obtained in 2010 (few months after the above-mentioned diplomatic tensions with China) the authorization to relaunch the activity. Molycorp’s efforts ended at the end of 2012 and the company increased its production from 3.000 tonnes to 20.000 tonnes per year and received 531 million dollars of funds. Currently, the company is the only one that extracts these materials outside China. The step of this process will be summarised in the following paragraph.
In June 2010 Molycorp signed an agreement with Canadian company NeoMaterial, which provides technical assistance and know-how on the production of rare earths elements. Moreover, in December of the same year, Molycorp set up a joint-venture with the Japanese Hitachi, in order to create several associated enterprises producing alloys and magnets in the United States. Furthermore, Molycor signed a memorandum of understanding with Sumitomo Corporation trough which Molycorp completed its supply chain of rare earth metal-manufacturing products. These products are then delivered to Sumitomo Corporation. In April 2011 Molycorp acquired the American branch of the Japanese enterprise Santoku for 17.5 million dollars and the Estonian Silmet for 89 million dollars. Therefore, Molycorp can actually count on a network of customers that goes from the Far East to Europe.
Molycop has secured funds, mines, know-how, logistical cooperation and a network of buyers, and became the only western enterprise with a full control of the entire supply chain of rare earth elements, from the mining to the sale process . The United States could thus avoid direct conflicts with China, after the threat of embargo and the increase in prices.
Despite the fact that China could not be excluded from rare earth elements-market, its power shall be controlled, as tensions arisen in 2010 showed. The idea of an embargo in September 2010 stimulated competition and pushed western countries to diversify their supply sources. As a result, the offer increased and Chinese power decreased.