Insights

Dollars and sense: charging growth
“Lithium is common. (The) hard part is turning Lithium salt or clay into extremely pure LiOH”. Elon Musk

Far from the headline news around Brexit and its aftermath – so centred on the Northern Ireland protocol, governance and rules for the financial services industry, customs declaration (or the lack thereof) and British-EU travel as the COVID-19 pandemic appears to be waning – Brussels and Westminster have been competing fiercely on an issue less headline-grabbing but likely at least as important to their economic futures: the development of a European battery industry.

This importance of this competition can be best summed up in Nissan Motor’s 1 July announcement that it would spend some £1 billion pounds developing a new battery plant at its hub in Sunderland alongside Chinese partner Envision AESC. It will also produce a new all-electric crossover vehicle, the details of which have yet to be announced, at the plant, where its legacy Qashqai crossover and its all-electric LEAF are already produced.

The announcement marks a stark reversal from electric car industry stalwart Tesla’s 2019 announcement that it would invest US$4.4 billion in a battery production plant outside Berlin, a cost that has since risen to closer to US$7 billion. It also marks a stark turnaround from 2016, when Tesla first announced it was exploring such an investment, and when Nissan warned it could pull out from the UK entirely if voters backed Brexit.

Nissan’s investment is being generously supported by subsidies; at least €100 million from the government, plus further support from Sunderland City Council. However, the ultimate difference between producing new electric car batteries in the UK versus on the Continent comes down to refining lithium, a matter that may prove familiar to long-term readers of Hawthorn Horizons as in November we covered the challenge facing the Portuguese government in the first-half of 2021, namely whether and how to push ahead with a Lithium mining and refining project in its far north that had attracted considerable local opposition.

Lisbon proved unwilling to do so, and in April scrapped plans to develop the site. In contrast, the UK’s British Lithium has made strides towards launching a lithium mine in Cornwall, as has Cornish Lithium, by securing UK government backing. In a sign of growing confidence, start-up Green Lithium announced last week that it had secured seed funding for a lithium refinery (on the back of a government-backed investment in April).

As things stand, lithium appears set to charge British growth – while a lack thereof could seriously damage Europe’s auto industry.

Policy preview: a red herring between the Pacific and Atlantic
“I’m a big fan of bitcoin…regulation of money supply needs to be depoliticised” Al Gore, former US vice president

El Salvador recently became the first country that set to accept Bitcoin, with President Nayib Bukele approving legislation in early June that mandated that businesses and individuals accept Bitcoin as payment effective 7 September. Just days earlier, he had announced the move at a conference in Miami that more closely resembled the ongoing of a nearby nightclub than the IMF summits in Washington D.C. or central bank summits in Jackson Hole, Wyoming, where monetary policy announcements are more frequently made.

Bukele’s new law unsurprisingly contains a major loophole, namely that all El Salvadorean firms and individuals who lack the technology to process Bitcoin transactions – well over 99% of each – will be automatically exempt from the regulation requiring they accept it. Nonetheless, the move has been hailed by many crypto-advocates as the first example of Bitcoin supplanting the US dollar – El Salvador does not have its own currency, and has been dollarised for quite some time. Bitcoin’s most ardent believers also argue that the move therefore helps restore some of El Salvador’s sovereignty, though the reality is that were Bitcoin ever to become the country’s de facto currency, El Salvador would still lack the ability to set an independent interest rate.

El Salvador’s central bank nonetheless has a significant role to play in the new crypto-friendly country, namely Bukele has tasked it with overseeing a fund that is responsible for ensuring convertibility between the dollar and Bitcoin. This effectively forces it to take on price risk, and as bitcoin’s significant volatility this year has shown, that may well prove to be quite the daunting task. It is made all the more concerning by the fact that El Salvador is currently in negotiations with the International Monetary Fund (IMF) for US$1 billion in desperately-needed hard currency funding.

The IMF has suspended negotiations as a result of El Salvador’s decision, concerned that El Salvador’s bitcoin regulations could see it effectively become a hub for those seeking to convert Bitcoin to dollars, and it is unwilling to see disbursed funds go to this market. For all the fanfare that El Salvador has received, the move is likely to be dashed, at least in practice by the IMF’s demands and US opposition.

It would not be the first time such an experiment has failed – then-Ohio Treasurer Josh Mandel announced in 2018 that the state would accept bitcoin to pay state taxes. His successor, Robert Sprague, shut the programme down in October 2019 citing procurement irregularities. It processed fewer than 10 transactions during its 11-month lifespan.

Cryptocurrency may be here to stay, but it will not be displacing the dollar anytime soon, even in El Salvador.

Power play: a one-tax world

“With deregulation, one sector of the economy after another is liberated to capital’s unominotred authority”

Economist Herbert Schiller

The G7’s June embrace of a global minimum tax proposal advocated by US Treasury Secretary Janet Yellen brought the campaign out of the shadows and into global headlines. We first discussed the issue in Horizons in March and noted that Washington was likely to use the Federal Reserve’s currency swap lines instituted at the onset of the COVID-19 pandemic as a sweetener to bring +EU nations on board. It has indeed done so, announcing just after the Carbis Bay meeting that it would extend the lines until the end of the year.

The Federal Reserve also concurrently extended swap lines to other central banks – including Brazil, Mexico and Australia’s. At the start of July, the Organisation for Economic Cooperation and Development (OECD) announced that its members too had backed the proposal, a far more significant move than the G7’s endorsement as the OECD has the ability to shape policy not just among the G7 but far beyond, even if it has long been reticent to use its legally-enforceable decisions to pressure member states.

So far only nine states have opted out – most notably Ireland but also Barbados, Estonia, Hungary, Kenya, Nigeria, Peru, Saint Vincent & The Grenadines, and Sri Lanka. Dublin’s reticence will remain a major sticking point, but the OECD, unlike the G7, has notably already agreed to exempt most financial services from the tax, which may ultimately be extended in a manner that allows Ireland to remain an attractive base for multinationals.

The global minimum tax is still a far way, likely at least a couple of years, away from becoming a reality. But as it appears on the horizon, it is important to consider how states will look to compete, and who may be poised to gain. One potential beneficiary is Canada, and its model may soon be adopted by others.

Canada has long made itself an attractive destination for corporates, particularly in the commodities sector. While its regulatory environment was shaped by its own mining sector, miners from Kyrgyzstan to Brazil to Indonesia have long seen Toronto and its stock exchange as their preferred destination.

The Canadian model leaves securities regulation and oversight to its Provincial governments, meaning it does not have a federal equivalent of the US’ Security and Exchange commission or the UK’s Financial Conduct Authority. They do have an umbrella organisation, the Canadian Securities Administrators (CSA), which aims to harmonise regulation.

In late May, the CSA announced a series of proposed amendments on continuous disclosure obligations, effectively reducing them by combining a set of three disclosure and filing requirements into one annual disclosure statement.

The institution of a global minimum tax will spur further such moves, as regulatory competition will supplant tax-rate competition for attracting multinationals.