Hello from Brussels. You won’t believe this, but the UK government is still currently planning for the Brexit transition period to end on December 31, despite UK businesses being fully occupied scrambling to deal with coronavirus.
The joint committee to administer the EU-UK withdrawal agreement meets today, but the talks about a final trade deal are going nowhere. Boris Johnson’s government is currently ignoring pleas from the likes of the Freight Transport Association, which knows a thing or two about trade logistics, to extend the transition. There’s being principled and then there’s being single-minded and then there’s being bullheaded and then there’s running face-first into a brick wall at full speed. Anyway. They’ve got till July 1 for sanity to return.
Today’s main section is on another EU tool of protectionism/economic sovereignty (delete as preferred) being honed ready for use. Meanwhile, John Denton, secretary-general of the International Chamber of Commerce, answers key questions in Tit-for-Tat, while the chart of the day shows how the US import downturn has been led by consumers.
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Repel boarders! The FDI pirates are on the horizon
There’s a global rush to self-sufficiency in healthcare, a scramble for control of antiviral technology and equipment and a serious lack of trust between the big trading powers. The result: governments are pointedly sharpening the trade tools they have long been crafting to protect their companies from foreign competitors bent on looting and pillaging.
The European Commission did its own bit of weapon-waving last week, reminding everyone of the EU’s forthcoming screening mechanism for foreign direct investment. The regulation aims to deter takeovers by overseas companies that threaten security and public order. Importantly, it explicitly includes critical health infrastructures and inputs.
Having been agreed in 2018, the regulation will come into effect this October. The long gestation period reflects the time it takes to set up a secure system whereby the commission and EU governments can scrutinise proposed investments in other member states and raise concerns. EU member states that don’t already have screening mechanisms are committed to create them pronto.
The commission’s intervention last week doesn’t give the process any new powers. The regulation can’t actually stop raiders climbing aboard a member state and seizing booty: it’s more what you’d call guidelines than actual rules. But given that the process relies on peer pressure between governments and the commission, might the intense public scrutiny make it more effective? Mais bien sûr, as the mechanism’s most strident longtime advocates would say.
The commission itself has already shifted a long way on the desirability of screening investments. Previously instinctively opposed lest it be used to protect weak industries from restructuring, in recent years the trade directorate has become much keener. Partly this is in response to the sense of China as a strategic competitor and partly it’s good old DG Trade mission creep. Alec Burnside, partner at the law firm Dechert in Brussels, puts it thus: “The commission is taking the opportunity to maximise its influence in the screening process, and the signs are that it is a gamekeeper turned poacher on this issue.”
Often with FDI screening regimes there is a politically sensitive case which concentrates everyone’s minds. In the US, which has the much more powerful Cfius (Committee on Foreign Investment in the United States) process, it was the Dubai Ports World saga in 2006. In a post-9/11 world, US lawmakers disliked a Middle Eastern state-owned company running critical American transport infrastructure. In the EU, or certainly in traditionally pro-FDI Germany, it was the takeover of the German robot manufacturer Kuka by a Chinese company in 2016. Bang on cue we now have the perfect coronavirus cause célèbre — the alleged attempt by Donald Trump to buy up the rights to any vaccine produced by the German company CureVac.
CureVac: the perfect coronavirus cause célèbre © REUTERS
What Trump was actually up to and whether this would constitute screenable FDI is almost beyond the point. “The Americans are after our vaccines” is a powerful rallying cry. Relatedly, Germany’s economy minister Peter Altmaier warned last week about foreign investors snapping up European companies in a fire-sale. Alarm is clearly rising among member states. Spain recently tightened up its national screening mechanism in response to the crisis. Even before coronavirus, Germany itself was lowering the bar considerably for being able to block takeovers, shifting from an acquisition being a “threat” to public order or security to merely posing a “probable impairment” (sometimes translated as “foreseeable impairment”).
The last time China came with generous offers while European assets were going cheap was the eurozone sovereign debt crisis. It gained solid allies for Chinese involvement in the EU in the shape of Greece and Portugal by investing — including, famously, in Greece’s Piraeus container port — where others would not.
Beijing has played a geopolitical blinder in the EU so far with its provision of doctors and equipment, though any more problems with the quality of the masks and testing kits and its standing is likely to fall quickly. Will this goodwill extend as far as letting Chinese companies take over Europe’s vaccine and ventilator producers? Probably not. Life-saving meds and equipment aren’t container ports. The commission has made sure to remind everyone the EU has the weapons to repel unwanted boarders before they get too near the ship’s treasure.
Charted waters
American consumers’ confidence in the economy is deteriorating as anxiety over coronavirus takes hold, Barron’s reports. The University of Michigan’s index of consumer sentiment dropped to 89.1 in March from 101.0 in February. That’s the lowest level in more than three years, and the monthly decline is among the worst on record. Sentiment is only going to get worse given surging unemployment and falling household incomes. Data on Friday showed consumers were already cautious about spending in February, before coronavirus began to spread across the US and claim jobs.
Tit-for-tat
John Denton
John Denton, secretary-general of the International Chamber of Commerce, joins us to answer three key questions about how business and trade supply lines are coping during the pandemic:
Which sectors are seeing the most pressure on their global supply chains, and what can be done to address this?
Few global supply chains have been spared from Covid-19’s impact. With many public places shuttered, anticipated demand in several sectors has simply fallen off a cliff — with immediate ripple effects down a number of supply chains. Almost $3bn in garment orders booked by Bangladeshi factories at the start of the year have been cancelled in recent weeks. In sectors where demand remains, we are seeing a shortage of available cargo routes and strains obtaining trade finance.
Governments can quickly take common sense steps to mitigate the potential damage of the pandemic. Measures to keep cargo ships moving, ensure the flow of trade finance, extend timeframes for duty payments, and remove tariffs on essential supplies are the bare minimum we should expect from the world’s leading economies.
Do you support the current restrictions on trade in medical supplies we are seeing, for example from the EU?
I completely understand why many countries have limited their exports of medical necessities. But the reality is such measures are misguided. The fundamental problem is a supply shortfall, which can only be addressed by increasing production.
Export curbs do the exact opposite: they remove incentives for companies to massively produce medical equipment by shutting off export markets. A potential global market for 7.8bn people becomes the size of the domestic population. Without export bans, companies would be much more likely to switch from producing vacuum cleaners, for example, to ventilators.
What are some of the positive best practice examples you’re seeing from businesses in your network in response to the crisis?
It has been impressive to see the private sector jump into action to respond to this crisis. In the US, commercial labs have filled the gap by introducing their own kits to improve testing capacities. Technology companies like Apple, Facebook, IBM, are offering tools to raise public awareness about the symptoms associated with Covid-19.
In response to a shortage of ventilators in Italy, the French sportswear retailer, Decathlon, has started converting snorkelling masks into ventilators. In the garment industry, Fanatics and Major League Baseball are teaming up to convert their stock of baseball uniforms into medical masks and gowns.
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Tokyo talk
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