EU shouldn’t rely on trade defence to strengthen its supply chains

Hi from Brussels. We’re not going to turn Trade Secrets into a racing tipsheet for the World Trade Organization director-general selection, but with the process under way (nominations open June 8 and close July 8) here’s some intel from conversations since we last discussed it.

Contrary to what you may have heard, the EU hasn’t coalesced around a candidate, nor even decided if it collectively wants to run one. EU member state trade officials will discuss the matter tomorrow in one of their regular meetings. Spanish foreign minister Arancha González seems pretty keen, but US support will be a serious problem. She’s achieved bipartisan unpopularity in Washington from being chief of staff to former WTO DG (and EU trade commissioner) Pascal Lamy, who alienated more or less everyone there. There would be a similar objection to current trade commissioner “Big Phil” Hogan, who’s not exactly all rainbows and kittens with the Trump administration. The lower-key Netherlands trade minister Sigrid Kaag would attract less opposition, but she may choose instead to pursue a domestic ambition to rise within her political party. Peter Mandelson, former UK minister and EU trade commissioner, remains a long shot. Literally no one has mentioned his compatriot Liam Fox.

Canadian deputy prime minister (and former FT journalist) Chrystia Freeland, who renegotiated Nafta with the US, would very likely get it if she wanted it, but she probably prefers to try succeeding Justin Trudeau as PM. A strong Japanese candidate would have a good chance, especially if you subscribe to the notion that it has to be someone from a rich country (absurd to us, see Tall Tales below, but real to some), but there doesn’t seem to be one. Tim Groser, former New Zealand minister, might fancy another attempt, but the current government there is unlikely to back him. If Kenyan former trade minister Amina Mohamed can get the nomination from Kenya’s president and emerge as a unity African candidate (by no means assured), she remains a favourite.

Amina Mohamed, Kenyan former trade minister. If she can get the nomination from Kenya’s president and emerge as a unity African candidate, she remains a favourite © AFP via Getty Images

Of course, the total unknown here is the Trump administration. It might not care who becomes DG. Or it might hold the whole process up indefinitely as leverage to force WTO reform. It might nominate its own candidate, say Ivanka Trump, or perhaps a fictional cartoon character, maybe Olive Oyl or Wile E. Coyote. It might try to insist it be renamed the World Trump Organization and moved to Mar-a-Lago. Who knows? 

Anyway, we’re not offering odds on the candidates. We’re just telling you what we pick up. Let us know if you hear anything new or different.

Today’s main piece is on how the necessary evil of antidumping and antisubsidy duties might be repurposed to inflict unnecessary harm, and Charted Waters looks at how US exports from communications companies have been falling. And there’s a Trade Secrets special report up from today on ft.com — a series of pieces by the team on the future of supply chains.

The indefensible misuse of trade defence

It’s now an established view that the pandemic will spur, or catalyse, a lasting surge of government intervention in industry and trade. Certainly there have been some pretty hefty crisis-related bailouts. France, which rarely needs an excuse for a handout, has just rustled up €8bn for its carmakers.

Subsidies mean trade distortions, and antidumping and antisubsidy lawyers are already grinning in wolfish anticipation at the lucrative work to come. A deeper issue, though, is whether those trade defence instruments (TDI) could be a systematic part of a new era of state intervention.

This issue was given a bit of spice the other week when a more-or-less-open letter came out of the blue from a gang (“conclave”? “fraternity”? “cabal”?) of retired EU officials including Peter Carl, former trade director-general (DG). The missive, directed at commission president Ursula von der Leyen, complained that the EU’s TDIs were too weak and slow, certainly compared with their American counterparts. 

A letter directed at EC president Ursula von der Leyen complained that the EU’s trade defence instruments were too weak and sluggish © AP

Standard-issue protectionism, cheap imports are hateful, let’s stick it to the Chinese steelmakers just a little bit more, you might think. But there’s some interesting framing. The letter makes the argument for more antidumping and antisubsidy duties in the context of building up the EU’s post-Covid-19 capacity in strategically important industries including medicines. It says the medical sector should be regarded as akin to defence, where a large part of production needs to be carried out at home or in the economies of close allies. In other words, it’s a bid to have TDIs play a big part in the post-Covid-19 push to refashion supply chains.

This letter got a fairly brisk and fierce rebuttal from two more recently-departed EU trade bigwigs, Jean-Luc Demarty and David O’Sullivan who wrote their own letter in response. Their argument was that there are plenty of constructive ways the EU and its governments can intervene to build resilience, including stockpiling and investment in capacity, but a routine and widespread use of trade defence isn’t one.

We’ve had our share of respectful disagreements with Demarty and O’Sullivan down the years, but we’re totally with them on this one. TDIs apply to a tiny part of total trade, much less than 1% of imports, concentrated in a few old-economy sectors such as steel. Suddenly we’re going to have them cover whole swaths of products?

What happens when some “strategic” product isn’t actually subject to unfair dumping, just efficient low-cost competition? Interfere in what’s supposed to be an objective process to get the result you want and bump up antidumping margins? What happens when you block imports from one source, say China, and they just pop up from another, say Vietnam? Does your reshoring strategy really hang on your ability to chase competing production around different low-cost Asian exporters blipping it on the head as soon as it resurfaces?

Also: aren’t we all about resilience and diversity of supply chains rather than just reshoring? If TDIs drive all industry back home, what happens if there’s a shock that hits just domestic production?

This focus on trade defence looks all too much like the EU’s Covid-19-related export restrictions on PPE, which Brussels finally lifted this week. In lieu of effective EU-wide procurement and distribution for emergency supplies, Brussels had to reach for a blunt tool — trade restrictions — despite the collateral damage.

To be fair and even-handed we asked Alan Wolff about this. Wolff, deputy director-general of the WTO, is a former US trade official and — most importantly for these purposes — was once an antidumping lawyer for the steel industry working alongside current US trade representative Robert Lighthizer. So he’s not exactly an ideological opponent of trade defence, but he doesn’t think much of using it strategically. “Trade defence might be one element of an industrial policy, but other much larger subsidy or regulatory interventions are needed as well to nurture a particular domestic industry,” he told us.

So there you have it. We’re going to hear a lot about antidumping and antisubsidy contributing to economic resilience. But the case for doing so systematically is very far from being made.

Charted Waters

The attempt by Elon Musk’s SpaceX to become the first private company to lift humans into orbit was delayed on Wednesday as a storm system off the coast of Florida failed to clear in time for the scheduled late-afternoon launch. But it came as US exports from communications companies have been falling, with greater launch capabilities in the US reducing the need to send satellites and other space systems to other countries for launch.

Tall Tales of Trade

On the subject of the WTO DGship, let’s quickly disperse one silly contention. EU officials say it’s time for a candidate from a developed country, following what they call “established precedent” that DGs alternate from developing and developed. There have been six DGs since the WTO was established in 1995. The first three were from Ireland, Italy and New Zealand respectively. Unless Italy is now a developing country, the “established precedent” is obviously nonsense. The EU shuffles a bit and says, well, if you look at the last four you can see the rich-poor-rich-poor pattern, and anyway lots of governments agree with us. It’s a long time since we studied statistical inference, but we’re pretty sure that taking a sample of six and discarding a third of it to get the result you want isn’t best practice. Four isn’t a precedent, however much you try to bully other countries to agree. Give it up, Europe. It’s a bit embarrassing.

One thing, though. Following pressure from the US and, yes, the EU, Brazil last year stopped designating itself a developing country in the WTO, for the purposes of receiving “special and differential” (ie preferential) treatment (good for them, we say). So in WTO terms Brazil’s now a developed country, right? So we can have another Brazilian DG to follow Roberto Azevêdo, yes? Come on, Brazil, make us proud. Nominate a candidate this time round as well. I mean, they won’t win, but the sheer brass neck will be most entertaining to watch.

Don’t miss

• The argument that diversifying or reshoring is the necessary response to the Covid-19 pandemic is easy to make but wildly oversimplified, argues Alan Beattie.
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• As the Covid-19 panic-buying empties supermarket shelves of toilet paper, many restaurants, hotels and offices — devoid of their usual visitors — are flush with it, writes Aime Williams.
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• And, on the topic of trade negotiations, Philip Stephens argues in the FT that Britain’s Brexiters still do not understand Europe — and that the EU simply cannot offer the deal that UK prime minister Boris Johnson wants.
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Tokyo talk

The best trade stories from the Nikkei Asian Review

• Japan is hoping to secure 1,000 ventilators from the US in preparation for a second wave of coronavirus cases, after imports from overseas — which account for 90 per cent of the country’s ventilators — fell as the US and Europe focused on their domestic situation.
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• Taiwan’s tech manufacturers have found themselves at the forefront of the global push to move supply chains out of “the world’s factory” as rising tensions between Washington and Beijing fuel demand for servers and chips not made on the mainland.
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Source: Economy - ft.com