Welcome to Trade Secrets, cruising smoothly towards the summer lull. Next week’s newsletter is the last weekly edition before we go fortnightly during August. Next month there’s going to be the Brics summit in South Africa, of which more later in the week, to keep global governance fans entertained. (I guess for a group with two southern hemisphere countries, the concept of a summer break is a bit northern-centric.) Today I look at the continued non-appearance of a global food crisis despite Russia’s best efforts to create one, and how Brazil’s president Luiz Inácio Lula da Silva might cure or kill the Mercosur trade deal with the EU. Charted waters is about Germany’s probable lead in electric vehicle battery production in Europe.
Entering a world of grain
Readers will surely remember a surge of (well-founded) worry last spring and summer about a global food emergency. Lower grain exports from Ukraine, the oil and gas shock hitting energy-intensive agricultural production and transport, interruptions to global shipping, and general high inflation: it all added up.
Moscow was weaponising grain by cutting off supply to world markets, potentially creating food crises in developing countries, especially in Africa. Then governments started restricting exports — India within weeks went from saying it would feed the world to blocking wheat exports — and a rerun of the 2007-08 food crisis seemed quite possible.
And then . . . basically nothing. Food prices fell. The export restrictions were lifted. It would be nice to think this was because governments and the World Trade Organization have got better at managing food trade and constraining export controls. In fact, it was mainly a series of good harvests and the trading system adapting to unreliable supply from Ukraine.
Over the past week we’ve had a bit of a reprise of last summer. As it briefly did last November, Russia suspended the Black Sea grain initiative, which provides safe passage to ships exporting food and fertiliser from Ukraine, and this time topped it off with an extra dollop of evil, bombing Ukrainian grain depots. Moscow is still trying to play grain geopolitics with a plan to turn sub-Saharan countries into vassals (its favourite kind of ally) by supplying them with the food they used to import from Ukraine. And India announced export restrictions on rice.
Yet the reaction hasn’t been catastrophic. Global wheat prices rose by 12 per cent last week, but are still not much more than half the levels of a year ago.
Politically, Turkey and Qatar seem unlikely to play ball with Russian president Vladimir Putin’s African blackmail. Fertiliser prices have more than halved since last spring, reflecting the falling cost of energy. Rice prices are at multiyear highs, but India has granted exceptions to its rice export bans to food-insecure countries and may well do so again.
Why the muted market response? One, investors may have already priced in a lot of disruption to Ukrainian supply. Two, global harvests have continued to do well despite the spate of extreme weather events. The US Department of Agriculture says wheat production will hit a record high in 2023-24, and the share of US output hit by drought has actually been falling.
The suspension of the Black Sea deal will mainly hit Ukraine and some food-importing poor countries. That’s obviously unwelcome, especially given the continued resistance in central and eastern Europe to accepting Ukrainian grain exports and the difficulty of finding alternative export routes. But it won’t be the kind of widespread disruption that will get Europe and the US leaning on Kyiv to agree ceasefires and peace talks. Sub-Saharan African countries might be charier about criticising Russia, but most low-income countries are avoiding taking sides in the war anyway. As with gas supply to western Europe, Putin’s attempt to weaponise food exports hasn’t really worked.
Snaring the elusive Mercosaurus
Maybe it’s a certain weariness because negotiations before signing in 2019 took nearly two decades and post-signing ratification talks have stalled, but it feels like the global importance of the EU-Mercosur trade deal isn’t sufficiently recognised in some quarters. Assuming India isn’t going to sign meaningful big trade deals any time soon and China’s bid to join the Asia-Pacific CPTPP will get blocked, the South American bloc would be one of the last big chunks of the emerging market world to make substantive new agreements with big, rich trading powers.
It would also rebut the idea that EU environmental neocolonialism prevents Brussels making agreements with middle-income countries, at least those with virgin forests. From Brazil’s point of view it would underline Brasilia’s diplomatic agility by getting along with both China and the rich democracies.
So what to make of Lula’s remarks last week? The Brazilian president said he was optimistic about getting the deal ratified, but proposed what seems like a poison pill — relaxing the deal’s public procurement provisions so that his country can pursue an active industrial policy.
Brazil has already unsuccessfully tried that for half a century, but there’s an appealing case for policy space given the EU’s own adventures in interventionism. And while the EU is normally obsessed with holding to its standard model trade deal, surely there’s an argument for agreeing tweaks here for the prestige of getting Mercosur in the bag.
The problem is that unlike the other unresolved issue — a side letter on deforestation that Brussels wants Mercosur to accept — substantially changing the public procurement provisions makes negotiators’ hearts sink. It would mean reopening the text, doing parts of the talks all over again and letting lobbyists and campaigners swarm all over it. If Lula continues to condition ratification on making changes to the text, it will look like he considers the deal expendable.
Charted waters
It started slowly and let China get a big lead in making electric vehicles. But a combination of manufacturing knowhow and lashings of state support mean Germany is projected to overtake the early leaders (including Hungary, which forms part of German carmakers’ supply chains) and have the largest EV battery capacity in Europe by the end of the decade.
Trade links
EU trade commissioner Valdis Dombrovskis warns in an FT interview there will be no compromise on green steel with the US if it violates WTO rules.
Counterpoint: the Biden administration outriders at the Roosevelt Institute explain why the US green steel proposal is the best.
The Taiwanese chip giant TSMC, which has moaned mightily about a subsidy race distorting global supply chains, delays production at a chip plant in Arizona because it can’t find good workers.
Peter Foster’s excellent Britain after Brexit newsletter shows how continued divergence from EU regulations (or even alignment, since that doesn’t automatically bring market access) will heap more burdens on UK business.
The Asian Infrastructure Investment Bank, recently criticised by a departing senior staff member for being unduly influenced by the Chinese Communist party, has nonetheless sealed a partnership deal with the World Bank
Trade Secrets is edited by Jonathan Moules
Source: Economy - ft.com
