Welcome to the first Trade Secrets of 2023. I used to do New Year predictions for the twelve months ahead, sometimes even moderately accurate ones. But that was in the days when trade policy involved discrete initiatives whose outcomes you could actually judge — investment agreements, appointments of World Trade Organization directors-general, retaliation on digital services taxes, futile attempts to make China buy American soyabeans . . . that kind of thing. These days, globalisation’s being bounced around by a whole range of interconnected macroeconomic and geopolitical issues: world growth, inflation, the US-China tech tussle, global energy shocks, Covid-19 and the Ukraine war. My one firm prediction is that we’ll see a lot of trade folk having to learn new stuff very quickly, including here at Trade Secrets.
Today’s main piece looks at how these cross-cutting issues affect one of the biggest running stories: the US’s aggressive moves on industrial policy. Charted waters is about the UK’s food price inflation problem. As usual, if you have views you wish to unload, email me at alan.beattie@ft.com.
Diverse impulses and contradictory aims . . .
Joe Biden left no doubt about his intentions for 2023. It was, he tweeted to the world on January 5, “the year of buying American”. It’s dawned on the US’s trading partners that the president was really serious about using spending, regulations and export controls to establish and maintain leads across a swath of tech products. The US is also clearly not going to let international trade rules stand in its way, as the USTR’s contemptuous dismissal of the WTO ruling against its national security tariffs showed. So how does the rest of the world react?
It’s a tricky one, because the US has mixed motives and multiple goals. That’s not surprising: Biden is, all at once, new cold war anti-China warrior with alliance-building instincts who believes in boosting American manufacturing and combating climate change. He is large, he contains multitudes.
In domestic economics/industrial terms, he’s trying to promote all of the following:
products with genuine national security implications (semiconductors with military use)
high value-added products where the US wants a global lead (electric vehicles)
products whose workers, especially unionised ones, might swing elections (steel)
lower US income inequality
In geopolitics/geoeconomics terms, he simultaneously wants to do these:
combat climate change
make the US self-sufficient/secure in critical goods
build regional and global alliances
project US interests abroad
It’s clear these immediately set up conflicts. See this review of my FT colleague Rana Foroohar’s book showing that some of the anti-globalisation crowd have finally got the economic localism they want, but in the wrong way and for the wrong reason, ie bashing China. (The greatest treason, and so on.)
For example: the infamous electric vehicle credits in the Inflation Reduction Act address the high-value added product goal and — having now added Canada and Mexico as beneficiaries — the regional alliance goal. But they undermine the climate change target by restricting competition that might provide Americans with the cheapest EVs, and also the global alliance goal by annoying the Europeans, Japanese and Koreans.
The national security steel tariffs, and their quota descendants, address the swing voter goal and the self-sufficiency goal — though seem unlikely to reduce inequality much, like all of trade policy. But again they annoy global allies and mean ignoring the WTO, thus absenting the US from a leadership role in the global economy.
. . . make for mind-bending trade diplomacy
When it comes to implementation, the administration thus has to pick its way carefully and try to hit as many targets as possible, which gets trickier when you add in folks on Capitol Hill with different preferences. The US Treasury is tweaking the EV credits to allow in EU, Japanese and Korean vehicles, but that is annoying Buy America (or Buy USMCA) senator Joe Manchin of West Virginia, who wants to hold up the implementation. Manchin’s fellow Democratic senator Raphael Warnock of Georgia is also trying to delay the subsidy handouts but for an opposed reason, wanting time for the Hyundai plant in his state to get up and running first.
This means the US’s trading partners and supposed allies having to do tricky calculations of optimal political responses. Do they rely on quiet diplomacy to negotiate loopholes in the IRA, relying on Biden’s alliance-building instincts, or file a WTO case to increase international pressure?
Does the EU go along with the US’s plans for a green steel club? That would advance transatlantic harmony and boost steel production, but undermine Europe’s plans for the carbon border adjustment mechanism and make Brussels vulnerable to a WTO challenge from China and others.
Do the EU, Japan and Korea try to integrate their own semiconductor supply networks with the US, or go for self-sufficiency? And if it’s the latter, where does the money come from?
That’s even before we’ve thrown in other strategic considerations — the EU desire to keep the Americans engaged in Ukraine, the US attempt to rope Europe into a general anti-China stance on everything, the emerging non-aligned movement of middle-income countries that doesn’t want to take sides in a superpower argy-bargy.
These are fiendishly hard judgments to make, and I’m not going to predict how they’ll turn out. As the old saying goes: I don’t have a solution, but I do admire the problem.
As well as this newsletter, I write a Trade Secrets column for the FT website every Thursday. Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.
Charted waters
Sometimes the British reputation for gloominess seems justified. Headline inflation is bad in the UK, but the rise in the cost of food for the nation is even worse.
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But wait. Is there a silver lining to this cloud? It seems that consumers — or at least supermarket shoppers — are not bearing the brunt of this element of the cost of living crisis. That headache is primarily being suffered by the farmers and the supermarkets themselves. OK, so still not such good news for the country as a whole. (Jonathan Moules)
Trade links
The New York Federal Reserve’s measure of supply chain pressure, after falling sharply between May and September, levelled out above its historical average between October and December. Renewed problems with Chinese supply thanks to its Covid-19 lockdowns prevented further declines.
China EV makers are worried by the end of state subsidies and shortages of semiconductors.
In a striking indication of the complexities of the relationship between trade diplomacy and geopolitics, Taiwan has asked to join dispute proceedings on China’s challenge to US semiconductor export controls at the WTO, though it’s not clear whose side it will take, or indeed whether it’s picking sides at all.
My esteemed FT colleague Helen Thomas completely nails the problems with politically motivated industrial policy, here with regard to the UK’s repeated bailouts of its steel industry.
Rishi Sunak, the UK prime minister du jour, is reportedly preparing one of Britain’s now regular capitulations to Brussels over post-Brexit arrangements, in this case by meekly postponing till after the country’s next general election the repeal of EU law applicable in the UK.
Trade Secrets is edited by Jonathan Moules
Source: Economy - ft.com
