EU trade policy serves Ukraine an unappetising menu

Welcome to Trade Secrets. Late last week the EU held a summit on Ukraine. It was predictably dominated by questions of how to get arms to the country, including the legal implications of using the bloc’s central budget to do so. It’s a touch ironic that Brussels is thinking of breaking ground here with its newfangled geopolitical ambitions, because it’s not being very helpful to Ukraine over its very long-standing functions of agriculture and trade. Today’s main pieces look at that issue and at European farming and imports more generally. Charted waters is on the EU’s carbon border adjustment mechanism.

A short history of tractors and Ukrainians

(The headline’s from a novel. A good one, too.) A big-up to my Brussels colleague Andy Bounds for extracting the quote of the week from a European diplomat over the EU’s decision to restore some of the barriers to Ukraine’s food exports that it took down in 2022.

The remark in question: “France and Poland and the European parliament, who are the most vocal about what we need to do to help Ukraine, have crumbled at the first sight of a tractor.” Nice. I mean, it’s true. The EU might be getting creative with rules to help arm Ukraine, but on trade issues it’s innovating in the opposite direction.

Last year Brussels weakened the principle of single market unity by a messy deal, including country-specific import restrictions, which Poland, Hungary and Slovakia then broke in any case. Last week’s deal created an “emergency brake” for a variety of food products. The EU has also said it will step in and buy surplus grain if the price falls too far, an echo of the bad old days of price support that ended up creating wine lakes and butter mountains.

The fact that even Poland under the fervently pro-EU and Ukraine-supporting Donald Tusk wants these restrictions underlines the importance of the farm lobby — Europe’s answer to America’s steelworkers, we might say — which started before the recent farmer protests.

OK, so in the short term this isn’t Ukraine’s biggest issue. Its war effort and humanitarian operations are heavily dependent on overseas aid rather than export earnings. But in the longer term it does underline the huge awkwardness of Ukraine’s accession to the EU. It’s almost precision-engineered to be an awkward entrant: a low-income country with a big population (close to Poland’s in size) and endemic corruption, but a world-beating agricultural sector, economically strong where its neighbours are vulnerable. Under the current structure of cohesion funds it will suck up cash by the billions while testing the EU’s rule-of-law conditions and undercutting the continent’s farmers.

Handwaving plans about creating new categories of EU membership are going to be very hard in practice, and denying an EU member state the benefits of the single market would be quite something. Brussels types tell you (accurately) that the union has gone way beyond being a trade bloc, but it certainly doesn’t mean that market access and farm support are an optional extra.

The EU reasonably enough complained about Brexiters wanting the UK’s relationship with the EU à la carte rather than taking the fixed menu. But giving a new member state the EU’s foreign and security policy and governance elements and cutting out the benefits of the single market would be like presenting a diner with aperitif, amuse-bouches, coffee and petits-fours but somehow forgetting the entrée, plat and dessert.

I guess to balance out Ukraine’s entry you’d need a new member that would be a big net financial contributor to the EU budget and with an agricultural sector that’s neither a Common Agricultural Policy money-sink nor a world-beating exporter, and which, given the continuing security threat on the EU’s eastern border, has a big intelligence and military capability used to working closely with another EU member state. Any ideas? Anyone?

Don’t blame the imports

Speaking of farmers, it’s obviously not just low-cost competition from Ukraine that they object to. Emmanuel Macron, never slow to seize a tactical opportunity, in January leapt on the European farmers’ protests to say that talks to ratify the EU-Mercosur trade deal should be stopped.

The French president will be in Brazil this week to talk to his counterpart Luiz Inácio Lula da Silva, who recently declared himself content with the deal as it was and said only France was standing in the way. As the text of the deal has already been signed, there’s not much that can be done to amend it short of the gargantuan effort of opening it up and restarting fundamental arguments. Certainly, France’s idea of “mirror clauses” whereby trading partners’ environmental and sanitary standards have to match the EU’s is an absolute non-starter.

How much are European farmers actually affected by trade deals and imports in general, anyhow? It’s worth remembering that lower tariffs in preferential trade deals don’t automatically mean market access. The sense from a lot of exporters is that even when the EU has granted you lower tariffs, there are still lots of regulatory hoops to jump through.

A well-timed new paper from the European Centre for International Political Economy goes through the general issue of trade and agriculture. It points out that the EU is one of the world’s biggest agri-food exporters, is self-sufficient across most food types and where it is a big importer it’s often as an input (soyabeans to feed cattle and so on). And the increased quotas of beef and poultry aren’t likely to make that much difference.

The thing is this: European farmers certainly are being pressured right now. Input costs are high, and environmental and food regulations can be expensive to implement. It’s an easy move to add international trade to that list of grievances, but that doesn’t mean it’s actually to blame.

Charted waters

There’s nothing like a deadline to concentrate minds, and the EU’s plans to start actually charging duties on its carbon border adjustment mechanism (CBAM) from 2026 is causing producers around the world to scramble to get their systems in place. The duties will be phased in over nearly a decade, though, so for some time the main challenge will be complying with the rules rather than the cost of the tax.

Trade links

Raghuram Rajan, former Reserve Bank of India governor and University of Chicago professor, robustly enters the debate on industrial policy on the sceptical side, saying governments aren’t good at picking winners.

A paper for the European Bruegel think-tank looks at creating broader border taxes to fund the EU’s budget.

Scott Lincicome of the Cato Institute argues that the US should try going after Chinese subsidies at the WTO rather than imposing unilateral trade remedies.

Further to the idea that there is a wide variety of chokepoints in the world economy beyond the Suez Canal, the New York Times examines how Taiwan is building its own satellite network rather than relying on Elon Musk.

The tech divergence between the US and China just took another step forward as Beijing decreed that US microprocessors from Intel and AMD would be phased out of use for government computers and servers.

Iceland seems set on conducting an exercise in comparative disadvantage by growing corn, a crop to which its climate is wildly unsuited.

Trade Secrets is edited by Jonathan Moules

Source: Economy - ft.com