Welcome to Trade Secrets. There’s been a bit of a lull in the old trade diplomacy game over the past week or two after all the excitement of Emmanuel Macron’s and Luiz Inácio Lula da Silva’s trips to Beijing. The next big get-together is the G7 meeting in Hiroshima in a month’s time. After the invasion of Ukraine, the existence of a like-minded club of rich democracies suddenly seems a lot more relevant, and in coming weeks I’ll assess what the G7 can do. Today’s newsletter is on a couple of big developments in trade and how governments will react: one, Chinese electric vehicle makers taking over the world; two, the EU, that joined-up geopolitical power, slapping restrictions on imports from, er, Ukraine. Charted waters is on commodity prices and the US dollar.
All about EVs
From the effort devoted in Brussels and Washington to arguing about Joe Biden’s electric vehicle credits (I myself plead guilty to mentioning them in eleven separate newsletters and columns this year) you’d imagine the global EV market was an Airbus-Boeing style transatlantic duel. In fact Chinese companies have poured money into EV and battery production and are threatening to squeeze their European and US competitors such as Volkswagen and Tesla out of the Chinese market.
A terrific report by my colleagues at the Shanghai motor show last week suggests that China is doing with cars what it’s failed to do with previous products — develop its own brands capable of competing internationally. Thanks to building economies of scale at home, China’s on the way to being the world’s biggest EV exporter, already making big inroads in south-east Asia and now targeting the EU market. See this chart from the think-tank Merics.
How is trade policy going to react? The obvious outcome in the EU is a rash episode of trade disputes with China involving antidumping and antisubsidy duties of the type that often happens after the introduction of new technologies (see solar panels and e-bikes) as companies race to establish market share. This creates an interesting wrinkle: if European carmakers in China also export on a large scale, they could face trade defence instruments selling into their home market.
But Chinese carmakers are also planning to expand in Europe through foreign direct investment, particularly greenfield. Overall Chinese FDI in the EU has dropped sharply since 2016 . . .
. . . but greenfield is rising sharply (albeit from a low base) and is dominated by the auto sector.
A Chinese presence in the EU market based on FDI rather than exports is less likely to cause a big policy pushback. Unlike Huawei and 5G, it’s going to be hard to suggest that EV production justifies national security restrictions. In theory, it could be a case for Brussels’ new foreign subsidies regulation if the investments and the resulting products can be shown to be backed by state money. But greenfield FDI as opposed to mergers and acquisitions is generally welcomed by recipient countries for creating industrial capacity and jobs.
In other words, there’s a rising Chinese dominance in one of the world’s most important and fast-growing products and the policy response from the rich economies is highly uncertain and potentially quite weak. And yet we’re still all arguing about whether the EU gets to sell critical minerals to US carmakers that Europe doesn’t even have. We’re doing this all wrong.
The grain from Ukraine that’s mainly just a pain
If, like me, you thought that Ukraine’s rapid accession to the EU was a bit unlikely, you’ll be feeling vindicated by current events, with Poland and Hungary blocking imports of Ukrainian wheat to protect their farmers.
Such action by national governments of course blatantly violates the rule that trade is a central EU competence. On the cynical principle that rank protectionism towards a war-torn neighbour is OK if it’s done by the book, the EU is planning to legitimise this unilateral action by allowing restrictions on imports to a small number of countries unless they are intended for onward sales to elsewhere in the EU. If it sounds to you like another inviolable principle of the bloc — the borderless internal market — thrown under the combine harvester, you’d have a point. The provisions are allowed under a feature of Ukraine’s trade deal with the EU, the signing of which in 2014 was fairly obviously the trigger for Russian president Vladimir Putin annexing Ukraine.
So far, so agriculturally protectionist, so fudging principles without actually breaking rules, so very EU. But the episode underlines a couple of wider points. First, the EU might chunter on about geopolitics, but it’s a trading bloc before anything else. The admission of one of the world’s most efficient grain producers into a protected market is obviously going to create problems.
Second, and relatedly, EU membership isn’t really the solution to a lot of Ukraine’s pressing challenges except as part of a general political reorientation towards the west. In the short to medium term the country needs security guarantees and military assistance, which the EU collectively at the moment doesn’t really do. In the medium term the governance criteria for EU membership could help it become less of a corrupt oligarchy, but they haven’t done that great a job in the aforementioned Poland and Hungary. It also needs an awful lot of aid, but that can be done outside the EU. Ukraine is a complex issue of many strands, and the EU as an institution struggles to deal with more than a couple of them.
Charted waters
Worries about the future strength of the US dollar has been a source of concern for many in Washington, and further afield, recently. Rumours of the demise of the greenback have been greatly exaggerated, as the Financial Times editorial board recently confirmed. But we have been living through an odd episode, and post pandemic changes in relationships between the currency and certain commodities may persist.
The chart, from research by Boris Hofmann, Deniz Igan and Daniel Rees at the Bank for International Settlements, illustrates the break in the long-term relationship between the US dollar and commodity prices during the Covid-19 pandemic and how since then, rising commodity prices have gone hand-in-hand with a strengthening US dollar.
The study presents evidence that post-Covid correlation patterns could become more common in the future based on two observations: that the US dollar exhibits a close and stable relationship with the US terms of trade, and that a US shift from being a net oil importer to a net oil exporter means higher commodity prices will tend to raise the US terms of trade, rather than lowering them. (Jonathan Moules)
Trade links
This piece in Foreign Affairs looks at the non-aligned pragmatism among many emerging markets I wrote about in last week’s column, and the Phenomenal World newsletter looks at how rich-world protectionism is leading to economic nationalism and mercantilism among emerging markets.
A piece in the American Prospect magazine says that tech lobbyists quietly seized control of US trade policy on data and tech by inventing the shaky concept of “digital trade” and making it conventional wisdom in Washington. See also the academic paper on which it is partly based and an older paper on the same subject.
A paper by Simon Lester for the Baker Institute looks at the history of industrial policy in the US and its potential for going wrong.
Trade Secrets is edited by Jonathan Moules
Source: Economy - ft.com
