Aurelia Butler

This article is an on-site version of our Chris Giles on Central Banks newsletter. Premium subscribers can sign up here to get the newsletter delivered every Tuesday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersIt is hot and the top central bankers have arrived in Sintra, Portugal for the European Central Bank’s annual forum. I am also there and will report on relevant papers and discussions next week. At the start of the conference, the ECB announced the result of its five-year strategy review (more on that later). But one of the key themes for central bankers here is how to communicate when the shocks are large and the world uncertain. It has not been a vintage week in central bank communications. A shadowy figureSince he was merely a potential candidate to become US Treasury secretary last year, Scott Bessent advocated creating a shadow Federal Reserve chair so that if Donald Trump came back to the White House, he could get the monetary policy he wanted. Bessent told Barron’s magazine last October: “You could do the earliest Fed nomination and create a shadow Fed chair . . . and based on the concept of forward guidance, no one is really going to care what Jerome Powell has to say any more”.That did not happen, and there is no doubt the US president really cares about what Powell says and does. Yesterday, he took to posting handwritten abuse in large letters on a weird league table of short-term interest rates and putting it on social media. It reads: “Jerome, you are, as usual, ‘too late’. You have cost the USA a fortune — and continue to do so — You should lower the rate — By a lot! Hundreds of billions of dollars being lost! No inflation — Donald Trump.”Let’s face facts. This is brilliant communication. It is absolutely clear what Trump wants.How does this affect Bessent’s shadow Fed idea? Last week, everyone got excited when the Wall Street Journal reported that Trump was toying with the idea of an early Fed pick to be a back-seat driver on rates. “I know within three or four people who all I’m going to pick,” the president said at the Nato summit. At the end of the week, he told journalists the key qualities the next Fed chair would need to display: “I’m going to put somebody that wants to cut rates. There are a lot of them out there,” he said. Financial markets increased their bets on quarter-point rate cuts in 2025 on the back of these comments from two to three, and the same number again in 2026, as the chart below shows. Some content could not load. Check your internet connection or browser settings.There is no subtle way of describing this idea. It is terrible. It sets up multiple communication challenges for the US administration and the Fed, while almost certainly undermining the credibility of the Fed and the next chair. Imagine the possible scenarios.Trump picks a sycophant. The FOMC could, of course, capitulate and cut rates soon, undermining its credibility. For sure, it would justify this with some invented economic reasoning, but no one with any critical faculties would be reassured. Fed independence would be dead. Since that is such a bad scenario, the FOMC would be likely to resist and carry on as if nothing had happened. This would be the right thing to do, but it does not solve the communication challenges. If Fed governors and regional Fed presidents vote with Powell until May and then fall into line with a new dovish chair next June, it would demonstrate that FOMC discussions and everyone on the committee is pointless apart from the chair. Credibility also dies. If instead, they stand their ground now and after the new chair arrives next June, either outvote him or persuade him to change his tune (it is likely to be a man), it will be the new chair, not Powell, that becomes the lame duck. Many people would cheer, but this would not be a good outcome for the Fed.If the nominee refused to be extremely dovish ahead of starting the job, he might find himself fired before being fully hired. Recognising that this is not the genius plan he thought it was last October, Bessent has been backpedalling as fast as he can. When asked on CNBC (9 mins, 30 secs) about a shadow Fed chair on Friday, he said “I don’t think anyone’s necessarily talking about that”. I enjoyed the switch to the present tense. The return of team transitoryOne of the candidates in the running for chair is Fed governor Christopher Waller. He recently went on TV to call for “good news” rate cuts as early as this month. His argument is that US interest rates at 4.25 to 4.5 per cent are well above neutral levels, so there is not much danger in lowering them. Waller laid this out more fully in a speech last month in Seoul in which he forecast that any rise in inflation from tariffs would be “transitory” — deliberately using the word that got the Fed into hot water in 2021 and 2022. I do not have a problem with Waller’s belief that the Fed should look through higher inflation (although his argument was undermined somewhat by data on Friday showing stronger than expected price rises in May). The problem about using the “t” word is that it makes assumptions about pass-through and persistence no central banker can know.Some content could not load. Check your internet connection or browser settings.The lesson from 2021 is to be wary about predicting transitory inflation, and instead to talk about your commitment to price stability and what you will do to ensure it lasts. Inappropriate ECBIn what was mostly a backslapping affair, the ECB’s governing council has just approved its monetary strategy review. Sorry, I should call it an “assessment” because, as ECB president Christine Lagarde said, there was “no reason to revisit core pillars” of policy. So it cannot be a “review”. The main points are that little changes: the inflation target stays at 2 per cent and policy reacts symmetrically to deviations around it; all the tools the ECB has used remain available; and this will be robust, the central bank thinks, in an era of more supply shocks and inflation volatility. It is odd that the speeches and all the material explaining the assessment are so self-congratulatory. The ECB was late to end quantitative easing and raise interest rates in 2021 and 2022, hemmed in by past commitments. It vaguely accepts this. Buried deep in the monetary policy strategy document, officials accept the way they had designed QE had neither been forward-looking enough, nor foreseen the losses the ECB imposed on taxpayers. But those moments of self-reflection were exceptions. Looking towards the future, Lagarde said the new approach would require “appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target in either direction”. She went on to stress the word “appropriately”. There is no word that I dislike more to describe policy than “appropriate”. It is utterly devoid of meaning; no official would ever say they were acting “inappropriately”. The following is absurd, but no different in substance from the conclusion of the strategy assessment:The ECB will take the right decisions at the right time for the right reasons and later it will judge it was right to do so. ECB messes up on the socialsAt the same time it was congratulating itself, the central bank was using inappropriate images on social media. Having had an assessment that said the “inflation environment will remain uncertain and potentially more volatile, with larger deviations from the symmetric 2 per cent inflation target”, its communications experts in Frankfurt should have taken a closer look at the following picture they posted. It shows a woman on a tightrope with certain death either side, suggesting any deviation from 2 per cent inflation spells imminent doom.If you can’t get your visual metaphor correct, how are you going to run monetary policy?© ECBWhat I’ve been reading and watchingThe OECD’s groundbreaking international tax agreement, designed to stop companies shielding profits in tax havens, is in trouble as the G7 agrees to give exemptions to US firms.The FinRegRag blog finds some differences between Powell’s comments to the Senate Banking Committee on the Fed’s plans to refurbish its buildings and the proposals it submitted. Marble, fountains and special elevators are involved, but not beehives.Turkey’s economic struggles are making life difficult for President Recep Tayyip Erdoğan.My colleague at Monetary Policy Radar, Andrew Whiffin, argues that the Fed might need to make further changes to banking regulations if it wants to ensure a functioning Treasury market.A chart that mattersThe Bank of England is facing ever louder calls to curb its bond-selling quantitative tightening programme when it makes a decision on how much to scale back the balance sheet in September. With fewer of the bonds it holds maturing in 2025-26, it needs to sell £52bn in the year from October, compared with £13bn this year, to keep QT at the £100bn-a-year pace. Perhaps markets are complaining too much. The chart below shows that the BoE’s share of bond issuance is tiny compared with that of the government. The one exception might be in long bonds, which the BoE defines as having a maturity of more than 20 years. The UK government’s Debt Management Office is also scaling back long-date gilt issuance. Not to get in its way, the BoE might choose to take the easier option of selling more medium- and short-term bonds. Some content could not load. Check your internet connection or browser settings.Central Banks is edited by Harvey NriapiaRecommended newsletters for you Free Lunch — Your guide to the global economic policy debate. Sign up hereThe Lex Newsletter — Lex, our investment column, breaks down the week’s key themes, with analysis by award-winning writers. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Trump loves low interest rates. And he really really really wants a low rates guy at the Federal Reserve. As Claire Jones reported in MainFT over the weekend.Donald Trump has said he will only pick a new Federal Reserve chair who will cut US interest rates, as he called on the central bank to slash borrowing costs to 1 per cent.Haven’t we seen this film before?© BloombergNo, not that film.Sure, there may be lessons from President Erdoğan’s decadal dalliance with trying to strong-arm Turkey’s interest rates down — and whether this was causally connected to the country’s soaring inflation rates, collapsing currency and teetering banking system.But our minds first went to the drama around the birth of the modern Fed in 1951. The story was told with gusto by Robert Hetzel and Ralph Leach in a gripping narrative account over 20 years ago. And while readers would be well-served by reading the whole thing, we’ve pulled out some highlights from what later became known as the Treasury-Fed Accord.Once the US entered WWII, inflationary concerns were put to one side in favour of national security. Short-term interest rates were pegged at 0.375 per cent, and yield curve control was implemented — with a cap on long-bond yields of 2.5 per cent. But while short rates could be — and were — lifted in 1947, the US Treasury insisted the Fed maintain the ceiling on longer-term bond yields. For President Truman it was a moral question of protecting the market value of war bonds purchased by patriots (he had himself been rinsed when he had to sell $100 of a WWI Liberty Loan for $80 on his return from France).The Federal Reserve board was not happy. Because after the initial postwar bust, inflation was getting yippy again.Some content could not load. Check your internet connection or browser settings.The Fed wanted to raise short rates, but the 2.5 per cent long bond yield cap seriously impaired their ability to do so. Higher short rates prompted the market to sell longer term bonds, in effect forcing the Fed into more and more QE to defend the cap. All this — they reckoned — was driving up inflation.But at the time, monetary policy was still in the hands of the president and the US Treasury. This became an tempting tool to use when the Korean war erupted in 1950, as Hetzel and Leach noted: Truman had compelling reasons to freeze interest rates. On January 25, 1951, he froze wages and prices, apart from farm prices. Raising the cost of borrowing, especially on home mortgages, while freezing wages was poison. More important, in January 1951 Truman confronted the possibility of world war . . . Truman and [Secretary of the Treasury] Snyder wanted to keep down the cost of financing the deficits that would emerge from a wider war.As war in Korea escalated, consumers rushed to buy goods, commodity prices soared, and CPI inflation — in the three months ending February 1951 — was running at an annualised rate of 21 per cent. Yikes. Truman therefore summoned not just Fed chairman McCabe but the entire Federal Open Market Committee to the White House to impress on them their patriotic duty to maintain confidence in government securities during a time of national crisis. The White House followed up with a press statement declaring that: The Federal Reserve Board has pledged its support to President Truman to maintain the stability of Government securities as long as the emergency lasts.Unfortunately, the FOMC had done no such thing. Maintaining public ambiguity as to their commitment to continue doing the Treasury’s bidding was one of the few cards they had. And Fed governor Marriner Eccles made sure the New York Times and the Washington Post knew it. Perhaps unsurprisingly, acrimony ensued with FOMC members making it ever clearer — and with ever-increasing volume — that rising inflation was the direct result of the yield cap forced on them by the Treasury.When Treasury secretary John Wesley Snyder headed into hospital for a cataract operation on 11 February, negotiations with the Fed were formally handed to a deputy, Treasury assistant secretary William McChesney Martin. The assumption (perhaps even the instruction) was to pause the escalating crisis for a few weeks until Snyder returned. However, Martin — a financial wunderkind who had become president of the NYSE more than a decade earlier at the age of just 31 — moved quickly.Chair William McChesney Martin, Jr More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Eurozone inflation hit 2 per cent in June, rising back up to the European Central Bank’s medium-term target.June’s annual inflation reading, published on Tuesday, was an increase from May’s figure of 1.9 per cent and in line with economists’ expectations in a Reuters poll.Diego Iscaro, head of European economics at S&P Global Market Intelligence, said the rise was “modest” and “not particularly worrying”.He added that, while the ECB was likely to hold interest rates steady at its next meeting in July, “we see the door opening for a last [quarter-point] cut in September”. The central bank has halved rates to 2 per cent since last summer.ECB president Christine Lagarde said last month that the central bank was “getting to the end of a monetary policy cycle”.Core inflation, excluding volatile food and energy prices, remained steady at 2.3 per cent in June. The closely watched figure for services inflation — a gauge for domestic price pressures that has remained well above the 2 per cent target for more than three years — rose to 3.3 per cent, up slightly on the 3.2 per cent it reached in May.The euro was largely unchanged after Tuesday’s data release at $1.181.The currency has appreciated 14 per cent against the US dollar since the start of the year, making many imports to the Eurozone cheaper and having a downward effect on wider price pressures.Oil prices temporarily soared by up to 26 per cent after Israel began bombing Iran in June, reaching the highest level since the start of the year. However, most of those gains reversed after the US entered the conflict and brokered a ceasefire.Market expectations for interest rate cuts were unchanged after the June inflation figures were published. Traders continued to give a roughly 10 per cent chance to a quarter-point rate cut at the ECB’s next meeting in July, according to levels implied by swaps markets. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldJapan has said it will not sacrifice its farmers to secure tariff exemptions from the US, as Tokyo and Washington hardened their positions in a rice diplomacy stand-off and hopes of an imminent trade deal between the allies faded.The comments from Japan’s chief cabinet secretary Yoshimasa Hayashi on Tuesday came as Donald Trump cast Japan, among other countries, as “spoiled” and the latest round of trade negotiations in Washington ended without clear progress.“We are not thinking about doing anything that would sacrifice the farm sector,” Hayashi said.Weeks of negotiations have produced a number of proposals aimed at breaking a deadlock, including Japan buying more US energy and agricultural products and new joint funding mechanisms for US manufacturing, according to people familiar with the talks.But none has succeeded at shifting the Trump administration’s commitment to reducing its trade deficit with Japan, which stood at $63bn for the Japanese financial year ending in March.In a post on his Truth Social site on Monday, Trump focused his ire on rice.“To show people how spoiled Countries have become with respect to the United States of America, and I have great respect for Japan, they won’t take our RICE, and yet they have a massive rice shortage,” wrote Trump.The combination of a poor harvest and policy has driven rice prices to more than double in the past year, causing temporary shortages, huge queues for cheaper rice and forcing the government to tap its strategic rice reserve to provide relief. Japanese rice production has for decades been an intensely political issue. The crop commands an outsized national importance and farmers have been a crucial base of support for the long-ruling Liberal Democratic party.The US exports some rice tariff-free to Japan under a World Trade Organization “minimum access” agreement, but Japan imposes a levy on any imports beyond a 770,000-tonne limit.Tokyo had initially hoped for a fast-track trade deal with Trump. But with both sides dug in, the LDP now faces the probability of a campaign for upper house elections on July 20 without a deal in place, according to people with direct knowledge of negotiations. That will raise the risk for Prime Minister Shigeru Ishiba, who is suffering low approval ratings and has a relatively fragile hold on parliament. It also comes as clouds are gathering over a Japanese economy that depends heavily on its car industry. The country’s automotive industry directly and indirectly employs more than 5.5mn people, according to the Japan Automobile Manufacturers’ Association.Tokyo has consistently demanded a full exemption from Washington’s blanket 25 per cent tariff on automotive imports, as well as the revocation of the 24 per cent “reciprocal” tariffs that Trump has threatened to impose on Japan. Those levies have been paused until a July 9 deadline to sign a trade deal.But Japan’s chances of securing any tariff exemption in the short term appeared to be low and falling, said two people close to discussions.In an interview with Fox News last weekend, Trump bemoaned the “unfair” trading relationship in blunt terms, claiming that the US “[takes] millions and millions” of Japanese cars, while the Japanese “won’t take our cars”.Japan’s biggest auto companies have established large manufacturing facilities in the US over decades. Car and truck exports to the US totalled 1.37mn vehicles in 2024, with the automotive sector representing about 28 per cent of Japan’s goods exports to the US. The US, in turn, exports few vehicles to Japan, where American car models are generally seen as too large and fuel consumptive.“I could send one [letter] to Japan: ‘Dear Mr Japan, here’s the story’,” Trump continued. “You’re going to pay a 25 per cent tariff on your cars.” More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldIndia is on track to seal an interim trade agreement with the US as soon as this week to avert Donald Trump’s “liberation day” tariffs, according to two people briefed on the talks.The interim deal, which would be among the first with a major US trading partner, would be an initial step towards a comprehensive bilateral accord between Washington and New Delhi. The two countries have said that they will seek to finalise the first tranche of the full agreement by autumn.India faces tariffs of as much as 26 per cent, among the highest against a major economy, under the levies that Trump unveiled on April 2. The US president has set a deadline of July 9 for new trade agreements to avert the levies.Rajesh Agarwal, who heads the Indian delegation, was in Washington on Monday to try to iron out the final details of the deal. S Jaishankar, India’s foreign minister, is expected to hold one-on-one talks with his US counterpart Marco Rubio on Tuesday or Wednesday on the sidelines of a meeting in Washington.According to the people briefed on the talks, the deal is expected to spare India’s big and politically influential agricultural markets, including wheat and dairy, from US tariffs, though they noted that the talks were still under way.A senior Indian government official, who asked not to be named, said there was “a lot of sensitivity” over its agriculture markets. India Business BriefingThe Indian professional’s must-read on business and policy in the world’s fastest-growing big economy. Sign up for the newsletter hereIndia has also agreed to import more natural gas from the US to bring down its trade surplus, which stood at $41.2bn for the 2024-2025 financial year, according to the people close to the Indian government.The two sides have agreed on tariff reductions on one or both sides on thousands of items. The countries had committed to more than double their bilateral trade to $500bn by 2030 during Indian Prime Minister Narendra Modi’s visit to Washington in February. Trump on Thursday promised a “very big” trade deal that would “open up India”. The following day, he said that his administration was “looking to get a full barrier dropping, which is unthinkable”. Agriculture and dairy products remain sensitive.India has managed to shield its dairy sector from foreign competition in other trade talks, including negotiations with the EU. The sector employs more than 80mn people, according to India’s government, many of whom are smallholders. There are concerns in India that foreign dairy products may come from cows that were raised on feed containing cattle products, making them off-limits to devout Hindus.Another person with direct knowledge of the talks said that India had agreed to import US farm goods such as nuts and fruits, despite pressure from US industry lobbies for market access.On Monday, White House press secretary Karoline Leavitt said US officials were “finalising” trade agreements. “You’ll hear from the president and his team, his trade team, very soon, when it comes to India,” she said. Modi’s government has embraced a more energetic trade agenda this year, concluding a long-awaited agreement with the UK in May and announcing plans to reach a pact with the EU by the end of 2025. New Delhi and Washington have forged closer defence, technology, and diplomatic ties in recent years in a shared front against China, and Trump has pushed India to purchase more US weapons in order to ease its trade deficit. However, Modi’s government openly objected last month after Trump claimed credit for ending a brief but bloody conflict with Pakistan and offered to mediate over the disputed territory of Kashmir. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldDonald Trump’s top trade officials are scaling back their ambitions for comprehensive reciprocal deals with foreign countries, seeking narrower agreements to avert the looming reimposition of US tariffs.Four people familiar with the talks said US officials were seeking phased deals with the most engaged countries as they race to find agreements by July 9, when Trump has vowed to reimpose his harshest levies.The narrower, piecemeal plan for new deals marks a retreat from the White House’s vow to strike 90 trade deals during the 90-day pause in the sweeping “reciprocal” tariffs the president announced on April 2.But it also offers some countries a chance to strike modest agreements. The administration would seek “agreements in principle” on a small number of trade disputes ahead of the deadline, the people said. Countries that agree these narrower deals would be spared the harsher reciprocal tariffs, but left with an existing 10 per cent levy while talks on thornier issues continue, the people said.However, talks remain complex, and alongside its narrower approach to deals, the administration was also still considering imposing tariffs on critical sectors, people familiar with the matter said.The twin track, involving the threat of new tariffs alongside openness to deals, underscores the difficulty facing negotiators with Trump, who has used trade as a cudgel to secure concessions from other countries. Last week the president announced he would end trade talks with Canada, prompting Ottawa to immediately rescind a digital services tax that Washington objected to. Trump triggered a global stock market rout in early April after imposing steep tariffs on the US’s largest trading partners, following weeks of a chaotic trade policy rollout marked by reversals and U-turns. Although he has since walked back some of the most punitive levies, so far the US has only reached a trade pact with the UK and signed a tentative truce with China.Foreign negotiators are now trying to understand what will come next.The US commerce department had already launched national security probes — Section 232 investigations — into goods including copper, lumber, aerospace parts, pharmaceuticals, chips and critical minerals.Several countries in serious trade talks with the US have sought relief from existing sectoral tariffs of 25 per cent on cars and their parts and 50 per cent on steel and aluminium.The US’s trade deal with the UK provides a limited lower-tariff quota for British cars and pledges to negotiate other carve-outs for pharmaceuticals. The UK also won lower levies on steel and aerospace parts.People familiar with the talks said the poor visibility of possible new sectoral tariffs the US might impose at a later date were hindering discussions.On Monday, Treasury secretary Scott Bessent suggested the US was focused primarily on the reciprocal tariffs, and would leave sectoral levies until later. “The Section 232s take longer to implement, so we’ll see what happens with those,” he said in an interview with Bloomberg TV. It is also unclear how Trump will set any new tariff rates on countries that do not agree a new deal before the July 9 deadline. On Monday, White House press secretary Karoline Leavitt said Trump was meeting with his trade team to set tariff rates for “many of these countries if they don’t come to the table in good faith”.The president later suggested on his Truth Social account that Japan would be sent a new tariff rate, despite weeks of trade negotiations between them.“To show people how spoiled Countries have become with respect to the United States of America, and I have great respect for Japan, they won’t take our RICE, and yet they have a massive rice shortage,” Trump wrote. “In other words, we’ll just be sending them a letter, and we love having them as a Trading Partner for many years to come.”Some people familiar with the talks said there was also uncertainty about whether Trump would stick to his schedule about ending his 90-day pause. Bessent also told Bloomberg TV that any potential extensions to the July 9 deadline would be up to the president, but that he expected to see “a flurry” of deals ahead of the deadline. But last week the Treasury secretary told Fox News that the US was negotiating with 18 trading partners and agreements could be done during the summer.In May, two court rulings declared Trump’s use of emergency powers to impose reciprocal tariffs unlawful. The administration has appealed, but the rulings had also injected uncertainty into talks, people familiar with the negotiations said.The White House declined to comment. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Brazil and Mexico have begun preliminary talks to deepen their trade agreement as Latin America’s two largest economies seek to boost commercial partnerships beyond China and Donald Trump’s US.Diplomats from the two nations have held ongoing informal talks since Mexico’s President Claudia Sheinbaum took office in October to try to set the terms for formal negotiations, three people with knowledge of the matter said. In that time, left-wing leaders Sheinbaum and President Luiz Inácio Lula da Silva have met on four separate occasions. Both have publicly stated an intention to deepen economic ties. Brazil’s trade secretary is set to travel to Mexico City in August to look into it in greater detail, Sheinbaum said this month.“We can supply what Brazil doesn’t have and they can supply what Brazil has that we don’t, not only in terms of the trade agreement but also in terms of investments,” she said. Brazil and Mexico are Latin America’s two largest countries but have historically been distant because of rivalry over regional leadership, differing levels of economic openness and Mexico’s focus on the US, which is by far its largest trading partner.But President Donald Trump’s new trade tariffs and the Latin American countries’ ideologically compatible leftist governments made this an auspicious moment for closer ties, the people said.“There is a lot of enthusiasm from both countries, a lot of will from both,” one person involved in the talks said. “There is a deep political, programmatic and ideological affinity . . . the dialogue is at all levels.”Only 14 per cent of Latin America’s goods trade takes place within the region, a lower proportion than anywhere else in the world. Lula has long championed closer integration, believing that improving the region’s poor trade and infrastructure links is key to boosting prosperity.The two countries already have a limited trade agreement from the early 2000s that lowers or exempts import fees on about 800 product categories. Their bilateral trade has a lot of room for growth. It totalled just $13.6bn in 2024, according to official figures from Brazil, which recorded a $2bn surplus. The figure was a tiny fraction of the $840bn of goods traded between the US and Mexico last year — and the $161.8bn in 2024 exchanged between Brazil and China in 2024. For Mexico, which is gearing up for a tense renegotiation of its USMCA deal with the US and Canada, Brazil could offer investment opportunities in sectors such as aerospace and pharmaceuticals, while helping ease its dependence on the US for imports of grains including yellow corn.Brazilian officials say its industrial and agribusiness sectors are interested in increasing exports to Mexico.Both sides are treading cautiously to avoid upsetting the US or China, Brazil’s top trade partner and the biggest buyer of its commodities, saying the talks fall into their efforts to diversify their trading relationships. The two sides are yet to decide whether to simply expand their existing deal to reduce tariff barriers — possibly including an investment protection agreement — or embark on a bigger negotiation for a full trade agreement, one official said.Yet officials caution about the pace of proceedings with both governments’ resources limited — Mexico’s by USMCA talks and Brazil’s by elections next year. This could make an upgrade to the existing trade deal more realistic than fully negotiating a new one.Both sides were allowed to negotiate agreements with each other under their regional trade deals, officials said. Mexico’s automotive sector agreement with South America’s Mercosur customs bloc could also come into the bilateral negotiations, said two officials. Brazil’s trade ministry said conversations with Mexico were ongoing. Mexico’s foreign ministry did not respond to a request for comment. More

A proudly independent European nation confronted with a stark political choice: keep EU single market access but only by making financial payments, taking migrants and giving up judicial power.This time the question is not one for Brexit Britain — but Switzerland.After more than a decade of grinding talks with Brussels, the Alpine country has reached a deal to keep and improve its access to the EU’s single market.But the agreement — which will be put to a referendum — includes all the same thorny issues that have bedevilled the UK-EU relationship, including budget contributions, migration policy and the role of foreign judges. Nearly 1,000 pages of text, unveiled last month after a deal was signed in December, would finally anchor Switzerland more firmly to the world’s largest single market.But even the six market access agreements, which try to bring order to the tangle of previous arrangements, would still be on top of about 120 additional sectoral agreements that remain in place. If approved, the new framework binds Switzerland to mirror changes to EU legislation in areas including the regulation of goods, migration, electricity and transport — or face retaliatory measures. Bern would have little influence over how the rules develop, but it would be obliged to pay €375mn annually into the EU budget. © Fabrice Coffrini/AFP/Getty ImagesSwitzerland could be readmitted as an associate member into the bloc’s Horizon Europe science programme and become part of the nuclear science body Euratom and the student exchange scheme Erasmus.The pact in many ways parallels the UK’s struggle of balancing sovereignty with EU market access. In May, the EU and UK agreed a number of changes from fisheries to energy as part of a relationship “reset”. “There has been a pick-up in engagement and interest by the British in the negotiations we have been having with Brussels,” said one Swiss official. The negotiations also come as both London and Bern are seeking deeper defence and security ties with the bloc after President Donald Trump’s threats to withdraw US guarantees that have underpinned Europe’s security since the second world war.“The EU’s public position has long been that the Swiss and UK negotiations are separate, but in practice EU negotiators were keen to avoid setting precedents in one negotiation that might affect the other,” said Anton Spisak, an associate fellow at the Centre for European Reform. He added it was “no surprise” the same EU officials were involved in the Swiss negotiations and the recent UK-EU reset. There were nearly identical outcomes on issues like food safety (SPS) and governance in both agreements.Now Switzerland will have to accept or reject the deal, a process that will take several years. First will be a public consultation process until the autumn, then the text — possibly with some amendments — will be handed to parliament to start debating next year. The government aims to hold the referendum by June 2027, otherwise national elections later that year will push it into 2028. The “dynamic alignment” — automatic adoption of changes to EU laws — are on six key areas: mutual recognition of goods standards, electricity, food safety, air and land transport and freedom of movement. Bern can lobby Brussels and EU members when they work on updates to those rules, but has no say in the final outcome and faces sanctions if it fails to implement the changes.This will be uncomfortable for many Swiss given their deeply entrenched system of direct democracy. “The Swiss have always followed these updates anyway. But they want to have the ability to choose. That is the key difference for us,” said one Zurich-based financier. The agreements include an arbitration clause that ensures disputes are resolved by an independent panel — rather than unilaterally by EU courts — to address Swiss concerns over sovereignty and legal autonomy. But when the case involves EU law, the arbitration panel must ask the European Court of Justice, the bloc’s top court, for a binding interpretation. © Fabrice Coffrini/AFP/Getty ImagesCarl Baudenbacher, a lawyer and expert on international business law, argued the ECJ would be the true legal authority behind the scenes. “The arbitrators are legally obliged to ask the CJEU in the most important cases and the judgment is legally binding on the arbitration panel. It is essentially camouflage,” he said.Like in the UK, ECJ jurisdiction and the “dynamic” adoption of EU laws are becoming lightning rods for Switzerland’s own Eurosceptic movement. “The dynamic takeover of EU law and ECJ rulings ultimately changes the system of direct democracy in Switzerland. It downgrades our competitiveness,” said Kompass/Europa chief executive Philip Erzinger. The anti-EU group, started by private equity billionaires and other entrepreneurs, is gathering signatures to launch an initiative for the public vote on the matter. “For example, you don’t need an agreement on free movement of people to hire people from foreign countries,” Erzinger added.Switzerland’s far-right SVP is against the deal though it had found support on the left. The centrist parties such as the Liberals are yet to take a stance. There is also a question of punishment if Switzerland votes no. In 2021, when Switzerland walked away from talks, the EU retaliated by downgrading Swiss participation in the Horizon Europe. That could happen again if the deal was not ratified by the end of 2028.EU trade commissioner Maroš Šefčovič has refused to be drawn on possible action. But EU officials told the Financial Times that maintaining the status quo was not an option. Swiss officials say the erosion of the existing bilateral agreements could have serious long-term ramifications, for example in terms of Swiss export capacity, security and transport between Switzerland and EU countries.“If there is a No [vote], the EU feels this needs to be the end of the road for the bilateral way and the special treatment for Switzerland,” said an official familiar with thinking in Brussels. Others, however, think it is high time to do a deal with Switzerland’s largest trading partner. “We have been living with this drama since the 90s. Europe is our biggest trading partner and we need to solve the problem institutionally as opposed to sector by sector,” said Jean Keller, head of Geneva-based fund manager Quaero Capital. “Yes, we need to make sure things like workers’ rights are protected, but finally finding a framework that is durable for us to do business in Europe is imperative.” More