This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every MondayWelcome to Trade Secrets. Like many trade folk, I keep a special cynical facial expression (one of an extensive range of such expressions, to be fair) for when I hear the terms “crunch point” or “make-or-break” in trade negotiations. The latest talks to get this treatment are between the EU and Mercosur, whose chief negotiators meet this week in Brasília. Paraguay’s president Santiago Peña threatened last week to kill the talks if the environmental and public procurement issues aren’t fixed when he takes over the chair of Mercosur on December 6. Self-imposed deadlines rarely work in negotiations, but the presidential election later this month in Mercosur member Argentina, the leading candidate in which has threatened to dissolve the four-nation bloc altogether, is concentrating minds. The deal has importance beyond the substance of cars and beef: it’s a huge test of whether agreements can still get done between the big rich-world trading powers and assertive middle-income countries, both of whom can afford to walk away. In today’s newsletter I discuss rich-world subsidies leaking to China and how badly world goods trade is doing. Charted Waters is on Germany making itself dependent on Russian gas before the Ukraine war.Get in touch. Email me at [email protected] the handouts at homeMy column last week touched on the issue of green subsidies in the context of Europe’s tardiness in building an EV industry. As I said there, the delays have more to do with inertia and incompetence in the German automaker-government complex than China handing out trade-distorting subsidies. But there’s no doubt that EU demand-side subsidies to consumers to buy electric vehicles (or install solar panels, an episode cited as a cautionary tale by commission president Ursula von der Leyen) have boosted Chinese businesses in the European market.Now, trade economists would usually say that allowing consumer subsidies to be spent on products from any company is the efficient and non-distorting way to go green, though they might concede the case for limited protection for domestic companies to let them establish a foothold in a fast-expanding industry, especially if there are national or economic security concerns.Whatever the economics, the politics of Chinese companies scooping up rich-country subsidies to dominate world markets are tricky. The US dealt with this in a hilariously convoluted fashion by first restricting the EV tax credits in Joe Biden’s Inflation Reduction Act to American companies and then grudgingly adding in one by one those of various allies and trade deal partners including Canada, Mexico, Japan, South Korea and the EU.Assuming you want to restrict the beneficiaries of said subsidies to stop Chinese companies snaffling them all, is there a better way to do it? One idea kicking around is a “subsidy club” where the rich democracies restrict their handouts to companies from countries that adhere to an agreed set of standards on labour and the environment such as forced labour, carbon emissions and waste disposal. This might help them avoid being undercut by some Chinese producers, if not exclude them altogether.Obvious sectors beyond EVs would be semiconductors and perhaps critical minerals. Hosuk Lee-Makiyama, of the think-tank ECIPE, who has sketched out such an idea, says: “A subsidy club where there are already similar standards on labour or environmental protections would be a way to address political concerns about unintended exploitation of buyer subsidies while staying within WTO law.” There are provisions in WTO rules that allow restrictions on trade to protect human health and the environment. One obvious problem would be the US, where Congress might balk at losing unilateral discretionary control over how it directs its subsidies. Senator Joe Manchin of West Virginia, the swing vote on the IRA, has already criticised the loopholes that the administration created for European and Japanese companies. Still, at least it’s one way of possibly defusing a politically explosive issue without simply ignoring WTO rules altogether.Don’t panic over the fall in tradeGlobal goods trade has shrunk at its fastest since the Covid crisis, falling 3.2 per cent in July compared with 12 months ago. Should we be seriously worried about the world goods trading system?Not really, no. Hope that helps.OK, so you want a proper explanation. Goods trade (which incidentally isn’t the most important part of globalisation) is cyclical: it follows GDP and industrial production, usually with a higher amplitude. The world economy and industrial production is slowing down as the impact of the Ukraine energy shock and central bank interest rate rises work their way through, and trade is slowing with them. Look at this chart, using the data compiled by the Dutch CPB think-tank (one of the Netherlands’ great gifts to the world, along with Total Football and hydroponic tomatoes), which I’ve smoothed into a three-month average and taken an annual change. There’s really nothing unusual, or not yet, in the relationship between industrial production and global goods trade. Trade is slowing a bit faster (and in fact has gone negative), but that’s what it tends to do. Worth keeping an eye on, but nothing to panic about yet.Charted watersJoy over sinners that repenteth. Lars-Hendrik Röller, Angela Merkel’s chief economic adviser when she was chancellor, has admitted that Germany was too dependent on Russian gas. The remarkable thing about this, as seen in the chart, is how Germany increased its reliance on Russian gas even after Vladimir Putin’s annexation of the Crimea in 2014. As doubled-down bets go, that one was a shocker.Trade linksA paper from the Brussels think-tank Bruegel looks at ways to cut carbon emissions from aviation and shipping.My FT colleague Gideon Rachman’s excellent regular podcast interviews WTO director-general Ngozi Okonjo-Iweala, who describes the threats to the global trading system before advancing the unsurprising thesis that the WTO is the way to counter them.Two more Brexit triumphs to report: with Britain’s carbon emissions scheme delinked from the EU’s, the declining cost of carbon credits in the UK market could hit British exporters to the EU with tariffs under Brussels’ new carbon border levy. Meanwhile, British businesses will also face new costs of £330mn a year if the government gets round to checking animal and plant imports coming to the UK.A thoughtful piece on Bloomberg notes the US no longer has the geopolitical power it once did from disposing of its agricultural surpluses.Joe Biden’s EV tax credits have pitted Ford against GM over the role of Chinese technology in the US car industry, the Wall Street Journal reports.Trade Secrets is edited by Jonathan MoulesRecommended newsletters for youEurope Express — Your essential guide to what matters in Europe today. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More
