Aurelia Butler

The Ukraine war has revived the transatlantic alliance. But the relationship between the US and its European allies is increasingly lopsided.The US economy is now considerably richer and more dynamic than the EU or Britain — and the gap is growing. That will have an impact well beyond relative living standards. Europe’s dependence on the US for technology, energy, capital and military protection is steadily undermining any aspirations the EU might have for “strategic autonomy”. In 2008, the EU and the US economies were roughly the same size. But since the global financial crisis, their economic fortunes have dramatically diverged. As Jeremy Shapiro and Jana Puglierin of the European Council on Foreign Relations point out: “In 2008 the EU’s economy was somewhat larger than America’s: $16.2tn versus $14.7tn. By 2022, the US economy had grown to $25tn, whereas the EU and the UK together had only reached $19.8tn. America’s economy is now nearly one-third bigger. It is more than 50 per cent larger than the EU without the UK.”The aggregate figures are shocking. Underpinning them is a picture of a Europe that has fallen behind — sector by sector.The European technology landscape is dominated by US firms such as Amazon, Microsoft and Apple. The seven largest tech firms in the world, by market capitalisation, are all American. There are only two European companies in the top 20 — ASML and SAP. Whereas China has developed domestic tech giants of its own, European champions are often acquired by American companies. Skype was bought by Microsoft in 2011; DeepMind was bought by Google in 2014. The development of AI is also likely to be dominated by American and Chinese firms.The leading universities that feed the pipeline of tech start-ups in the US are lacking in the EU. The Shanghai and THE rankings of the world’s top universities both have only one EU institution in the top 30. (Britain does better — courtesy of Cambridge, Oxford, Imperial and others.)In 1990, Europe made 44 per cent of the world’s semiconductors. That figure is now 9 per cent; compared with 12 per cent for America. Both the EU and the US are rushing to build up their capabilities. But while the US is expected to see 14 new semiconductor plants come on stream by 2025, Europe and the Middle East will add just 10 — compared with 43 new facilities in China and Taiwan.Both the US and the EU are looking to turn this situation around with ambitious industrial policies that provide public finance and incentives for chip manufacturers and producers of electric vehicles. But the dollar’s status as the world’s reserve currency gives the Americans the ability to finance their ambitions, without spooking the markets. As one European industrialist puts it: “They can just swipe the credit card.” The EU, by contrast, has a much smaller budget and has only just begun issuing common debt.Private capital is also much more readily available in the US. Paul Achleitner, chair of the global advisory board at Deutsche Bank, says that Europe is now “almost totally dependent on US capital markets”. He tells me that Europe has very few of the large pension funds that give depth to the US capital markets, adding that: “If you want to get anything sizeable done — whether it is an acquisition or an IPO — you always go back to American investors.” The EU has spoken a lot about creating a “capital markets union” to give Europe some of the scale of the US. But progress has been feeble.Unlike Europe, the US also has plentiful and cheap domestic supplies of energy. The shale revolution means that America is now the world’s largest producer of oil and gas. Meanwhile, energy prices in Europe have soared. The Ukraine war and the loss of cheap Russian gas mean that European industry typically pays three or four times as much for energy as their American competitors. Gloomy European bosses say this is already leading to factory closures in Europe.Some in Britain may be tempted to see all this as proof that, inside the EU, Britain was “shackled to a corpse” and that Brexit was a good move. But, outside the European single market, Britain suffers from an exaggerated version of the problems of scale that are hobbling the EU itself. British industry is already falling behind, as a result.So are there really no areas where Europe is a world leader? Some point proudly to the fact that the size of the EU single market means that companies all over the world have had to adopt European regulations — the so-called “Brussels effect”. But it would clearly be better to lead the world in creating wealth, rather than regulating it.Europe does outperform in “lifestyle” industries. Almost two-thirds of the world’s tourist arrivals are into Europe. The luxury goods market is dominated by European companies. Football, the world’s most popular sport, is dominated by European teams — although many of the biggest clubs are now owned by Middle Eastern, American or Asian investors.Europe’s dominance of lifestyle industries underlines that life in the old continent is still attractive for many. But perhaps that is part of the problem. Without a greater sense of threat, Europe may never summon the will to reverse its inexorable decline in power, influence and [email protected] More

Welcome to Trade Secrets. It’s another week of trade tensions between the big powers on display, or at least being uneasily suppressed. Narendra Modi is in Washington, and ahead of his visit India’s power minister helpfully decided to bash Joe Biden’s green investment binge, criticising renewables subsidies for undercutting production in low-income countries. Li Qiang, the new Chinese premier, is visiting Europe, with both sides trying not to ignite tensions. Charted Waters looks at the frailty of China’s economic recovery.Cash from complianceUrsula von der Leyen made a bold claim on her visit to Latin America last week, saying that the EU and Brazil would work to finalise the EU-Mercosur preferential trade agreement (PTA) by the end of the year.The deal has stalled since it was signed in 2019, partly because of concerns about the Amazon (and, more prosaically, beef imports). The situation has been complicated by the EU’s new deforestation regulation, which prohibits the import of seven commodities — including beef, soyabeans and palm oil — from recently cleared land. This chart from the UN Food and Agriculture Organization shows the problem.

As the regulation starts being applied, a familiar dynamic will no doubt kick in. Bigger and better-organised producers, who can afford the complicated traceability and monitoring procedures, including geolocation and time-stamps for production, can benefit from the rules creating barriers to entry from smaller producers.You see this in a lot of EU regulation. Big manufacturing companies moaned when Brussels brought in the REACH chemicals directive, but now they’ve mastered compliance they’re fairly OK with it. The GDPR data privacy regime was soon nicknamed the “Google Data Protection Regulation”: big tech companies have more capacity to follow the rules.One of the biggest fights over the deforestation regulation is of course palm oil — already a cause célèbre after the European parliament put a de facto import ban on it. Indonesia and Malaysia have suspended trade talks with the EU amid much frothing about hypocrisy (Europe has, after all, razed vast forests for farmland over centuries) and neocolonialism. Some farmers find it easier to clear the compliance bar. Those who have already qualified for the Roundtable on Sustainable Palm Oil (RSPO) standard, an international certification scheme, will meet the EU’s requirements with relative ease. One association of Indonesian growers, the Union of Palm Oil Smallholders (SPKS), welcomes the deforestation regulation as a business opportunity. But the organisation claims only “over 70,000” members out of a total of several million palm oil smallholders in Indonesia. A much bigger grouping of associations vehemently opposes the regulation, saying that the EU should exempt smallholders from the regulation, recognise Indonesia’s own certification programme as adequate and apologise in writing for even suggesting it (a bold gambit, admittedly, but if you don’t ask you don’t get).As ever in trade, rivalries within countries are pivotal in shaping disputes between them. Overall, governments like Brazil, Indonesia and Malaysia are solidly sceptical of the EU’s new rules. But some producers will see a commercial opportunity where others see unfair discrimination.A new US ports crisis averted for nowEvery now and again, something pops up to remind us of the great supply chain snarl-ups of 2020-2022. The crisis has eased rapidly: freight rates and “dwell times” in ports are sharply down.Almost certainly it wasn’t better ports and container handling or the lifting of Covid lockdowns that fixed the problem. It was simply the waning of the extraordinary surge in demand for consumer durables and hence container traffic. If that ever comes back, the crisis might too, especially in Los Angeles and Long Beach, the dysfunctional US west coast ports that were its main locus. Experts from the shipping industry have told me they haven’t been fixed.Last week the west coast ports tentatively resolved a labour dispute with dockers (longshoremen) after 13 (seriously, 13) months of negotiations that had threatened to choke the ports ahead of the summer season. The Biden administration weighed in to the talks to get the draft deal over the line. Good for it, but the fact Washington had to intervene to stop a major snarl-up suggests the west coast ports’ chronic problems haven’t really been resolved.The ports’ traditionally combative labour relations create stoppages and hinder automation. Their terminals are small and have poor infrastructure, particularly connecting container trade from ships with road and rail.Biden’s other intervention during the crisis came in October 2021, when he persuaded the unions to run a container handling operation 24 hours a day (incredibly, unlike world-class ports such as Rotterdam in the Netherlands, they previously shut at night). But that didn’t make much difference: distribution warehouses and the like also tend to run only in the daytime, so typically no more than a couple of consignments came through during night shifts.The end of the labour dispute is obviously a good thing, and credit to the administration for its help. But deep-seated problems with the bottlenecks of US container trade remain.Charted watersTalking of the problems of recovering from Covid, here is a sobering chart about the fragility of China’s post-pandemic rebound. The country has domestic problems with the housing market — one of the two key economic drivers — suffering from a lack of buyers. But exports are also vital for the world’s second most populous country, and these have been hit by the cost-of-living challenges in other countries making consumers unwilling to buy the stuff Chinese factories make.

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Monetary policy is providing some support to Chinese exporters. The renminbi fell to a six-month low against the dollar after the People’s Bank of China cut its main policy rate last Thursday. However, the more intractable problem is US restrictions on Chinese tech products, and its knock-on effect on Chinese trade with its neighbours Japan, South Korea and Taiwan as the excellent news analysis by FT reporters in China and Hong Kong explains. (Jonathan Moules)Trade linksFrench internal markets commissioner Thierry Breton told Politico he was pushing for an anti-dumping investigation on Chinese electric cars, a potentially huge trade dispute in the making, though other member states are more cautious.The Wall Street Journal says that the New Development Bank, set up by the Brics countries as a rival to the World Bank, has virtually stopped making loans and is struggling to raise dollar funds to pay its debts, having been hit by the reputational damage of having Russia as a major shareholder.My colleague Peter Foster has superbly covered the Resolution Foundation think-tank’s admirable new report into UK trade policy. It’s really worth a read, and I’m not just saying that because I agree with its criticism of the UK’s current preferential trade agreement strategy and also joined a panel at the report’s launch.A lot of World Bank financing labelled as combating climate change is nothing of the sort, a new report finds.Trade Secrets is edited by Jonathan Moules More

The cost of a two-year fixed-rate mortgage in the UK rose above 6 per cent on Monday while two-year gilt yields broke through the 5 per cent mark for the first time in 15 years, piling pressure on homeowners and Rishi Sunak’s government.Mortgage costs have been rising sharply over the past week, ahead of an expected increase in interest rates from the Bank of England on Thursday. According to data provider Moneyfacts, the average cost of a two-year fixed-rate deal rose from 5.98 per cent on Friday to 6.01 per cent on Monday morning. The cost of a five-year deal has risen from 5.62 per cent to 5.67 per cent.In an indication that mortgages rates could have even further to rise, two-year gilt yields rose 0.07 percentage points on Monday, as they went above 5 per cent for the first time since 2008. Such increases pose a mounting challenge to Sunak’s government, which is already confronting a cost of living crisis and is lagging behind in the polls. But on Monday the prime minister declined to offer any new support to people struggling with mortgage payments.“I know the anxiety people will have about the mortgage rates, that is why the first priority I set out at the beginning of the year was to halve inflation because that is the best and most important way that we can keep costs and interest rates down for people,” he told ITV’s Good Morning Britain.Jeremy Hunt, chancellor, has also ruled out direct fiscal support for mortgage holders, warning it would push up borrowing, forcing inflation and interest rates higher.To date, Sunak’s pledge to halve inflation from double-digit rates at the end of last year has been confounded by continued price rises, with inflation at 8.7 per cent for April. The BoE has acknowledged its economic model has failed to predict inflation’s persistence.Economists polled by Reuters expect UK core inflation — which strips out volatile food and energy prices — to stay elevated at an annual rate of 6.8 per cent in May. In recent weeks, swaps markets have revised estimates markedly upwards for the rate at which they expect BoE benchmark interest rates to peak, to 5.80 per cent for early next year. That is about one percentage point higher than had been expected when the BoE last met on May 11.Swap rates feed into lenders’ decisions on mortgages, since they guide their pricing of fixed-rate deals. Monday marks the first time since the market turmoil of Liz Truss’s September “mini” Budget that the average cost of a two-year mortgage fix has breached 6 per cent. Mortgage rates fell back from such highs in November but have risen sharply in recent weeks because of concerns about persistent inflation and wage growth.Simon Gammon, founder and managing partner at mortgage broker Knight Frank Finance, said the trend was “hugely unfortunate”. He added: “Rates at this level are going to come as a shock to the 1.4mn or so households that face remortgaging this year.”

The number of residential mortgage deals available is also falling. There were 4,683 products available on Monday, down from 4,923 on Friday. Those building societies, banks and specialist lenders withdrawing mortgage deals at the weekend or raising rates included the Co-operative Bank, Kensington Mortgages, and building societies Nottingham, Progressive, Principality and Leeds. Santander, NatWest, Nationwide and HSBC took similar moves last week. Rates on buy-to-let mortgages rose even faster than those on residential deals, with the average two-year fixed rate jumping from 6.21 per cent on Friday to 6.3 per cent on Monday, Moneyfacts said. Landlords with mortgages are more sensitive to rate rises since they generally favour interest-only loans. This means their monthly payments rise more sharply when interest rates increase. Despite the rise in interest rate expectations, sterling fell 0.1 per cent against the dollar to $1.2803. More

COLOMBO (Reuters) – The World Bank is likely to approve $700 million in budgetary and welfare support for Sri Lanka at its next board meeting on June 28, sources told Reuters, the biggest funding tranche for the crisis-hit island nation since an IMF deal in March.The economy of the country of 22 million is expected to shrink 2% this year before returning to growth next year, the government estimates, following last year’s record contraction of 7.8% after foreign exchange reserves hit record lows.The International Monetary Fund approved a bailout of nearly $3 billion in March, which Sri Lanka expects will bring additional funding of up to $4 billion from the World Bank, the Asian Development Bank and other multilateral agencies.Of the proposed World Bank funding, $500 million will be for budgetary support and is likely to come in two tranches of $250 million each, one of the sources, from the World Bank, said.All four sources, from the World Bank and the Sri Lankan finance ministry, sought anonymity as they were not authorised to talk to the media.The first tranche is likely to be disbursed immediately after board approval with the next possibly in October, as the bank watches the progress of Sri Lanka’s debt restructuring and the first review of the IMF programme, due in September, the World Bank source added.The remaining $200 million will be earmarked for programmes to assist the poor, whose numbers have doubled to 25% of the population since the onset of the Indian Ocean nation’s worst economic crisis early last year, another World Bank source said.”Households that have registered for support will be ranked … and the lowest 2 million will be eligible for support,” the source added.The World Bank and the finance ministry did not immediately respond to requests for comment. More