Aurelia Butler

Welcome to Trade Secrets, and thanks to Andy Bounds for standing in for me last week. Here’s his account of the waning “Brussels Effect”, the EU’s ability to project its rules and norms abroad — and indeed sometimes within its own single market. This week I’m looking at an argument that definitely needs some airtime: whether the EU (and perhaps by extension other rich economies) is overdoing rather than underdoing it in its green subsidy race with the US. I also look at the UK’s trade and geopolitical relationship with the US, in which it’s either a lapdog or a bulldog or perhaps a bit of both. Sticking with the green theme, Charted waters is on climate change’s impact on palm oil prices.No need to flash EU cashThe whole world’s got Joe Biden green investment subsidy envy right now. (Except China, obviously, which has been at it for years.) If it’s not about latching on to the US taxpayers’ teat directly through the US president’s Inflation Reduction Act — see today’s second piece on the UK joining the queue at that particular feeding station — then it’s about governments shelling out their own cash.The EU is the most salient worrier in this regard. There’s lots of discussion about how it can match the US but less debate about whether and why. What market failure exactly is this investment intending to correct?I don’t have a very strong view myself, but there’s an interesting new paper out on EU subsidies from John Springford and Sander Tordoir at the Centre for European Reform urging restraint. They make a few key points:The EU is already pretty competitive in global green tech exports — less so than China but much more so than the US. The EU has been importing green goods because domestic demand has been growing so quickly, but markets are maturing: the authors reckon the EU should be supplying enough EV batteries to meet its domestic demand by 2030.

Relatedly, the distance effect (that is, far-flung economies trade less) in green goods exports is asserting itself. EVs and particularly their batteries are heavy: it makes sense to produce them close to the consumer. EVs for Europeans will mainly be made in Europe.

Finally, if you’re going to subsidise, better to do it with very immature technologies to build an early advantage, such as green hydrogen, not established sectors such as EVs.At the same time, the authors make a few caveats and suggestions of intervention. Wind power is one area China appears to be dominating despite the distance effect, and it might be worth using subsidies to avoid strategic dependence — similar to the way that EU handouts to Airbus and US to Boeing promoted competition. Another, rather more contentious, is taking some kind of reciprocal action where a market such as Chinese EVs is closed to European exports.I’d flag another big issue, which I’ve written about before. EVs in particular are likely to be one of the first big consumer goods where a substantial amount of European-based production is owned by Chinese companies. (Note all that courting of Chinese investment into EV battery plants.) Is it really going to be plain sailing economically or politically if much of the intellectual property and profits for European EV production are retained by Chinese companies? I suspect not, but it might well take the mother of all battles over foreign direct investment, perhaps using the EU’s new foreign subsidy regulation, to stop them.Britain: existing strengths, new weaknessesBritain’s Rishi Sunak was in the US last week doing the traditional UK prime minister thing of signing a declaration with the word “Atlantic” in it (here’s the previous one, featuring some character called Boris Johnson) including a critical minerals agreement, which will give British companies access to certain tax credits under the IRA.You can read opposing views here and here about whether this visit underlined Britain’s economic weakness after Brexit or showcased its geopolitical freedom outside the EU.The first, pessimistic view is fairly obviously right as far as trade and regulation go. Sunak has announced the UK will in the autumn be hosting a global summit on regulating artificial intelligence, but Washington and Brussels are already discussing AI rules in their bilateral Trade and Technology Council without consulting London. The UK has failed to create its own similar bilateral council with the US.However, I think the second point about geopolitics is also often true — except that Brexit is basically irrelevant. Support for Ukraine, the Aukus deal, Five Eyes intelligence-sharing: Biden’s declaration of geopolitical comity with the UK isn’t just pleasantry. But British military and foreign policy independence and alignment with the US existed well before Brexit — both for good (supporting Ukraine’s military after Russian president Vladimir Putin’s 2014 annexation of Crimea) and ill (joining in the 2003 invasion of Iraq). The EU’s national security and military capability still isn’t yet developed enough to make it a serious constraint on its member states, so leaving it made little difference.More generally, although le tout monde (including me) is banging on about trade being all about geopolitics these days, the connections are still often weak.For example: the EU may be regarded in Washington as a relatively unreliable US ally over Ukraine. But it’s clearly America’s friend for the purposes of the likes of IRA tax credits, which it’s getting faster than the UK. Simple commercial interest dictates the US doesn’t unnecessarily annoy one of its biggest trading partners.Similarly, the Biden administration’s foreign policy alignment with Britain — now that the Northern Ireland issue is somewhat sorted — isn’t going to get Sunak the preferential trade deal he’s stopped even bothering to ask for, because PTAs are toxic in Washington at the moment. Brexit hasn’t enhanced the UK’s foreign policy influence with the US or elsewhere, but nor has it entirely destroyed it.Charted watersThe cost of living crisis has been blamed on many factors, not least Russia’s invasion of Ukraine and the supply chain snarl-ups post Covid-19. Another factor has been the shifting Pacific currents of El Niño, marked by higher southern temperatures, droughts and gyrations in agricultural commodity prices as a recent Lex note explains.Vegetable oil prices are most affected by El Niños, a 2016 study from Sydney university found. Data from Refinitiv shows commodity prices peaking a year after El Niño. Palm oil prices are most highly correlated (see the chart below), largely owing to drought conditions in Indonesia and Malaysia.Other commodities have also been affected. Orange juice prices are already near record highs in part due to cold weather and hurricanes. Sugar prices are soaring because of elevated rainfall levels in India. Any good news? Well, the current La Niña period is fading. But if the next one is bad, as some weather prophets are forecasting, emerging markets on the equator will be hit hard. (Jonathan Moules)Trade linksThe South China Morning Post describes how the European Commission’s ambitious plans for “de-risking” its trade with China are encountering opposition from member states. I’m not saying I told you so. I’m not, I’m not.The Wall Street Journal says Brazil’s attempts to reverse deindustrialisation (see here for how Lula is trying to court Chinese manufacturing investment) aren’t working, not least because its protectionist moves to protect local industry have had the opposite effect. (Incredible, I know).Namibia is the latest country to try to force more of the supply chain for processing raw materials in-country, in its case by banning the export of unprocessed critical minerals including rare earths and lithium.The Turkish lira fell rapidly last week following Recep Tayyip Erdoğan’s re-election as president. His new economic team (the FT’s profile of the central bank governor is here) have apparently stopped trying to defend it, amid talk of a more orthodox monetary policy.Trade Secrets is edited by Jonathan Moules More

The US Federal Reserve will need to take tougher action than expected to bring inflation under control, according to a majority of leading academic economists polled by the Financial Times, who predict at least two more quarter-point interest rate increases this year.The latest survey, conducted in partnership with the Kent A. Clark Center for Global Markets at the University of Chicago Booth School of Business, predicts the Fed will lift its benchmark rate to at least 5.5 per cent this year.Fed funds futures markets suggest investors favour just one more quarter-point rate rise in July above the current range of between 5 per cent and 5.25 per cent, the highest level since mid-2007.The survey results were published ahead of the Federal Reserve’s latest interest rate-setting meeting which starts tomorrow. The US central bank is expected to pause its aggressive policy of tightening monetary policy after 10 consecutive rate rises since March 2022 while keeping the door opening to further tightening. Of the 42 economists surveyed between June 5 and June 7, 67 per cent forecast the federal funds rate to peak between 5.5 per cent and 6 per cent this year. That is up from 49 per cent in the previous survey, which ran just days after a string of bank failures in March. “They haven’t done enough for long enough yet to get inflation down,” said Dean Croushore, who served as an economist at the Fed’s Philadelphia Reserve Bank for 14 years. “They are on the right path, but the path is going to be longer and more tortuous than they ever thought.”The latest inflation data will be released tomorrow. The annual core rate of inflation, which strips out the cost of energy and food, rose 5.5 per cent in April. The Federal Reserve is expected to update its interest rate expectations following the conclusion of its two-day meeting on Wednesday.Go deeper: Consensus on the Federal Reserve board is breaking down about the pace at which US inflation will moderate and just how close the economy is to a cliff edge.Opinion: Unless the inflation data due out tomorrow shows significant weakness, the Fed’s proposed course of action to “skip” a rise will end up as a muddled option, rendering future decisions even more challenging, argues Mohamed El-Erian.Have your say: Do you think the Fed will raise interest rates once or twice in the remainder of this year? Vote in our latest poll.Here’s what else I’m keeping tabs on today:Nato: Secretary-general Jens Stoltenberg visits US president Joe Biden at the White House to discuss the military alliance’s summit in Vilnius, Lithuania, next month, where the war in Ukraine will top the agenda.Economic data: The US publishes its federal budget balance.Results: Software company Oracle reports results for its fiscal fourth quarter.Five more top stories1. UBS executives have drawn up a list of nearly two dozen “red lines” that prohibit Credit Suisse staff from a range of activities, after completing the takeover of its ailing rival earlier today. “We will never compromise on UBS’s strong culture, conservative risk approach or quality service,” the bank’s chair and chief executive wrote in an open letter to mark the takeover.2. Italy’s former prime minister Silvio Berlusconi, the billionaire media magnate-turned trailblazing populist, has died aged 86. Berlusconi was Italy’s longest-serving postwar prime minister in stints totalling almost a decade that were marked by criminal investigations into his business affairs and sex scandals. Read more on the politician who provided a template for today’s populists. 3. EU funds managed by Odey Asset Management are discussing restrictions on investors’ withdrawals as part of emergency measures to contain the fallout of sexual misconduct allegations against the hedge fund manager’s founder revealed in an FT investigation. Read the full story.4. Ukraine claimed to have breached Russia’s defences and freed at least three villages yesterday in the south of the Donetsk region. The day before, President Volodymyr Zelenskyy had confirmed that Kyiv’s long-awaited counter-offensive was finally under way, with the aim to liberate some 18 per cent of occupied territory in south-eastern regions.5. Donald Trump’s allies rallied to his defence before the former president surrenders to authorities on criminal charges. The former president is expected to plead not guilty tomorrow in Miami to 37 criminal counts in connection with his alleged possession of sensitive material after departing the White House in 2021. Not all Republicans came to the former president’s defence though. Read moreThe Big Read

© FT montage; Dreamstime

Around the world, developers of renewable energy infrastructure are being told they must wait anything from a couple of years to up to 15 years before they can plug projects into grids that are struggling to keep pace with shifts in electricity generation. There is a dawning realisation that these connection delays could have a calamitous impact on global efforts to cut greenhouse gas emissions.We’re also reading . . . Argentina: The increasingly desperate government in Buenos Aires is going cap in hand to both China and the IMF as it tries to stave off a currency crisis. Masters in Finance 2023: The FT’s annual rankings of finance masters courses were published yesterday and French business schools dominated the list. Rana Foroohar: Last month, a big insurance company said it would stop selling California homeowners coverage because of wildfire risk. Other states are not far behind, Rana argues, because of climate change. What happens when America becomes uninsurable, she asks. Chart of the day

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Pharmaceutical and biotech companies spent $85bn on acquisitions in the first five months of the year, marking a dramatic recovery in dealmaking as they seek to replenish their drug pipelines. The surge in M&A compared with just $35.6bn in deals in the same period of 2022, according to Stifel, an investment bank. Read moreTake a break from the newsFormer French president François Hollande sat down recently with FT editor Roula Khalaf to discuss French politics, the war in Ukraine and dealing with the Kremlin. “Putin cannot be seduced,” Hollande said. “He respects force.”

© James Ferguson

Additional contributions by Tee Zhuo and Benjamin Wilhelm More

OTTAWA (Reuters) – Despite the fastest monetary tightening cycle in the country’s history, Canada’s economy is still running hot, which forced the central bank to crank its key interest rate even higher to a 22-year high of 4.75% last week.Analysts are betting on another rate hike in July, to help the Bank of Canada bring inflation back down to its 2% range. Here are some factors that are keeping demand robust in the Canadian economy. EXTENDED MORTGAGE AMORTIZATIONSMany of Canada’s major banks allowed holders of variable rate mortgages to extend their amortization period in order to keep their payments at nearly the same level, temporarily blunting the impact of higher borrowing costs.As a result, higher borrowing costs have so far caused less financial stress for home buyers than they had expected, so the market has not seen a spike in supply from forced sellers.That has partially helped the recovery in home prices, which have jumped 17% in the three months since January, after a year-long slump.”It’s really something that has been a game changer in terms of how monetary policy is transmitted to the economy,” said Randall Bartlett, senior director of Canadian economics at Desjardins.”A lot of households have been able to continue spending in a way that they wouldn’t otherwise be able to, and to stay in their homes in a way that they wouldn’t otherwise be able to.”POST-PANDEMIC SPLURGECanadian consumers have been splurging on interest-rate sensitive sectors including durable goods like furniture and appliances, despite a 1% decline in disposable income in the first quarter, drawing down their pandemic savings. The savings rate has halved to 2.9% in the first quarter from the fourth quarter of last year, Statistics Canada said. “It seems like a lot of Canadians are looking to catch up on experiences that they weren’t able to have for a couple of years,” like traveling and eating out, Bartlett added.GOVERNMENT SPENDINGTo offset the impact of inflation, which peaked at 8.1% last year, the federal and provincial governments have passed affordability measures, such as a federal C$2.5 billion ($1.9 billion) one-time grocery rebate for low earners that was in this year’s budget.Provinces have enacted a number of different measures, including cutting taxes on fuel. Provincial stimulus measures are estimated to total about C$12 billion in fiscal year 2023-2024, Bartlett said, compared with more than C$20 billion in mid-2022. Taken together, “they all exacerbate inflation when you’re in an environment of excess demand,” Bartlett said. But he estimated it will add “much less” than one-tenth of a percentage point to inflation this year.The central bank says the fiscal spending is not adding to inflation, but it is not helping bring it down either. ($1 = 1.3347 Canadian dollars) More

WASHINGTON (Reuters) – U.S. Federal Reserve officials, who hoped to return the job market to its 2019, best-in-a-generation status after the pandemic, may be on the verge of success as the economy passes key milestones for labor participation and nears a return to pre-pandemic trend levels of employment.The question now: Will the victory be short-lived as those same policymakers battle inflation by engineering an economic slowdown aimed at undercutting conditions that have been tilted heavily in favor of workers?At the onset of the pandemic, “getting back to where we were was the first reaction, and we are basically there” though with different patterns of employment and stronger wage growth, said Michael Madowitz, macroeconomic policy director at the Washington Center for Equitable Growth. But while the Fed in 2019 was asking “‘is this as strong as the labor market can get?’ Right now inflation…is driving the policy discussion,” he said. Fed rate hikes could have “very significant, uneven short-term impacts” on the job market.The Fed is expected to hold rates steady at its meeting this week but possibly flag further hikes later this year and project a rising unemployment rate. So far headline payroll employment growth remains strong. U.S. employers added 339,000 positions in May, a pace well beyond what was normal before the pandemic. That left U.S. employment perhaps just a few hundred thousand jobs short of where it would have been had the pandemic not occurred.But the number of unemployed and the unemployment rate both increased, the jobless rate for Black workers rose nearly a full percentage point, and wage growth slowed, potential signs that the conditions which fueled “the Great Resignation” and a spike in wages for lower-paid jobs may be turning. WHAT CHANGED?On many fronts the U.S. labor recovery from the pandemic remains a work in progress. Within the service sector, key industries such as health and education are short workers, a fact attributed in part to pandemic-era changes in people’s preferences about work and the workplace. The leisure and hospitality industry remains about 350,000 jobs short of where it stood in February 2020, before the spread of COVID-19 forced the shutdown of many in-person services beginning that March. But increasingly policymakers and economists talk about the impact of the pandemic not just as the sort of deep structural shock that it first seemed. There were initial concerns, for example, that women’s employment and labor-force participation would be permanently scarred by the pandemic, but recent estimates indicate it has fully recovered, or nearly so.While there were clearly structural changes – like the explosion in at-home work – what has become increasingly clear is that the pandemic accelerated a reshuffling of workers across occupations and industries that was already underway: An economy in need of more managers and truck drivers during an e-commerce driven transportation boom, for example, became even more logistics driven. An aging society already needed more nurses and home health aides. Recent data from the Bureau of Labor Statistics, for example, showed that a larger reshuffling of workers occurred in the three years from 2016 to 2019, when just over 5% of the workforce reallocated to a new occupation, than did so in the pandemic-influenced period from 2019 to 2022, when about 3.3% of the workforce crossed occupational lines.It’s a process Fed officials see as not yet complete.”I still feel like we’re deep into disequilibrium,” around the types of jobs that will be demanded and the working conditions agreed upon between businesses and employees, Atlanta Fed President Raphael Bostic said in a Reuters interview earlier this year. In its most recent 10-year projections published last fall, the BLS said it anticipated annual employment growth, a broader notion than the monthly nonfarm payroll jobs number designed to capture things like self-employment, would slow in coming years to about half the 1% it averaged from 2011 through 2021. Of the additional 8.3 million jobs expected to be created in that period, nearly a third will be in health and social services, BLS projected.WANTING IT BOTH WAYSFor now, though, the Fed might mark the pandemic labor rebound as essentially complete, despite the risks.The unemployment rate has been under 4%, the Fed’s rough estimate of full employment, since January 2022. The participation rate for 25-to-54 year olds, a measure of workforce engagement that sidesteps the issues of population aging, regained its pre-pandemic level of 83.1% in February and by May had risen to 83.4%.The Center for American Progress and others have estimated that prime-age participation rates for women also reached a new high this spring. The numbers of foreign-born workers, according to the White House Council of Economic Advisers, has also recovered to trend after falling sharply during the Trump administration.Overall payroll jobs, a headline figure decimated by the loss of 22 million jobs in the spring of 2020 and a benchmark of the recovery, may not be far behind.Of course, it’s impossible to know what would have happened to U.S. employment absent the pandemic. With a 3.6% unemployment rate at the end of 2019, the economy was considered close to full employment, but that doesn’t mean hiring would have gotten more difficult or that it would have remained healthy. Changes in labor supply might have allowed faster job creation; even without the health crisis other events might have caused the economy to slow and joblessness to rise.The economy needs to create about 100,000 payroll jobs a month to keep pace with population growth. Had that occurred beginning in 2020 there would be about 156.4 million payroll jobs as of May – just 300,000 more than the current 156.1 million, statistically close and within a month or two of breakeven given the recent pace of job creation.Whether labor market gains can last in the face of the central bank’s tightening campaign remains unclear, though Fed officials say they still hope to have it both ways: Cooling the economy enough to slow inflation without causing major damage to the job market their pandemic policies were meant to preserve. More