Aurelia Butler

UK prime minister Rishi Sunak is considering following Washington’s lead by imposing new restrictions on domestic companies making investments into critical industries in China.US president Joe Biden has been drawing up a plan to limit investments in key parts of the Chinese economy by American companies that is yet to be announced.“I think the US is still formulating their thinking on that space, they haven’t published [yet] . . . but we are engaged in a dialogue with them. We are also doing policy thinking on that particular area,” Sunak told journalists on Wednesday on the plane to Japan for the G7 summit of global leaders.Sunak said that any joint action over tougher controls on western investments in China was still a work in progress and would not be agreed at the G7 summit given the US had not yet “fully formed view”. But the prime minister added: “In broad terms, absolutely, that will be something we will be talking about.”Placing further export controls on China will also be discussed by western allies in Hiroshima with “economic security” high on the agenda, Sunak said.The prime minister said western allies were “well aligned” on their economic approach to China ahead of the G7 summit with “very similar” dialogue taking place between the US, UK, Australia, Canada and Japan as each country develops its strategy.“There’s a separate conversation to be had on export controls, which we already have, and you’d expect that to be a feature of the conversations,” Sunak said.Biden last year urged his administration to pay close attention to investment deals with China involving critical technologies such as semiconductors.The White House indicated it was considering issuing an executive order to create a screening mechanism for outbound US investment, just one of many efforts to make it harder for Beijing to obtain cutting-edge technology.Liz Truss, Sunak’s predecessor as prime minister, on Wednesday made a controversial speech in Taiwan calling for the island nation to be included in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) — a trade agreement between 11 countries — which the UK recently joined to strengthen economic ties with Asia.She also called on Sunak to more clearly designate China as a “threat” to the West.Sunak said he had not followed the details of Truss’s trip but ruled out the idea of changing Britain’s foreign policy on Taiwan. “I tell you that our approach to Taiwan is longstanding and it hasn’t changed.”Asked specifically whether Taiwan should join CPTPP, he indicated otherwise: “I think that we have a very strong unofficial relationship with Taiwan as our allies do. Our position . . . will continue.”James Cleverly, foreign secretary, gave a speech in London in April arguing that isolating China would not be in the UK’s interests.“It would be clear and easy — and perhaps even satisfying — for me to declare some kind of new cold car and say that our goal is to isolate China,” Cleverly said.“It would be clear, it would be easy, it would be satisfying and it would be wrong. Because it would be a betrayal of our national interest and a wilful misunderstanding of the modern world.” More

The warning by Stellantis that Britain’s trade rules with the EU threaten the viability of its electric van plant at Ellesmere Port has reopened one of the car industry’s most complicated headaches: rules of origin. The UK’s failure to attract international battery investments means British plants will be reliant on imported batteries for years. The wider car industry, which includes JLR, Nissan, BMW and Toyota, is reliant on exports to Europe, even after Brexit. These companies are concerned that anything that penalises their vehicle sales will make their factories less competitive, and more at risk in the future. How do rules of origin work for vehicles? Rules of origin, sometimes abbreviated to “ROOs”, are a common condition of trade deals to ensure that goods have sufficient locally made content to qualify for tariff-free access to a market. Under the UK’s post-Brexit Trade and Cooperation Agreement with the EU, cars sold from one side to the other must have 55 per cent of their “content” — whether engines or other costs such as materials or components — from within the EU or UK in order to gain tariff free access to the other’s market. Electric vehicles initially received a concession because the battery is such a significant portion of the vehicle’s value and many still come from China, South Korea or Japan. However, from January 2024 some 45 per cent of an electric vehicle must come from the UK or EU to avoid tariffs when sold across the Channel, but 60 per cent of a battery pack must originate from Europe or the UK for the whole battery to qualify as “local”. These levels increase to 55 per cent for vehicles and 65 per cent for batteries in 2027.The concession was put in place to allow fledgling battery industries to develop on both sides of the Channel. How do the rules affect UK carmakers? Many of the UK’s car plants, from Nissan’s in Sunderland to Toyota’s site in Derbyshire, were opened in order to export vehicles to continental Europe. Around four in five UK-built cars are sold abroad, with more than half going to the EU. Stellantis, which owns the Vauxhall plants in Luton and Ellesmere Port, argues that price rises outside Europe, particularly in battery materials, mean it will not now comply with the upcoming rule changes, something that puts the site at risk.The company, stitched together by combining Opel, Peugeot and Fiat Chrysler, has a large network of plants across Europe, and currently makes the same electric vans as Ellesmere Port in Spain and Portugal. It is also planning a similar factory in South Africa.This means it will be able to meet some EU demand without exporting from the UK, and may be able to sustain its UK plant on domestic sales alone if it can secure the batteries, trade experts suggest. The business currently imports batteries from China’s CATL, something that makes it harder for the company to comply with the higher threshold requirements.Other carmakers are less exposed to the rules. Nissan builds batteries in the UK with Envision, while BMW’s electric Mini uses imported batteries from Germany. JLR, whose parent Tata Motors is close to deciding whether to put a battery factory in Spain or the UK, is less reliant on European sales as it exports more of its cars to the US or China, neither of which have trade deals with the EU or UK. Toyota, the UK’s other large carmaker, does not make battery electric models in Europe yet, and does not plan to do so until the middle of the decade. Yet the risk is still substantial. In its submission to MPs on the business select committee, Nissan warned: “There is a vital need to fulfil rules of origin requirements for UK battery content required to export EVs, not just to Europe but also to the rest of the world, and to create the supply-side demand that is necessary to justify the establishment of an EV battery supply chain and battery manufacturing presence in the UK.”Will the EU agree to a delay?The European Commission is being lobbied by both EU and UK car manufacturers to delay the imposition of the tougher thresholds for originating content, but has so far not yielded to industry pressure.The commission also sees the rules of origin as a lever to encourage EU carmakers to invest in EU battery plants, partly at the expense of the UK industry, which has struggled to attract investment in the sector. However, the UK accounts for almost a quarter of EU-built EV exports, but since 2019 has seen a growing number of imports from China. EU carmakers fear that if a 10 per cent tariff is added to their vehicles they will lose further UK market share.Despite industry concerns, insiders on both sides say the commission is in principle reluctant to set a precedent by renegotiating the UK-EU Trade and Cooperation Agreement, although the deal does allow for the rules of origin to be changed by a joint EU-UK decision, without the need for a further ratification process.One commission official said Brussels was “not open to changes to the rules of origin”.Still, leading industry experts believe Brussels may, at the eleventh hour, give manufacturers more time to adapt. This would also avoid a political confrontation with London just as post-Brexit relations have improved under prime minister Rishi Sunak.UK business minister Nusrat Ghani told MPs on Wednesday that ministers “have had productive conversations with our counterparts in the European Union” and said they will “continue to make strong representation” on the issue.Sam Lowe, trade expert at consultancy Flint Global, said it was clear that neither EU or UK manufacturers had the domestic manufacturing capacity to meet the 2024 rules of origin requirements. “Ultimately, I think the EU will agree to some form of extension — a scenario in which combustion engine cars can trade tariff-free, but EVs cannot is absurd — but the decision could be made quite late in the day so as not to weaken the desired onshoring impact,” he said.How will this affect the UK car market? While the UK imports far more electric vehicles from Europe than it sells into the market, the overall impact of tariffs on UK carmakers will be more significant than on EU carmakers.The UK is one of the leading markets for electric vehicles in Europe, with many battery-driven Volkswagen, Peugeot and Fiat models imported from the mainland.If the rules are not relaxed then models that do not use European batteries will face 10 per cent tariffs.

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Electric vehicles are already more expensive than petrol rivals to buy outright, and further price rises will stem demand significantly, industry leaders fear. In addition, the UK will introduce an electric vehicle sales mandate from next year, penalising companies that do not meet their quotas.If electric vehicles become more expensive, it will be harder for carmakers to hit the targets, which start at 22 per cent from 2024 and rise every year, and may see them scale back offerings of petrol or hybrid models to compensate, industry executives say privately. There are already concerns about the coming wave of Chinese EVs from brands such as BYD, Great Wall, and Geely. These are likely to be cheaper than European models, a gap that will widen if EU-made cars face additional tariffs. More

IMF First Deputy Managing Director Gita Gopinath told a conference hosted by the Central Bank of Brazil that markets were probably “too optimistic” about what it would take to bring down inflation in emerging markets.”Despite encouraging signs, I am worried that price pressures seem entrenched in many economies and that upside inflation risks are sizeable,” she said in remarks prepared for the event. “Central banks must remain resolute in keeping policies tight and recognize that insufficient monetary tightening now may necessitate even more painful actions down the road,” she said. That was a lesson learned from the high inflation period of the 1970s and it “very much applies today,” Gopinath said.She said fiscal restraint could support the fight against inflation by central banks and financial tools could improve tradeoffs in the event of pronounced financial stress, if judiciously used.Gopinath said emerging market economies have maintained growth in recent years, helped by strong monetary policy frameworks and reforms that had lowered credit and currency risks.But these countries still faced “considerable downside risks” from monetary policy tightening in advanced economies, and conditions may get “significantly worse,” she said. Rate hikes in the United States, for instance, had come with still-benign conditions, but that could change in the period ahead, she said.Gopinath said she was less optimistic than markets about lowering inflation in emerging markets, given that it had been unexpectedly high and persistent, and often rose faster than expected, she said.Inflation in services had been strong and policy tightening had not cooled labor markets significantly, with wage growth still robust in many emerging market economies.She said several factors could be contributing to the stickiness of inflation, including pent-up demand from the pandemic, rotation of demand from goods to services, and a decrease in potential output and employment.Given few historical precedents for inflation coming down from very high levels without a significant economic slowdown, Gopinath said “quite strong” labor markets and activity pointed to “considerable upward pressure on inflation.”She said companies might pass on higher costs instead of absorbing them into their profit margins, and that workers could demand payback for real wage losses. That meant the longer inflation stayed high, the harder it could be to bring it down, and the larger the contraction of output that would be required.These challenges are global, but the risks are heightened for emerging markets, Gopinath said, underscoring the need for authorities in these countries to continue to strengthen their monetary, fiscal, and financial policy frameworks. More

BENGALURU (Reuters) – The U.S. Federal Reserve will hold its key interest rate steady this year despite an expected recession, according to a Reuters poll of economists, who also said the risk of a U.S. default over the debt ceiling was higher compared to prior stand-offs.Those concerns, along with failures of some regional banks, led markets to price in at least a 50 basis point cut by end-2023, an expectation that gained momentum after policymakers signaled a pause to the rate hiking campaign at the May 2-3 meeting.However, U.S. central bankers reiterated the federal funds rate would stay high or could go even higher, not lower, despite 34 of 46 respondents to an additional question in the May 11-16 Reuters poll predicting a U.S. recession in 2023.Over 60% or 75 of 116 economists predicted the Federal Open Market Committee, which hiked the interest rate by 25 basis points in early May to 5.00%-5.25%, said it would be there at end-2023.While 14 expected the rate to be even higher at some point this year, three of them also had a cut penciled in to take it back to the current level. Thirty predicted no hike and at least a 25 basis point cut.”Put simply, inflation is more than double the Fed’s target rate and the unemployment rate is below every FOMC participant’s estimate of the natural rate. These facts alone suggest the Fed’s bias would be to hike rather than cut,” said Michael Gapen chief U.S. economist at Bank of America (NYSE:BAC).”In our view, rather than lean against a mild recession, the Fed would view it as an acceptable price for bringing inflation back down to target.”The world’s largest economy, which likely expanded at an annualized rate of 1.1% last quarter, will grow 0.6% in this one before contracting 0.2% and 0.3% in the final two quarters of 2023, according to the poll.Still, inflation was not forecast to fall to the central bank’s 2% target until at least 2025.The unemployment rate was expected to rise from its current 3.4% level to 4.2% by end-2023 and average 4.5% in 2024, still historically low compared to previous recessions.But what could worsen that outlook of a mild economic downturn is the ongoing debt-limit crisis.President Joe Biden and top lawmakers in Congress have about two weeks to strike a deal as the U.S. Treasury Department said it only expects to be able to pay the government’s bills through June 1 without an increase to the $31.4 trillion debt limit.Previous stand-offs have typically resulted in last-minute arrangements, but in 2011 the top-notch U.S. credit rating was downgraded for the first time. A slight majority, 22 of 41 respondents, said the risk of a default was higher this time compared to prior episodes of debt ceiling brinkmanship. While 16 said the risk was the same, three said lower.Elevated worries about a default will push U.S. Treasury yields higher over the coming weeks, a separate Reuters poll showed.”No matter how you slice it, the U.S. faces tough choices to bring its fiscal house in order. However, further political brinkmanship – or even worse, failure to raise the debt limit – would be like adding salt to the wound,” said Michael Gregory, deputy chief economist at BMO Capital Markets.”If brinkmanship pushes the U.S. closer to X-date without a deal in place, then we’re more likely to see market stress indicators amplify. The macroeconomic consequences of a short default would be somewhat more severe.”(For other stories from the Reuters global economic poll:) More

“I think at the end of the day, we do not have a debt default,” McCarthy said in an interview with CNBC.”The thing I’m confident about is now we have a structure to find a way to come to a conclusion. The timeline is very tight. But we’re going to make sure we’re in the room and get this done.”McCarthy defended Republican proposals to impose spending caps and work requirements for Americans who receive some federal benefits, saying both would help the U.S. economy.McCarthy also said there would not be a discussion on taxes in the current negotiations with the White House on raising the U.S. debt ceiling. More