Aurelia Butler

Welcome to Trade Secrets. There’s been a bit of a lull in the old trade diplomacy game over the past week or two after all the excitement of Emmanuel Macron’s and Luiz Inácio Lula da Silva’s trips to Beijing. The next big get-together is the G7 meeting in Hiroshima in a month’s time. After the invasion of Ukraine, the existence of a like-minded club of rich democracies suddenly seems a lot more relevant, and in coming weeks I’ll assess what the G7 can do. Today’s newsletter is on a couple of big developments in trade and how governments will react: one, Chinese electric vehicle makers taking over the world; two, the EU, that joined-up geopolitical power, slapping restrictions on imports from, er, Ukraine. Charted waters is on commodity prices and the US dollar.All about EVsFrom the effort devoted in Brussels and Washington to arguing about Joe Biden’s electric vehicle credits (I myself plead guilty to mentioning them in eleven separate newsletters and columns this year) you’d imagine the global EV market was an Airbus-Boeing style transatlantic duel. In fact Chinese companies have poured money into EV and battery production and are threatening to squeeze their European and US competitors such as Volkswagen and Tesla out of the Chinese market.A terrific report by my colleagues at the Shanghai motor show last week suggests that China is doing with cars what it’s failed to do with previous products — develop its own brands capable of competing internationally. Thanks to building economies of scale at home, China’s on the way to being the world’s biggest EV exporter, already making big inroads in south-east Asia and now targeting the EU market. See this chart from the think-tank Merics.

How is trade policy going to react? The obvious outcome in the EU is a rash episode of trade disputes with China involving antidumping and antisubsidy duties of the type that often happens after the introduction of new technologies (see solar panels and e-bikes) as companies race to establish market share. This creates an interesting wrinkle: if European carmakers in China also export on a large scale, they could face trade defence instruments selling into their home market.But Chinese carmakers are also planning to expand in Europe through foreign direct investment, particularly greenfield. Overall Chinese FDI in the EU has dropped sharply since 2016 . . . 

. . . but greenfield is rising sharply (albeit from a low base) and is dominated by the auto sector.

A Chinese presence in the EU market based on FDI rather than exports is less likely to cause a big policy pushback. Unlike Huawei and 5G, it’s going to be hard to suggest that EV production justifies national security restrictions. In theory, it could be a case for Brussels’ new foreign subsidies regulation if the investments and the resulting products can be shown to be backed by state money. But greenfield FDI as opposed to mergers and acquisitions is generally welcomed by recipient countries for creating industrial capacity and jobs. In other words, there’s a rising Chinese dominance in one of the world’s most important and fast-growing products and the policy response from the rich economies is highly uncertain and potentially quite weak. And yet we’re still all arguing about whether the EU gets to sell critical minerals to US carmakers that Europe doesn’t even have. We’re doing this all wrong.The grain from Ukraine that’s mainly just a painIf, like me, you thought that Ukraine’s rapid accession to the EU was a bit unlikely, you’ll be feeling vindicated by current events, with Poland and Hungary blocking imports of Ukrainian wheat to protect their farmers. Such action by national governments of course blatantly violates the rule that trade is a central EU competence. On the cynical principle that rank protectionism towards a war-torn neighbour is OK if it’s done by the book, the EU is planning to legitimise this unilateral action by allowing restrictions on imports to a small number of countries unless they are intended for onward sales to elsewhere in the EU. If it sounds to you like another inviolable principle of the bloc — the borderless internal market — thrown under the combine harvester, you’d have a point. The provisions are allowed under a feature of Ukraine’s trade deal with the EU, the signing of which in 2014 was fairly obviously the trigger for Russian president Vladimir Putin annexing Ukraine.So far, so agriculturally protectionist, so fudging principles without actually breaking rules, so very EU. But the episode underlines a couple of wider points. First, the EU might chunter on about geopolitics, but it’s a trading bloc before anything else. The admission of one of the world’s most efficient grain producers into a protected market is obviously going to create problems.Second, and relatedly, EU membership isn’t really the solution to a lot of Ukraine’s pressing challenges except as part of a general political reorientation towards the west. In the short to medium term the country needs security guarantees and military assistance, which the EU collectively at the moment doesn’t really do. In the medium term the governance criteria for EU membership could help it become less of a corrupt oligarchy, but they haven’t done that great a job in the aforementioned Poland and Hungary. It also needs an awful lot of aid, but that can be done outside the EU. Ukraine is a complex issue of many strands, and the EU as an institution struggles to deal with more than a couple of them.Charted watersWorries about the future strength of the US dollar has been a source of concern for many in Washington, and further afield, recently. Rumours of the demise of the greenback have been greatly exaggerated, as the Financial Times editorial board recently confirmed. But we have been living through an odd episode, and post pandemic changes in relationships between the currency and certain commodities may persist.

The chart, from research by Boris Hofmann, Deniz Igan and Daniel Rees at the Bank for International Settlements, illustrates the break in the long-term relationship between the US dollar and commodity prices during the Covid-19 pandemic and how since then, rising commodity prices have gone hand-in-hand with a strengthening US dollar. The study presents evidence that post-Covid correlation patterns could become more common in the future based on two observations: that the US dollar exhibits a close and stable relationship with the US terms of trade, and that a US shift from being a net oil importer to a net oil exporter means higher commodity prices will tend to raise the US terms of trade, rather than lowering them. (Jonathan Moules)Trade linksThis piece in Foreign Affairs looks at the non-aligned pragmatism among many emerging markets I wrote about in last week’s column, and the Phenomenal World newsletter looks at how rich-world protectionism is leading to economic nationalism and mercantilism among emerging markets.A piece in the American Prospect magazine says that tech lobbyists quietly seized control of US trade policy on data and tech by inventing the shaky concept of “digital trade” and making it conventional wisdom in Washington. See also the academic paper on which it is partly based and an older paper on the same subject.A paper by Simon Lester for the Baker Institute looks at the history of industrial policy in the US and its potential for going wrong.Trade Secrets is edited by Jonathan Moules More

Eoin McDonald is managing director of GreenAgCapital, an investor in food and agriculture. It’s not often that the combined net effect of decades of monetary policy, globalisation and private equity are seemingly summed up in one tweet photo. Behold, a crustless NYC sandwich on “Health Bread” (?) for $29. Plus tip and tax, that’s probably closer to $38? (NB below is a screenshot because Elon seems to be messing Twitter up again, but the tweet can be found here).

Europeans cannot fathom such lunacy, wondering if it comes with a side order of diamonds. My WhatsApp finance groups also laughed and were quick to make comparisons to my personal favourite, Pret’s Chicken Salad & Avocado Sandwich, which costs a more reasonable £8.79. But what is in the price of a sandwich, really?Anyone who has braved the aisles of American supermarkets and delis know the stark difference in grocery prices between the two continents. A single loaf of bread (that never seems to age) can set you back a small fortune in the US. Meanwhile, even on the indulgent coast of Portofino, Italy, high-quality pastries only cost a few euros.Ignoring the incredulous responses from social media — which attributed the price rise to what was once “transitory” and now “stubborn” inflation — it is worth reflecting on whether the “Health Bread” sandwich is forewarning European consumers. Because Europeans might soon be exposed to the same exorbitant prices for fresh food, as the continent’s agri-food sector slowly shifts towards the consolidated US model.Food for thoughtOver the past three decades, European consumers have enjoyed an unprecedented abundance of produce at affordable prices, available year-round on supermarket shelves.Ever buy Spanish strawberries and wonder how they are so cheap? That’s because the European market — one of the most lucrative and competitive in the world — has been dominated by major retailers such as Aldi, Tesco, and Auchan. Over the past decade, they have exerted increasingly significant control over the landscape, and benefited from the highly fragmented and subsidised European farmers that rely on support from the European Common Agricultural Policy (CAP). This asymmetric power dynamic has overwhelmingly benefited les supermarchés and their associated consolidators, as they dictated fresh produce pricing.However, the future of the global food supply chain is going to look very different from the past. Two core trends — market consolidation and climate change — are poised to bring irreversible change to the European food industry.Industry consolidationÀ la style in the US, one of the main drivers of change is industry consolidation, driven by the need for extreme efficiencies and economies of scale to offset higher input, capital investment, and regulatory compliance costs. As a result, farming operations are being forced to consolidate and integrate across the value chain. Hence, ye olde simple farm model that we’ve grown up with must now give way to more complex corporate family businesses; larger farms with better access to technology, equipment, and non-family labour. (And yes, for the British, this means that Brexit has screwed them.)Consolidation not only allows for greater negotiating power with suppliers and buyers, but also improves access to credit and capital. The result is a more streamlined and efficient food production process that can better navigate the challenges posed by a changing climate and supply chain disruptions.But consolidation also means an increased likelihood of $29 sandwiches.Climate changeNelly put it well when he said that it’s getting hot in here. Increased climate volatility — in the form of increased periods of prolonged drought, severe flooding, unseasonable heat spikes and frost events — will probably have a significant impact on food production. The result will be more frequent shocks to the system. Although technological advances within the agricultural industry continue to mitigate the impact, they may not be enough to eliminate the extremes. Remember the Napa Valley fires and the unseasonably late Bordeaux frost that horrifyingly destroyed the wine grapes that we need to get through the week? Those types of extremes. Farming technology that could help includes new patent-protected crop varieties that are more resilient to extreme weather events. But will this technology be enough? Maybe, but science says probably not. And these technologies are capital-intensive. That means that farmers unable to afford them will exit farming altogether. In turn, that leads to even greater consolidation, and ultimately to higher prices.The more we need these technologies, the more our lunchtime Prets are going to cost us. I Am America (And So Can You!)They say that those who laugh last, laugh the loudest; and I suspect we’re laughing too soon at the crazy Manhattanites. The continued consolidation of the food supply chain will create a winner-takes-all phenomenon with a smaller number of suppliers controlling the wider food industry.Indeed, it is also likely that periodic disruption of global food chains will persist, if not increase. I would nearly bet that fresh produce will soon be marketed as a luxury good. Europe’s future is written on the US wall: close to monopolistic integration of the food supply chain and significantly more expensive food. The question is, who in Europe will be willing to pay $29 for a sandwich? And will it, at least, have the crusts still left on? More

Investors are underestimating how high eurozone borrowing costs will rise, the head of Belgium’s central bank has warned, insisting he will only agree to halt interest rate rises once wage growth starts to fall.Pierre Wunsch, who sits on the European Central Bank’s rate-setting governing council, told the Financial Times: “We are waiting for wage growth and core inflation to go down, along with headline inflation, before we can arrive at the point where we can pause.”His focus on wage growth raises the bar on the conditions that have to be fulfilled before the ECB will stop raising rates. The central bank has already raised its deposit rate at an unprecedented pace from minus 0.5 per cent last July to 3 per cent in March.“I would not be surprised if we had to go to 4 per cent at some point,” said Wunsch, indicating that borrowing costs could rise further than expected by investors, who are betting on a rise in the ECB’s deposit rate to slightly above 3.75 per cent. Investors expect the ECB to keep raising rates further than the US Federal Reserve and Bank of England, which are both expected to increase policy rates by a quarter percentage point next month.Several members of the ECB council have said they expect another rate rise at its next meeting on May 4, but most are waiting for data on bank lending and inflation before deciding whether to slow down to a quarter point move.Some council members worry the banking sector turmoil of the past month, following the collapse of Silicon Valley Bank and forced rescue of Credit Suisse, will cause lending to dry up and reduce the need for more rate increases.But Wunsch said Belgian bank executives he met last week told him they had no plans to cut the supply of credit in response to the tumult.“It’s not like I love hiking,” said Wunsch, who worked at the Belgian central bank for eight years before taking charge in 2019 and had become one of the more hawkish ECB council members, often pushing for higher rates. “What we try to do is always to go for a soft landing and nobody is going to err on the side of destroying the economy for the sake of destroying the economy,” he said. “But I have absolutely no indication that what we are doing is too much.”Hourly labour costs in the 20-country single currency zone rose by a record 5.7 per cent in the fourth quarter from a year earlier, exceeding the pace of wage rises in the US. German trade union Verdi agreed a two-year deal at the weekend to boost the wages of about 2.5m public sector workers and end weeks of strikes. The deal will mean that staff receive a series of one-off payments totalling €3,000 up until February 2024, after which their wages will be raised by €200 a month, plus an extra 5.5 per cent increase.Analysts at Barclays said the deal was equivalent to an annual pay rise of 5 per cent, in line with expected eurozone wage growth this year. But it falls short of German inflation, which was 8.7 per cent last year. It is also below the 10.5 per cent Verdi initially demanded.In Belgium, one of the few European countries to still formally link pay to inflation via indexation clauses, many workers were given a 10 per cent pay rise at the start of the year.Wunsch said there were already clear signs of “second-round effects” in the bloc, as workers demand higher wages to offset a higher cost of living and that pushes prices up even more.“I’m not a fetishist,” he said. “I’m not going to hike rates even in a recession just because we have 2.3 per cent or 2.1 per cent inflation in the two-year forecast. But I’m not seeing inflation numbers going in the right direction yet.”The ECB set out a new three-part guide to its future policy decisions last month, saying future rate moves would be decided by a combination of its inflation forecast, past changes in underlying price pressures and how much impact its policies are having.Wunsch said wage growth was a key part of this due to its impact on the inflation forecast. “If we see wage agreements remaining around 5 per cent growth for longer than this is going to be in the forecast and then inflation is not going to go back to 2 per cent on a structural basis,” he said.Wunsch called on governments to start reducing their budget deficits, even before they withdraw the widespread energy and fuel subsidies.“We are flirting with a weak form of fiscal dominance,” he said. “The base case is we can hike, but there are risks that something will happen, a political crisis in a country, where we will be faced with fiscal trade-offs.”ECB president Christine Lagarde has taken pride in her ability to persuade most of its 26 council members — including the 20 heads of each national central bank — to support carefully constructed compromises on rate moves. As the ECB gets closer to the peak rate, bringing everyone together will get harder, Wunsch said.He “very much appreciates” Lagarde’s approach, but added: “Where there is room for discussion is if there is too much consensus. I think it removes relevant information from the market.” Hiding divisions between rate-setters risked surprising the market, as has happened several times already, he added. More

Call it in-flight diplomacy. The US wants to recruit South Korea as a chip war ally. The effort began before President Yoon Suk Yeol’s plane had even landed in Washington for a state visit.The White House wants Yoon to discourage chipmakers from filling any supply gap in China if Beijing bans chips made by Micron of the US. The request underlines South Korea’s position as a technological frontier state. Investors in South Korean chipmakers fear deeper embroilment in the battle between Beijing and Washington. They are right to do so. But the spat over Micron is not financially material to them.China has launched a security review into Micron, one of the top-three memory chipmakers alongside Samsung Electronics and SK Hynix. Any Chinese sales ban would be a blow to Micron. Mainland China generated about a tenth of its sales for the 2022 fiscal year. But the value was only $3.3bn. That compares with Samsung’s total sales of $226bn, of which about a third came from chips. The US has no problem with Samsung’s existing sales to China. These stood at $34bn in 2021. The US added Yangtze Memory Technologies, China’s largest memory chipmaker to its trade blacklist in December, limiting its access to critical technologies. This means South Korean chipmakers’ profits from the country would remain buoyant without fresh sales to any ex-Micron customers. Micron shares have dropped more than a tenth in the past year. SK Hynix is down a fifth and Samsung only 7 per cent. This mainly reflects expectations of an industry-wide downturn. Companies stockpiled micro processors during pandemic shortages. Global memory chip prices fell a fifth in the first quarter, adding to a similar decline in the previous quarter. The forecast for chip demand growth this year is at a historic low, with “significant oversupply” in memory chips, according to Gartner. This will overhang stock prices more than the trade spat, unless the latter intensifies. More

Berlin-Brandenburg airport cancelled all departures and said some landings would also be affected after the Verdi union called security workers out on strike until midnight (2200 GMT). Roughly 240 flights had been scheduled to take off. As in other countries, Europe’s largest economy has seen repeated disruption from strike action as workers press for more pay and better working conditions to tackle a surge in the cost of living.While public sector workers agreed a wage deal with employers in a separate dispute over the weekend, bringing some respite, Verdi announced a further wave of rail strikes in five federal states to take place on Wednesday. Employees from the private Aviation Handling Services Hamburg (AHS), who handle check-in, boarding and lost and found for a number of airlines including Lufthansa at Hamburg airport, also called a 24-hour strike at short notice. Neither arrivals nor flights serviced by other companies were expected to be affected, Hamburg airport said. AHS was due to handle 84 of Monday’s 160 departures.Last week, Duesseldorf, Hamburg, Cologne-Bonn and Stuttgart airports were hit by strikes.Ralph Beisel, chief executive of the airport association ADV, said unions were taking their right to carry out warning strikes prior to arbitration to absurd lengths.In a separate statement on Monday, Verdi announced strike action for 5,000 railway workers who are pressing for a pay increase of 550 euros ($605) a month.”The employees and their families have been hit hard by the recent price increases,” said Verdi negotiator Volker Nuss. “It needs a significant increase to absorb the rising costs.”($1 = 0.9088 euros) More

FRANKFURT (Reuters) – The “very generous” pay rise secured by Germany’s public sector workers may complicate the European Central Bank’s fight against inflation, analysts said on Monday.The proposed deal will give 2.5 million employees in Europe’s largest economy a 5.5% permanent increase next year, on top of a series of one-off payments over the next 12 months to help them deal with a surge in the cost of living. That will set an important precedent for other pay talks, and could threaten the ECB’s forecast that wage growth will peak this year, which underpins its expectations for euro zone inflation to come back to the central bank’s 2% target by 2025.”The permanent increase next year may raise some eyebrows at the ECB because wages were supposed to peak this year,” Natixis economist Dirk Schumacher said. Gilles Moec, chief economist at French insurer Axa, called the proposed deal “very generous” and Mark Cus Babic, an economist at Barclays (LON:BARC), said it “could significantly increase aggregate wage growth”.The ECB projects that wage growth across the 20 countries that use the euro currency will average 5.3% this year before declining to 4.4% next year and 3.6% in 2025.But the ECB’s account of its March meeting shows this forecast was challenged by some policymakers as too benign when it was presented to them last month. Holger Schmieding, chief economist at Berenberg, said the German deal gave policy hawks at the ECB “another argument to raise key rates at least twice more, and at least not to rule out a new 50 basis point move on May 4″.The ECB is widely expected to raise rates by a quarter of a percentage point next week, slowing the pace of tightening due to lingering uncertainty about the financial sector and lagged effects from past increases in borrowing costs. Other economists noted the German public sector pay agreement followed a period of falling real wages, when prices grow faster than salaries.”Doves may argue that the deal comes after a period of wage restraint and is reasonably front-loaded,” Christian Schulz, an economist at Citi, said. Marcel Fratzscher, a former ECB economist who has since founded the DIW think tank, estimated the deal will leave public sector workers nursing a 6% drop in purchasing power by the end of next year, assuming 6% inflation in 2023 and 3% in 2024.”This means that it will probably take at least another five years for public sector wages to recover this loss of purchasing power and for employees to have the standard of living they had in 2021,” Fratzscher said. More

NEW YORK (Reuters) – U.S. prosecutors will square off this week against a former employee of OpenSea, the world’s largest marketplace for non-fungible tokens (NFTs), whom they accuse of insider trading.The charges against Nathaniel Chastain, a former OpenSea product manager, were the first in a series of high-profile cases related to digital assets launched by the Manhattan U.S. Attorney’s office last year. It is considered the first criminal insider trading case involving such assets.Prosecutors have accused Chastain of secretly buying dozens of NFTs based on confidential information that the tokens, or others from the same creators, would soon be featured on OpenSea’s home page.Chastain chose which NFTs to feature, and then profited illegally by selling his tokens shortly thereafter, they said. “He abused that position of trust,” prosecutors said in an April 4 filing.The defendant faces one count of wire fraud and one count of money laundering. His trial before U.S. District Judge Jesse Furman in Manhattan is expected to last one to two weeks.Chastain’s lawyers have argued that his actions were not insider trading, and that the information he accessed was not OpenSea’s property and had no inherent value to the company. “We are not talking about securities trading,” David Miller, a lawyer for Chastain, said at a pretrial conference on Thursday.He added that if prosecutors mention insider trading, “there is a substantial danger of undue prejudice and confusion of the jury.”Chastain’s lawyers have also said OpenSea did not start banning employees from buying or selling featured collections or creators until Chastain’s last day, in September 2021.Its new policies “tend to show that OpenSea did not consider – or treat – the relevant information to be confidential” while Chastain worked there, Miller said in an April 17 filing.The case could have broader implications for assets that do not fit into existing regulations preventing investment advisers, brokers and others from trading on material nonpublic information, said Philip Moustakis, a former SEC enforcement lawyer and partner at Seward & Kissel LLP.”Is it insider trading of anything?” Moustakis said. “If this case sticks, there is precedent that insider trading theory can be applied to any asset class.” More