Aurelia Butler

Day by day, the coalition against Vladimir Putin is conducting a high-speed experiment in building and deploying a toolkit of trade and economic measures against a belligerent state. On Tuesday the EU, whose speed and unity continue radically to outperform expectations, ratcheted up its sanctions to include restrictions on dealing with Russian state-owned companies and bans on luxury goods exports there.Although drawing conclusions about the future at this stage feels a bit like anticipating the Bretton Woods conference in the weeks after Pearl Harbor, it’s natural to think ahead to how this might permanently change the way the world economy, trade and energy are governed. Especially if the sanctions actually dislodge Putin (unlikely) or force him into a ceasefire that looks like failure (a bit more likely), an international policy framework will have been created that could be turned to more sustainable and creative ends. There are, however, a bunch of substantial obstacles to getting there.First, the willingness of the EU to take on a broader geopolitical role based on principle is untested outside Ukraine. It’s much easier to get consensus around sanctions, arms sales, willingness to absorb energy shocks and generosity towards refugees for a white mainly Christian country aspiring to EU membership. The much harsher treatment of African, Middle Eastern and Asian refugees and migrants arriving at the EU’s borders suggests Europe’s commitment to universal values is selective.Moreover, as the late US president George HW Bush knew from personal experience, the successful conduct of a war doesn’t guarantee re-election after it. Domestic politics will continue sharply to delimit the possibilities of co-operative US trade policies. Ukraine may well be the kind of military operation and exercise in statecraft for which Joe Biden has been preparing for decades, but he’s getting poor poll ratings for economic policy. The US public is apparently not connecting the sanctions on Russia they support with the inflation they don’t like.Accordingly, it’s optimistic to think the US is about to go all multilateral or even alliance-based in trade and drop its obsessions with reshoring in general, manufacturing in particular and steel very specifically. You’d hope at least that the coalition-building against Ukraine might be replicated in managing supply chains with allies — “friendshoring”, to use the grating neologism. But the administration retains restrictions on imports of steel, including from the EU, and the White House and its whisperers continue to push a “green steel” club in a form that looks to many in Brussels like protectionism in a halfhearted disguise.In the short term, the war and the rich world’s actions have highlighted the flaws in existing institutions. Whether or not you agree with withholding most-favoured nation status from Russia at the World Trade Organization (on balance, I do not), the conflict has inevitably undermined the institution’s ability to function. There’s heartening news this week of a possible compromise over a waiver on patents for Covid vaccines, but negotiations on other issues have more or less ground to a halt. No one really wants to sit around a table with the Russian ambassador and discuss rules on ecommerce. In that context, it looked like a mistake for a group of rich countries this week to have released an almost purely political statement in the WTO condemning Russia’s invasion, with just a passing reference to Belarus’s application to join the institution. No emerging markets signed on to the intervention except a few in eastern Europe (Moldova, Albania, Montenegro — the last two of whom are Nato members). The statement will have no practical effect but will further encourage the idea that the WTO is a place to form camps and strike poses, not negotiate deals.Of course, the pole of influence that will pull any system of governance apart is China. The more any new alliance or set-up appears aimed at isolating or punishing China (as with the US’s green steel plan), the more it will push Beijing towards sympathy with Moscow, or at least away from the US and EU. The Chinese economy is far too big and enmeshed with the world trading system to be sanctioned as Russia’s has been. It’s not realistic to expect emerging markets en masse definitively to choose a European-American politico-economic camp over a Chinese one. The UN resolution condemning the invasion, although it passed overwhelmingly, received some significant abstentions in Africa and Asia, including India and South Africa as well as China itself. This isn’t a new cold war, or if it is then half the developing world will want to be in a new non-aligned movement. The coalition against the invasion has done a remarkable job in this situation, though public support may wane if the war drags on for months and high energy prices savage living standards. But that doesn’t mean it has created an apparatus of global governance that can easily be set to work [email protected] up for Trade Secrets, the FT’s newsletter on globalisation More

China’s latest attempt to suppress an outbreak of Covid-19 with lockdowns in several cities has disrupted global supply chains, which is likely to lead to lower growth and profitability across the technology industry.Apple supplier Foxconn said on Wednesday its revenue could contract by up to 3 per cent this year and it might struggle to raise its operating profit margin as component costs rise and the pandemic persists.“2022 is a very challenging year,” Liu Young-way, Foxconn chair, told investors on an earnings call, adding that the continued spread of the coronavirus imposed “very big uncertainty”. The warning follows a local government order in Shenzhen on Monday for all but essential factories in the technology manufacturing hub to stop production for a week. After the new restrictions were announced, more than 70 Taiwanese companies operating in the city and dozens of local Chinese manufacturers said they had suspended production. “China is digging itself into a deep hole with its zero Covid policy,” said Olaf Schatteman, a supply chain expert at Bain, the consultancy. “As the restrictions are hurting suppliers and logistics operations, companies are moving beyond containing the current crisis and towards diversifying production locations, undermining China as the supply chain hub of the world.”Analysts said the impact on Apple remained limited because the main iPhone production site at Foxconn, its largest supplier, was in Zhengzhou, a central Chinese city not affected at this time. “We think this is a manageable issue especially if it’s limited to one week, the challenges could be more supply chain problems for the tech ecosystem and further pressure on supply/logistics overall,” Evercore ISI said in a research note.But while many companies said in statements they did not expect this week’s factory closures to have a significant financial impact, internal communications indicated the restrictions had already begun to cripple supply chains in southern China.An internal report from a technology company in Shenzhen obtained by the Financial Times called the domestic epidemic control situation “very serious” and said it had a cascading effect on shipments. As a result of traffic controls and personnel access restrictions in Shenzhen districts, “factories cannot ship, freight forwarders warehouses are also mostly shut down”, it said.It added that transport between Hong Kong and the mainland was in “semi-meltdown status” and the ports of Yantian and Shekou were hampered by limited container access. About 6,000 of Hong Kong’s 8,000 cross-border truck drivers had been unable to work as a result of new health requirements instituted in wake of Shenzhen’s lockdown, an industry group said.About 25 per cent of US-bound sea freight from China and half of Shenzhen’s exports go through Yantian, according to transport consultancy Freightos.A suspension of parcel services from Hong Kong leading courier company Shunfeng announced last week, and disruption of other nearby ports, would lead to shipment delays between three and five days, industry executives said.This could exacerbate capacity strains and cost increases in ocean freight brought on by the Ukraine war. “The pause in manufacturing will probably cause a surge in freight demand once factories reopen,” Freightos said.Foxconn said on Wednesday it had restarted some operations at its Shenzhen plants under a “closed-loop” management that “can only be done on campuses that include both employee housing and production facilities”, the company said.A factory owner surnamed Lu in nearby Dongguan, whose company supplies smartphone casings to Huawei, also said production was continuing.Analysts cautioned companies such as Huawei and their suppliers or Foxconn, the world’s largest contract electronics manufacturer, are exceptions because of their scale and vast factory network.“Unless they are of the size of Foxconn, who can house their workers and campus and have learned to compartmentalise some cases and having A and B teams in place, factories are still forced to stop production, and that in effect means that the government is shutting down the whole city,” Schatteman said.Phelix Lee, a technology analyst at Morningstar in Hong Kong, said the migration of many technology manufacturing plants from Shenzhen to several other hubs in China and elsewhere meant the widespread factory closures in the city were less catastrophic than they would have been a few years ago.Still, Lee warned of significant impact. “A week-long factory shutdown would amount to just 2 per cent of annual capacity which most manufacturers could likely compensate, but if you factor in the ripple effects caused by transportation backlogs, we are more likely looking at 5 per cent of annual revenue,” he said.Luxshare, a Chinese contract electronics manufacturer with a rapidly growing share of Apple orders, makes some cables and interconnectors in its Shenzhen plants. “They are being disrupted because they could not ship to Foxconn,” Lee said. “It could be quite significant.”Additional reporting by Gloria Li in Hong Kong, Eleanor Olcott in London and Maiqi Ding in Beijing, Chan Ho-Him in Hong Kong More

The outlook is weakening for Foxconn amid rising Chinese coronavirus infection rates and accompanying lockdowns. The business is Apple’s main contract manufacturer of iPhones, which topped global smartphone sales rankings last year. Fourth-quarter profits at Hon Hai — the name under which Foxconn is listed in Taiwan — beat expectations. Cash flow figures tell a gloomier story.Foxconn’s quarterly profits exceeded forecasts at NT$44bn ($1.6bn), a 3 per cent decline on sales that were 6 per cent lower. The company, which assembles about 70 per cent of the world’s iPhones, remains dependent on its consumer electronics business for 60 per cent of its sales.The business of assembly and contract manufacturing has always involved razor-thin operating margins, currently less than 3 per cent. In hopes of fattening these, Foxconn has been moving into electric vehicles and low-end chipmaking. On the face of it, forecast EV sales growth of seven times until the end of 2030 to more than 30m vehicles compares favourably with the outlook for contract manufacturing smartphones.But the shift is proving too slow and too expensive. Liabilities have grown. Net cash has more than halved. Free cash flow turned a negative NT$190bn last year, from a positive NT$312bn. The components business accounts for just 6 per cent of group sales.Foxconn has, meanwhile, been forced to suspend most of its operations in Shenzhen, which analysts estimate represent around a fifth of its total iPhone production capacity. If China’s coronavirus outbreak triggers wide, extended lockdowns, the company would also lose production from big assembly plants in Zhengzhou. Foxconn faces a cocktail of other risks, including chip shortages.The shares have fallen 17 per cent in the past year. At 10 times forward earnings they trade at a steep discount to Chinese rival Luxshare. The gap reflects doubts over Foxconn’s capital-intensive bet on chipmaking and EVs. The group has limited options for boosting cash flow. Dividend yields of 4 per cent are already down from the 5.5 per cent in 2020. A return to those levels looks unlikely. Avoid. More

The writer is a senior fellow at Harvard Kennedy School and chief economist at KrollRussia’s war on Ukraine means the EU is set to become a big spender. The question is how to fund anticipated relief programmes and spending on defence and the green transition. Italian prime minister Mario Draghi suggests as much as €2tn may be needed. For the eurozone, how the money is raised may determine whether the bloc is plunged back into debt crisis or takes a step towards finally becoming an optimal currency area.The EU is disproportionately affected by the war, given geography and its enormous reliance on Russia for energy. Oil and natural gas prices have spiked since late February; last week, European gas futures were up more than 1,000 per cent year-on-year. That is not a typo. Higher energy costs will push up eurozone inflation from February’s already eye-watering 5.8 per cent annual rate. The continent’s leaders recognise rising inflation will create a massive income squeeze for consumers, dragging on demand. And in the weeks since the Russian invasion, Europe has found renewed resolve on two issues. First, Germany embarked on a new era in defence policy with a €100bn fund to modernise the military and a pledge finally to meet its Nato commitment by boosting defence spending above 2 per cent of gross domestic product. Other European countries will follow suit. Second, Europe has learnt the hard way that it must diversify its energy supply. The EU is studying plans to cut Russian gas imports by two-thirds over the next year. The proposal has yet to be adopted by member states and, even if it is, it pushes a lot of assumptions to their limits. It would require a flurry of investment in renewables and other technologies. The Bruegel think-tank in Brussels estimates that would cost about €175bn in 2022 and about €70bn each subsequent year. Where are those euros to come from? One option for countries in the eurozone is the European Central Bank, which could continue suppressing borrowing costs so member states can raise funds in capital markets at low rates. The most powerful tool for doing this is asset purchases, but last week the central bank indicated it was set on a path to wind these down in the third quarter. The ECB does have two other tools for addressing market fragmentation, although each is flawed. The central bank can reinvest the proceeds of maturing assets from its Pandemic Emergency Purchase Programme to strategically reduce yields, but with limits on the flexibility of reinvestment. Member states needing help could also sign up for the Outright Monetary Transactions plan. This, however, comes with strict conditionality that no eurozone country wants to accept. If Frankfurt won’t help finance the spending, Brussels might. When the pandemic hit, the EU created the Recovery and Resilience Facility, a package funded by joint debt issuance providing loans and grants for EU member states to address the shocks from Covid-19. Brussels could make this facility permanent, or generate a new one. EU leaders discussed such a proposal at a summit in Versailles last week. Opposition remains, particularly in Germany, where the coalition agreement rules out another recovery fund. If the EU jointly issues debt to finance the response to another asymmetric shock, what was a one-off during the pandemic may become a potential crisis-fighting tool for the future. Fiscal authorities might finally pick up the baton from the ECB and bring the eurozone closer to having a sustained fiscal union. The central bank would no doubt welcome this. But that is a big “if”. It took more than six months to find political agreement on the pandemic RRF, in the face of a much deeper crisis and alongside a simultaneous debate over the EU’s multiannual financial framework that provided room for horse-trading and compromises. Negotiating a new facility could take as long under the current circumstances. What Europe doesn’t need is for the ECB to stop its asset purchases, hoping that fiscal authorities will agree a new facility, and for EU member states to fail to come up with a financing plan. Then the necessary investments would be foisted on to already stretched national balance sheets, sowing the seeds for another euro debt crisis. As always, programme details are scarce, and time is of the essence. The good news is that, so far, the Russian war has united EU countries on the need for a robust fiscal response. If the authorities pick up the mantle, the EU and the eurozone can emerge from this crisis more unified and far more resilient. More

Securing a trade deal with the United States was one of the main goals of the campaign that led Britain out of the European Union, although critics said any deal would take years and never fully compensate for leaving the EU’s single market. Discussions will start March 21 and March 22 in Baltimore, Md., followed by another meeting later in the spring in Britain, the two sides said in separate statements. The talks “will explore how the United States and United Kingdom can collaborate to advance mutual international trade priorities rooted in our shared values, while promoting innovation and inclusive economic growth for workers and businesses on both sides of the Atlantic,” the USTR said.The “new series of transatlantic dialogues (is) aimed at deepening trade and investment ties and boosting our already-thriving 200 billon pound ($153 billion) relationship,” the UK government said. The allies are expected to discuss collaboration on easing supply-chain congestion, decarbonizing their economies, promoting digital trade, supporting domestic workforces and labor rights, said the Wall Street Journal, which earlier reported the talks, citing U.S. and UK officials. More

TOKYO (Reuters) -Japan’s Prime Minister Fumio Kishida signalled a fresh stimulus package on Wednesday, saying the government is ready to take further steps to cushion the economic blow from rising energy costs driven by the Ukraine crisis.While a weak yen is playing some part in driving up import costs in Japan, global commodity inflation is largely to blame for pushing up energy and food bills, Kishida said.With an upper house election looming later this year, Kishida is under pressure from politicians to ramp up spending to ease the pain for households and retailers still suffering from the impact of the coronavirus pandemic.”We’ll need to take further steps, all available measures, to protect the economy and people’s livelihood if the spike in prices continue,” Kishida told a news briefing.The Kyodo news agency reported on Wednesday that Tokyo is considering compiling a fresh stimulus package that includes an extension of temporary subsidies given to energy wholesalers that expire at the end of this month.The ruling coalition, together with the opposition Democratic Party for the People (DPFP), agreed on Wednesday to look into unfreezing a “trigger clause” that removes the gasoline tax when the price exceeds 160 yen ($1.35) for more than three months, DPFP Secretary General Kazuya Shimba said.”The government will consider what the most effective steps would be in addressing higher fuel costs, including the possibility of unfreezing the trigger clause,” Kishida said.The clause was frozen in 2011 to secure funds to rebuild Japan after it was hit by devastating earthquake and tsunami.The government is cautious about unfreezing it for fear of losing tax revenue, and had instead offered temporary subsidies to energy wholesalers to cap gasoline prices. [T9N2U1022]($1 = 118.1900 yen) More

China’s property market chilled last year as Beijing’s deleveraging campaign triggered a liquidity crisis at some major property developers, resulting in bond defaults and projects being shelved or left unfinished.Overall demand remains sluggish, though a slew of measures have been put in place to revive buying interest.New home prices stalled in February after edging up a month earlier, official data on Wednesday showed.The implementation of a property tax faces challenges, including macroeconomic pressures and downward pressure on the real estate market, said Yan Yuejin, research director of Shanghai-based E-house China Research and Development.”This move is bound to reduce home buyers’ concerns,” said Yan, adding it was also favourable for real estate companies.Chinese vice premier Liu He on Wednesday urged government bodies to roll out market-friendly policies and “cautiously” introduce measures that risk hurting markets. He also pledged to tackle risks in the property sector.China will implement city-specific policies to promote the healthy development of the property sector, Premier Li Keqiang told the annual meeting of parliament earlier in March.In 2011, China launched a property tax pilot in Shanghai and Chongqing, and the idea of rolling out a new trial has been resisted by stakeholders including local governments that rely heavily on land sales as a source of financing.In October, the top decision-making body of parliament said it would roll out a pilot real estate tax in some regions, but did not identify the regions or give other details.Most analysts were expecting the property tax to be delayed, according to a Reuters poll last month.At the annual meeting of parliament earlier this month, China omitted a potential property tax in its 2022 legislative plan for the third consecutive year. More