Aurelia Butler

Hello all. This week, if I manage to tear my attention away from the chaos engulfing perhaps Britain’s worst prime minister since Lord North lost the American colonies, I’m turning back to the most salient example of the supply chain/reshoring issue: the global scurry to build semiconductor production at home. In a day or two the EU will unveil its Chips Act, inspired by the hyperactively interventionist French internal markets commissioner Thierry Breton and enthusiastically embraced by European Commission president Ursula von der Leyen. I shamelessly crib off the work of my excellent Brussels colleagues for precise details of the debate inside the commission, and I advise you to do the same. Today’s main piece stands back to consider the risk of gluts and trade wars from a semiconductor subsidy game that goes global. Charted waters looks at the reasons to be cheerful for global trade in 2022.Chips off the EU blocAmid lots of strategic-autonomy rhetoric and with the shortages of the past year in mind, the European Chips Act will set the suspiciously precise yet arbitrary goal of increasing its share of the global semiconductor market from 10 to 20 per cent by 2030. To this end, von der Leyen wants the EU to match, more or less, the $52bn in investment the US government is about to shower on its chip industry. Is this going to happen? It looks pretty ambitious. As I’ve said before, the EU is more resilient than the US when it comes to shovelling out public cash, thanks to its relative lack of centralised funds, and it has a history of being heavily over-optimistic that public money will leverage in private.Compared with other countries, there are also significant policymaking counterweights in Brussels to the industrial policy interventionists. The main one is the commission’s competition directorate. The competition commissioner, Danish heavy-hitter Margrethe Vestager, is very publicly resisting a free-for-all on state aid. Providing quieter back-up is the trade directorate, which correctly fears a whole load of trade-distorting handouts undercutting its campaign to reduce subsidies worldwide.In an industry that’s always been characterised by cycles of shortage and glut, the risk of global oversupply in some products is rising. Aside from China’s vast efforts to increase output, we’ve already seen public money start to gush out from advanced economies such as Japan and South Korea to build up domestic chip production. There’s no real sign of global co-ordination between governments: the EU’s Chips Act will call for partnerships with its international allies, but with no credible binding mechanism that we can see.The chips that have been in short supply over the past year or two are often the less sophisticated “legacy” ones used in cars. But that’s a mature product. As the Peterson Institute’s semiconductors guru Chad Bown repeatedly warns, if the legacy chips shortage starts to diminish — and it’s at least partly related to the one-off surge in consumer durables demand — governments subsidising their production will end up with a lot of outdated facilities indefinitely dependent on public money. The likes of Breton claim they only want to subsidise manufacture for the more sophisticated chips, but if a fire hose gets turned on it’s hard to control it. It’s tempting to think OK, if governments are daft enough to create global gluts in semiconductors (as they’ve done in steel, aluminium, shipbuilding and other prestige capital-intensive industries down the decades) so be it. Spend public money subsidising everyone else’s car industries and other downstream users if you really want to. It won’t be efficient, but it’s your money you’re wasting.However, if you put that much money into boosting semiconductor production you’ll want to get first dibs on the chips if the cycle swings and there’s a global shortage. Hence either implicitly or explicitly these subsidy programmes contain threats of general export restrictions, going beyond existing blocks on the sale of sensitive technology to geopolitical rivals. This creates a classic prisoner’s dilemma like the vaccine procurement issue last year. If everyone else is building chip factories and preparing to block the exits you’d better do so too.This suboptimal outcome doesn’t even make sense on its own terms. Everyone who knows anything about semiconductors seems to think it’s just not possible to take such a blindingly complex supply chain entirely in-house at any reasonable price — Vestager estimates self-sufficiency would cost the EU €240bn-€320bn. You can imagine a world where all the big economies have chip production facilities, there’s a global shortage of one particular product, everyone slams on export controls and still no one is actually self-sufficient.The EU already has an excellent strategic position in the early parts of the supply chain, particularly thanks to its research capacity and to businesses such as the Dutch company ASML, which supplies extremely advanced lithography machines to chipmakers. Some very precise official support enhancing European dominance of this part of the global industry would give it strategic power. But that’s not just what the expansive version of the Chips Act wants. It’s trying to bring big chunks of the manufacturing supply chain within Europe, and it wants to spread production into other EU member states, such as, I don’t know, to take a purely hypothetical example, maybe Breton’s native France? It’s not 100 per cent clear what’s going to emerge as the EU’s final strategy. Like everyone else, we’re watching the balls in the Brussels policy lottery clatter around the rotating drum ahead of the big draw. But along with the headline subsidy numbers, which will almost certainly be overstated, keep an eye on what people are saying or implying about how exports might be controlled.Charted watersAnd now for some good news. ING Bank’s macroeconomics team last week published its trade outlook for 2022, predicting that world trade will not only normalise this year but grow further, despite the challenging circumstances.The chart, showing the percentage change in global trade volumes year on year, records a growth in merchandise world trade of 4.1 per cent this year, down from 10.6 per cent in 2021, but still a healthy figure.

World trade in 2022: Return to pre-crisis growth rates © Source: CPB, ING estimates

Co-authors Inga Fechner and Rico Luman acknowledge that the pandemic remains an uncertain factor affecting the outlook for 2022. But they note that last year showed that supply chain problems and higher shipping costs didn’t necessarily hamper the world from continuing to trade. “The economics of trade still make sense,” they said. “So, we’re optimistic given the economic outlook, a hopefully receding pandemic, and clear evidence of richly filled order books, notably in the automotive sector.”Trade linksUS president Joe Biden’s administration has renewed expiring tariffs on solar panels for another four years.A podcast from the Centre for European Reform discusses the economics of climate change including carbon border adjustment mechanisms.Six forthcoming WTO rulings against the US’s use of national security grounds to restrict imports could have serious implications for its future trade.New research on a group of French companies during the first pandemic lockdown shows that holding higher inventories helped guard against supply chain shocks, but geographically diversifying sourcing did not. The US and EU have agreed to allow trade between the two in mussels, clams, oysters and scallops.The EU is discussing plans to shield European households from energy price rises if Russia invades Ukraine. More

“For the future, member states must play a leading role in setting their own fiscal targets,” Calvino told an event in Madrid she was attending alongside her Irish counterpart and Eurogroup head Paschal Donohoe.EU countries are currently discussing a change to the fiscal rules, officially called the Stability and Growth Pact, that limit government borrowing to protect the value of the common euro currency – shared by 19 states.The rules have been suspended since 2020 to give governments leeway to fight the COVID-19 pandemic. With growth now back on track, the rules were to be reinstated from the start of 2023. The discussion focuses on the need to acknowledge the EU’s new economic realities – the high post-pandemic public debt, wide deficits and the need for huge public investment to fight climate change.The issue is politically divisive as EU countries with more fiscal discipline are wary of their more profligate partners.Calvino acknowledged there is a need to reduce governments’ indebtedness, but not at the same pace everywhere, and said she wants rules that are easier to understand and more acceptable for citizens.”We need to ensure that we absorb the extra debt we took to respond to the pandemic in a manner which is compatible with growth and compatible with job creation,” she said. More

(Reuters) -A group of major cryptocurrency firms including Coinbase (NASDAQ:COIN), Circle, Anchorage Digital and Huobi Global are forming a new coalition aimed at cracking down on market manipulation in an effort to instill trust in the burgeoning digital asset industry. The Crypto Market Integrity Coalition, which was convened by risk-monitoring software company Solidus Labs, is also urging digital currency companies to sign a “market integrity” pledge that acknowledges the potential for fraud in the cryptocurrency space and the need for the industry to protect investors. “It really is about recognizing that you need entities that are focused on a fair and orderly system here, and really trying to prevent the abuses that can happen if you’re not paying attention,” said Kathy Kraninger, vice president of regulatory affairs at Solidus Labs and former director of the Consumer Financial Protection Bureau. The new alliance and pledge comes as regulators remain concerned the new market is safe for investors, despite its surge in popularity. The Securities and Exchange Commission has cited the potential for market manipulation as one of the primary reasons for rejecting several applications for spot bitcoin exchange-traded funds.Most recently, the markets regulator vetoed a proposal https://www.reuters.com/article/crypto-currency-sec-etf/update-1-u-s-sec-rejects-fidelitys-wise-origin-spot-bitcoin-etf-idUSL4N2U7462 from Fidelity’s Wise Origin Bitcoin Trust to offer an ETF that would track the cryptocurrency, determining that it did not meet the standards designed to prevent fraudulent and manipulative practices.In December, the Bank for International Settlements called for more regulatory safeguards to prevent crypto fraud, arguing that the limited application of anti-money laundering rules, along with transaction anonymity, exposes DeFi to illegal activities https://www.reuters.com/markets/europe/decentralised-finance-cryptoassets-built-an-illusion-says-bis-2021-12-06 and market manipulation. While this new pledge is a major acknowledgement of the potential for fraud within the crypto space, it remains unclear how exactly the decentralized finance industry can curb bad actors. The other founding members of the coalition are CrossTower, BitMex, GSR, Bitstamp, Elwood, CryptoCompare, Securrency, MV Index Solutions, the Chamber of Digital Commerce, Global Digital Finance and CryptoUK. The coalition should help to “harmonize financial integrity standards” across market participants as many await more regulatory clarity, said Dante Disparte, chief strategy officer and head of global policy at Circle. “Integrity is paramount to the progress and ability of our industry to continue innovating and building an infrastructure that delivers on the promise of access to financial resources for all,” he said. Although the group will initially be focused on recruiting additional firms to sign its pledge, CMIC eventually hopes to be able engage with regulators, promote training programs and endorse data-sharing frameworks that can help to address concerns about transparency in the cryptocurrency space. More

LONDON (Reuters) – Rapid action is needed to update how cross-border financial services are scrutinised and consumers protected as the sector becomes digitalised with “Big Tech” playing an increased role, European Union regulators said on Monday.People are turning to social media and using smartphones to buy and sell shares, move money around bank accounts and make payments, a trend accelerated by the COVID-19 pandemic, leaving regulators playing catch-up.”Digital finance has unlocked new synergies between financial and non-financial activities that potentially introduce systemic risk into the market for financial services,” a joint report from the EU’s banking, insurance and markets watchdogs said.Cloud computing, or banks and other financial firms using outsourced providers for services, is booming, the report said.It is sometimes unclear how to categorise some digital financial services under existing rules, creating uncertainty over data privacy, anti-money laundering safeguards and how much capital they should be holding, the report said.It called on the bloc’s executive European Commission, which has opened a public consultation on digital finance, to take a “holistic” view of supervising financial services.New “supervision structures” may be needed to capture transactions spread across “mixed activity” groups or MAGs, such as Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL), Meta’s Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL) and other Big Tech firms offering financial and non-financial services.The crash of German payments company Wirecard demonstrated that complex arrangements within a group providing both financial and non-financial services create specific challenges for supervisors, the report said.”The growing digitalisation and datafication of financial services necessitate closer cooperation between financial and relevant non-financial authorities,” the report said.The report said that regulatory action may be warranted given that some posting on social media are effectively advertisements.”In securities markets in particular, the growth of digital trading platforms has coincided with new trends, such as ‘social trading’, or investment advice shared over social media—which brings new opportunities but risks as well.” More

WASHINGTON (Reuters) – The White House on Monday released a highly anticipated report from its labor task force that includes nearly 70 recommendations on how the government can help workers join labor unions and bargain collectively.These include the government offering greater access to the federal workforce for unions seeking to build membership, and pushing agencies such as the National Labor Relations Board and the Federal Labor Relations Authority to work closely together to facilitate worker organizing.The 43-page report also pushes the Labor Department to ensure workers, who allege retaliation when engaged in organizing, receive full protection and prevent the misclassification of workers as independent contractors – a long-running battle with so-called “gig economy” workers. President Joe Biden established the task force in April with the goal of facilitating worker organizing and reversing a decades-long decline in union membership. He appointed Vice President Kamala Harris as the chair of the task force and Labor Secretary Marty Walsh as vice chair of the group, which also includes over 20 heads of agencies and cabinet officials.Union support was important to Biden’s victory in several Rust Belt states in 2020, and those voters’ choices in 2022 will play a key role in the midterm elections.Only 10.3% of the U.S. workforce was represented by a union in 2021, down from more than 30% in the 1950s, the White House says. The numbers are even lower for private-sector employees, where union membership has fallen to 6.1% in 2021 from 16.8% in 1983.”This report is going to do some good things for workers in America,” U.S. Labor Secretary Marty Walsh told Reuters in an interview. Harris and Walsh, who held more than two dozen meetings with stakeholders around the country, met Biden on Friday to discuss the report, a source with knowledge of the matter said.During the meeting, Walsh said Biden and Harris were focused on “what’s the follow-up going to be, so it’s not just the paper documents.” They discussed “coming up with a system” that helps report progress, he said.The task force will submit a second report in six months, which will describe progress in implementation, he said.Liz Shuler, president of the AFL-CIO, which comprises 57 affiliated unions and 12.5 million workers, told Reuters the U.S. labor movement will “be the eyes and ears on the ground,” making sure the report gets implemented.”I think this could be a game changer, to have the power of the federal government examining itself and how its practices can be utilized to advance worker organizing,” she said.Biden’s administration may be the most overtly pro-union since Harry Truman left the Oval Office nearly 70 years ago, labor leaders and outside analysts have said, citing actions that have put unions at the center of policy. Biden has rarely missed a chance to highlight his interest in bolstering the U.S. labor movement, including through a slew of provisions in his legislative initiatives. The White House report does not state how much union membership has risen since Biden took office but says the pandemic has boosted union approval. Sixty eight percent of Americans currently approve of labor unions — the highest level since 1965. Unions have lobbied for the passage of the Protecting the Right to Organize Act, or PRO Act, which would prohibit employers from holding mandatory anti-union meetings and impose financial penalties for violating workers’ labor rights. The House passed the measure in March and Biden supports the legislation, but it faces long odds in the Senate. “It is important to acknowledge that the task force recommendations do not and cannot take the place of the robust legislative change that is needed to fix our labor laws,” the report said. More