The EU is an uncertain trade ally for Biden

Hello from Brussels. The vaccine export restrictions barney is dying down a bit, but there’s still quite a bit of political debris lying around. Also, apparently, a need in some quarters of the EU to denigrate the UK’s impressive vaccination programme, which seems risky given the amount of anti-vaxx sentiment already about.

Today’s Tall Tales looks at how the EU-UK stand-off over the weekend has spawned more disingenuous Brexit-related claims over Northern Ireland. The main piece will help you while away the time waiting for Joe Biden to reveal his hand on trade policy by discussing whether the EU is properly ready for an offer of transatlantic co-operation over China if and when it comes. Charted waters, meanwhile, looks at the surge in the cost of transporting goods from East Asia to Europe.

Tricky transatlantic deal with a multi-layered Europe

“Trump with manners” is a pretty brutal way to describe Joe Biden, or at least his nascent trade policy as seen from Europe. That was, however, a verdict in the highly respectable Dutch newspaper NRC Handelsblad (a hat-tip to the eminent Rem Korteweg of the Clingendael Institute think-tank for flagging this). 

The charge sheet alleging that new Joe is but old Donald writ large, as the noted 17th-century trade analyst/epic poet John Milton might have put it, is lengthening. Biden has already toughened up Buy American procurement rules, reversed Trump’s last-minute decision to drop tariffs on aluminium imports from the United Arab Emirates and as yet failed to unblock the appointment of Ngozi Okonjo-Iweala as director-general of the World Trade Organization, saying only the issue is under “active consideration”. On the positive side, the administration has emitted some warm words about revitalising the WTO and working with Europe to counterbalance China and build resilient supply chains.

OK, OK, let’s give them time. It’s very early days. The appointment of US trade representative Katherine Tai hasn’t yet been confirmed by Congress. Buy American might well end up full of loopholes, as it has before. The order on aluminium tariffs might just be Biden underlining his right to make his own decisions.

In the meantime, even leaving aside tricky transatlantic trade issues such as the digital services tax, carbon border adjustment and the Airbus-Boeing dispute, Europe has its own responsibilities to look after in this relationship. If and when Biden suggests a China-focused alliance on trade, tech and national security, will the EU be unified and prepared to respond?

The answer, unfortunately, is only “sort of”. The European Commission has ambitious plans for EU-US relations and co-operation over China: see this interesting exchange yesterday between Sabine Weyand, head of the EU trade directorate, and former US trade negotiator Wendy Cutler. It is establishing a joint “trade and technology council” to co-ordinate discussions. But collaboration will be far easier for issues decided at EU level than those left to member states.

The WTO, where the EU speaks with one voice, is a good example of the first type. There’s obvious common ground if the US supports Okonjo-Iweala’s appointment and eventually unblocks the dispute settlement system’s appellate body (AB) in return for constraining its judicial adventurism. Ironically both the EU and US would like the AB to be a little more adventurous in declaring certain types of Chinese state aid illegal, but failing that Brussels, Washington and Tokyo are working on a joint proposal to tighten subsidy rules.

But the EU is less co-ordinated on issues controlled by member states, particularly where national security is involved. On the contentious issue of allowing Huawei to build 5G systems, for example, EU member states have gone various ways. France is politely but firmly guiding the Chinese company out of its network. Others, such as Spain, are more welcoming. Germany equivocated before adopting a law that sets security hurdles for all telecoms equipment companies, but not before Huawei has already created facts on the ground through its use in existing German networks.

It’s much easier for China to exert pressure on individual countries and businesses than on the EU as a whole. Sweden, for example, is in the peculiar position of trying to push out Huawei and the partially state-owned Chinese company ZTE against resistance from Ericsson, Huawei’s Swedish rival, which fears being driven from the Chinese market in retaliation.

National security screening of foreign direct investment is another area of common transatlantic interest, but the commission has only a monitoring and advisory role. Ditto with building resilient supply chains: the hopes of some in Brussels for central EU co-ordination complete with a designated pot of money have faded.

One EU official defends the new trade and tech council by pointing out that the commission is used to negotiating at a bloc-wide level for some area legally reserved for member states, such as work visas in trade deals. The EU is also developing collective anti-subsidy instruments and sanctions for human rights violations, which can be used against Chinese companies and individuals. True enough, but it’s still going to be hard building a comprehensive approach.

We’ve left the EU-China investment deal out of this argument so far in deference to those who contend (wrongly in our view, but not absurdly so) that it will facilitate transatlantic co-operation against China on trade and human rights. However, the rhetoric of the deal’s biggest champion, Angela Merkel, does not support a firm alliance with the US against China. Her likely successor, although sentiment in Germany is shifting against Beijing, also has a history of relatively pro-Chinese comments.

So while Europe waits for Biden, it might want to spend the time firming up a solid and practical offer of co-operation. If one party extends the hand of alliance across the Atlantic it needs to be sure it will get a firm grip from the other.

Charted waters

The strong rebound in trade flows has led to transport bottlenecks that in turn have had a sharp impact on freight rates. Rates have soared on the major routes — in particular, as this piece highlighted, between East Asia and Europe. The chart below highlights the extent of the leap in freight prices, though it also signals that on the East Asia to Northern Europe route costs are falling.

Tall Tales of Trade

Two wrongs don’t make a right, as our primary schoolteachers endlessly told us. They were irritating, but they had a point. They’d no doubt have had things to say on the subject of the Northern Ireland protocol, part of the Brexit deal, which aims to avoid a hard border on the island of Ireland by leaving Northern Ireland under EU customs rules and part of the single market for goods.

The UK yesterday seized on the EU’s mistake over the weekend, in which Brussels briefly invoked an override mechanism to suspend the protocol, to argue the whole thing was flawed. London demanded big changes in customs practices, including relaxing goods inspection regimes between Great Britain and Northern Ireland years into the future. This is seriously disingenuous. The underlying problem here is that the UK promised (and continues to promise) its voters something it simply cannot deliver — Great Britain leaving the single market and yet maintaining no trade barriers down the Irish Sea. And it has failed to put in place new inspection systems to mitigate that contradiction.

When the UK says it needs big revisions to the Northern Ireland protocol, it’s implicitly admitting that its claim of no Irish Sea barriers was wrong. It is, if you like, a tall tale that refutes itself.

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