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France gets its way, thanks to Brexit

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Hello from Brussels for the last time in a while for Trade Secrets. Alan Beattie will be up and running in London next week. Among the policy innovations he will be able to appraise is the effect on trade of readopting imperial measurements (clue: not great) and the impact of trade facilitation deals with individual US states (clue: also not great). There may also be the start of a trade war with the EU as London seeks to disapply parts of its post-Brexit trade deal.

I will focus on events in Brussels — well, Luxembourg and Strasbourg actually — as explained below. Charted waters looks at the problem for the UK of securing energy supplies into the winter.

As ever, if you have any thoughts to share, you can contact Alan on alan.beattie@ft.com.

How Brexit helped France get its way on trade rules

The French presidency of the EU ends this month and Paris will be very satisfied with its work.

On Thursday the European Parliament plenary meeting in Strasbourg is expected to vote for the International Procurement Instrument (IPI), which will limit non-EU companies’ access to the EU public procurement market if their governments do not offer EU companies similar access to their public tenders.

France has backed the measure since it was introduced by the European Commission a decade ago. But it was repeatedly blocked by the UK and the Hanseatic League of liberal, northern free traders such as Sweden and the Baltics.

That member states have agreed the procurement instrument shows how the mood in Brussels has shifted towards a more defensive trade posture.

France argues that others will open their procurement markets to avoid being locked out by the EU. The earlier one-way openness was an example of how “naive” Brussels had been, argues French trade minister Franck Riester.

As well as the IPI, Paris has advanced the anti-coercion instrument (ACI), which would allow the EU to hit back quickly against trade sanctions by a third country without going through the World Trade Organization; a carbon border tax, which will put tariffs on imports of steel and other goods where the producer is not paying a cost for emissions; an anti-subsidy instrument, which will ban foreign companies benefiting from state aid from buying EU rivals, and an emergency export control regime.

Reister said the ACI measures would act as a deterrent to third countries fearing EU retaliation. He cited China’s recent ban on imports from Lithuania after Vilnius forged closer ties with Taiwan. Brussels has challenged the move at the WTO. But Riester said that if the ACI had been in place, Brussels could have retaliated swiftly with a similar block on Chinese goods, potentially persuading Beijing to hold back.

“We want our trade policy to be more assertive,” Riester told the Financial Times, welcoming a “paradigm shift” in recent years. “We have decided to create some interesting new instruments.”

The classic trade defence responses are anti-dumping, anti-subsidy and safeguard measures, or to take a complaint to the WTO, which takes at least a year, said Ferdi De Ville, an economics professor at the University of Ghent who is writing a paper on the subject.

“For about 60 years the EU has used only three trade defence instruments to protect itself against unfair imports or a surge in imports. All of a sudden they are acquiring one unilateral instrument after another.”

It is partly a response to Donald Trump’s US administration, which slapped tariffs on steel and aluminium on national security grounds, and the block on Lithuanian imports by China under President Xi Jinping.

Brussels was finally prompted to toughen its stance last year, when US president Joe Biden invoked the Defense Production Act to restrict exports of vaccine ingredients in the midst of the Covid-19 pandemic. Thierry Breton, the EU’s internal market commissioner, threatened to withhold supplies of vaccines to the US unless it lifted its de facto ban.

He said he needed a similar tool to the DPA — most recently used to increase production of baby formula and airlift supplies from Europe.

“It is a new world — the balance of power,” Breton told the FT. The EU’s stance had moved from “open by default” to “open with conditions”, he said. “If the UK was still here it would have been difficult” to change, Breton admitted.

The French commissioner’s team is now working on a Single Market Emergency Instrument, which would allow export restrictions on five or six categories of goods, such as raw materials, in an emergency. The commission has also proposed a similar system for microchips under its European Chips Act after the pandemic disrupted global supply chains.

Member states in favour of open trade, such as Baltic and Scandinavian countries, confirm the British exit in 2020 has left them leaderless. “The French propose things and the Germans go along with it,” said one diplomat. “The British provided a counterweight before.”

Several diplomats and officials said Breton in particular had grown in influence, buzzing with ideas for “strategic autonomy”. “He’s full of energy, like a footballer who gets the ball and runs the length of the pitch with players standing off him. Sometimes he gets stopped by a last-ditch tackle in the box, sometimes he scores,” said one.

They point out that the EU is a global winner from trade, with an annual trade surplus in goods and services of £285.6bn in 2020.

France has also been effective at preventing things. In the final trade ministers’ meeting of its presidency last Friday in Luxembourg free traders such as Finland and Sweden asked when trade deals with Chile, New Zealand, Mercosur and Mexico would finally be concluded and presented for adoption.

Riester made clear such deals had to promote sustainable development, save the rainforest and improve labour conditions in those countries.

An employee passes rolls of steel at the Salzgitter AG steel plant in Salzgitter, Germany
An employee passes rolls of steel at the Salzgitter AG steel plant in Salzgitter, Germany © Rolf Schulten/Bloomberg

Reister also said “sensitive sectors” such as farming needed protection from cheap imports — the Chile deal would mean accepting more of its chicken.

There is internal opposition to Breton’s policies. The commission’s trade and competition departments, which have long championed liberal ideas, have tried to water down several of the defensive measures, with limited success.

Jonathan Hackenbroich, policy fellow of the European Council on Foreign Relations, sums up their arguments. An open economy ensures competition, improving company performance.

“A strong network of deep trade relations facilitates diversification — avoiding the kind of excessive dependence that another power could leverage for economic coercion,” he added.

It is a point constantly made by Valdis Dombrovskis, EU trade commissioner. After the trade ministers meeting he said: “We must seek a new consensus on how to advance our bilateral partnerships. Clearly business as usual is not an option.

“We need to get over the finish line agreements which have already been negotiated like Chile, Mexico and Mercosur. These are important deals with large potential for generating mutual benefits. And we need to advance ongoing negotiations for new deals, notably New Zealand, Australia, Indonesia and India.”

The Czech Republic takes over the presidency on July 1, followed by fellow open trader Sweden. Do readers think they will have any success getting trade deals done?

Charted waters

President Vladimir Putin’s use of energy exports as a weapon in his battle to conquer Ukraine has been obvious for many months. So it is understandable that the UK energy industry is expressing frustration that the country’s government is only now getting round to outlining methods of securing supply from domestic production.

Column chart of By origin, terrawatt hours showing UK imports of natural gas

As my colleagues Nathalie Thomas and Jim Pickard note in their analysis over the weekend, there is concern that the government is underplaying the country’s reliance on Russian gas, which ministers say accounts for less than 4 per cent of supply.

Official data show about 8 per cent of total gas imports in 2021 came from undersea pipelines, or interconnectors, from the EU. But as the bloc relies on Russia for 40 per cent of its own supply there could be knock-on effects on how much gas can be pumped to the UK. (Jonathan Moules)

Trade links

The future of electric car manufacturing is in China, contends Robin Harding in an opinion piece. China’s electric vehicle market share in the EU is already bigger than that of any country but Germany. Just like a Philips or a Sony television, well-known brands will continue but they will not be made in the Netherlands or Japan, he contends.

The EU and US are looking to increase ties with Taiwan as relations with China sour. The island is already an important source of investment and high technology goods. Since Beijing considers Taiwan to be a part of its territory, full trade deals are off the cards. But the US launched a new trade initiative with Taiwan and the EU/Taiwan Trade and Investment Dialogue was upgraded last week as both sides sought close co-operation on silicon chips.

The UK is preparing legislation to disapply parts of its post-Brexit trade deal with the EU, setting the scene for a possible trade war with Brussels. Prime minister Boris Johnson wants to do away with “pointless and bureaucratic” checks on goods going to Northern Ireland. The bill to do so is expected within the next couple of weeks.


Trade Secrets is edited by Jonathan Moules


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