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The government handouts that hand down trouble

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The government handouts that hand down trouble

Hello from Brussels. All the talk here is of the EU’s big bust-up with Poland over money and the rule of law. As far as we’re concerned this illustrates how Brussels’ plans for becoming a geopolitical power and using trade to project European values abroad and so on are often rather feebly let down by events at home. It’s a bit hard to chunter on about promoting democracy and freedom in the Indo-Pacific when you’re struggling to get them respected in a country next door to Germany.

Today’s main piece is on industrial subsidies, which are undoubtedly distorting global trade, but — and here’s a big part of the problem — we don’t really know by how much.

Charted waters looks at how the UK’s supply chain is suffering from a lack of warehouse space.

Of hidden cash and open trade

Sometimes it feels to us that the importance of something in trade is in inverse proportion to our ability to measure, or even define, it. We spend a lot of time going on about goods tariffs (steel, aluminium, agriculture) because you can put a percentage value on them and they affect trade pretty much by definition. Government subsidies to industry? Much harder to evaluate their size and effect. You can put numbers on cash handouts and tax breaks, assuming you can identify them, but the myriad ways in which the multi-layered Chinese state extends below-market lending to favoured companies is harder to pin down.

To give a specific example: we’ve written before about how trade lawyers and the EU last year started to execute a cunning plan to go after Chinese subsidies to companies outside China, starting with a case in Egypt. We speculated this might open the way to a broad-spectrum legal campaign against the handouts that facilitate China’s Belt and Road Initiative. In the event it just hasn’t happened: no new cases since the beginning of last year, as far as we can tell. It’s apparently too hard to prove exactly how China is doing the subsidising.

Into this vacuum canters Global Trade Alert, the analytical service run out of St Gallen university in Switzerland, which for more than a decade has done fine work documenting acts of protectionism that aren’t reported to the World Trade Organization or otherwise recorded. Global Trade Alert’s latest report, through combing official documents, finds that corporate subsidies officially notified by governments to the WTO are massively smaller than their real size.

Even before the pandemic, more than 80 per cent of goods imports into China and the EU were in products where subsidies had been received by local rivals (the figure for the US is 66 per cent). Nearly two-thirds (62 per cent) of global trade was in products and trade routes where subsidised US, EU and Chinese companies compete.

Now, we should give the familiar caveats with Global Trade Alert. It doesn’t directly measure how big the distortive effect of subsidies are, and is more useful in revealing a massive unrecognised problem than providing a definitive guide on measuring it. But the report is surely right to conclude there is a clear need for much better recording of subsidies and their economic effects, let alone discussions on new rules to constrain them.

The debate about subsidies as a trade issue is getting more salient. Pandemic-related corporate bailouts are one thing, but the transition to a green economy has the potential for handouts to go on for much longer. Margrethe Vestager, the EU competition commissioner, told the Financial Times recently that the suspension of EU state aid rules would continue for longer and some might end up being permanently waived.

Let’s not overreact and espouse a pearl-clutching libertarian disgust at all government subsidies. Technologies with potential to reduce carbon emissions have planet-saving positive externalities that justify state intervention. And of course it’s possible to design some of these subsidies to be non trade distorting: tax breaks for consumers to buy electric cars, rather than producers to make them, are one example. And there are subsidy rules in the WTO that cover which subsidies are outright illegal and which can be challenged through dispute settlement or met with countervailing duties.

But working out what those rules apply to and how to calculate them is subject to considerable uncertainty, and writing new ones even harder. For example: we’re bigger fans of the EU-US Airbus-Boeing litigation than some, given its role in restraining subsidies. But it doesn’t create certainty about future spending programmes to come up with an unconvincing fudge to resolve 17 years of arguing about precise issues. (Whether it was an implicit state subsidy to Airbus to use public money to extend the runway at Germany’s Bremen airport to allow the A380 to land was perhaps our favourite wrinkle in the litigation.)

Similarly, one of the ways the WTO dispute settlement process has annoyed the US is by drawing a narrow definition of what constitutes a “public body” — something that in turn limits what can be defined as a state subsidy. We have some sympathy for the US, given that this somewhat narrow definition lets China off the hook for plenty of the state support it provides.

The US, EU and Japan have promised for years to draft a broader definition that they can suggest as a change to WTO rules, but they can’t even agree among themselves. In any case, the chance that Beijing will voluntarily sign on to a substantive new constraint to its industrial policy is close to nil.

There’s a big test coming up of how subsidies can be defined, measured and dealt with. As we’ve noted before, the EU, as part of its general strategy of creating unilateral tools where the multilateral ones aren’t working, is designing a foreign subsidies rule that essentially extends its state aid regime to overseas companies operating in the European market. We’ll return in due course to how the plans are developing. But the fact that the EU feels driven to this point underlines the discontent about how the current global subsidies regime is working.

Charted waters

The supply chain snags affecting the global economy are a many headed beast. One of those heads, so to speak, is a lack of warehouse space.

When demand for consumer durables is so hot, this might sound counter intuitive. Surely warehouses would be empty as people buy up stock as soon as it becomes available right? However, it’s a little more complex in practice.

What seems to be happening is this. Goods are made of many parts and a shortage of some of those parts has meant that the ones that are there are left lingering on shelves for longer than usual. A shortage of workers may also be exacerbating the problem.

The chart below highlights the situation in the UK, where it seems all of the UK’s larger warehouses are now booked out. Claire Jones

Line chart of Availability and take-up of units greater than 50,000 sq ft* (m) showing UK warehouse space is running out

Trade links

A rare good news story on supply chains. We’ve been keeping a close eye on Ryan Petersen’s excellent Twitter threads of late. The Flexport chief executive has been heading down to ports on the US West Coast to speak to workers about the delays in getting containers off ships and out of the port. One of the tweetstorms that’s resulted from that seems to have triggered a policy change that might save Christmas. If gloom’s more your thing and you prefer hearing about festive season shortages, here’s a piece from the New York Times ($).

Nikkei reports ($) that China will restructure three rare-earths producers to create a state-owned company with a nearly 70 per cent share of the domestic production quota for metals critical to high-tech manufacturing. In Japan, chicken has become (Nikkei, $) the most visible example of the global supply crunch, with 7-Eleven halting sales of its popular fried chicken snack and restaurants limiting servings to one chicken skewer per customer. Francesca Regalado and Claire Jones

Published at Mon, 25 Oct 2021 10:31:24 +0000

https://www.ft.com/content/13d8a050-8240-43ae-b629-cfc4a096f669

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