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Welcome to Trade Secrets. There has been a bit of a lull in the old game of trade diplomacy over the past week or two after all the excitement of Emmanuel Macron and Luiz Inácio Lula da Silva’s trips to Beijing. The next big meeting is G7 meeting in Hiroshima within a month. After the invasion of Ukraine, the existence of a club of like-minded rich democracies suddenly seems much more relevant, and in the coming weeks I will assess what the G7 can do. Today’s bulletin is about a couple of big developments in trade and how governments will react: one, Chinese EV manufacturers taking the world by storm; Two, the EU, that united geopolitical power, imposing restrictions on imports from, uh, Ukraine. charted waters it is based on commodity prices and the US dollar.
All about electric vehicles
From the effort spent in Brussels and Washington to discuss Joe Biden’s EV credits (I myself plead guilty to mentioning them in eleven independent newsletters and columns this year) would imagine the global EV market was a transatlantic duel à la Airbus-Boeing. In fact, Chinese companies have invested money in the production of electric vehicles and batteries and are threatening to drive their European and American competitors, such as Volkswagen and Tesla, out of the Chinese market.
an excellent report from my colleagues at the Shanghai Auto Show last week suggests that China is doing with cars what it failed to do with earlier products: developing its own brands capable of competing internationally. By creating economies of scale at home, China is already on its way to becoming the world’s largest exporter of electric vehicles. making major inroads into Southeast Asia and now targeting the EU market. See this graph from the expert group Merices.
How will trade policy react? The obvious result in the EU is a precipitated episode of trade disputes with China involving anti-dumping and anti-subsidy duties of the kind that often follow the introduction of new technologies (see solar panels and electric bikes) as companies compete for market share. This creates an interesting problem: if European automakers in China also export on a large scale, they could be faced with selling trade defense instruments in their home market.
But Chinese automakers also plan to expand in Europe through foreign direct investment, particularly greenfield. In general, Chinese FDI in the EU has fallen sharply since 2016. . .
. . . but the greenfield is rising sharply (albeit from a low base) and is dominated by the auto sector.
A Chinese presence in the EU market based on FDI rather than exports is less likely to cause major political blowback. Unlike Huawei and 5G, it will be hard to suggest that electric vehicle production justifies national security restrictions. In theory, it could be a case for the new Brussels regulation of foreign subsidies if it can be shown that the investments and resulting products are backed by state money. But completely new FDI, as opposed to mergers and acquisitions, is generally welcomed by host countries to create industrial capacity and jobs.
In other words, there is growing Chinese dominance of one of the world’s most important and fastest growing commodities, and the policy response from rich economies is highly uncertain and potentially quite weak. And yet we are still arguing whether the EU can sell critical minerals to US automakers that Europe doesn’t even have. We are doing all this wrong.
The grain from Ukraine that is mainly a pain
If, like me, you thought Ukraine’s rapid EU membership was a bit unlikely, you will feel vindicated by current events, with Poland and Hungary. blockade of Ukrainian wheat imports to protect their farmers.
Such action by national governments, of course, flagrantly violates the rule that trade is a core competence of the EU. On the cynical principle that rank protectionism towards a war-torn neighbor is fine if done to the letter, the EU plans legitimize this unilateral action by allowing restrictions on imports to a small number of countries unless they are destined for subsequent sales elsewhere in the EU. If it sounds like another inviolable tenet of the bloc, the borderless internal market thrown under the combine, you’re right. The provisions are allowed under a feature of Ukraine’s trade deal with the EU, the signing of which in 2014 was obviously the trigger for Russian President Vladimir Putin’s annexation of Ukraine.
Until now, so protectionist in agriculture, so falsifying the principles without really breaking the rules, so very EU. But the episode underscores a couple of larger points. First of all, the EU can talk about geopolitics, but above all it is a trading bloc. The admission of one of the world’s most efficient grain producers into a protected market is obviously going to create problems.
Second, and related, EU membership is not really the solution to many of Ukraine’s pressing challenges, except as part of a general political reorientation to the west. In the short to medium term, the country needs security guarantees and military assistance, something that the EU collectively doesn’t really do at the moment. In the medium term, the governance criteria for EU membership could help it become a less corrupt oligarchy, but they haven’t done a great job in the aforementioned Poland and Hungary. You also need a lot of help, but that can be done outside the EU. Ukraine is a complex issue with many threads, and the EU as an institution struggles to deal with more than a couple of them.
Concerns about the future strength of the US dollar have been a source of concern for many in Washington and beyond recently. Rumors about the demise of the dollar have been greatly exaggerated, as recently confirmed by the editorial board of the Financial Times. But we have been living through a strange episode, and post-pandemic changes in currency-commodity relationships may persist.
The graph, from research by Boris Hofmann, Deniz Igan and Daniel Rees of the Bank for International Settlements, illustrates the breakdown in the long-term relationship. between the US dollar and commodity prices during the Covid-19 pandemic and how, since then, rising commodity prices have gone hand in hand with the strengthening of the US dollar.
The study presents evidence that post-Covid correlation patterns could become more common in the future based on two observations: that the US dollar exhibits a close and stable relationship with the US terms of trade, and that the US The US ceases to be a net importer of oil. for a net oil exporter it means that higher commodity prices will tend to raise the US terms of trade, rather than lower them. (Jonathan Moules)
This article in Foreign Affairs examines the misaligned pragmatism among many emerging markets I wrote about in last week’s columnand the Phenomenal World newsletter looks at how rich world protectionism is leading to economic nationalism and mercantilism among emerging markets.
An article in American Prospect magazine says that tech lobbyists are quietly seized control of US trade policy on data and technology by inventing the shaky concept of “digital commerce” and turning it into conventional wisdom in Washington. See also the academic work on which it is based in part and a old paper on the same topic.
An article by Simon Lester for the Baker Institute discusses the history of industrial policy in the united states and its potential to go wrong.
Trade Secrets is edited by jonathan moules