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Greetings from Washington, to where your intrepid trade reporter is delighted to have returned from a brief visit to the UK. The queues at Dulles were soul destroyingly long, as ever, but seemed to move more swiftly than usual. Perhaps the US Customs and Border Patrol officers sensed the sheer joy of us Brits and other assorted Europeans at being allowed to travel freely again and were letting us through with a lighter grilling than usual.
Speaking of borders, our note today is on some more trade friction with Canada and Mexico, which we sense is about to escalate.
Charted waters looks at the stats on how Brexit is affecting trade between the UK and EU.
Subsidies sour relations with the US’s neighbours
We’ve written before about continuing spats between the US and Canada over trade. Despite a new era of attempted co-operation by Joe Biden, there have been tensions over goods such as cheese, lumber and solar panels.
With Mexico, too, there have been a few difficulties over energy reforms and some friction over the Latin American country’s implementation of the USMCA trade deal’s labour provisions.
Now there’s a new trade fight brewing, in which Canada and Mexico are united in their opposition to America, and it’s about Biden’s plans to provide an incentive for electric vehicle manufacturing.
In new proposals that are part industrial policy, part efforts to make the US greener and the climate cleaner, Biden has set out new tax credits meant to help people afford electric vehicles. For the first five years after the bill is enacted, buyers of electric cars will be given $7,500 of credit regardless of where the vehicle is made. But for five years after that, the credit will only apply to cars made in the US. Moreover, there’s $500 of tax credit available for any car with a US-made battery, and another $4,500 if the car is made in a plant with a union.
Unsurprisingly, Canada is not very impressed with this, and neither is Mexico. Both see the proposed measure as in effect more of Biden’s Buy American sentiment, but this time applied to the North American car supply chain. Canadian trade minister Mary Ng has argued it would encourage auto companies to build new EV battery plants in the US, as opposed to Canada. Ng has gone as far as to write to senior US senators and officials to complain that the tax credits could “undermine decades” of Canada-US auto collaboration, prompt the loss of tens of thousands of Canadian jobs and cause additional harm to US workers.
Canada’s innovation and industry minister François-Philippe Champagne, meanwhile, last Thursday said Canada would respond “appropriately” to the credits, which sounds ominous to us. “They understand that legislation like that would generate a response on the Canadian side,” Champagne said in an interview with Reuters. “We have always responded appropriately to these types of legislation.” Mexico’s top trade official for North America, meanwhile, Roberto Velasco Alvarez, has also said he is “very concerned” about the impact of the proposals on the Mexican auto sector.
This puts Biden in a tricky spot. The North American supply chain for autos is famously integrated. This doesn’t stop when it becomes green. Canada boasts a wealth of minerals needed to make EV batteries, such as lithium, graphite and cobalt, providing a useful source of minerals to be imported into the US from Countries That Are Not China (or the Congo, where child labour has been known to be used). It’s unlikely the US will be able to become self-reliant when it comes to the minerals needed for EVs, and Canada is going to become an increasingly important supplier. It would be unwise to get into too much of an adversarial relationship with Ottawa over EV manufacturing (or over auto trade more broadly).
On the other hand, these tax credits are a central tenet of Biden’s new green industrial policy efforts, and he’s not going to be able to give them up. Moreover, it fits into the rhetoric of providing American jobs for American workers. As Ted Alden of the Council on Foreign Relations points out, “if you can go into the swing states in the Midwest and say, ‘look, the transition to electric vehicles is providing you with great factory jobs again’, that’s a big deal politically”.
So what now? Well, Canada and Mexico may well bring a dispute forward under the USMCA mechanisms. But it’s difficult to see what the happy resolution is — unless the part about the cars needing to be made in the US is dropped and swapped for “in North America”. We suspect this might be another fun trade problem for trade representative Katherine Tai to try and fix without unbalancing the political equation. We’ll be watching.
Martin Wolf, our chief economics commentator, has written his latest column on how Brexit — specifically London’s threat to repudiate its deal with the EU — risks damaging the UK’s trading relationship with countries beyond Europe’s shores.
In today’s Charted waters, however, we’re focusing on evidence of how it has affected the relationship with its largest trading partner, the EU.
The chart below clearly shows an impact, with exports from the UK to the EU almost 10 per cent lower over the past three months than they were in the fourth quarter of 2020. There is less evidence that the break with the EU is affecting relations with the rest of the world, with goods exports more or less at the same level now as at the end of last year. Claire Jones
Foreign Affairs ($) has an interesting piece on the China Shock’s Lessons for the Green Economy. Biden’s commerce chief Gina Raimondo has said (Bloomberg, $) talks with the UK and Japan over steel will start soon.
Europe’s largest chipmaker Infineon almost doubled its profits in the three months to the end of September, benefiting from the clamour for semiconductors amid a global shortage. In a coup for economic security planners in Tokyo, meanwhile, Sony has signed a deal (Nikkei, $) with TSMC to jointly build and operate a $7bn chip plant in Japan. Other Asian chipmakers — Samsung, Renesas, SK Hynix and Kioxia — have complied with the US request for data — excluding client information — to help identify supply chain vulnerabilities. Aime Williams, Francesca Regalado and Claire Jones
Trade Secrets Summit — 11 November 2021
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