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Hello from Washington, where you join us for the final DC-based edition of this newsletter. It will continue in geographically shrunken form, of which you’ll hear more soon.
In the meantime, our main piece today looks at a trend we’re starting to see trade folks furrow their brows over, and that’s the threat of a subsidy race that could become the new Airbus-Boeing.
Charted waters looks at shipping prices on north Europe routes.
The storm clouds brewing for the US over trade
Joe Biden is fast approaching his midterm election period and it’s safe to say that, so far, his trade policy has been less confrontational than his predecessor’s. But just as protectionist.
The US Trade Representative’s office is rightly pleased that it has struck deals with Europe to suspend billions of dollars of tariffs on transatlantic trade. Those deals involve both the decades-long Airbus-Boeing dispute (now postponed), and a suspension of Trump’s controversial national security crusade on steel and aluminium. In that sense, we could say some protectionist policies have been paused. Neither of those disputes is close to over. The aircraft subsidies are the subject of an ongoing conversation, and on metals almost no work has been done to thrash out exactly how the two sides will make steel green. Plus, rather than a return to tariff-free trade, there are quotas. Regardless, the tariffs are gone for now.
But on the horizon storm clouds are brewing. The first and most urgent problem is the threat to the US-Mexico-Canada trade deal that Biden’s electric vehicle tax credits pose. Canada has threatened to suspend parts of the agreement (specifically the parts about dairy quotas that it thinks the US likes and that it considers concessionary on its part) in retaliation for the tax credits. Ottawa has also threatened to impose tariffs on the US auto sector, and plans to publish a list of suggested further products to slap tariffs on soon.
It’s worth pointing out that the US’s tax credit plan is still in an as-yet-unpassed bill, and could change in form. So far, there doesn’t appear to be any substantial effort on the Hill to alter it, despite intense lobbying from both Canadian and Mexican officials. Europe, too, has also expressed its displeasure at the proposal. EU trade chief Valdis Dombrovskis has complained that the proposals are not compliant with World Trade Organization rules.
Another looming issue is the question of chip subsidies. So far, the US and EU are in agreement that subsidising their semiconductor industries is a good idea. The US is proposing investing billions of dollars into boosting its domestic chip manufacturing, and the EU is floating similar plans. The two sides say they are in touch with each other about how best to do this to avoid a subsidy race, which, as EU competition chief Margrethe Vestager points out to the FT, is “a waste of taxpayers’ money”. The subsidies in Europe would be “appropriate, proportionate and necessary” and in the US “a legal basis for providing subsidies is being established.” In Washington, however, European diplomats are starting to worry about this issue, with one lamenting to us that it had the potential to become “the new Airbus-Boeing”.
And so what of the WTO? Well, the WTO would perhaps be a good place to discuss this. But the days of the US caring what is and what is not WTO-compliant may be gone. The US just blocked the appointment of an appellate body judge for something like the 48th time. USTR officials say they care about the WTO and reforming the WTO, and they say that they care about concluding the fisheries negotiations. But there are unlikely to be any fish left in the sea by the time trade diplomats in Geneva manage to reach consensus on this topic. Meanwhile, in Washington, Europeans are muttering about the new subsidy race.
As Simon Lester, formerly of the Cato Institute think-tank and now of China Trade Monitor, a news website, points out on Twitter, the Biden administration appears to want greater scope for protectionist policies, while pushing back against regulations such as Europe’s fledgling Digital Markets Act, that it argues “disproportionately” affect US companies.
In fact, it seems that any effort to regulate or tax US tech companies prompts Washington to accuse whichever government that happens to be trying to create its own sovereign laws or tax regime of unfair discrimination. (The US was broadly furious about other counties introducing digital services taxes, too). However, Washington itself wants to have free rein to subsidise and stimulate its own chosen industries (like electric vehicles or chips).
Legacy issues like Airbus-Boeing and steel might have been swept under the rug when it comes to Europe. But the contradictions might eventually come to a head, and bigger problems — ones that threaten to challenge fundamentally the global trading rules — lie ahead as the US presses on with its new doctrine of self-reliance and secure supply chains.
Yesterday’s Trade Secrets noted that, despite some quite dramatic falls in container shipping costs on the high-profile Far East to US West Coast route, travel on other arteries of world trade remains as expensive as it did a few months ago. Among those routes are two that involve North Europe.
We’ve charted the price to transport a 40ft container on these arteries using figures from shipping data firm Xeneta and Compass Financial Technologies. We’re not sure exactly why they’re yet to display the same falls as those witnessed on the Far East to US West Coast routes. If you do, please do get in touch. Claire Jones
Washington hasn’t learned the real lesson of the China shock, according to this Bloomberg piece.
Martin Sandbu has joined us in championing the efforts of the world’s makers in trying to match rampant demand for consumer durables. His piece — Shortages, what shortages? — is well worth a read.
European gas prices are rising again on the back of concerns over Ukraine.
Top Japanese apparel makers will shift (Nikkei, $) most production back home from China and Vietnam in the next three to five years because of pressures from a weaker yen, overseas labour costs and shipment troubles.
Thailand targeted (Nikkei, $) around $30bn in food exports this year, but a shortage of migrant labour from Myanmar, Cambodia and Laos has pushed that goal out of reach. Aime Williams and Francesca Regalado