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Hello from Brussels and welcome to the last Trade Secrets of 2021.
Over the weekend we got some late-breaking news on the UK’s annual Brexit capitulation tradition, which has run uninterrupted since 2018. Lord David Frost, the UK Brexit minister, had embraced the ultimate capitulation and resigned. That followed the UK’s capitulation on Friday over the European Court of Justice’s role as the ultimate arbiter of the Northern Ireland protocol, which we wrote about on Thursday, and which Downing Street had fiercely denied the week before would happen, despite UK officials having earlier briefed EU media that it would. That makes a capitulation double-bill for 2021, a 100 per cent increase on previous years, and executed in a comedically incompetent fashion. Good work, everyone.
Last night it turned out Frost would be replaced by foreign secretary Liz Truss, a free trade ideologue and a former Remainer. Ladies and gentlemen, place your bets! (Ours is on more capitulation.) Trade Secrets will be back on January 10 with a whole new lot of trenchant opinions to share and a fresh format with which to do so. For now, we’ll have a look back at the year that was.
Charted waters looks at the impact dealmakers think supply chains will have on mergers and acquisitions in 2022.
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Businesses bail out the bumbling bureaucrats
On the face of it, this year was not a stellar one for world trade. The US and China continued to club each other with high tariffs and harsh rhetoric, the EU’s flagship deal with China was flung unceremoniously into the deep freeze, supply chains around the world were disrupted as port after port became snarled up, semiconductor stocks were exhausted and Covid-19 forced the postponement of the World Trade Organization ministerial meeting. Not exactly a vintage turn around the sun.
And yet, looking back to where we were a year ago, well, frankly, things could have been worse. The good news hasn’t been so much to do with what policymakers have been up to so much as the remarkable resilience of trade itself. (We may have gone on about the relative contributions of business folk versus bureaucrats once or twice this year already.)
This time last year, the WTO predicted that goods trade this year would increase 7.2 per cent after a fall of 9.2 per cent in 2020, a forecast it has now upgraded to 10.8 per cent growth in 2021 with a much smaller fall last year. Encouragingly, it seems likely that last year’s crunch was mainly down to a massive drop-off in demand rather than the supply-side shocks from Covid interrupting production and trade. Indeed, the truly heroic policymakers of trade aren’t actually trade ministers but the finance ministries and central banks who kept the stimulus coming. Despite the terrifying infectiousness of the Omicron variant, economists are generally estimating a rather modest hit to global growth and trade compared with the fear of meltdown during previous waves.
So, what of said trade policymakers? The known unknown was just how far US president Joe Biden’s administration would break with the destructive modus operandi of Donald Trump — not just the protectionism but the aggression, caprice and spite with which it was implemented. The answer, sadly, is not far enough.
To be fair, unlike Trump, the Biden administration hasn’t gone around picking fights for the hell of it. Where it’s been able to settle disputes without compromising its core objectives, it’s done so, particularly with the EU. The Airbus/Boeing litigation, the digital services tax stand-off, the steel and aluminium tariffs dispute: all have been defused with jury-rigged deals that aren’t pretty but have done the job for now.
But its core objectives, under the highly misleading rubric of a “worker-centred” trade policy, still rule out a lot and embody a wrong-headed protectionist approach. By all accounts Katherine Tai, the US trade representative, is considerably more constructive to deal with than her abrasive predecessor, Robert Lighthizer. But the US is still trying to make work the “Phase 1” trade deal with China signed by Trump, it’s still failing to engage meaningfully in WTO reform and it’s ruled out joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, much to the disappointment of its trade and foreign policy allies in the region such as Japan and Australia.
This newsletter isn’t a set a of predictions for next year, but we very much doubt this is going to change much in 2022, not least because there are midterm elections at the end of it. Maybe we’ll get some movement towards WTO reform, the US at least acknowledging that allowing the dispute settlement system to wither and die is on balance a bad thing, but they’re going to be focused on saying nothing that can be taken down and used in evidence against them in the elections.
On the WTO itself, you have to feel sorry for the heroic efforts by its leadership and the chairs of negotiating committees to get something done at the December ministerial. To be honest, a big breakthrough didn’t seem likely, but in any case it might have been a cathartic experience if the meeting had failed to reach agreement. As it is, the postponement because of Covid just pushes that question into next year.
From the EU’s point of view, apart from seeing its ill-judged China deal deservedly enter cryogenic suspension, the European Commission was largely concerned with tooling up with a series of legal weapons to implement its favoured policy of strategic autonomy. As for China itself, it has continued its dual-circulation strategy of separating its external from its domestically focused sector.
But here’s the thing. China has nonetheless continued to attract a lot of foreign direct investment. As we said before, goods (and services) trade has roared back. There are divergences in the treatment of personal data, sure, but so far just not that much evidence of a bifurcation or trifurcation of the global economy. Reshoring hasn’t happened very much. Supply chain blockages are a serious problem, but for the moment we’re sticking with our default view that they’re mainly about sudden and unsustainable surges in demand. Globalisation hasn’t ended, still less gone into reverse. The world trading system has performed a lot better than perhaps its policymakers deserve. And in this Covid-ridden festive season we can at least be grateful for that.
It’s fair to say that we’re not surprised by the poll below, from M&A data specialists Datasite, which shows that supply chain snags are one of the top reasons listed by executives for why deals in 2022 could go awry.
Still, in some of the worst affected sectors — such as the auto industry — the snags are so bad that more deals are now taking place.
“While [supply chain problems are] putting pressure [on the auto industry] to make some tough choices, including potentially how it partners with semiconductor providers on supply and research, it may also mean more investing to acquire technology for both processes and products to stem nearer-term liquidity challenges,” Merlin Piscitelli, Datasite chief revenue officer for Europe and the Middle East, said. “In fact, we’re seeing some of this activity in real time on our platform, where new global industrial, transportation and defence projects, which are deals at their inception rather than announced, are up 54 per cent year over year January 1 through mid-December.” Claire Jones
The Peterson Institute’s Chad Bown on the false allure of managed trade.
A Republican senator said he would hold up the confirmation of the US’s nominee for ambassador to the WTO, Maria Pagan, because of the administration’s support for an intellectual property waiver for Covid medical treatments that many consider in any case to be merely a political stunt.
The development economist Branko Milanovic argues we’re not seeing a crisis of capitalism so much as the unequal distribution of its benefits.
Amazon is competing hard with the UK Royal Mail delivery service as couriers in Britain prepare for a tough Christmas.
Uniqlo parent Fast Retailing is one of the Japanese apparel makers scrambling (Nikkei, $) to rework their supply chains before Joe Biden signs into law a US ban on imports from Xinjiang.
The Aukus security alliance is an ideal vehicle for Australia, the US and UK to forge a vertically integrated rare earths supply chain, analyst Liam Gibson says ($) in Nikkei Asia. Alan Beattie and Francesca Regalado