Reaching for the whiskey | Financial Times

Hello and welcome to Prague, basking in the same autumn sunshine that seems ordered from on high to frustrate President Vladimir Putin’s plan to make Europe freeze because of its support for Ukraine.

I am here for an informal meeting of EU trade ministers, which includes special guest US trade representative Katherine Tai.

They will be buoyed by news from Brazil. The electoral defeat of rightwing populist Jair Bolsonaro should improve relations.

Returning president Luiz Inácio Lula da Silva has pledged to reduce the destruction of the Amazon rainforest. He could sign a commitment to do so with the EU that would convince it to ratify a trade deal with Mercosur, the trade bloc dominated by Brazil. However, as we have reported, he might want to renegotiate the pact to protect domestic industry. Charted waters looks at the rising cost of living for drug users.

A critical moment for US-EU trade relations

It seems almost heresy to say it, but just two years after Donald Trump left office have we already seen the high water mark of restored transatlantic trade relations?

The Biden administration has made great play of its efforts to bring back trust and good trading links with the EU. Brussels likewise has been keen to talk up the improved ties.

A number of contentious disputes have been, if not solved, at least parked. They include the long-running spat over subsidies for Airbus and defence contracts for Boeing that the EU considered unfair. And the outrageous, at least in EU eyes, duties on steel and aluminium imposed by Trump using security legislation.

However, the clock is ticking very fast on the section 232 metals tariffs. The US did not lift them but simply increased the duty-free quota, which still provides headaches for EU exporters. Brussels and Washington also agreed to work on a mechanism to put tariffs and quotas on imported steel from countries with more carbon-intensive production processes. Or, as President Joe Biden put it at the time, “dirty Chinese steel”. If the two fail to agree within two years — and a year’s worth of talks has made little progress given the need on the EU side to comply with WTO law — the EU could simply reimpose its reactionary tariffs on such all-American products as bourbon whiskey and Harley-Davidsons.

Then there is the impact of sanctions on companies providing US technology to Chinese chipmakers that could restrict many EU businesses’ dealings with China.

As if this was not enough fodder for lunch between EU trade ministers and Tai today there is something even more indigestible on the menu — the Inflation Reduction Act.

This massive spending bill involves $370bn of state money to help fight climate change through subsidies to green technology. That includes electric vehicles, and tax credits for domestic clean energy initiatives, such as solar, wind, nuclear and carbon capture technologies.

As the Financial Times revealed yesterday, France has told other member states it would lose €8bn in investment as factories set up in or move to North America to benefit from subsidies for local production. Other countries are quickly doing their sums so the European Commission has some evidence to take to Washington.

Diplomats say US officials have played down the consequences of the act — even though Congress did listen to complaints from Canada and Mexico, its closest trade partners, and agreed to include them as domestic producers before it passed the legislation.

Although trade commissioner Valdis Dombrovskis, a Latvian well-disposed to the US, is pushing for similar treatment it is far from certain the administration can deliver this.

The IRA is an act of Congress that passed the Senate in August only by vice-president Kamala Harris’s casting vote. No Republican voted for it and some Democrats did partly because it promised a jobs bonanza in their states. They are unlikely to want to reopen it to send carmaking subsidies to Europe instead. The Treasury is in charge of implementation, but it is difficult to get an answer on how far it can change things.

One suggestion is that it could interpret the definition of “final assembly” to mean that cars could be imported to be completed in the US and thereby qualify for tax breaks.

“Would it have to go through Congress or through implementation by the Treasury? I really don’t know and nobody knows, not even on the US side,” said a senior EU diplomat.

Cars are only part of the problem. Commission officials wading through hundreds of pages of text are finding new issues daily.

Brussels has so far stuck with talks. First it said it would address the matter at the Trade and Technology Council, a forum where the US and EU discuss aligning regulations and avoiding subsidy competition over silicon chips and the like. (Before you ask, the US did not mention its huge subsidy bill at the last meeting, somewhat undermining its effectiveness.) Now the chief of staff of commission president Ursula von der Leyen, Björn Seibert, has set up a task force to find solutions with senior US national security officials.

EU officials are hoping that the US will recognise the need for the bloc’s support when dealing with China, for example. But they accept that their hand is weak — the US is internally focused and wants to help its industry, not the Europeans, one noted. Nothing will happen before midterm elections in November, where the Democrats are fighting to keep control of Congress.

EU member states such as Sweden, desperate to keep good relations with the US, are backing this approach for now. Johan Forssell, Stockholm’s new trade minister, told me in Prague: “We welcome that the EU and US have created this dialogue where these questions will be discussed. We believe in the transatlantic relationship.”

Businesses are already muttering that the EU is guilty of failing to stick up for them because it values the US relationship and doesn’t want to upset a plan that is finally trying to reduce its carbon emissions. The official admitted that it would do all it could to avoid a transatlantic trade war in the current geopolitical climate.

But the longer the talks drag on without a result the louder the voices of states such as France will get. It has two solutions.

One would be a “Buy European” Act similar to the US one with subsidies restricted to European-made products. Germany’s finance minister Christian Lindner dismissed such, as it is hard to imagine the commission, and other multilateralists, agreeing to this.

The other is to go to the WTO since the US’s discriminatory subsidies are a clear violation of its rules, trade lawyers say. Jozef Síkela, the Czech minister chairing the Prague meeting, told reporters that there would be “pretty frank” discussions with Tai and a demand for swift action.

And even Forssell added that “one cannot exclude a WTO dispute”.

There is a growing chorus in Brussels rubbishing the Geneva-based body. Bureaucrats roll their eyes about how slow it is, as if EU directives were built in a day.

Margrethe Vestager, the competition commissioner, espoused this view to the FT and suggested the TTC as the appropriate forum. Yes, the WTO takes time, but so do competition cases. And you don’t bust a cartel by asking its members nicely to stop.

It might be a year for Geneva to rule on a complaint. But in the meantime the EU could rip up its truce with the US on steel, imposing tariffs once again.

Unless Washington can find a clever fix soon Jim Beam and Jack Daniel’s could be feeling the squeeze once more.

As well as being the regular writer for this newsletter, Alan Beattie pens a Trade Secrets column for FT.com every Wednesday? Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.

Charted waters

Some price rises are to be welcomed. The price of illegal drugs being produced in Afghanistan has rocketed since the Taliban outlawed narcotics exports. The chart below illustrates the surge in opium prices, up by more than 50 per cent since the ban was announced in April.

The figures, gathered from across Afghanistan by UK-based Alcis, which conducts satellite imagery research for governments and NGOs, are all the more remarkable because there is limited evidence that the Islamist militants are enforcing the ban.

Even in lawless Afghanistan, economic rules prevail. The rational expectation that the Taliban government will succeed in its quest to clamp down on narcotics production is driving the market price up. (Jonathan Moules)

Trade links

Like many companies Apple has been moving to diversify its supply chains to other Asian countries to reduce reliance on China. Now a large site owned by iPhone assembler Foxconn is almost paralysed as workers desert.

US sanctions on trading with China have hit chipmakers worldwide, with Japan’s Kioxia warning that decoupling global supply chains would be “very complicated, expensive and time-consuming”.

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Trade Secrets is edited by Jonathan Moules

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