Business is booming.

Business (and trade frictions with partners) as usual in Washington

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There are two big global governance gabfests going on this week, the COP27 climate change conference in Sharm el-Sheikh that wraps up a week today and the G20 leaders’ meeting in Bali. I’ll look at the climate issue in due course, but as for the G20, well, it is what it is and what it’s always been — which is largely pointless. It’s often a useful venue for high-level encounters such as today’s Biden-Xi meeting and there’s no doubt some useful chat on the sidelines. But its negotiation process isn’t worth much since it doesn’t seem to restrain member states by changing their domestic political calculus. It certainly doesn’t seem to have done much to hold back protectionism — see the links section below. So here’s a challenge for Trade Secrets readers. Can anyone show me an example where a government has substantively changed an important trade or international economic policy because of a promise at the G20? Answers as ever to the email address below, or hit reply to the newsletter email. Today we look at the implications of the US midterm elections and the latest developments in global trade itself. Charted waters looks at the problems behind electronic vehicle battery production.

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Midterms, schmidterms

As of “hit send” time, the Democrats had (very impressively) retained the Senate and were possibly losing the House of Representatives to the Republicans by a narrow margin, though that remains unclear. Assuming the Democrats also win the run-off for the Georgia Senate seat, the unexpected implication is that had the Biden White House waited, they might have got a much bigger and probably greener Inflation Reduction Act through the Senate without West Virginia coal fan Joe Manchin slashing it back and nearly killing the thing outright.

In that case we’d have been having an even feistier debate about local content provisions and the US trying to nab electric vehicle investment from Europe and Asia. Then again, given the likelihood of a Republican House blocking all tax increases, they’re probably pleased with what they got.

So, what does this mean for trade policy until the presidential election in 2024? Once upon a time, there would have been intricate speculation. Congressional Republicans, if they could overcome partisan spite, would be more likely to give the administration trade promotion authority (TPA) to allow unamendable up-or-down votes on trade deals and pass preferential agreements.

These days, though, the administration doesn’t really want to get any of that done. They’ve already got the IRA subsidy cash in hand and they aren’t eyeing any substantive bilateral or regional deals, which they’ve written off as political poison. US trade representative Katherine Tai claims she wants TPA if there’s broad bipartisan support for it, which (probably to the administration’s relief) there won’t be.

The administration’s trade policy is basically done by executive order and the collateral impact of other legislation, such as the said electric vehicle tax credits and semiconductor export restrictions. China has become what Washington political types call a valence issue (everyone on one side) rather than a wedge issue (the public is divided), so anything that can be dressed up as China-related national security gets a free pass.

The administration is clearly going to take the midterms performance as a massive vindication of its worker-centred trade policy and not stay up fretting about pettifogging things like the World Trade Organization. It’s rightly going to infuriate trading partners and it’s not the best way of doing the green transition, but as Sam Lowe of Flint Global points out, that may be a trade-off worth making.

The EU, Japan and South Korea will concentrate on punching holes in the EV tax credits through crafty lobbying, thus heading off a trade war by stealth. That’s probably the best we can hope for.

Trade (and maybe the dollar) starting to tank

As the bad news has mounted about the global economy, we’ve been waiting for trade to weaken with it. Well, it looks like it’s happening now, with forward-looking indicators in shipping weakening rapidly.

Trade itself has been holding up fairly well, but it comes in with a lag and the latest global numbers are only for August. In October, Chinese exports fell for the first time since the early months of the pandemic.

The WTO’s central case in its forecast last month was for goods trade to slow sharply to 1 per cent growth in 2023, revised down from its previous projection in April of 3.4 per cent.

The gloomy case in the WTO’s probability distribution has trade contracting year on year in 2023 which, pandemic aside, would be the first fall since the financial crisis. This will no doubt be grist to the doomsters’ mill about globalisation heading for the dustbin of history. In fact, it’s cyclical: trade tracks the GDP cycle more or less simultaneously but with a bigger amplitude.

A couple of reasons to be cheerful, by the way: the Chinese authorities loosening their Covid-19 restrictions a bit and the lower than expected US inflation on Friday, which caused the dollar’s biggest two-day fall since 2008. A weaker dollar and lower US rates are just what a bunch of beleaguered other countries need.

While I’m not in the business of forecasting GDP and trade, I don’t see any structural problem for now. Growth is slowing, trade’s weakening with it. This happens.

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Charted waters

Ever rooted around in vain in your kitchen drawer for those AAAs you were certain you had bought? Then you will appreciate one of the biggest challenges with electronic devices is a ready supply of batteries. So it is with the electric vehicle manufacturing market.

The critical minerals needed to meet global battery demand by 2035

The problem is that some of the world’s most important battery makers are at risk of running out of raw materials because they have not done enough deals with the relevant mining companies, according to FT correspondents.

Of particular concern are the EV battery suppliers in South Korea, because that country alone produces a quarter of the world’s supply. It is also a key partner for Washington, given the Biden administration’s moves to cut its dependence on China.

Singapore explicitly calls for a “non-aligned movement” in trade (something I predicted back in March) for countries wanting to stay out of the US-China semiconductor war. My colleague Gideon Rachman points out that Indonesia, host of the G20, is also reprising its cold war role pushing a broader geopolitically neutral stance.

The Global Trade Alert monitoring service reports that G20 countries’ trade policies in 2022 are apparently becoming relatively less protectionist and reverting to the pre-Covid pattern, though favouring local companies more than before the pandemic.

The redoubtable Mark Sobel, formerly of the US Treasury, powerfully and to my mind convincingly puts the case that the Federal Reserve’s concern when setting monetary policy should be the US, not the rest of the world.

The big beast is quitting the circus: Germany has announced it’s the latest European country to leave the Energy Charter Treaty, whose over-reach problems I discussed when the big exodus started last year.

The EU’s departing ambassador to the UK reckons that London and Brussels aren’t too far away from fixing the Northern Ireland Protocol and with it the main post-Brexit trade irritant.

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