Europe’s aversion to anti-coercion | Financial Times

Welcome to Trade Secrets. I seem to have annoyed a few people a couple of weeks back saying that the UK’s imminent entry into the Asia-Pacific CPTPP agreement was essentially irrelevant and borderline damaging. So, with accession now more or less agreed, today I will double down and annoy them some more. But first a thought on the EU’s anti-coercion instrument (ACI), which has taken another step towards launch. The newsletter takes a break next week for the pagan fertility festival now known as Easter, but will be back on April 17.

Being bashful about beating up Beijing

The European Commission, European Council of member states and parliament agreed last week on the form for the ACI, an idea I’ve been banging on about since they first thought of it. To recap: originally targeted at Donald Trump, now focused on China, the tool gives the EU great leeway to use trade and investment restrictions to hit back at a country attempting to coerce a member state or the bloc to change its policies.

The big shift during intra-EU discussions was a bigger role for the member states rather than the commission in deciding whom to hit and with what. This means it’s less likely the ACI will get used, for fear of reprisals. Take the obvious example, punishing China for coercing Lithuania over relations with Taiwan. The commission might have been pretty gung-ho for retaliation, but the immediate response from German industry to Chinese boycotts of Lithuanian exports was pushing Lithuania to back down in case it hurt their supply chains.

Similarly realist/mercantilist/defeatist (delete au choix) sentiments will no doubt be reflected in future discussions. The German coalition government might be less reflexively pro-China than its predecessors, but it’s still got all those lovely exports and investment to protect.

As if to prove the point, commission president Ursula von der Leyen last week gave one of her clearest China-sceptic interventions yet. But there’s a whole stream of EU heads of government going to Beijing, including Emmanuel Macron in a joint visit with von der Leyen next week, who generally sound a lot less aggressive. All are watching for business opportunities and diplomatic concordance over Russia, and all are chary of starting fights they don’t have to. Discussions on using the ACI are going to be strongly politicised, more so than some of the other trade instruments the EU is creating.

More reasons to discount the UK joining CPTPP

So, the UK is in the CPTPP and a new Asia-Pacific era begins for a country in the north Atlantic. The standard Brexiter argument for joining the deal is that membership anchors the UK in a dynamic fast-growing region rather than being shackled to a sclerotic continent run by an ageing rabble of sausage-scoffers. (I caricature, but you get the vibe.) Here are two more reasons that argument doesn’t really work.

The UK’s comparative advantage is in services. The CPTPP doesn’t cover services very much. Nor, in fact, do many preferential trade agreements — except, of course, the EU Single Market. Some UK services exports to the Asia-Pacific region are important, such as higher education. But you don’t need a trade deal for that — you need the Home Office to stop assiduously shooting the UK university sector in the foot by cutting back on study visas. And yes, distance continues to matter for services trade.

The UK needs something to sell. As Sam Lowe points out in his Most Favoured Nation newsletter, one plus point of the deal for the UK is the relatively generous rules of origin. These will allow the UK to build supply chains with CPTPP members in, say, cars, by importing inputs from one member country and then exporting to another without being caught by pesky rules on domestic value-added. Problem: the UK doesn’t have much of a car industry with which to take advantage, and certainly not in electric vehicles. Why not? Amazing to relate, one reason is Brexit. The restrictive ROOs in the EU-UK trade deal, plus the general sense of political and business uncertainty, are endangering Britain’s car industry. UK car manufacturing recovered from its previously disastrous state from the 1980s onwards thanks to foreign investment, assiduously encouraged by Margaret Thatcher’s government, and exports to the EU. (More evidence that Thatcher, who ended up loathing the EU, and the EU, a lot of which ended up not liking Thatcher much, were actually a highly productive combination.)

The UK’s flagship electric vehicle battery producer just went bust and its successor won’t be making car batteries until 2025 or beyond. Foreign car companies are citing Brexit as a reason not to invest in the UK. To compete in Asia you need super-efficient supply chains. Volkswagen has them, thanks to its sourcing strategy throughout the EU single market, which contains a variety of economies with different cost, skill and technology profiles. The UK doesn’t. If it wanted to sell into the Asia-Pacific, it would do better from within the EU.

In other words: CPTPP is basically irrelevant for the UK because it doesn’t produce the kind of stuff that might benefit, and Brexit means it’s less likely to start. Still, Global Britain.

Trade links

The FT reports that China has de facto turned itself into a rescue lender in an attempt to recoup money it has lent under the Belt and Road Initiative. Alphaville’s Robin Wigglesworth gives his thoughts on the phenomenon here.

Europe’s transition to electric cars is under threat because of persisting shortages of lithium. As Patricia Nilsson and Harry Dempsey report, the projected deficit may prove existential for European carmakers.

The FT’s TechTonic podcast examines an attempt to use a quantum application to streamline the notoriously inefficient Port of Los Angeles.

Laurence Boone, France’s Europe minister, describes the EU’s approach to economic statecraft in a seminar at the Peterson Institute.

The FT’s inflation tracker shows price increases beginning to wane in many countries following the cost shock of Russia’s invasion of Ukraine.

Trade Secrets is edited by Jonathan Moules