G7 inches towards defence pact against trade coercion

So the G7 happened, and Volodymyr Zelenskyy turned up at short notice, and the general vibe was an American high school where the dominant but ageing clique invites along the new supercool kid at the last minute as a power play. Did it work? Will it backfire? I guess we’ll have to wait for the end of senior year to find out. Today I look at what the G7 said this weekend on the issue of economic coercion. I also issue a Told You So encyclical on my thesis that the UK Is probably better off not doing trade negotiations at all unless they’re about rejoining the EU. Charted waters looks at the wisdom of government action to cap food inflation.

Standing up to China

The deterioration (or perhaps improvement, take your pick) of international relations into a daily popularity battle between the rich democracies on one side and China on the other is getting really quite entertaining. Dragging ourselves away from the riveting details of whether or not Brazil had procured a Ukrainian flag for a Lula-Zelenskyy bilateral meeting that didn’t actually happen, something closer to actual substance came out of the G7 in the form of a 1,600-word statement on economic security covering forced tech transfer, trade-distorting subsidies, cybertheft and so on.

As I wrote the other week, there were extensive discussions during preparations for the G7 on resisting economic coercion, with the activities of China in regard to countries such as Australia and Lithuania very much in mind. In the event, that section of the statement was softened a lot from the idea (espoused particularly by the US) that the G7 should form itself into a mutual defence society ready automatically to spring to each other’s aid.

In the end the G7 promised to create a co-ordination platform against economic coercion as follows:

“[W]e will use early warning and rapid information sharing, regularly consult each other, collaboratively assess situations, explore co-ordinated responses, deter and, where appropriate, counter economic coercion, in accordance with our respective legal systems.”

All a bit vague, but the next bit is more promising.

“We will also co-ordinate, as appropriate, to support targeted states, economies and entities as a demonstration of solidarity and resolve to uphold the rule of law.”

There’s no automaticity there and no new legal powers either individually or collectively. But it’s a substantive signal even to have a rhetorical commitment to stand by countries (including those outside the G7) affected by coercive trade blockades. Said support could include defensive support like emergency credit lines, temporary tariff concessions and so on to enable affected companies to adjust rather than aggressively hitting back at Chinese exports.

Of course, whether it’s a good idea for a government bullied by a trade blockade to start a diplomatic incident by sending up the G7 bat-signal is a separate decision. Someone in the field noted to me the other day that Australia’s main tactic in response to the Chinese trade embargoes — its exporters simply found other markets — was all the more effective because the companies by and large just got on with it rather than making lots of noise and showing they’d been hurt.

The UK needs to get a grip and focus on Europe

A while back I wrote that all UK trade negotiations apart from preparing to align with or rejoin the EU were basically either wasting time or actually destructive. I got pushback on this, including from some sensible people, but I’d contend my case strengthens by the month.

Last week a long-simmering problem boiled over — the UK’s, ahem, let’s say nascent electric vehicle and battery industry being clobbered by planned rules of origin changes in its post-Brexit deal with the EU. (See excellent explanations of the context by my FT colleague Helen Thomas and longtime Trade Secrets favourite “Big Sam” Lowe.)

The government response to the car company Stellantis’s threat to quit the UK was bizarre and revealing. Kemi Badenoch, the trade secretary, riposted with a total non sequitur in Parliament (10:19:22 onwards here): “This isn’t to do with Brexit: this is to do with supply chain issues following the pandemic and the war in Russia and Ukraine.” (Eh?) Badenoch also — of course! — tried to muddy the waters by talking about the UK joining the Asia-Pacific CPTPP agreement.

And there’s the problem. If you’re going to distract from Brexit by chuntering about fast-growing Pacific Rim . . . something . . . supply chains . . . something, it’s going to reduce focus on trading with the EU in substantive, bureaucratic and political terms. The UK isn’t going to build a high value-added domestic EV supply network on its own or meshed only with Asia-Pacific producers that can compete in that region or sell into the vast rich European market on its doorstep. Pretending it can may be more than a harmless indulgence.

The talking point about booming Asia-Pacific vs sclerotic Europe will obviously surface in any debate about rejoining the EU. For my money the tiny benefit of joining CPTPP is outweighed by the chance that the prospect of losing membership of the deal (and similarly oversold Brexit benefits) could sway minds. Remember some people really did vote Leave because they believed the bent banana myth.

Brexit isn’t set to bed in and to fade as a trade issue: probably the opposite. Underperformance compared with China (and the EU) over EVs will become more obvious; there’s a new EU entry/exit system coming to make passport control even worse; ditto new food inspection controls on imports. See FT colleague Peter Foster’s no doubt excellent forthcoming book on all of this.

As time goes on, CPTPP and anything that isn’t focused on realigning with the EU will seem increasingly irrelevant. The UK needs to forget the distraction of creating Brexiter talking points and get a grip.

Charted waters

Food inflation is a problem. On that we can all agree. However, there is little consensus about the causes of this or on what the solution should be.

The chart below shows how significant the problem has been for Hungary. Its government’s solution, like that of some other eastern European countries hit by high cost of living increases, has been to cap the prices of certain essential food items.

The measures may have been effective in keeping a lid on prices for some items, but the World Bank has come out against their use.

A report by the multilateral lender last week called on European governments to provide more “targeted policy interventions and social safety nets” to support those suffering from the cost of living crisis. But it stressed that price controls and subsidies were “suboptimal as they distort price signals for consumers and producers”. (Jonathan Moules)

Trade links

China went there, banning products from the US chipmaker Micron Technology from its critical infrastructure, the news coming out yesterday just in time to disrupt the G7 narrative about economic security.

The Peterson Institute’s Chad Bown writes in the IMF’s Finance and Development publication about how the WTO needs to help its developing members comply with the increasingly far-reaching export controls and sanctions regimes.

Barry Eichengreen, one of the world’s great experts in currency regimes, says that recent moves towards the world diversifying away from the dollar are minimal and have little to do with the US’s use of sanctions.

The FT reports that European policymakers are resorting to old-style policies of imposing price caps to cope with soaring food costs.

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Trade Secrets is edited by Jonathan Moules