Most Favoured Nation: A UK-US Trade Deal?

UK-US IPEF, good tweets, a subsidy club, supply chain diversification and critical technologies

Welcome to the 112th edition of Most Favoured Nation. This week’s edition is free for all to read. If you enjoy reading Most Favoured Nation, please consider becoming a paid subscriber.

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Earlier this week, Politico reported that Joe Biden and Rishi Sunak are planning to launch negotiations on a new UK-US kinda trade deal, tentatively called the “US-UK Trade Partnership Forum (TPF)”.

First, I should say that I am pretty annoyed about this. I was planning to write a piece predicting that a future Labour government, if elected, would try and do something like this with the US. I would then point to the post, if it happened, as evidence of my prophetic talent and unbeatable levels of insight. (Of course, if it didn’t happen, I would never ever mention it again.)

So yeah, annoying.

Anyway, I say a kinda trade deal, because, as per the reporting, it doesn’t sound like it will be an actual trade agreement that does trade agreement stuff, such as removing tariffs, rather it will instead be modelled on the the US-led Indo-Pacific Economic Framework (IPEF), which currently has 14 members.¹

In practice, trying to define what it is IPEF actually does is difficult, but on paper, it is split into four pillars. These four pillars roughly break down as follows:

1. Trade. The US will chat with other countries about rules relating to the digital economy, food standards, AI and other related stuff, while also pushing partners to adopt the recent US approaches to labour and environmental rules.

2. Resilient economy. Chat about issues relating to supply chain resilience, including the development of possible early warning systems, risk mapping, and strategic diversification.

3. Green stuff. Chat about new commitments relating to clean energy, decarbonisation, infrastructure and clean [American] jobs.

4. Fair economy. Chat about measures to prevent tax evasion, anti-money laundering, bribery, etc.

Pillar 2 is the one that theoretically could result in critical mineral agreements that unlock IRA exemptions, but in practice, the US seems to be approaching these discussions bilaterally (including with the UK and EU, as we speak).

Given the lack of material substance, you see a lot of people on Twitter and elsewhere questioning why countries are signing up to IPEF. But actually, it makes a lot of sense. The US is still the biggest economy on earth and the only real military superpower, but it is going more protectionist and doesn’t really care about global trade rules. In that context, if the US asks you to join something to discuss trade-related issues, you join it. It is most definitely in your wider economic interest to humour the US, even if you think the project is a bit pointless.

The same rationale holds for a UK-US equivalent. Better to be chatting to the US about trade-related stuff rather than nothing at all.

But beyond that would a UK-US version of this do anything? I suppose it depends on what you mean by anything …

• Would it lead to any new market access, or progress on issues that weren’t being discussed anyway (e.g. data adequecy, critical minerals agreement)? No.

• Would it allow the UK government to say it had negotiated a trade deal with the US in the run-up to the next general election election? Yes. Would this be true? Kinda, but the nuance is politically irrelevant because the Right-leaning UK would write it up as a win.

• Would it allow Labour to say that the government had negotiated something bad with the US, probably with a focus on food standards? Yes. Would this be true? Nah, but see the previous point, but replace ‘Right-leaning’ with ‘Left-leaning’.

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Tweet of the week

Well done Chatham House’s Pepjin Bergsen, this tweet made me laugh.

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Subsidy club

In this week’s FT Trade Secrets, trade Yoda Alan Beattie discussed Hosuk Lee-Makiyama’s idea for a so-called ‘subsidy club’:

Assuming you want to restrict the beneficiaries of said subsidies to stop Chinese companies snaffling them all, is there a better way to do it? One idea kicking around is a “subsidy club” where the rich democracies restrict their handouts to companies from countries that adhere to an agreed set of standards on labour and the environment such as forced labour, carbon emissions and waste disposal. This might help them avoid being undercut by some Chinese producers, if not exclude them altogether.

Obvious sectors beyond EVs would be semiconductors and perhaps critical minerals. Hosuk Lee-Makiyama, of the think-tank ECIPE, who has sketched out such an idea, says: “A subsidy club where there are already similar standards on labour or environmental protections would be a way to address political concerns about unintended exploitation of buyer subsidies while staying within WTO law.” There are provisions in WTO rules that allow restrictions on trade to protect human health and the environment.

The logic underpinning this is that Western, non-discriminatory, consumer subsidies have inadvertently (or arguably advertently) cross-subsidised Chinese production to the point that Chinese industry is now outcompeting Western incumbents. So yeah, one way of preventing this is to form a club, and only provide subsidies for products purchased from companies located in members of the club.

This is obviously quite obviously discriminatory, and even if you think you could justify it under WTO rules, it would at least be contested (which the EU cares about, even if the US doesn’t.)

A different approach that has come up recently is to restrict subsidies to products that meet certain, strict, environmental criteria. For example, from the beginning of next year, French EV subsidies will be contingent on the EV being low-carbon:

French President Emmanuel Macron already announced in May that he wanted to make state subsidies for electric cars dependent on CO2 emissions during the production of the vehicles and batteries. Now, his government has outlined the first key points.

It plans the introduction of a points system based on various environmental criteria, which include the characteristics of the vehicle model itself, e.g. its weight, but also the origin and environmental impact of the materials used (including the battery), as well as the assembly plant’s environmental record and transport routes to the point of sale.

For an electric model to be eligible for the reformed eco-bonus, manufacturers must submit a file with the required information to the Agence de la transition écologique (ADEME) for each vehicle model. These must score at least 60 out of 100 points. A list of eligible vehicles will be published by 15 December 2023, before the reformed eco-bonus comes into effect on 1 January 2024.

In theory, this approach is non-discriminatory — there’s nothing stopping a low-carbon Chinese EV from qualifying — but in practice, it excludes vehicles produced in countries still very reliant on carbon-intensive-energy. Funnily, this could also include cars made in Germany … (lots and lots of coal).

Of the two ideas, US government outriders are already pushing this idea of a subsidy club, so I think we will hear a lot more about it. But in practice, I expect to see lots more of the second approach, where the discrimination is not explicit but still there in practice.

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GVC realignment

People love to talk about supply chain realignment and diversification away from China. But is it really happening?

A new research paper by the Bank of International Settlements finds that:

• The latest firm-level network data reveal that global value chains have lengthened, although without the accompanying network densification that might indicate that supplier relationships are diversifying.

• Lengthening of supply chains is especially significant for supplier-customer linkages from China to the United States, where firms from other jurisdictions, notably in Asia, have interposed themselves in the supply chain.

• Nevertheless, these recent developments have not so far reversed the long-running trend towards greater regional integration of trade in recent decades, especially in Asia

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Critical technologies

This week the EU published its new list of critical technologies. As a next step, member-states will now perform risk assessments related to these technologies, which could ultimately result in interventions.

But I know what you’re thinking, doesn’t everyone have lists like this and how do they compare?

Well, you’re in luck. Elvire Fabry has compiled a very helpful table comparing the EU list with Australia, Japan and the US:

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Best wishes,

Sam

1. Australia, Brunei, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, Vietnam & USA