Most Favoured Nation: A Worker-Centric Trade Policy? [UK-Edition]

Biden-on-Thames

Welcome to the 104th 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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[Note: this week’s edition is quite UK-centric because I assume all of the Brussels/EU-based readership are on holiday.]

Earlier this week, Nick Thomas-Symonds, the UK Labour Party’s shadow trade minister, told the Guardian newspaper that, were Labour to win the next UK general election, UK trade policy would be very much aligned with President Biden’s:

“We share the Biden administration’s worker-centric trade policy,” he said. “The Biden administration will have a strong ally in a Labour government. I think it would be great to have those shared priorities across the Atlantic, whether on workers’ rights, consumer protections, environmental protections, the ‘jobs first’ agenda.

This is not at all surprising. The UK Labour Party has good relations with the US Democratic Party, and much of its base support would like to see Bidenomics replicated in the UK. And on trade policy, there are certain things you would expect to be true of any Labour government.

For example, I expect a future Labour government would:

• Focus less on free trade agreements, although this does not rule out the possibility of existing FTA negotiations being concluded. (There is also an outside chance of some sort of trade agreement with the US in an “only Nixon could go to China” type dynamic.)

• Seek to deepen the UK’s economic relationship with the EU, short of single market and customs union re-entry. This could include a deeper veterinary agreement to remove agrifood checks, linking of carbon pricing schemes to avoid new EU carbon-border adjustment mechanism-related friction, a new agreement on temporary labour mobility, and structured cooperation on foreign policy and defence.

• Pay more attention to the demands of unionised labour and industry. This could mean more protection for UK steel and heavy manufacturing — either through the UK’s own carbon border adjustment mechanism or simply more tariffs.

• Pay more attention to environmental and human rights issues throughout international supply chains. This could lead to the adoption/replication of EU measures to increase obligations on companies to report and address issues through their supply chain, such as pollution and forced labour.

This is all baked-in and, of course, overlaps with some of the Biden agenda.

However, given this is a trade-nerd newsletter, I am going to take Nick Thomas-Symonds’ comment, “We share the Biden administration’s worker-centric trade policy”, literally [note: I do not think he actually meant Labour would therefore try and exactly replicate it], mainly for the purpose of discussing just why it is so difficult for any other country to actually replicate the US’s approach:

Here I should begin by saying discussion with **some** [not all!] US trade folk who have been involved with negotiations, or held a trade-related role in a US administration, can be quite frustrating. There is quite often an unstated assumption that a country can just demand and do things and that other countries will just have to go along with it. While this is true for the US — as discussed in previous newsletters, the US can pretty much do what it likes, in the knowledge that most countries will baulk and direct economic confrontation with the global economic and military superpower and that even if they do retaliate the US can probably live with it – it is most certainly not true for nearly any other country.

And this is something worth bearing in mind if you are the UK.

Anyhow, what even is the US’s “worker-centric trade policy”? I simplify it to mean the following:

“A trade policy that tries to provide/protect jobs of unionised labour in key swing states, maintain US global technological superiority by boosting investment in frontier industries and curtail Chinese access to new technologies … all of which will hopefully lead to reduced carbon emissions, maybe.”

Okay, fine. So there’s then the question of how.

Here I break it down as: “High tariffs on steel and aluminium (and some other things) combined with large fiscal subsidies in green and advanced manufacturing, made conditional on local production; and stricter export controls and outward investment screening for key technologies.”

In a UK context, this poses a few issue-specific challenges, and one overarching concern that I will address at the end:

• High tariffs on steel and aluminium. This is something the UK already does, via safeguards created as part of the legacy response to the Trump steel and aluminium tariffs, and other other anti-dumping and counter-veiling tariffs. You could also see the UK/a future Labour government introducing further protection via a carbon-border adjustment type mechanism.

  However, it can’t go quite as far as the US and introduce tariffs with no legal basis. Or rather, it could do, but would fear retaliation from the countries impacted. India, for example, is already questioning the UK’s [illegal] steel, and threatening to impose “rebalancing” tariffs on UK exports such as whisky.

• Large fiscal subsidies in green and advanced manufacturing. The US is pouring billions into green subsidies and the creation of, for example, domestic high-end semiconductors. Is this something Labour could replicate? I’d guess, a little. The challenge is that the US subsidies, in the first instance, are damaging to the UK, in that they risk pulling existing investment out of the UK, and attracting future investment into the US that would have otherwise happened in the UK.

  The UK is also fiscally unable to compete with the US [and EU] in terms of the quantity of subsidy it can offer. In such an environment, companies are also incentivised to play governments off against each other, in order to drive the amount of subsidy up — which will lead to a lot of waste *and* make intervention more expensive. One area where a UK government could probably make positive investments is in sectors where the UK has structural or geographic advantages. For example, floating offshore wind and tidal, where the UK has a lot of wind and big tides. Here you could see the UK investing heavily in the hope of benefiting from both the deployment and associated supply chains and industry.

• Local content provisions. And this brings us to local content provisions. The US is [famously] conditioning the receipt of its taxpayer subsidies on much of the manufacturing being done within the US or, in some instances, allies. You could absolutely see Labour wanting to do the same. For example, “we’ll give you a load of money to make xxxx, so long as you only use locally-sourced steel”.

  The problem is this sort of approach is very very in breach of not only the UK’s WTO obligations but also pretty much every free trade agreement it has ever signed (of which there are many), including the deal with the EU. The US can get away with this because everyone is scared of the US … the UK, less so. The EU already raised a complaint at the WTO over perceived UK local content bias in a recent business department consultation [this was quickly resolved]. So, what to do?

  I suppose the question is, could Labour get away with designing a subsidy scheme that is not technically contingent on local content but also primarily benefits local providers? Maybe? You could see this being achieved via some arguably environmental justifications. The sweet spot is being just illegal enough to benefit local providers but not illegal enough for any other country to bother retaliating.

• Export controls on key technologies. Here the UK will just probably end up going along, half-heartedly, with what the US does, but implement it in a slightly chaotic way that ends up annoying UK companies. So a continuation of the status quo.

So yeah, replicating the US is difficult. But I think there is an additional overarching concern related to being too aligned with the US’s trade policy: countries that are cheesed off with the US but too scared to do anything about it may decide to take out their frustration on you instead.

Let’s say, the UK decides to introduce its own EV tax credit, but make it contingent on the EV being made locally, similar to the US measure. If you’re an EV-making country that is already annoyed at the US measure, you might very well decide to take that annoyance out on the UK, in the form of retaliatory tariffs and trade restrictions.

Maybe.

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Best wishes,

Sam