Most Favoured Nation: Grain Today, Gone Tomorrow
Unintended consequences, a job, Grain and Nepal
Welcome to the 91st 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.
I was concerned I would not have time to write MFN this week. Thankfully (for you, not for me), my flight to the US has been delayed by two hours, so here you go. I should really try and make some link between being in an airport and international trade, but I’ve got nothing.
Instead, let’s talk about unintended (if predictable) consequences. The Financial Times published a piece this week listing some of the things China is doing in response to Western export controls on semiconductors and the tools used to make semiconductors [a refresher with helpful drawings here].
See:
Over the past two months, Chinese officials have slapped new sanctions on US weapons companies Lockheed Martin and Raytheon, launched an investigation into US chipmaker Micron, raided US due diligence firm Mintz and apprehended local staff, detained a senior executive from Japan’s Astellas Pharma group and hit London-headquartered Deloitte with a record fine. President Xi Jinping’s administration is now considering curbing western access to materials and technologies critical to the global car industry, according to a commerce ministry review.
Now, China was always going to hit back. But it does highlight the risk of strategic trade interventions in an interconnected world.
In a recent paper for the UK Mission to the EU’s Open Trade Project, some colleagues and I dive into this issue and make some recommendations on how best to proceed (with the help of a large number of case studies).
I’ve published the Executive Summary below, but do give it a read!
Executive Summary
In 2021, China responded to Taiwan opening a representative office in Vilnius under the name “Taiwan” rather than “Chinese Taipei” by removing Lithuania from its customs system, effectively banning imports of Lithuanian goods. This attempt at economic coercion is in keeping with a recent pattern of behaviour that includes China imposing a series of trade restrictions on Australian wine and barley, in response to Australia banning Chinese vendors from operating in its 5G network and the then Australian Prime Minister endorsing an independent investigation into the origins of Covid-19.
While international trade and economic interdependence can be a catalyst for deeper political cooperation and engagement between countries, interdependence, or rather, overdependence, can also grant leverage to those governments seeking to impose their political will on others. This is particularly true when a country controls access to critical energy sources, resources or components. Russia’s efforts to weaken Western support for Ukraine by throttling gas supplies to Europe, and the resulting soaring energy costs, supply chain friction and general price inflation, are an acute example of a country weaponising its economic ties, albeit one that has so far failed to achieve its primary objective.
Alongside increased exposure to economic coercion, the economic security of Europe is threatened by a rise in unfair competition, stressed supply chains and the economic fallout of Russia’s invasion of Ukraine. Ensuring the measures taken to address these concerns are proportional, targeted, and effective is crucial if Europe is to balance its twin goals of economic security and openness to trade and investment and avoid unintended consequences.
Interventions to enhance economic security can be broadly grouped under three headings: unilateral, plurilateral and multilateral. Unilateral interventions benefit from being quick to implement but are often less effective or more readily bypassed. Multilateral interventions are often more impactful but can take a long time to agree and, assuming agreement is reached, implement. For example, multilateral cooperation to significantly bring down industrial carbon emissions and prevent carbon leakage would be more effective than a unilateral carbon-border adjustment mechanism by one country or bloc, but is also arguably unachievable, at least in the short-medium-term.
Unilateral interventions also increase the risk of unintended consequences. For example, the new EU Foreign Subsidies Regulation exists predominantly to ensure the Commission has the tools necessary to intervene when state-subsidised Chinese firms compete unfairly within the EU single market. However, the Regulation’s design means that all foreign companies engaging in large M&A and procurement activities within the EU now face additional costs and bureaucracy – with companies in allied countries such as the US, Canada and the UK most exposed.
Plurilateralism, or cooperation between smaller groupings of countries, offers a pragmatic middle way. In the absence of global agreement, like-minded states can and should work together to coordinate their efforts to address economic security. Recent coordination between the US, EU, Japan and UK on Russia sanctions offers an illustrative example of effective multi-country cooperation. Where states are required to act unilaterally, better care should be taken to ensure that individual tools or measures are targeted, proportionate, and do not penalise allies.
Trade [Remedies] Job
Having recently clarified that the UK Trade Remedies Authority is not going to be defenestrated after all (good!), the UK is now looking for a new chair to replace the outgoing Simon Walker.
If you think that could be you, apply here.
Grain
In response to Russia’s invasion of Ukraine, the EU dropped its import tariffs on Ukrainian food exports. An unintended consequence of this (although, as above, not unexpected) is that the price of grain in neighbouring countries such as Poland and Hungary has been pushed down. This has led to backlash from Polish and Hungarian (and Bulgaria, Romania and Slovakia) farmers and the recent introduction of unilateral import bans by the two countries, in breach of EU rules.
The interesting thing here is that the Ukrainian exporters can live with not being able to sell onto the Polish and Hungarian markets, their main concern is that the two countries also blocked grain from transiting across them, arguing it is hard to differentiate between grain meant for the domestic market and for onward travel at the border.
Anyway, the EU has decided it does not want to have this specific fight with its Eastern members and will introduce new safeguards and find a way to better facilitate the secure transit of grain through the concerned countries. All is well.
However, in terms of where this goes next, I think my former colleague Agata Gostyńska-Jakubowska makes a very astute point re: what this kerfuffle could mean for future Ukraine EU accession negotiations:
Removing trade barriers
The [A] job of a country’s trade department is to remove barriers to trade. Most of the time – at least in the UK – this is discussed in the context of free trade agreement negotiations. But in reality, there are lots of ways to make things easier for exporters/importers — and quite often it involves getting officials and regulators in your country to spend many years talking to officials and regulators in other countries.
Tedious but very important.
For example, Ireland the UK and others recently succeeded in convincing the US to remove restrictions on the import of their lamb. This ban was introduced following the outbreak of BSE in Europe and has taken YEARS to resolve.
Anyway, I’m emphasising all of this so that you know that I think doing this stuff is important and to be encouraged! More! I like it!
Which brings me to this list of trade barriers the UK claims to have removed since September last year:
Removing a ban on importing luxury products including toys, diamonds and colour TVs to Nepal.
Reducing registration requirements for pharmaceutical products to Vietnam.
Relaxing the foreign ownership cap on renewable energy projects in the Philippines, allowing UK companies to invest in the development of solar, hydro, tidal and wind energy.
Ensuring the recognition of British education qualifications for UK teachers to teach in Thailand.
Lifting the ban on certain pork products to South Korea, including bacon, ham and pork sausages.
Allowing the export of pet food to Chile.
Allowing teachers from West Java, Indonesia to complete maritime training programmes in the UK, after acceptance of UK maritime qualification standards benefitting the City of Glasgow College.
Supporting companies to access financial products in Mauritius and supporting further development of the local financial market.
Review of regulations such as the price threshold for the sale of refurbished mobile phones to Turkey.
Allowing certification companies to access the Brazilian market and speeding up approval processes in the automotive sector.
Guys.
If you publish lists like this, I will google the most interesting examples. In this case, Nepal’s ban on the import of colour TVs.
This is quite an interesting one. According to the internet, Nepal introduced a ban on the import of a number of luxury goods – including colour TVs, diamonds, SUVs and playing cards – due to concerns about its depleted foreign exchange reserves last May.
This ban was then lifted in December when the forex concerns eased.
So … I guess what I’m saying is … there definitely was a ban, and it was definitely lifted … but guys. You know what you’ve done.
As ever, do let me know if you have any questions or comments.
Best,
Sam