Most Favoured Nation: January Blues
Most Favoured Nation: January Blues
Sanctions, divestment, forced data localisation, USIRA and the first ever trade agreement
Welcome to the 82nd edition of Most Favoured Nation. This week’s edition is free for all to read. If you would like to receive top quality trade content in your inbox every week, please do consider becoming a paid subscriber.
Western exports to Russia have dropped significantly as a result of sanctions imposed by the US, EU, UK, Japan and others following Putin’s invasion of Ukraine.
The full suite of Dec 21-Dec 22 trade data aren’t available yet, but BOFIT’s Iikka Korhonen published a useful look at the countries that have published:
As he observes, it looks like exports to Russia are starting to find their new level. For some countries (Japan, Taiwan, South Korea) this is notably lower than the pre-invasion trend. But for others (Turkey, China, Kazakhstan) the opposite is true. Which isn’t unexpected, but still not ideal from a constraining-Russia’s-economic-capacity point of view.
However, while exports have fallen, exports aren’t the only way of judging the corporate response to sanctions and the invasion.
Simon Evenett and Niccolò Pisani have published a new paper looking at what proportion of Western-headquartered (EU & G7) companies have sold their Russian subsidiaries following the invasion. Specifically, they focus on whether companies have sold an equity stake (rather than non-equity commercial ties such as franchising and arms-length exporting deals).
Here the story is slightly different. As of November 2022, they find that 8.5% of EU and G7 companies had divested at least one of their Russian subsidiaries. Which isn’t very much:
Which leads to the question of why?
This will vary by company — and some reasons are considered in the paper — but to my mind, reasons could include [note: I offer no opinion on rights or wrongs of any of these, just interested in why decisions are/are not taken]:
Don’t want to and don’t have to. Non-sanctioned industries that make a enough money in Russia to make it worth any reputational risk
Want to but can’t. Want to leave but for whatever reason — intervention by Russian state or inability to find a buyer — can’t.
Don’t have to and [arguably] shouldn’t. Now this is subjective [the Ukrainian government has been arguing for new sanctions on medicines for example] but there is an argument that certain companies — for example food, drink and medicine providers - should stay.
Should have left but don’t want to. These guys are living life on the edge because they want to make lots of money
Cost of data localisation
Frontier economics has published a new paper for DCMS attempting to estimate the wider economic cost of data localisation measures. Of particularly interest are the country-by-county comparisons.
Now this is a little complicated, but the most interesting scenario is Scenario 1, which estimates, relative to existing approaches, the impact of each country (or bloc) introducing rules mandating local data storage and prohibiting the transfer of data overseas. (Note: if you’re wondering why the China figure looks relatively small, it’s because China’s existing level of data restrictiveness isn’t so far off that of Scenario 1 …).
So yeah, forced data localisation is bad for the economy.
Is the EU a climate villain? (Part 2)
I previously asked whether the EU’s (and UK, Japan, everyone’s …) opposition to the US’s inflation reduction act made it climate a villain.
To summarise: there is no question that the IRA is discriminatory and in breach of the US’s WTO commitments. It’s also pretty obvious that the IRA’s primary purpose isn’t to address climate change (or inflation for that matter), but rather to [hopefully] create some jobs in politically expedient sectors. You can also make a pretty convincing argument that the local content requirements actively undermine the effectiveness of the climate measures (the US could get more bang for its climate buck if didn’t condition support on local provision).
HOWEVER, despite all this, given that the political choice in the US was between this imperfect IRA or none at all, rather than between a better IRA and this one, the exam question is whether this imperfect IRA is better for climate change than not having it at all.
Its supporters talk a good game. A quick google throws up claims that the IRA is “The Most Important Climate Action In U.S. History”, among other things.
And lots of Americans are really quite annoyed that the EU is annoyed about the IRA. Here Brad Setser (recently of USTR) says that EU should be focusing its ire on China instead (and kinda creates moral equivalence between the US and China, which I don’t think is his intention):
BUT WILL THE IRA HELP TACKLE CLIMATE CHANGE?
With thanks to Simon Lester for flagging, the answer appears to be … a little? But perhaps not as much as all the fuss would have you believe.
First time for everything
According to DIT’s Rob Macpherson, the first ever trade deal was between Britain and France:
This is a good fact. If it is in fact not true, then take it up with him!
MFN fan-favourite Chad Bown’s latest piece for Foreign Affairs includes a very enjoyable historical account of what happened when Americans found out some Japanese firms were evading US export sanctions during the Cold War:
Then the scandal broke. In 1981, Tekmashimport, a Soviet importer, used a network of KGB agents and trading companies to contact Toshiba Machine Tools. The Soviets needed the Japanese firm’s equipment to cut, grind, and polish large pieces of metal into submarine propeller blades. Toshiba agreed to supply the machines, and it partnered with Kongsberg to calibrate the Japanese tools to make the Soviet submarine propellers nearly undetectable.
When the details of these transactions were finally reported in 1987, there was uproar in the United States. The strength of the congressional backlash alone was enough to frighten Toshiba and the Norwegian government into commissioning two independent investigations. Toshiba strove to limit the damage: it fired executives, hired a team of Washington lobbyists, and took out full-page advertisements in dozens of newspapers apologizing to the American public. But congressional fury persisted and rose again when, nearly a year later, the Japanese courts punished Toshiba—a corporation with $17 billion in annual revenues—with just a $15,000 fine.
For policymakers, the investigations exposed deep problems with the allies’ system of export controls. Kongsberg had been working since the early 1970s with machine tool companies in France, Germany, Italy, and the United Kingdom to sell potentially dangerous equipment to the Soviets. This revelation forced those allied governments to conduct their own investigations, which discovered still more offenses. Few NATO members, it seemed, were adequately enforcing their laws that limited the outward flow of technology to the Soviet Union.
If you can’t navigate the Foreign Affairs paywall, you can listen to him discuss it in the context of recent export controls here:
Anyhow, in the same piece he makes the observation that a joined up approach to export controls is needed because:
Without joint controls, Dutch and Japanese firms could take over the market niche vacated by U.S. companies. Thus, the failure to align controls would hurt the U.S. companies without protecting national security, calling the existence of U.S.-only controls into question.
This is interesting!
Because as we discussed in MFN a few weeks back — drawing on Hosuk Lee-Makiyama’s work – there is a sense in the EU that the US export controls are designed so as to … deliberately harm EU industry to the benefit of American.
Perception matters.
As ever, do let me know if you have any questions or comments.
Best,
Sam