Most Favoured Nation: The EU’s nuclear deterrent

Wine, borders, consultations, buying American and the EU's unilateral efforts to defend itself from others

Welcome to my newsletter, Most Favoured Nation. If you’re enjoying these AND would like to receive MFN in your inbox every week (instead of just every fortnight), please do consider becoming a paid subscriber.[1]

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I’ll be joining Dmitry Grozoubinski and Anna Isaac to discuss trade shenanigans over at Dmitry’s twitch feed on Monday at 19:30 UK time – tune in here.

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This ain’t a scene, it’s an arms race

Yesterday morning I freed a pigeon from our chimney. I then charged it with a mop, causing it to flee our living room. I have since spent many hours trying to turn this into a metaphor for something trade-related.

So, on the theme of threatening things with mops (this doesn’t work at all, but I couldn’t think of anything better, sorry), here’s a number of new powers the EU is giving itself to allow it to threaten anyone/thing who misbehaves:

As well as the proposed carbon-border adjustment mechanism (CBAM), the EU intends to introduce new rules policing foreign subsidies and procurement, co-ordinated FDI screening, and a new anti-coercion instrument, to combat political interference from foreign actions.

The CBAM will see imports of steel, iron, aluminium, fertiliser, cement and electricity from jurisdictions without an equivalent domestic carbon price hit with an additional carbon levy. The foreign subsidies regulations will allow the Commission to intervene and block investments, meddle with procurement bids, and fine companies in the event they are deemed to be unfairly benefiting from subsidies granted by foreign governments. While the anti-coercion instrument could see the EU levying tariffs in the event of political interference from foreign actors.

These aren’t the only tools either. The International Procurement Instrument is back in play, which could see the EU make access to its non-covered procurement markets (procurement markets not covered by existing international agreements) made conditional on reciprocity.

Stepping back, and assessing all of these different measures (foreign subsidies, CBAM, etc.) as a package, rather than distinct instruments, it’s hard not to conclude that the EU is gearing up for a fight. At the very least it is amassing a lot of firepower. But is this firepower in the ‘if we have a lot of weapons we won’t need to use them because everyone knows we have a lot of weapons’ sense, or the ‘purchasing lots of weapons because we want to fight a war’ sense? Or maybe even the ‘use the weapons a little bit so that people know you are serious so hopefully you don’t have to keep using them’ sense?

I’m not sure. But in the next year or so the EU is certainly going to have acquired itself quite the trade arsenal.

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Wine drinkers of the UK: rejoice!

The UK is going to do something actually useful with its newfound sovereignty and scrap certification requirements for imported wine. My quick scan of even the most FBPE wine importers on twitter suggest that this move has gone down pretty well.

Nice.

Border force

Since exiting the EU’s customs union and single market, Great Britain has been running a pretty lax border regime for goods (particularly food products) entering from the EU. This has led an asymmetric impact, with GB exporters to the EU facing (pretty much) the full EU third-country border regime, while EU exporters to GB have had it (relatively) easy.

But that’s going to change from October onwards, with the UK starting to phase in a load of different controls.

Joe Marshall at the Institute for Government has created an incredibly useful infographic, mapping out the stages.

I’d just add one more thing, as of October the UK will be also be banning the import of chilled meat preparations from the EU into GB. Yes, that means a ban on SAUSAGES, which is something people apparently care about.

MOAR CONSULTATIONS

As discussed in last week’s newsletter (£) (subscribe, you know you want to) the summer means one thing and one thing only: responding to hundreds of government consultations. Woo!

The EU has published one as part of its review of trade and sustainable development commitments in EU trade agreements and you can respond here (open until the end of October).

The context here is that the Commission has long fought to ensure that, unlike in the US or Canada’s FTAs, the trade and sustainable development commitments of its trade agreements are not subject to sanctions or remedies beyond a stern ticking off. The Commission argue that their preferred approach of having a chat and writing a shaming report or two (this isn’t quite what actually happens) is enough to hold partner FTA countries to their commitments. [And tbf, the evidence so far kinda backs them up].

But the European Parliament, and increasingly the member-states too, just aren’t buying it. The EU’s trade deal with Mercosur in particular is DOA in the European Parliament unless the environmental obligations come with additional teeth. (Making preferential access to the EU’s market for Mercosur eggs contingent on the implementation of EU standards probably isn’t going to be enough to win over the doubters.)

My view is that the EU opened Pandora’s box with the EU-UK trade deal, which conditions duty and quota free trade on the UK committing to uphold a whole raft of protections relating to environmental and labour standards (among other things), with future non-compliance leading to the possible withdrawal of preferences. After years of the EU saying its approach to trade and sustainable development was sufficient, when the chips were down, it clearly wasn’t.

So conditionality is here to stay.

But I do fear the European Parliament and member-states haven’t learned all of the right lessons from the negotiations with the UK. Yes, there is strict conditionality, but the UK only ended up signing up to it because the market access offer (duty and quota free trade) was a pretty good one [and because exiting without a deal was madness].

So if the EU wants other countries to sign up to similar levels of conditionality in their FTAs with the EU, then the market access offer will have to be much better – particularly in respect of agriculture – than is the case now. Or to put it another way, no one is going to sign up to match EU levels of environmental protections if all doing so gets them is a yearly tariff-rate quota for half a cow and a thank you card.

Buy (75%) American

President Biden has signalled that Buy American rules – which apply to around $200 billion of federal government procured goods and services each year – are to be toughened up, with the minimum US content requirements increasing to 75 per cent by 2029.

This isn’t really a surprise, the Biden administration loves a bit of Buy America, as does the Democratic base. Also, as the great Ron Steenblik points out on twitter (without endorsing the practice), you only have to look at the make of police cars and guns in most countries to realise that everyone engages in a bit of preferential treatment when it comes to procuring things for the state.

But on the question of whether it will actually help or hurt American industry is not clear cut. Scott Lincicome, who isn’t a Buy American fan, has a good piece highlighting the complexities and contradictions. Essentially, it turns out quite a lot of good ol’ American manufacturers are … actually pretty dependent on foreign imports.

Anyway, on a slightly separate note: look at how insane the process American importers had to go through to get exemptions from Trump’s trade war tariffs!

Wild.

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As ever, do let me know if you have any questions or comments. And do join me, Dmitry and Anna on Monday at 19:30 UK time.

Best,

Sam

[1] If you’d really love to get the newsletter every week but can’t afford it for whatever reason, let me know and I’m sure we can work something out. Also, if you’re a CER member let me know.