Will the UK have to choose?

Binary choices, sanctions, batteries and diggers

In the UK’s post-Trump debate, one of the reoccurring questions is whether the new Labour government will be forced to abandon its planned deepening of the EU-UK trade relationship to placate Trump

My usual response to this question is a variation of “Can you be more specific?”

Because if you think that Trump is going to ask the UK to put tariffs on EU goods and new export controls on UK exports to the EU in return for a reprieve from his new trade war tariffs then … sure, that’s pretty binary.

But, I don’t think anyone seriously thinks that is on the cards. (Famous last words …)

As a better starting point, we should instead begin with a realistic assessment of what the EU and UK might actually try to do to deepen the trade relationship in the coming years. (Yes, sorry, talking about UK rejoining the EU or re-entering the single market and EU customs union is near pointless from a scenario planning perspective.)

On this point, Ignacio Garcia-Bercero — formerly the EU Commission’s chief TTIP negotiator — has written a new paper looking at how to improve the EU-UK trade deal.

As well as some broader institutional stuff, he identifies a veterinary agreement, ETS linkage, and enhanced labour mobility arrangements as achievable outcomes.

So, let’s take these one at a time.

What might Trump mean for … an EU-UK veterinary agreement

I thought it best to start with this one, because, yeah, it is absolutely an arrangement you could hypothetically see being an issue. Let’s take a scenario in which Trump threatens the UK with tariffs unless they buy more US food products, and as part of this (either a mini deal or a wider negotiations), the UK is forced to remove EU-era restrictions on the import of, for example, hormone-treated beef and the infamous not-actually-washed-in-chlorine chicken.

This would make the deep veterinary agreement envisioned by Ignacio, which removed near-all regulatory border controls nearly impossible:

A veterinary agreement would however only achieve these objectives if the UK were ready to commit to maintain regulatory alignment with the EU. An agreement of the type that the EU has concluded with third countries, such as New Zealand, would do little to eliminate border controls and is unlikely to be in the economic interest of the EU. This implies that a mutually beneficial agreement is likely to be close to the agreement that the EU has with Switzerland, and which at time of writing is being updated.

But, as mentioned above, this is mainly a fun hypothetical because the chances of a Labour government doing something a Conservative government was afraid of, changing UK sanitary and phytosanitary rules to accommodate US trade requests, are slim. (The UK even stood its ground on this in the context of its CPTPP accession, much to the annoyance of Canadian farmers.)

So could Trump drive a wedge between the EU and UK on this issue? Sure! Will it work? I’m not so sure.

[Note: there are still lots of other reasons why an EU-UK veterinary agreement might prove difficult, including the probable request for dynamic alignment of UK domestic and third-country rules.]

What might Trump mean for … linking the EU and UK Emissions Trading Schemes

First, for those uninterested in energy policy, what am I even talking about?

From a UKICE article I wrote with my Flint colleague James Low [unrelated]:

Article 392 (6) of the EU-UK Trade and Cooperation Agreement (TCA) states that [emphasis added], ‘The Parties shall cooperate on carbon pricing. They shall give serious consideration to linking their respective carbon pricing systems in a way that preserves the integrity of these systems and provides for the possibility to increase their effectiveness.’

This clause is unusual in the context of the TCA, given that it actively leaves open the possibility of future EU and UK regulatory convergence and the possible linking of their respective Emissions Trading Systems (ETS).

Linking the schemes would have a number of advantages. Chief among them: UK exports of goods covered by the EU’s Carbon Border Adjustment Mechanism (CBAM) would be exempt from new CBAM charges and bureaucracy.

In parallel, the UK is also introducing its own CBAM in 2027.

These two issues — linking the EU-UK ETS and the UK introducing its own CBAM — are distinct for the purpose of the Trump conversation, for reasons that hopefully become apparent below.

Okay, Trump. Let’s take a scenario in which Trump threatens the UK with tariffs unless it exempts US exports from its CBAM. (Note: something like this has a very high probability of happening.)

Now, let’s assume the UK complies. Does that mean the UK can’t link its ETS to the EU’s?

Ummm, no. This is because ETS linkage is not contingent on both parties having a CBAM. Switzerland has linked its ETS to the EU’s, for example, and has no current plans to introduce a CBAM.

In practice, having a linked ETS sans UK CBAM, or in this case with a leaky CBAM, causes a problem for one country and country only: the UK. This is because, in this scenario, UK firms would face the same carbon price as those in the EU, but unlike their EU competitors, which are protected by the EU CBAM, would face competition from potentially higher-carbon US producers when selling in their domestic (UK) market.

[Note: EU producers would face the same competitive pressures with the US when selling into the UK, too, assuming the phase-out of ETS free allowances goes ahead … but that’s a different issue. This is also broadly the case whether the UK’s ETS is linked to the EU’s or not.]

There’s also the broader context to consider. Do we think that Trump is solely going to demand an exemption from the UK CBAM, which doesn’t exist yet? Of course not. In the first instance, it will be the EU’s CBAM which suffers his ire (as it did the Biden administration’s). So from a UK perspective, the best approach is probably to wait and see what the EU works out with the US and then try and plug itself in.

As Ignacio notes, there are of course good reasons why the EU and UK might want to coordinate their CBAM’s as well as linking ETSs, but they are not the same thing:

Beyond the ETS linkage, there is a strong case for the EU and the UK to harmonise at least those aspects of their CBAMs for which regulatory divergence either increases the burden for third countries exporting to the EU or the UK, or results in a risk of trade deflection. This is particularly the case for administrative requirements, such as the methodologies to account for carbon emissions or the application of default values. The UK has not yet decided on the precise features of its CBAM, and the European Commission still needs to adopt a series of implementing acts before the application of import charges.

What might Trump mean for … EU-UK labour mobility

Like, nothing. Sorry. No impact.

But here’s Ignacio explaining why improving labour mobility might prove tricky despite better labour mobility (and yes, youth mobility) being very obviously a Good Idea:

The EU-UK reset under the new UK government has not had a good start on issues relating to mobility. The EU request for a youth mobility agreement ¹⁶ has been sometimes mischaracterised as being linked to immigration and the principle of free movement. The European Commission proposal for an agreement also included certain elements that would be difficult for the UK to accept. The UK meanwhile has identified two priorities – mobility for touring artists and mutual recognition of professional qualifications – that are either technically difficult or hard to achieve in the short term. It has not been helpful either that the Commission has dismissed the UK request on touring artists on the formal argument that meeting it would imply changes to the TCA. These failures of communication illustrate the risks of uncoordinated public positioning and incompatible mandates.

There’s then the politics. If the UK very explicitly toadies up to Trump and wrangles its way out of new US tariffs more quickly than the EU then yes, of course, this could lead to some political friction between the EU and UK. But you’ve got to consider the context — the EU will also be trying to negotiate with Trump (perhaps while making a few more threats than the UK) and having to navigate its internal tensions where, for example, some of the toadying from certain member states [you know who you are] will probably make even intense UK efforts look tame by comparison.

All of this is to say that Trump could insert tension into the EU-UK relationship, but I’m not convinced it will be either’s biggest concern. For that, I would look towards China, where I expect the US demands — “You’re either with us or against us” — will be much more explicit.

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Do sanctions work?

In the latest episode of Credit Notes, I had a fascinating chat with ECFR’s Agathe Demarais and CFR’s Brad Setser about sanctions. Specifically, we talked about whether the recent Russia sanctions have worked, continue to work, and would work if applied to another unnamed *ahem&* country in future.

A short teaser clip is embedded below, but you can listen to the full thing online HERE or via your usual podcast provider.

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Cell Damage

Some of you may remember, back in the good old days before Trump won another election (the summer) when I was talking about EVs all the time, I became slightly fixated on the idea that EU tariffs on EV batteries were just around the corner.

Here’s me in FT Alphaville:

Or to put in another way, to twist the words immortalised in song by the, ahem, Manic Street Preachers [Ed: please excuse him, he’s Welsh]: “If you tolerate this, then your batteries (and lithium) will be [tariffed] next”. Maybe.

Anyhow, following the Trump election and the recent collapse of EU battery champion Northvolt, this is looking even more likely.

In a piece arguing for greater EU support for its failing battery industry, ECFR’s [note: does everyone work for one of the CFRs nowadays?] Tobias Gehrke sets out the measures he’d like to see:

However, this strategy still needs to ensure the right market conditions on the continent. It first requires the EU’s latest battery regulation, which aims to strengthen sustainability rules for batteries, to include strong CO2 footprint disclosures favouring green and made-in-the-EU production. Second, the EU should consider extending Chinese EV countervailing duties to EV components such as batteries to ensure Chinese EV makers in Europe are incentivised to use local-made batteries. Third, the commission should implement the Foreign Subsidies Regulation which targets foreign battery firms benefitting from EU subsidies.

I wouldn’t be surprised if Tobias gets his wish.

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‘I'm Sam, I'm 35, and the secretary of state is called Jon-ny. Putting tariffs on a knock-off JCB’

For those interested in such things, the UK’s Trade Remedies Authority has proposed tariffs of up to 85% (!) on imported Chinese diggers.

As per TRA Chief Executive Oliver Griffiths:

“Excavator production is an important component of the UK’s Advanced Manufacturing sector. Our provisional finding is that UK producers are being undercut significantly by dumped imports from China.”

The TRA opened its investigation in response to an application from JCB, a Staffordshire-based multinational business. The TRA estimated that during the period of investigation, UK excavator producers employed around 900 workers and had a turnover of around £500 million.

Around 180,000 tonnes of excavators were sold in the UK during the period of investigation, with the UK industry supplying between 10-25% of this volume. The UK industry’s market share decreased by 11% over the injury period.

The TRA found that Chinese exporters were able to use reduced production costs to price their exports below UK competitors who did not benefit from an artificially low-cost base. It determined that UK prices were undercut by a rate of 23.39%.

The TRA has therefore published its initial findings in a Statement of Essential Facts, proposing that an anti-dumping measure be imposed on imports of excavators from China weighing 11 tonnes or more, but less than 80 tonnes.

Interested parties now have until 16 December 2024 to comment on the SEF and can do so through the TRA’s public file.

And for those of you wondering what the subheadings is all about / think I’ve completely lost the plot, I am of course referencing this absolute banger of a tune by UK one-hit-wonders Nizlopi:

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Best wishes,

Sam