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Good afternoon. Andy Bounds in Brussels is taking over Peter’s newsletter for the day.
I want to shed light on an issue that is being talked about here but largely ignored in London: the threat posed to transatlantic relations by US trade policy.
Many Brexit supporters wanted to free themselves from Brussels to strike a trade deal with the United States, the only deal that could deliver a significant economic boost – even if such a deal would only add 0.16% to the size overall economy at most. , according to the UK Trade Policy Observatory at the University of Sussex.
Compare that with the 4% drop in GDP caused by leaving the EU, according to estimates from the Office for Budget Responsibility.
Even Brexiters such as Trade Secretary Kemi Badenoch now accept that Washington is in no mood for deals. In fact, it is becoming increasingly protectionist, as the Inflation Reduction Act shows.
Signed into law on August 15 by the administration of Joe Biden, the IRA aims to reduce carbon emissions by around 40% by 2030 and promote investment in household energy production and manufacturing.
Great news for the planet. Not so good news for trading partners. The law is stuffed with $369 billion in subsidies and tax breaks that promote green technologies.
They include new tax credits to promote carbon capture, clean hydrogen and investment in clean energy technologies and to mitigate greenhouse gas emissions – all areas where the UK ( and the EU) wish to develop industrial expertise.
Even wind turbines, electric vehicles and solar panels will have to be made largely in the United States.
The EU has already heard a sucking sound this year as investors and manufacturers flee the bloc’s high energy costs and low subsidies for the New World and its vast treasures.
Brussels and Washington have set up a working group, which meets weekly to find ways to improve the EU’s treatment.
Ursula von der Leyen, chair of the commission, said over the weekend that even if it were possible, the bloc should consider pumping more money into its own green industry and loosening aid rules of state. These limit government loopholes to prevent wealthy countries from giving their companies an unfair advantage.
What does this mean for the UK? To be fair, the government is aware of the threat. Badenoch spoke in November at the right-wing Cato Institute and expressed concern about Joe Biden’s new law.
“We know this was a strategic step to protect the American economy and we also know there will be many people in DC and across the country who will support it.
“But it’s important that these moves don’t confuse long-time allies and partners like the UK with those other countries that might want to harm American interests,” she said.
This is of course the code for China. It has a long history of subsidizing businesses and blocking imports to develop its own industry. China is home to around 80% of the world’s production of electric vehicle batteries, for example, and a growing share of the car assembly industry.
Trade lawyers are clear that the US law violates World Trade Organization trade rules by conditioning subsidies on local manufacturing and excluding imports.
But even Brussels is reluctant to file a complaint against the United States when it needs its support in the fight against Russia.
David Henig, a trade expert at the European Center for International Political Economy, said the UK was understandably stuck between the world’s three big power blocs – the US, EU and China.
“There’s not much the UK can and should do about the Cut Inflation Act,” he told me. “We chose not to be a global decision maker.”
“If the WTO is no longer important and the world is moving towards protectionism, we cannot compete with subsidies. We must compete with stability, smart regulation and predictable rules. »
I’ll leave it to the UK commentators to judge how that plays out.
But Rishi Sunak’s government is at least trying to make common cause with the EU, officials say. He joined other U.S. allies such as Japan, Canada and South Korea in making representations.
The Department for International Trade said it was ‘disappointed’ that Washington has adopted policies ‘which will harm UK businesses and impact global supply chains in batteries, electric vehicles and wider renewables’ .
“Protectionism affecting our friends and allies is not the answer to the global challenges we face and risks disrupting industries that are essential to us all if we are to achieve net zero.
“The Secretary of Commerce has raised the issue with the Biden administration and senior officials from both parties, and we continue to call for immediate action to reassess the impact of these discriminatory tax credits.”
Biden has promised to “tweak” the law in its implementation phase, but it comes into effect on January 1 and time is running out.
EU Trade Commissioner Valdis Dombrovskis left Washington this week after “more optimistic” talks than when he arrived, he said.
The most promising signals come from the area of subsidies for electric vehicles.
Under the IRA, a $7,500 electric vehicle tax credit is only available for models assembled in the United States and with batteries using materials from countries with which the United States has a free trade agreement.
But Biden clarified that point last week after meeting with French President Emmanuel Macron at the White House. “This was added by a member of the United States Congress who acknowledges that he was simply talking about allies; he didn’t mean, literally, a free trade agreement. So we can do a lot,” the president said.
EU officials also point to an article that exempts commercial vehicles from local content rules. This could include vehicles that consumers lease for multiple years.
The UK motor industry lobbied the government for similar concessions.
Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, told me: “The UK and US motor industries have a long and productive relationship, supporting jobs and vehicle manufacturing across the Atlantic. Measures that support free and fair trade between us should therefore be encouraged, rather than those that seek to protect individual markets.
“[The] SMMT is in dialogue with the government to ensure that UK-made electrified vehicles, batteries and critical components continue to be competitive in the US market and support the administration’s goal that half of all new vehicle sales should be covered by these technologies by 2030.”
I will be monitoring developments elsewhere in the FT over the next few days.
Brexit in numbers
Kemi Badenoch also said in his speech at the Cato Institute that the ‘trope’ of the UK withdrawing from the world was completely wrong.
“I voted to leave the European Union and saw Brexit as a unique opportunity for the UK to embrace the world. And trade was – and still is – at the heart of that,” a- she declared.
She then added, “So why does it feel like everyone is getting more protectionist?”
To some extent because they are. While President Joe Biden reversed some policies of his “America First” predecessor Donald Trump, he added some of his own in a growing rivalry with China.
The EU has responded to Trump and Beijing with a list of new unilateral trade defense measures that now come into effect.
The Covid pandemic, followed by the war in Ukraine which drove up the cost of food and fuel, also led to trade restrictions.
Trade experts warn not of de-globalization but of fragmentation, with the world divided into blocs that trade with each other, but less with medium-sized independent countries like the UK or New Zealand.
The World Trade Organization warned this week of rising trade-restrictive measures.
Ngozi Okonjo-Iweala, Director General of the WTO, said: “Members have increasingly implemented new trade restrictions, particularly on the export side, first in the context of the pandemic and more recently. in the context of the war in Ukraine and the food security crisis.While some of these export restrictions have been lifted, many others persist.
Of the 78 restrictive measures on the export of food, feed and fertilizers introduced since the start of the war in late February, 58 are still in place, she said, covering around 56.6 billions of dollars in trade.
Some restrictions have also been eased, but overall trade has become less free over the past year.
“The stock of import restrictions in place has also continued to grow. As of mid-October 2022, more than 9% of global imports continue to be affected by import restrictions put in place since 2009 and which are still in place,” Okonjo-Iweala added.
Badenoch in his speech made it clear that protectionism was increasing due to uncertainty and fear of job losses.
“So if we want people to feel less protectionist, we first have to make them feel more secure. And we need to show how free trade and free markets, when properly implemented, provide security. It’s a big job.
And, finally, three unmissable Brexit stories
Car manufacturers warned that the price of many electric vehicles made or sold in the UK and Europe could jump by 10% or more from 2024 after Brussels said it would not extend tariff exemptions agreed in the trade deal on Brexit.
Do you really want to live to be 100? If you answer yes, you are in the minority, like Sarah O’Connor. The FT employment columnist points out that even if life expectancy is increasing, healthy life expectancy is declining, and since Brexit, especially in the UK.
The current dispute over North IrelandBritain’s trade deals with the EU and the UK have sparked the same neuralgia that surrounded the granting of statehood to the six northernmost counties a century ago, writes Philip Stephens.
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