This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every Monday
Hello from Brussels and welcome to Trade Secrets. Alan is away so I am here to fill you in on what is happening in the EU — still, as it likes to remind us, the world’s biggest trading bloc with the most trade agreements.
I will look at whether that number will increase and its direction of travel as it continues to tool up on trade defence instruments and economic security measures. Or, to put it bluntly, become more French. (Or one could say American and Chinese).
Get in touch. Email me at andy.bounds@ft.com
EU tries to get to grips with economic security
The next three months should see muscle added to the bones of a strategy outlined in the summer as Brussels responds to a unilateralist US and more coercive China. Time to stop being naive, as the French put it.
The immediate cause was Washington pressuring the Netherlands and Japan to restrict sales of high-end chipmaking technology to China. Fear of retaliation by Beijing has convinced The Hague to favour collective defence. It and other “like-minded” countries such as the Baltics and Nordics have long fought against a French push towards greater protectionism. But their alliance was hugely weakened when its biggest member, the UK, left the bloc in 2020.
Russia’s invasion of Ukraine has convinced its neighbours, generally free traders, to reduce reliance on possibly hostile partners. Lithuania’s decision to boost ties with Taiwan and back Ukraine led it to end almost all trade with Russia and China at the same time, noted one Brussels-based official.
The strategy has three pillars — tightening existing controls on inbound investments; shifting decisions on export controls from national governments to an EU-wide system; and, most controversially, regulating outbound investment.
Venture capital firms should not be funding Chinese companies to develop AI, weapons-grade technology and the like, and manufacturers should not be able to skirt export controls by producing the same parts in China, the logic runs.
The European Commission has pledged to come up with a list of sensitive technologies that could be subject to EU-wide export controls by the end of the month. It is likely to be short since the issue is sensitive, officials say.
By the end of the year expect a proposal to tighten inward investment screening. Most countries have now got some sort of national scheme and will probably have to refer more to Brussels, which can recommend, but not force, a rejection.
Outbound screening will take longer, but even the liberal VVD party of Dutch prime minister Mark Rutte has backed the idea in its manifesto for elections in November.
The Chinese question
The drumbeat for action against China is growing louder. President Emmanuel Macron last week addressed France’s ambassadors and railed against Beijing’s import tariffs on electric vehicles. He contrasted its 25 per with the EU’s 10 per cent.
Calling for reciprocity, he said: “We have to have a trade policy that defends Europe’s productive base.” He added: “I don’t want a France and a Europe where we can only buy technologies that are built either in China or in the United States.”
Chinese imports are rapidly gaining market share in the EU and its overseas markets such as the UK. Meanwhile, EU carmakers struggle.
Companies are wary of complaining about Chinese behaviour for fear of retaliation. So it’s significant that the trade commissioner told the Financial Times last month that he was willing to consider an “ex officio” case on his own initiative.
Many in Brussels suspect that DG Trade is examining the subsidies Chinese carmakers have received — but the fateful political decision to pull the trigger has not yet been made. It will only go ahead if there is significant member state support. Diplomats from countries pushing for action say it is the last chance to preserve hundreds of thousands of auto jobs.
Brussels has also been complaining loudly about the exclusion of European-made medical devices from China on the grounds that they do not meet Beijing’s standards. That could also result in EU barriers to Chinese imports of similar goods.
Valdis Dombrovskis will visit Beijing for the latest high-level economic and trade dialogue this month in the hope of making progress on these issues.
Progress on trade deals
Mercosur — don’t hold your breath. On the EU side, green NGOs and farmers have formed an alliance to block it. Fears that Brazilian and Argentine farmers would chop down trees to grow cheap food to undercut led Brussels to demand an additional instrument to protect the Amazon. Mercosur is now preparing its counterproposal. The deal was agreed in 2019 by previous residents in Brazil and Argentina and the clearest sign of desperation is hearing Eurocrats point out that Uruguay is really keen.
Mexico — waiting for Andrés Manuel López Obrador. The deal is done, but Mexico has not yet decided whether to ratify. EU officials say some in the president’s leftwing government are nervous of the labour and investor protections in the agreement. The US has been using the labour provisions in its own UMSCA deal to bring cases against Mexico City.
Australia — the commission was surprised when trade minister Don Farrell broke off talks in July rather than clinch the agreement. As ever, the beef is over beef. Canberra is pushing for more sheep and cattle meat quota, having lost market share in recent years. Things could move again after October 14 and a difficult referendum on Aboriginal rights. If the government wins, it might feel empowered to face down farming interests. If it loses, a possibility that grows by the day, it could be too weak to do so.
Charted waters
China is following its usual industrial playbook in the battery market. New analysis shows it is building far more plants than it needs for electric cars and grid energy storage thanks to state subsidies and soft bank loans.
Production capacity at China’s battery factories is expected to reach 1,500 gigawatt hours this year — enough for 22mn EVs — more than twice forecast demand, according to data from CRU Group, a research firm.
The belief among EU battery makers is that the Chinese aim to “pump and dump”, sending cheap subsidised batteries on to the world market.
This has already happened with steel, aluminium and solar panels. There are also no EU producers left of a host of critical raw material such as magnesium because of cheap Chinese production flooding the market.
After the EU put tariffs on Chinese steel production, it invested in plants in other countries and Brussels has now hit Indonesian plants with similar measures.
With batteries and carmakers viewed as foundational industry by many member states, action is likely once again. (Please see above!)
Trade links
The drugs trade is booming. My Brussels-based colleagues Laura Dubois and Ian Johnston went to Antwerp, Europe’s second-biggest port, to find out how cocaine smugglers exploit security gaps.
Chinese lenders are replacing western banks in Russia, extending billions of dollars’ worth of loans to the country. The move is part of Beijing’s push to establish the renminbi as an alternative global currency to the dollar, write Owen Walker and Cheng Leng.
How do you de-risk from China without consequences? Italy’s foreign minister Antonio Tajani is in Beijing to find out as Rome’s hard-right government tries to extricate itself from the Belt and Road Initiative.
Politico has a profile of the EU’s chief trade enforcement officer, Denis Redonnet, who will be at the heart of any action against China. It features ex-trade commissioner Pascal Lamy and other former colleagues.
Trade Secrets is edited by Jonathan Moules
