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Analysis

Long road lies ahead for UK-US trade talks

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Trade talks between the UK and US were already facing mounting obstacles before Boris Johnson’s threat to rewrite his Brexit divorce treaty drew anger from senior politicians in Washington.

Led by top Democrats including presidential candidate Joe Biden and Speaker of the House of Representatives Nancy Pelosi, Mr Johnson was told in no uncertain terms that a trade deal would be blocked if new laws designed to limit the EU’s influence over trade in Northern Ireland threatened the fragile peace in the UK region.

“Any trade deal between the US and UK must be contingent upon respect for the [Good Friday] Agreement and preventing the return of a hard border. Period,” tweeted Mr Biden last month.

Lauded as one of the great prizes for post-Brexit Britain, leading figures in Donald Trump’s administration were promising in February that a US-UK trade deal was “top of the list” of priorities.

But nearly eight months later and after four rounds of talks, officials and trade experts acknowledge that a long road still lies ahead. UK hopes of clinching a deal with Mr Trump before the presidential election — now plunged into turmoil by the president’s hospitalisation with coronavirus — have quickly faded.

“There are political obstacles, there are substantive obstacles, there are timing obstacles,” said Dan Ikenson, director of trade policy studies at the libertarian think-tank the Cato Institute.

While officials on both sides speak positively of the progress made so far, they acknowledge the difficulties of conducting trade negotiations largely online due to restrictions imposed by the coronavirus pandemic.

Trying to secure a trade deal in the same year as the election has only added to the difficulties along with the increasingly febrile atmosphere of US domestic politics and the possibility of a changeover of top trade officials and negotiators. 

The most contentious issues around agriculture and food standards, market access for US drug companies, and rules of origin are only in the very early stages of being talked about.

Nasim Fussell, a lawyer with Holland & Knight who was recently the chief trade counsel to the Republican-chaired Senate finance committee, which must approve a trade deal, said that while there was “genuine desire” on the US side to strike a deal, November’s US presidential election would be distracting. 

“It’s just very difficult in an election year,” said Ms Fussell. “I mean we’re not just getting an election year, we’re in the home stretch, and it is just tough to see this not getting in the way.”

While the outcome of the election has been thrown into further uncertainty by the president’s illness, the long-held assumption in the UK has always been that a victory for Mr Trump would help smooth the way to a deal with London. In contrast his rival Mr Biden has indicated that domestic political concerns would be at the top of his agenda were he to gain control of the White House, with trade — including a trade deal with the UK — falling behind as a priority.

The talks also face another deadline — in July, an obscure piece of US legislation that both governs the process through which trade deals pass through Congress and sets out the overarching principles of US trade policy expires. 

When protected by that legislation — known as the Trade Promotion Authority — trade deals are effectively “fast tracked” through the US Congress with lawmakers unable to make substantial changes or amendments to the text of the deal, although they remain able to vote for or against the deal as a whole.

In order to be protected by the TPA, a US-UK trade deal must be put before the US Congress by April. If that deadline is missed, the deal will either be put before Congress without the fast-track protections offered, and risk being bogged down in dispute, or UK officials could wait for a fresh TPA to be negotiated. 

However, the current TPA took the US Congress several years to negotiate, and the next one is unlikely to be easier to secure. “It will definitely be the toughest negotiation for TPA I think that there ever has been,” said Ms Fussell. Lawmakers would want to debate at length the ideological and economic principles guiding US trade policy, she warned.

Alongside negotiating a fresh trade deal with the US, the UK faces a raft of broader disagreements with the US over digital taxation, state support for airlines, and steel and aluminium tariffs, all of which are being dealt with outside of the trade agreement. 

Washington has a series of painful tariffs in place on British imports including Scottish whisky, and threatened further tariffs on UK gin and vodka this summer before holding off on them.

British officials are hopeful that those remaining tariffs, which are related to a long-running dispute over airline subsidies, can be negotiated away once the World Trade Organization issues a ruling determining the level of tariffs European countries can levy on the US.

Steel and aluminium tariffs, which the US has levied at 25 per cent and 15 per cent respectively since 2018, also remain in place on British metals as the US looks to boost its domestic capacity. 

Separately, the US is furious with the UK over its digital services tax, over which it threatens more tariffs. Washington has launched a wide ranging war on the taxes, arguing broadly that they discriminate against US tech companies such as Apple, Amazon and Facebook.

The UK has already passed its digital services tax — which requires companies to pay 2 per cent on British-generated revenues — into law, although it will not collect the first round of the tax until 2021.

Despite these challenges, John Dickerman, head of the Washington office of the CBI, said that while talks on the agriculture and pharma portions of a trade agreement may require some “significant trade-offs”, a deal would be possible. “Our position has always been that getting the right deal done within the right timeframe is the goal, not getting the quickest deal possible,” he said.





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Analysis

Pandemic shift to premium brands leaves drinks makers in high spirits

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Drinks industry chiefs may be hoping for a new “roaring 20s” when coronavirus restrictions ease, but millions of households have already embarked on an era of upmarket stiff drinks in their living rooms as Covid-19 reshaped global drinking culture.

Global sales of tequila, vodka and liqueurs outperformed the broader alcohol market in 2020 as housebound consumers took to sipping high-end spirits and mixing their own cocktails.

While parts of the population faced acute financial hardship because of coronavirus, wealthier consumers who kept their jobs have been left with extra disposable income as holidays and going out became all but impossible.

That has resulted in “huge trading up” when it comes to alcohol, said Ed Mundy, analyst at Jefferies, as these cash-rich drinkers also took advantage of lower retail prices compared with those for the same drinks served in bars and restaurants.

“If you’re stuck at home and you don’t want to go out to the shops, it’s easier to buy a big bottle of spirits than 24 beers. There’s more cocktail making at home going on . . . people are trading up from brandy to cognac, from cheap drinks to expensive drinks,” said Mr Mundy.

Sales of prestige spirits, which cost more than $100 a bottle, are forecast to grow by more than two-fifths to 2024, about four times faster than standard brands and almost twice the growth of premium bottles, according to drinks analytics group IWSR.

Chart showing that prestige and premium brands forecast to outperform standard spirits

The world’s largest distiller Diageo said its tequila sales shot up 80 per cent last year, driven by the high-end brands Don Julio and Casamigos, which was co-founded by the actor George Clooney. The boom, centred in the US, has followed a resurgence of upmarket “pure agave” tequila as a sipping drink.

“The trend of moving to spirits away from beer and wine has accelerated in the pandemic,” said Ivan Menezes, chief executive of Diageo. The group’s North American chief said late last year that household penetration for spirits had increased in 2020 at three times the rate of beer, and double that of wine.

Pernod Ricard said its whisky brands Jameson and The Glenlivet had shown “solid growth” despite the closure of stores in airports and train stations, which have traditionally been a major sales outlet for spirits.

Globally, overall alcoholic drinks consumption fell just 8 per cent in 2020 by volume from the year before despite many pubs, bars and restaurants being closed, according to IWSR figures. But there were substantial differences between countries.

Chart showing drinks sales fell modestly in 2020 as people switchedto cocktails and upmarket spirits

Shifts in drinking patterns, at first glance, appear similar in the UK and US: sales through the “on-trade”, which includes pubs, bars, restaurants and clubs, dropped by half in 2020 in both countries, while retail sales rose 12 per cent.

Yet overall drinking was far higher in the US last year, since retail sales of drinks to consume at home account for much more of the market. Before Covid-19, a fifth of alcohol sales by volume took place in bars and restaurants in the US, while it was twice the level in the UK, Jefferies said.

In South Africa, where periodic alcohol bans have been imposed, and Turkey, where drinks sales are closely linked to tourism, consumption dropped by about a third. Many countries still turned to a spirit of choice: Brazilians favoured gin, Colombians liqueurs and vodka, said Diageo.

While all drinks makers suffered to some extent from pub closures, brewers were especially hit: the world’s second-largest brewer Heineken announced 8,000 job cuts this year as it struggles to deal with the drop in beer drinking.

In China, where the pandemic originated but where the virus was brought relatively quickly under control, drinking declined by 9 per cent but retail sales of drinks by volume were up 23 per cent, the highest among major markets. Kweichow Moutai, which makes a luxury version of the national white spirit baijiu, reported a 10 per cent sales rise for the year.

Chart showing that drinking dropped in countries with strong barand restaurant cultures

For those with a thirst for less fiery drinks — Kweichow Moutai comes in at 35 to 60 per cent alcohol — another trend has taken hold: the cocktail in a can. 

Ready-to-drink cocktails, a broad group that also includes the flavoured alcoholic sparkling water known as hard seltzer, were the only category to record growth last year. Sales increased by more than 40 per cent, a surge that began in the US but is also evident in other markets such as the UK and China.

As vaccinations are rolled out, analysts at Bernstein expect a return to “near normal” in terms of socialising by the middle of 2021. “As the vaccines are rolled out and lockdowns ease, there will be enormous pent-up demand to socialise, glass in hand,” said Trevor Stirling, analyst at Bernstein. 

And entrepreneurs are making a similar bet; in the UK, despite the pain of coronavirus, the Wine & Spirits Trade Association said a record number of new distillers were registered in 2020.



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Pandemic fuels fast food’s appetite for UK expansion

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Fast-food chains are gobbling up high street sites left vacant by struggling retail and casual dining operators as they target aggressive expansion in the UK.

Adam Parkinson, European vice-president of the Filipino fried chicken group Jollibee Foods Corp, said the company wanted to be in “every major city in the UK” with plans to invest £30m, including opening 10 new outlets in 2021 and a further 15 to 20 next year.

The first will be a flagship site on Leicester Square in London, which is set to open as lockdown restrictions on restaurants lift in May.

German Doner Kebab claimed to be the UK’s “fastest growing restaurant chain” after it announced plans to open between 47 and 49 new outlets this year, doubling its estate and creating roughly 1,800 jobs.

The group, which launched in Berlin in 1989 but is based in Glasgow, had originally planned to open about 25 UK sites this year but Imran Sayeed, its chief executive, said the pandemic-driven boost in demand for takeaway food had spurred wider expansion. “New communities discovered us during the pandemic [and] that opened up avenues for us to look at some of the territories that we had not been looking at,” he said.

Same-store sales jumped 51 per cent last year compared with 2020 and were already up a further 38 per cent this year, Sayeed added.

Others that have announced plans to open multiple sites this year include “fast pizza” company Fireaway, which intends to double its UK estate to 110 sites, aviation-themed Wingstop, a US fried chicken brand, and the US fast-food chain Wendy’s, which has secured five sites for its return to the UK after it exited the market 20 years ago blaming high rents and operating costs.

Fast pizza group Fireaway intends to double its UK estate to 110 sites © Alamy

The growth is being fuelled predominantly by overseas chains which see the UK as an attractive market from which to launch a European expansion.

Jollibee also plans to open its first continental European site in Spain this year, while Wendy’s chief executive Todd Penegor said the company planned to “solidify a good beachhead in the UK to really prove out the model for the broader European business”.

Graeme Smith, managing director at consultancy AlixPartners, which advises Burger King UK, said the UK was a popular place for fast-food chains to establish themselves in Europe because of its “proximity to the US market is terms of cultural trends and even simple things like language”.

Thomas Rose, co-founder of property consultancy P-Three, said established brands such as McDonald’s and Burger King were also weighing expansion but were “more sensitive” about publicising their plans as negotiations were continuing with existing landlords over rent while stores had been closed.

The growth of fast-food chains stands in stark contrast to the travails of the wider restaurant sector, which has suffered under a series of government lockdowns that have allowed takeaway food to be sold but ordered dine-in restaurants to close.

Jollibee plans to open 10 new sites this year, with the first a flagship outlet on London’s Leicester Square © Jollibee

One in six casual dining restaurants shut during 2020, according to the industry research firm CGA, as the pandemic hit a sector already struggling with high debts as a result of private equity ownership, over expansion and increasingly steep operating costs. Overall, 3,267 food-led venues closed — equivalent to 63 a week — CGA data showed.

Rose said that the closure of casual dining chains and the administration of several large retailers such as Philip Green’s Arcadia, owner of Topshop, and Paperchase had opened up opportunities for new entrants to the UK’s fast-food market that would not have been possible before, as landlords desperately seek tenants to take up empty high street lots.

“Fast food was historically excluded from real estate because rents were too high and landlords were more discerning about what brands they chose,” he said.

Parkinson said: “Our prime location is always on the main pedestrianised street on a corner site and they were few and far between pre-Covid but now they are jumping into our laps.”

The rush to expand has in part been driven by significant drops in property prices as the pandemic accelerates consumers’ shift to shop, order food and entertain themselves online.

Rents have fallen as much as 40 per cent in some locations such as London’s Oxford Street but are typically down around 20 to 25 per cent.

Tom Grogan, director of Lemon Pepper Holdings, the franchise owner of Wingstop UK, said the crisis “has allowed us to secure preferential agreements with landlords”.

Sayeed said German Doner Kebab found that demand was driven by teenagers and 20-somethings who were looking for alternative types of fast food: “McDonald’s and Burger King are great brands but people are looking for new things rather than just eating burgers and fried chicken.”



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Investors lambast Sunak’s plans to raise corporation tax

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Shareholders have hit out at the British government’s plans to raise the UK corporation tax rate and warned it could make the country a less attractive place for investment.

Chancellor Rishi Sunak on Wednesday set out plans to increase the corporation tax rate from 19 to 25 per cent for larger businesses in 2023 — the first time it will have been raised since 1974.

The Treasury estimates the move will raise £17bn in 2025-26, but investors expressed concern because of how it could reduce dividend payments by companies.

Richard Buxton, fund manager at Jupiter, an investment group, said Sunak’s proposed increase in the corporation tax rate amounted to a “sizeable bite” out of businesses’ profits.

“When looking at potential profits over a three to five year time horizon investors will have to factor this in, and it will erode earnings and potential dividend growth,” he added.

“In turn, this may at the margin reduce the attraction of UK equities to both domestic and international investors.”

The UK is one of the world’s most popular financial markets for income-seeking investors.

Tom Stevenson, investment director at Fidelity International, a fund manager, said Sunak’s increase in the corporation tax rate would leave the UK just about competitive “but shareholders in the largest, listed companies that will bear the brunt of the measure will not welcome this”.

David Page, head of macro research at Axa Investment Managers, another investment group, said he expected more countries to raise corporation tax rates like the UK, but added: “Does this make the UK less attractive? At the margins yes.”

Nigel Green, chief executive of deVere Group, a financial adviser, said Sunak’s move “will reduce profit after tax and slash the profit available for dividends. This will not go unnoticed by those looking to invest in the UK”.

Sunak said in his Budget speech in the House of Commons that even after his corporation tax reform, the UK’s headline rate would still be the lowest among G7 nations.

But experts said the UK does not look as competitive internationally on other measures, because it is much less generous than other countries — including France and Germany — in the share of capital spending that companies are allowed to set against taxable profits.

An OECD measure of the effective marginal corporate tax rate — the amount of tax a hypothetical company pays on an extra pound of profit — shows the UK is close to the average among developed economies now, but could have one of the toughest regimes among the international organisation’s member nations after 2023.

“The headline rate is not the only thing that matters . . . Mr Sunak is taking a gamble that raising corporate taxes further up the international pecking order won’t have too terrible an effect on investment,” said Paul Johnson, director of the Institute for Fiscal Studies.

Corporation tax rise will give UK relatively high effective rate. Chart showing Effective marginal corporate tax rate, 2019 (%). With the increase in UK's corporation tax in 2023 it will be behind only Australia, Spain and New Zealand in the OECD with the Effective marginal corporate tax rate

The IFS said the extra revenue stemming from the higher rate of corporation tax would in the long run be less than the government’s £17bn a year estimate.

A higher rate would reduce incentives for companies to make investments that would increase profits in later years, it added.

Sunak said on Wednesday the majority of businesses would avoid the corporation tax reform given a rate of 19 per cent would apply to businesses making profits of less than £50,000 each year.

He added the rise in the corporation tax rate to 25 per cent for larger companies in 2023 will be preceded by a new allowance for capital spending, providing a “super-deduction” of 130 per cent on new plant and machinery. 

Dan Neidle, a partner at the law firm Clifford Chance, said the two year tax break would be a strong incentive for companies to accelerate investments that were in the works, although it was not long enough to generate new capital spending that took time to plan.

Tax campaigners TaxWatch UK also criticised the move, saying it would give a tax break to companies that have thrived during the pandemic, including Amazon.

Analysis by TaxWatch found Amazon Services UK, an entity that provides warehousing and delivery services, would have its corporation tax bill wiped out based on its last reported spending on plant and machinery. Amazon declined to comment.

Several smaller companies announced they would bring forward investments as a result of Sunak’s proposed tax break, although larger businesses including defence manufacturer Meggitt said that it would be more difficult to change long term plans.

Tony Wood, chief executive of Meggitt, said the company made “decisions on where to do [the] engineering effort based on what is right for the decade rather than what is right for the two year timeframe”.

But Gavin Cordwell-Smith, chief executive of Hellens group, which owns a paving slab manufacturer in Sunak’s Richmond constituency, said that “as a direct consequence of the [chancellor’s super deduction] announcement, we have already decided to accelerate our growth plans, including a new production line”.

Chemicals maker Christeyns will also bring forward investment plans — and likely increase them — in three factories, said director Nick Garthwaite. 

Some business leaders expressed concern at how Sunak’s planned tax break would only last two years, and be immediately followed by the increase in the corporation tax rate to 25 per cent.

“The chancellor wants a two year investment boom, but we will then go from feast to famine at a time when the consumer recovery might be tailing off,” said one executive.

Additional reporting by Sylvia Pfeifer in London



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