Hello from Washington, where almost all eyes have been on the confirmation hearing of Amy Coney Barrett, Donald Trump’s third Supreme Court nominee, on Capitol Hill, as she dodges questions about how her views on abortion, healthcare and gun rights could influence her judicial decisions.
Our eyes, however, are on the World Trade Organization, which yesterday came out with its latest ruling on the Airbus-Boeing dispute. Our main piece looks at what might happen next. Our person in the news is shiny new EU trade commissioner Valdis Dombrovskis, while our chart of the day looks at South Korea’s cultural exports.
The WTO’s difficult second album
It’s finally here. Like a difficult second album, the World Trade Organization’s ruling on Airbus-Boeing took longer than expected, but it has arrived.
For those who have not been following, this is the long-awaited ruling expected from the WTO outlining the retaliatory measures the EU can take against the US for its state support of Boeing. The US has already hit Europe with tariffs on $7.5bn-worth of imports over state support for Airbus.
So what next?
People have for some time been hoping this ruling would break the deadlock between the two sides on negotiating some kind of resolution to the fight over subsidising airlines. The logic goes that while the US can put tariffs on Europe without fear of retaliation, it does not face much political pressure to engage in talks. This ruling gives Europe some leverage.
The first obvious point to make is that EU is allowed to levy tariffs on just $4bn of US goods, while the US can hit $7.5bn of European goods. The US sees the lower amount as somewhat of a vindication of its position that Europe is definitely the worst offender of the pair when it comes to subsidising airlines — and it definitely gives Brussels less bargaining power than it might have hoped.
Nevertheless, the Europeans have come up with a cunning mix of American items to put tariffs on, including aircraft, diggers and fitness machines — and as is customary has carefully targeted some products to cause political hurt. For example — it’s gone after Florida’s blueberries: Florida is a swing state in the upcoming presidential election, so swift application of those tariffs may not be a point in Trump’s favour.
The United States Trade Representative punched hard on Tuesday morning. While a victory dance was to be expected, it went further and argued that if the EU actually dared to go ahead with those tariffs, it would be forced to respond. While pleased that the WTO had granted Europe less room for tariffs than had been granted to the US, the US went further and argued that, actually, the correct answer was that Europe could put no tariffs at all on the US. It pointed out that the WTO ruling was in fact authorising retaliatory tariffs solely on a tax-break given by Washington state, and given that this tax break was repealed in April, the $4bn of tariffs had “no legal basis”.
The prospect of more tariffs everywhere is not good for the transatlantic relationship. The good news is that both sides say they want to come to an agreement on how to settle this dispute, and Washington is likely to try harder now that there will be political pressure in the form of US exporters unkeen on tariffs being applied to their goods.
For its part, the US claims that its state aid problem with Boeing has been fixed. But Robert Lighthizer’s USTR wants more from Europe — earlier this summer, he suggested that a negotiated solution would involve not only “commitments” from Airbus and European backers “not to do it again”, but would also involve “paying back some element of the subsidy”. In July, Airbus also put out a statement that it was no longer taking government handouts. New European trade commissioner Valdis Dombrovskis has called for the US to remove its tariffs so that the two sides can focus on reaching a long-term agreement.
An intermediate solution was suggested last October by commerce secretary Wilbur Ross. Speaking to the FT, he suggested that the amount awarded to the EU could simply be subtracted from the amount awarded to the US. That would still leave the US with tariffs of $3.5bn on European goods, and would likely lead to the US being able to select which items it left tariffs on. So it would hardly be the best deal for Europe.
Elsewhere, it’s reported that Europe will hold off implementing the tariffs until at least after the presidential election in the hopes that they can negotiate some kind of deal. But Republican-minded trade folk in Washington point out that Europe is unlikely to find the Biden administration totally sympathetic. They may have a point on this issue — the US and EU have argued over planes throughout both Democratic and Republican administrations. Biden has promised to make amends with Europe — but an agreement on how each country can support its aerospace champions seems far away, regardless of who is in the White House.
There’s still a chance things could escalate in the meantime. Dombrovskis has said on the record that Europe will levy its $4bn of tariffs if the US does not remove its $7.5bn. If this proves more than fighting talk and Europe goes ahead, and the US holds good on its own threat to “respond”, the already fraught transatlantic relationship might well get worse before it gets better.
As Seoul music agency Big Hit Entertainment prepares its IPO this month, Korean music, film and television dramas have been steadily building popularity across Japan, China, Hong Kong and Taiwan, as well as south-east Asia. The value of these “cultural exports” grew fourfold to $10.4bn in 2019, from $2.6bn 10 years earlier. The figure equates to one month’s worth of computer chips exports, Korea’s most important product. For a country with few natural resources, the economic contribution of hallyu, the “Korean wave” of cultural exports, is significant.
Person in the news
Who is it?
New EU trade commissioner Valdis Dombrovskis.
Why is he in the news?
Valdis Dombrovskis was confirmed last week as the EU’s replacement trade chief, after his predecessor Phil Hogan’s shock resignation in August. He told the Financial Times that repairing the transatlantic relationship between the US and the EU would be a top priority, and that the US should withdraw its Airbus-related tariffs as a confidence-building measure.
A transatlantic settlement on how to support Airbus and Boeing is sorely needed, and Covid-19 is a chance to end the row over aircraft aid, writes the FT’s editorial board.
Germany has warned of the serious economic damage that would stem from a no-deal outcome to the EU-UK trade talks as it called for rapid progress in the limited window of time left to negotiators.
Who would China vote for in next month’s US presidential election? Any accommodation towards China from a Biden administration would be shortlived, experts caution.
The best trade stories from Nikkei Asia
Japan is planning to sign an agreement to export defence equipment and technology to Vietnam, part of its push to bolster the defence capabilities of Indo-Pacific nations to counter Chinese maritime advances.
Nikkei Asia interviews Alen Wu, chief executive of Chinese smartphone maker Oppo, who plans to make a play for growth in Europe as Huawei slips.
Nato warns China’s military ambitions threaten international order
Nato leaders have warned that China poses “systemic challenges” to the rules-based international order, in a sign of growing western unease over Beijing’s military ambitions.
Members of the transatlantic alliance convening in Brussels on Monday cited activities such as disinformation, Chinese military co-operation with Russia and the rapid expansion of China’s nuclear arsenal as part of the threat, according to a Nato communiqué.
The strength of the statement shows how far relations between the west and Beijing have deteriorated in the 18 months since Nato countries last met. Then they had issued a cautious statement about the “opportunities and challenges” presented by China.
The tougher language at US president Joe Biden’s first Nato summit comes as members of the 72-year-old cold war-era military pact vowed to widen co-operation in new theatres of conflict from cyber space to outer space. The Nato communiqué followed a tougher line from the weekend’s G7 meeting, when the club of rich democracies criticised China over human rights, trade and a lack of transparency over the origins of the coronavirus pandemic.
Jens Stoltenberg, Nato secretary-general, insisted Beijing was “not an adversary” but said the alliance needed to “engage with China to defend our security interests”.
“There is a strong convergence of views among allies,” he said, adding that Nato was primarily concerned about Beijing’s activities in the group’s Euro-Atlantic sphere of operation. “China’s growing influence and international policies present challenges to alliance security.”
China’s “stated ambitions and assertive behaviour” posed “systemic challenges to the rules-based international order and to areas relevant to alliance security”, said the summit communiqué, approved by the leaders of the 30 Nato member states.
“We call on China to uphold its international commitments and to act responsibly in the international system, including in the space, cyber and maritime domains, in keeping with its role as a major power.”
The communiqué pointed to China’s “coercive policies”, its accumulation of nuclear warheads and sophisticated delivery systems, and its participation in Russian military exercises in Atlantic region waters. Another trend troubling Nato allies is the involvement of Chinese companies in critical infrastructure in Europe, such as ports and via telecommunications company Huawei.
Nato said it would aim for “constructive dialogue” with Beijing “where possible”, including on climate change, in a sign of more nuanced views held by some of the alliance’s members.
The Nato broadside reflects an attempt by the Biden administration to use his first European trip to mobilise allies to push back against China.
Beijing hit back at criticism by the G7 club of rich democracies this weekend, accusing the group of “sinister intentions” and “artificially creating confrontation and friction”.
The Nato leaders also pressed ahead with efforts to modernise a grouping originally set up as bulwark to the Soviet Union. Nato is now pulling back from an era of “expeditionary” international missions, with its forces preparing to leave Afghanistan along with US troops after almost two decades.
The Nato heads of state and government approved a cyber defence strategy and extended existing powers to invoke the alliance’s “Article 5” principle of collective defence, in cases of co-ordinated cyber attacks.
“[This] will upgrade the defence, political and intelligence dimensions of cyber across the alliance,” Jake Sullivan, US national security adviser, said before the meeting.
UK prime minister Boris Johnson had also called for more investment in cyber defences in the wake of the Covid-19 pandemic, when hostile states were accused of carrying out cyber attacks on allies’ health systems.
Nato leaders also pushed through measures to strengthen their collective response to attacks on satellites, and to build capabilities in emerging technologies such as artificial intelligence. Members of the alliance have become increasingly preoccupied with potential military uses of AI and with the growing activities of China and Russia in outer space.
As well as confronting external threats, Nato faces some chronic internal divisions, notably between Turkey and some member states such as France in the eastern Mediterranean.
Additional reporting by Helen Warrell in London
Biden says he is open to exchange of cybercriminals with Putin
US president Joe Biden said he was open to Russian president Vladimir Putin’s proposal to hand over cybercriminals to the US if Washington did the same for Moscow, just days before the two leaders meet for a summit in Geneva.
Biden and Putin will sit down in Switzerland on Wednesday for their first face-to-face meeting since the former was sworn in as US president. Both leaders said at the weekend that relations between their two countries were at a low point, but Biden’s latest comments suggested there could be room for co-operation.
Speaking at the conclusion of a meeting of G7 leaders in the UK on Sunday, Biden told reporters he was receptive to Putin’s suggestion of reciprocal extradition of cybercriminals responsible for disruptive ransomware attacks.
Earlier on Sunday, Russian state TV aired an interview with Putin in which the Russian president said that Moscow and Washington must “assume equal commitments”.
“Russia will naturally do that but only if the other side — in this case the United States — agrees to the same and will also extradite corresponding criminals to the Russian Federation.”
Asked about Putin’s comments, Biden said: “Yes, I am open to, if there are crimes committed against Russia, that in fact are people committing those crimes are being harboured in the United States, I am committed to holding them accountable.”
“I was told as I was flying here, that [Putin] said that,” Biden added. “I think that is potentially a good sign of progress.”
An increasing number of audacious ransomware attacks has paralysed companies in recent weeks. These have included the disruption of the Colonial Pipeline, which provides petroleum supplies for much of the US east coast, as well as operations at JBS, the Brazilian meat processing company. The White House has said it believes both attacks originated in Russia.
Jake Sullivan, US national security adviser, later clarified that Biden had not signed up to a “prisoner swap”.
“What he was saying was that if Vladimir Putin wants to come and say I am prepared to make sure that cyber criminals are held accountable, Joe Biden is perfectly willing to show up and say cyber criminals can be held accountable in America, because they already are. That is what we do,” Sullivan told reporters on Air Force One en route to the Nato summit in Brussels, the second leg of Biden’s first foreign tour as president.
“This is not about exchanges or swaps or anything like that.”
Putin told NBC News in an interview that aired on Friday that relations between the US and Russia were at their “lowest point in recent years”. Biden on Sunday said that he agreed with the characterisation, but also pointed out areas where he believed the two countries could work together.
The White House confirmed on Saturday that Biden would hold a solo press conference following the summit with Putin, rather than share a stage as his predecessor Donald Trump did with the Russian president in Helsinki in 2018.
“This is not a contest about who can do better in front of a press conference or try to embarrass each other,” Biden said. “It is about making myself very clear what the conditions are to get a better relationship.”
He added: “Russia has engaged in activities which we believe are contrary to international norms. But they have also bitten off some real problems they are going to have trouble chewing on. For example, the rebuilding of Syria, of Libya.”
“I am hopeful that we can find an accommodation that can save the lives of people in, for example, Libya.”
Construction sector warns rising costs will eat into EU recovery plan
Construction industry executives across Europe have warned that “dangerous” price rises and shortages of many building materials risk undermining the EU’s flagship €800bn economic stimulus programme.
The EU construction sector generates almost 10 per cent of the bloc’s economic output and vast infrastructure projects make up a sizeable proportion of Brussels’ recovery fund, which will distribute grants and loans to rebuild member states’ economies after the Covid-19 pandemic.
But prices of construction materials from steel and wood to concrete and copper have begun to rise sharply in recent weeks as the economic rebound both in Europe and elsewhere — including the US and China — triggers a building boom.
According to the European Construction Industry Federation (FIEC), bitumen prices have risen 15 per cent in only three months, cement prices were up 10 per cent in a single month and wood prices were up over 20 per cent.
Public infrastructure projects usually impose penalties on builders for delays, while contractors often have to bear the cost of unexpected price increases.
Domenico Campogrande, director-general of FIEC, warned that the price rises and extra delays risked diluting the impact of the EU funds.
“The danger is that we have this big EU recovery plan but if 30 to 40 per cent of these funds are absorbed in extra financial instruments to cover the higher prices, it would be a real nonsense as it won’t go into the real economy,” he said.
In a recent letter to the European Commission, the FIEC expressed “alarm” at the price rises and shortages of materials, including a more than doubling of the Italian price of steel bars used to make reinforced concrete in four months to March.
“This phenomenon is jeopardising the construction sector’s contribution to economic recovery and is threatening the potential impact of European recovery programmes,” it said.
In Italy — the biggest beneficiary of the stimulus cash from Brussels — the government is planning to spend more than €100bn of its EU funding on building new infrastructure over the next five years. But the construction sector has warned officials that it will struggle to rise to the challenge without major reforms.
“We are facing shortages of many basic materials for construction and this is very dangerous as Italy is being hit harder than the rest of Europe,” said Flavio Monosilio, research director at ANCE, the association of Italian construction companies. “This crisis is at the heart of the new EU recovery plan.”
Construction executives blame several factors for the bottlenecks, including the sharp rebound in demand which has outstripped the supply of materials in many countries, as well as pandemic-related disruption to supply chains and continued trade tensions.
Some materials have been hit by additional problems such as a bark beetle infestation that has hit wood production, and delays in the redistribution of unused steel.
Thomas Birtel, chief executive of Austrian construction group Strabag, said price rises had “increased tremendously in the last two weeks” and the company had to “report delays on individual construction sites because the material is simply no longer available”.
Strabag, which built the Copenhagen Metro in Denmark and the Limerick Tunnel in Ireland, operates its own concrete and asphalt plants, but Birtel said: “Construction is a small-scale business and it is not even possible to control the supply chains for all building materials.”
In Germany, 44 per cent of construction companies surveyed by the Ifo Institute in May reported problems procuring materials on time, up from less than 6 per cent in March.
“We haven’t seen a bottleneck like this since 1991,” said Felix Leiss at Ifo. “This evidently caused construction activity to slow down in April, at least temporarily.”
Production in the German construction industry fell 4.3 per cent in April from the previous month, despite companies in the sector reporting a record order backlog of €62bn in March.
“Many producers are unable to supply the materials before the end of the year and that’s a real problem,” said Stephan Rabe at the German construction industry association. “A lot of money is going into public and private sector construction projects in the US and China and that is sucking up a lot of materials. Wood is being produced in Germany and exported to the US, so it is in short supply here.”
Some German politicians have called on Berlin to seek temporary EU export restrictions on wood and other materials.
“It will take time to go back to normal — at least the end of the year,” said Campogrande.
Some countries, such as France and Germany, have responded by easing the rules on some public sector construction contracts, waiving fees for delays and compensating contractors for unforeseen price rises.
Monosilio said Rome was yet to offer any relief to the sector, which has been battered by a decade-long fall in public infrastructure investment, a lack of funding from banks and long delays in project approvals and payments.
Italy’s prime minister Mario Draghi has said the “destiny of the country” depends on the success of a €248bn package of investments and reforms mostly funded by the EU’s Recovery and Resilience Plan. It includes investment in high-speed train lines, renewable energy facilities, smart electricity grids and energy efficient buildings.
EU states have a poor record in distributing funds; in the six years to 2020, they on average only spent just over half the money they were allocated by Brussels.
Without reforms to address the Italian construction sector’s problems, Monosilio said similar problems could bedevil the EU’s recovery spending efforts.
“The Draghi government absolutely wants to improve the situation,” he said. “[But] it is a sword of Damocles hanging over the whole European project.”
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