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Trade floes and China’s Arctic shipping route to Europe

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Hello from Brussels. Sorry to talk Brexit news: we generally try to administer it only in moderation as excessive consumption is strongly associated with feelings of exhaustion, listlessness and nausea. But we can’t help recording that, according to UK prime minister Boris Johnson, Thursday was going to be the last day he would be able to come to an agreement with the EU or Britain would totally walk away and there would be no deal, SO THERE. Certainly, the EU summit isn’t going to make any big concessions to the UK, so let’s see what Johnson does in response.

Tall Tales is about how the economically insignificant but symbolically important subject in the Brexit talks, fisheries, reveals some rather fact-free attitudes on both sides. Also on a maritime theme, the main piece is how the overhyping of the new ice-free Arctic shipping channels tells us something interesting about globalisation. Our chart of the day looks at China’s medical exports.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at alan.beattie@ft.com.

Getting to EU on a slow boat from China

(It’s from a song.) Even planetary destruction through global warming apparently has its upside, and the opening of new trade routes through the melting of the Arctic pack ice is one of them.

Trade Secrets’ old sparring partner, conventional wisdom, has it that the Arctic is becoming one of the new theatres of geopolitical struggle for the big powers (mainly the US, Russia and China), marked by scrambles for mineral wealth and strategic influence. The trade part of this in the first instance is the Northern Sea Route, skirting the Russian coast. Melting ice is opening the passage and could potentially cut 10 days off the sea voyage from China to Europe, enabling container ships to avoid the bottlenecks of the Strait of Malacca and Suez Canal.

Beijing regards this as part of the Belt and Road Initiative, and is looking at investing in transport and digital infrastructure to consolidate its position there. Naturally, the project has acquired a cool name: the Polar Silk Road.

On closer examination, such as an admirable recent report from the Friends of Europe think-tank, this all seems a bit overdone. It’s not just that taking container ships through the Arctic seas is more uncertain, dangerous and environmentally controversial than many companies can countenance. It’s also, interestingly, that the development of globalisation is rendering fast single-stop long-distance trade routes less relevant.

For sure, there are gains to be made in the Arctic, particularly for Russia, in exploiting and transporting new mineral resources. But it’s a bit of a stretch to think the opening up of the ice-free passage is going to make a big difference to container shipping. For their part, big western companies have already ruled out using the route for the foreseeable, citing environmental concerns (the “black carbon” emissions from ships affect the snow quality and therefore the atmosphere). Maersk, the world’s biggest shipping company, did a trial run with a container vessel in 2018, but said it wasn’t environmentally or commercially sustainable. There’s also a reputational risk from safety, given the vicious polar storms and high seas: it’s a very long way from search-and-rescue services if anything goes wrong.

The Chinese company Cosco has few such qualms, and says it intends to exploit the route. But while it might be shorter than going via the Malacca strait and the Suez Canal, it will also require expensive icebreaking and ice-class vessels and will be subject to delays. If China is going to use the route, the Friends of Europe report concludes, it will be mainly as a diversification exercise to reduce the risk of relying on other sea lanes, not particularly to save costs.

So what’s this got to do with changing globalisation? Well, one of the reasons China won’t make much money out of the Arctic route is that container goods trade these days isn’t just about a poor country making stuff and shipping it a long way to a rich country. It’s more complex than comparative advantage and containers full of toys.

The development of globalisation is rendering fast single-stop long-distance trade routes less relevant © Lauryn Ishak/Bloomberg

As low-income countries (including China itself) in Asia turn into middle-income, and middle-income countries become rich, they become destinations for consumer goods, not just a place to pick up cheap inputs. Container ships coming from China don’t just chug all the way to Rotterdam without stopping. They do a lot of shorter-haul business, dropping off and picking up part-finished and finished goods around Asia, particularly in trans-shipment hubs such as Singapore.

China’s “labour cost arbitrage” model of competing on price to do basic manufacture has long been running out of space. Chinese incomes have risen and its exports become more sophisticated and time-sensitive. Increasingly, its companies use airfreight or the small but growing rail service to reach European markets.

As Financial Times colleagues have described, container shipping has survived surprisingly well during the pandemic. But in relative terms there is a secular shift away from transpacific and Asia-Europe transport towards intraregional routes, with the huge container ships that have traditionally dominated long-distance trade being supplanted by smaller and nimbler vessels. The problem with the Arctic route is not just that the crossing is dangerous, timings uncertain and the shipping emissions an environmental disaster: it’s that there’s nowhere interesting to stop on the way. 

No doubt there will be more ships ploughing through the Arctic waters on the Northern Sea Route in coming years than there are today. But it’s unlikely to be a pivotal moment for global goods transport. The nature of trade has changed too much for that.

Charted waters

The pandemic and the fiscal stimulus injected into economies around the world have been good for China’s exports, which have benefited from demand for the likes of work-at-home products and consumer electronics. Figures earlier this week showed exports from China rising at their fastest rate this year. Demand for medical supplies, though, is not quite as strong as it was after hitting a peak in June, suggesting an element of domestic stockpiling.

Column chart of monthly exports in $m* showing Chinese exports of medical supplies peaked in June

Tall Tales of Trade

Harrods department store is almost certainly worth more to the UK economy than its entire fishing and fish-farming industry © Mikecphoto/Dreamstime.

One of our favourite calculations of recent years was our eminent FT colleague Chris Giles’s estimate that the Harrods department store was almost certainly worth more to the UK economy than its entire fishing and fish-farming industry. Letting Brexit talks founder on the rocks of fishing rights would be like amputating your leg because you have an itchy toe. And yet here we are. Issues of actual economic significance to Britain’s service-based economy such as legal and accounting qualifications have basically been ignored while the negotiators argue about herring quotas.

Both sides have to do a bit of getting a grip here. The UK, lost in misty fantasies of being a proud island nation . . . something . . . our brave trawler lads . . . something . . . the Radio Four Shipping Forecast . . . something . . . needs to grasp that, while Brits might land a lot of seafood, they sell most of it to the EU and without a trade deal they’ll end up without a market. The EU sea-fishing nations, particularly France, should probably recognise that a largish island nation with the longest coastline in the EU is leaving the Common Fisheries Policy and there will probably be fewer fish to go round. It’s a real haddock for negotiators, for sure.

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Coronavirus latest: Boris Johnson extends lockdown restrictions in England to July 19

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New York state has the lowest seven-day average Covid-19 positivity rate at 0.44 per cent, governor Andrew Cuomo said, citing Johns Hopkins University data.

On Sunday, the state health department said 383 new positive cases were identified from 110,437 tests – a rate of just 0.35 per cent.

“We’re beating back Covid-19 across the state and New York has the nation’s lowest seven-day average positivity rate, but it’s going to take more vaccinations to get us across the finish line,” Cuomo said.

The state plans to offer “exciting incentives” for vaccinations, he added.

Cuomo said more than two-thirds of New York adults – 67.2 per cent – now had at least one vaccine dose, and 60 per cent were fully vaccinated.

“I encourage everyone eligible who hasn’t yet been vaccinated to take advantage of a free $20 lottery ticket.”

Scholarships in the State University of New York system and City University of New York were also being offered.

The number of new coronavirus cases tallied in the US has remained near levels not seen since the early days of the pandemic, an encouraging decline that has prompted some states to scale back their daily reporting of Covid-19 trends.

Infections, hospitalisations and deaths related to Covid-19 have dropped sharply since a winter surge, brought down by a vaccination rollout that kicked off in December. 

Overall about 64 per cent of American adults have now received at least one shot, according to the Centers for Disease Control and Prevention.

The US has reported 15,928 infections per day in the week ending June 10, which is down about half in the span of one month and 94 per cent from a January peak of nearly 251,085, based on a Financial Times analysis of figures from Johns Hopkins University.



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Hong Kong-Taiwan spat threatens cross-Strait business

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Official representation between Hong Kong and Taiwan is set to end this year as mounting political tensions threaten one of the region’s most important trade and investment relationships.

The number of staff in Taiwan’s representative office in Hong Kong has dwindled over the past two years as the territory has stopped issuing visas, with the documents of those who remain due to expire by the end of November.

Hong Kong also abruptly suspended operations of its representative office in Taipei two weeks ago, ending its official presence there. The stand-off has grown so severe that Taipei has begun making contingency plans for a situation without on-the-ground representation in Hong Kong, two senior Taiwanese government officials said.

The breakdown in relations follows rising military tensions between Taiwan and China and a crackdown by Beijing on pro-democracy groups in Hong Kong that has led some activists in the territory to seek refuge in Taipei.

China claims Taiwan as part of its territory and has threatened to annex it if the island fails to submit to its control indefinitely.

Analysts said that cutting official channels would undermine Hong Kong’s traditional role as a conduit for business and financial exchanges between Taiwan and China. Despite the dispute with Beijing over sovereignty, Taiwanese companies are among the largest foreign investors, employers and exporters in mainland China.

Taiwan air force personnel during the visit by President Tsai Ing-Wen
Military tensions between China and Taiwan have escalated, but investment and trade across the Taiwan Strait remains important to both countries © Ritchie B Tongo/EPA-EFE/Shutterstock

A significant part of trade across the Taiwan Strait trade goes through Hong Kong, and many Taiwanese investors in China also use Hong Kong for financial, taxation and legal purposes. Last year, Taiwan was Hong Kong’s second-largest trading partner, while Hong Kong was Taiwan’s fifth-largest, with HK$504bn (US$65bn) in total bilateral trade. Taiwanese companies invested US$912m in Hong Kong in 2020, while Hong Kong-registered companies invested US$555m in Taiwan.

“Hong Kong has been a springboard for Taiwanese companies into mainland China and it has also been a springboard for Chinese [companies] into Taiwan,” said Liu Meng-chun, a research section director at the Chung-Hua Institution for Economic Research, a Taiwanese government-backed think-tank.

Tensions between Hong Kong and Taipei have escalated over the past two years after the territory started demanding Taiwanese diplomats sign documents declaring their country part of China as a precondition for being issued a visa.

After Taipei refused, the number of staff at its office in Hong Kong began to dwindle, from 20 to eight today, according to the Mainland Affairs Council, Taiwan’s cabinet level China policy body.

Hong Kong, meanwhile, said it was temporarily closing its Taipei office because “Taiwan’s series of actions in recent years has severely damaged Hong Kong-Taiwan relations”.

A Hong Kong government official suggested the suspension came on instructions from Beijing.

“I think Beijing is of the opinion that [Taiwan’s representative office] affects national security,” said Sung Yun-wing, an economics professor at the Chinese University of Hong Kong, who is also a member of a semi-official think-tank, the Chinese Association of Hong Kong and Macao Studies, in Beijing.

“There have been reports that Taiwan has been encouraging the protest movement in Hong Kong, which has turned violent, so the protest movement is not only against the Hong Kong government but also Beijing,” said Sung. He added China was also concerned Taiwan was “sheltering” Hong Kong protesters.

While Taipei has been careful to avoid being seen as making it too easy for Hong Kong dissidents to flee to Taiwan, civil society groups in the country have supported the protest movement with advice, money and logistics. “This is something we cannot interfere with as they have done nothing illegal,” said a senior Taiwanese China policy official.

Historically, Hong Kong’s most important economic role in the Taiwan-China trade has been as a sea and air trans-shipment hub for Taiwanese companies to supply their factories in southern China with components.

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While analysts suggested that much of this commerce could continue even if official ties between Taiwan and Hong Kong were severed, they foresaw a sizeable impact on financial services, tourism and education.

“Hong Kong plays a very important role for Taiwanese private wealth management,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage.

He said many Taiwanese individuals had accounts in Hong Kong, where the local units of Taiwan’s banks offered them offshore investment products not accessible under the island’s stricter regulations.

Liu of the Chung-Hua Institution for Economic Research said many Taiwanese enterprises kept profits from their China operations with their Hong Kong affiliates for tax purposes.

“These things would become a lot more cumbersome without official representation because you would have to start sending documents back and forth for notarisation,” Liu said.



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Nato leaders fret China’s Atlantic ambitions

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China’s growing military and economic presence in the Atlantic region is expected to trigger a rare warning from Nato leaders about the potential security threat when they meet on Monday, diplomats said. 

From joint Chinese drills with Russia to western worries that China wants to set up military bases in Africa, the Nato focus reflects China’s primacy among western foreign policy concerns, in particular those of US president Joe Biden.

“This is not about ‘Nato going to China’,” said Claudia Major, a defence analyst at the German Institute for International and Security Affairs. “It’s about ‘China is coming to Europe and we have to do something about it’.”

In 2015, joint military drills with Russia brought the Chinese navy into the Mediterranean and the heart of Europe for the first time. Since then, China has built up the largest naval fleet in the world and invested in critical European infrastructure, including ports and telecoms networks.

“China [through its navy] has come through the Indian Ocean, into the Gulf, up to the Red Sea and they’ve been in the Mediterranean,” according to one British military official, who said China had not yet deployed submarines in the north Atlantic but could do so in future.

“You build nuclear submarines for range and stealth. And China does like to test the boundaries.”

The planned joint statement by the transatlantic security alliance, which diplomats said was still under discussion and subject to change, would be only the second time that Nato leaders have addressed the subject of China head-on. The first was in December 2019, at the insistence of the administration of Donald Trump.

But Biden is understood to be pushing for tougher language than the bland “opportunities and challenges” terminology used that time.

Nonetheless, how to deal with the issue represents a dilemma for the 30-member group, which was originally set up in 1949 to deal with cold war-era threats.

Internally, Nato countries are divided over how to treat China: member Hungary, for one, has good political relations with Beijing.

In addition, there is reluctance to confront Beijing in its own Pacific region — although the UK and France have followed the US in deploying ships to carry out freedom of navigation exercises in the South China Sea.

Chinese and Russian marines take part in joint exercises in China’s Guangdong province
Chinese and Russian marines take part in joint exercises in China’s Guangdong province © Li Jin/Getty

China’s joint military operations with Russia are viewed as a particularly unwelcome development by some Nato members. As well as their annual military exercises, Beijing and Moscow have recently added joint missile defence drills and training for internal security forces.

“Their [the Chinese/Russian] relationship is transactional and pragmatic rather than ideological,” the UK military official said. “But working together in any form provides confidence. And confidence is something we should be wary of.”

As the Center for a New American Security, a bipartisan US think-tank, warned in a January report: “Where Russian and Chinese interests align, Moscow and Beijing could eventually co-ordinate their combined capabilities to challenge US foreign policy.”

Another Nato anxiety is Africa, which China could use to expand its military presence in the Atlantic as part of its long-term goal to become a truly global armed force.

Gen Stephen Townsend, head of US Africa Command, told the US Senate in April that his “number-one global power competition concern” was what he described as Chinese efforts to establish a militarily useful naval facility on Africa’s west coast. “I am talking about a port where they can rearm with munitions and repair naval vessels,” he said.

Experts on the Chinese military said there was no evidence that Beijing was trying to establish such a west African base, yet. However, China has a base in Djibouti and has already used international anti-piracy missions in the Gulf of Aden to train thousands of military personnel and to build military relations with countries outside its usual neighbourhood.

Each time a naval contingent finishes deployment, for example, it typically takes a detour on the way home. Some have visited the Mediterranean and the east and west coasts of Africa.

Another trend vexing Nato allies is the growing involvement of Chinese companies in critical infrastructure in Europe, such as through telecommunications company Huawei.

Chinese state shipping company Cosco also owns a controlling stake in Piraeus, Greece’s largest port, and is reportedly in talks to invest in a Hamburg port terminal.

Such economic ties complicate Nato’s efforts to create a unified approach on China — as do the political relationships between Beijing and friendly European leaders.

That creates the potential for clashes, with the tougher stance of Washington and Jens Stoltenberg, Nato’s secretary-general, who last month warned that China was “coming to us” in areas including cyber space, Africa and the Arctic.

“There is a risk that having this discussion within Nato surfaces very uncomfortable differences between allies on how much China is actually perceived as a threat,” said Sarah Raine, an expert in geopolitics and strategy at the International Institute for Strategic Studies.

“The fact is that there are countries which are seen by hawks as making very pro-China arguments within Nato, at least with regards to being robust but not confrontational.”

Additional reporting by Katrina Manson in Washington



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