Hello from Brussels. Now here’s an odd thing out of Washington that has people here and at the World Trade Organization in Geneva puzzled. The Trump administration has been chuntering for years about pulling out of the government procurement agreement of the WTO (in fact the WTO in general, but specifically the GPA) given the constraints it puts on Buy American support for domestic industry. So on Friday there was an actual decision-making meeting of all the relevant administration bigwigs in Washington, which sounded ominous enough that US senators from both parties started sounding the alarm.
And then . . . nothing. Silence. We gather that last week was the deadline to take the decision in time to implement the withdrawal before Joe Biden takes over as president. So if the aim was to give Biden a nasty political dilemma about whether to reverse it, it’s too late. One theory is that the administration hopes Biden might even countenance withdrawing from a limited part of the GPA, regarding procurement of Covid-related meds, in which case there’s no hurry. What a way to run American trade policy. We guess that should be no surprise by now.
Today’s main piece is how the EU, in thrall to inward-looking ideas about digital sovereignty, continues to absent itself from the global governance of cross-border data flows. In Tit for tat, David O’Sullivan, esteemed former head of the EU trade directorate, answers three questions, while our chart of the day looks at how Japan has lessons for the rest of the world.
The data that Brussels prefers to stay at home
The EU may not have its own army, nor a big enough pile of cash it can use to prop up or bring down foreign regimes. But it is nonetheless convinced that it is a global power through the influence of its product regulations, which often get adopted around the world.
For old-economy products it has a point. The so-called Brussels Effect, which we rarely stop going on about, is powerful for cars, chemicals and food hygiene. Producers worldwide follow rules written in the EU.
The EU seems confident this will extend to the digital economy, with the General Data Protection Regulation providing a global model for privacy. Certainly, regimes inspired by GDPR have been implemented in a lot of countries. But Brussels has some serious weaknesses as a digital rulemaker. Tech governance isn’t just about domestic regulation: it’s also about cross-border data flows. Possessed by mistaken beliefs about the threat to privacy, the EU remains allergic even properly to discussing that issue in trade talks.
Other governments rely on ad hoc data transfer deals with the EU through “adequacy” findings. But those are fragile and prone to aggressive litigation at the European Court of Justice, as the architects of the US Safe Harbor and Privacy Shield agreements can tell you.
Unhelpfully, the EU is focusing inwards rather than outwards and continually threatens to make disruptive moves. The latest iteration is the proposed Data Governance Act, which the European Commission’s top officials will consider this week. The final model has been fought over fiercely, with an intense battle between the instinctive regulators (internal market commissioner Thierry Breton) and the liberalisers (Margrethe Vestager and Valdis Dombrovskis, respectively commissioners for competition and trade).
Early leaked versions made trade folks blanch. They contained a form of data localisation requiring information collected by public authorities to be kept within the EU. Even more dramatically they created an “establishment requirement” that required companies handling data also to be based within EU borders. Both would have taken digital protectionism to new heights: every lawyer we spoke to thinks they clearly violated WTO rules on services trade.
As it happens, a fierce defensive action by the trade directorate and its allies have softened the provisions considerably. According to our soundings, it seems that by the end of last week, the latest iteration had made the controls on movement of public data more flexible and precise, creating narrowly defined categories of sensitive information that would be subject to restrictions. Meanwhile, the establishment rule had been reduced only to a requirement to have legal representation inside the EU.
But it’s still notable that there is a strong impetus in the EU to veer towards “data sovereignty” and the use of digital information as a form of domestic industrial policy rather than focusing on cross-border information flow.
Meanwhile, much of the rest of the world is going the other way. The Apec (Asia-Pacific Economic Cooperation) grouping of economies, the pointlessness of whose summits was traditionally satirised with the nickname A Perfect Excuse to Chat, has done something substantive for once. It’s evolving a “Cross-Border Privacy Rules System”, a government-backed certification scheme to allow qualifying companies to move data internationally.
Unlike the GDPR, the Apec system is flexible, risk-based and voluntary. Sabina Ciofu, head of EU and trade policy at the TechUK business association in Brussels, calls it “in effect a competing system to GDPR”.
Apec economies are also putting together deeper and binding data flow agreements among themselves, including a New Zealand-Singapore-Chile deal. Australia and Japan are also spinning webs of data agreements, including one in the recent Japan bilateral trade deal with the UK — provoking much boasting in London that it had outflanked Brussels. And here’s the important thing: as Japan shows, it’s perfectly possible to combine these agreements with a domestic data protection regime that the EU considers as equivalent to GDPR and certifies by an adequacy finding (to be fair that’s a bit trickier for Britain, given its proximity to the EU).
Data flow is one of the most pressing issues of globalisation, and there’s lots of talk about it right now. There are, for example, intriguing ideas kicking about to create a plurilateral for data flows that could incorporate the EU, US, Japan and smaller countries such as Canada.
Yet still the EU continues to look at tweaking its internal market rather than facing out. A fragile and uncertain cross-border trade regime and yet a refusal to contemplate binding international laws: this isn’t the attitude that made the EU the global rulemaker for cars and chemicals. At this rate, the biggest threat to the Brussels Effect for the digital economy will be Brussels itself.
As the world’s developed economies struggle to recover from the economic impact of the pandemic, they face ultra-low interest rates and low growth. Japan has been coping with these trends for several decades and has lessons for the rest of the world. This is the first in a series of articles that will appear this week.
Tit for tat
David O’Sullivan, senior counsellor at the law firm Steptoe, previously head of the EU’s trade directorate and then its ambassador to Washington, joins us to answer three questions.
What does the EU have to do to rebuild the transatlantic trade relationship under a Biden administration?
The past four years have done great damage. The election of Joe Biden will bring a welcome course correction, but we cannot ignore the zeitgeist. There is a sense of fatigue in the US body politic with the country’s global trade role, combined with a sense that there needs to be more focus on domestic problems. This means finding common projects where we can collaborate, such as climate change, the setting of global standards, eliminating industrial tariffs, developing a common approach to China and revitalising the WTO. We will also need some (necessarily limited) movement on agriculture to address the pervasive American sense that we treat them unfairly (which is not true).
Will disputes like the negotiation of a final settlement over Airbus-Boeing, or the digital services tax, derail transatlantic co-operation?
The transatlantic corridor is the single most important trade and investment corridor in the world and will be for decades to come. Where there is much economic interaction, there will inevitably be some friction. We will not eliminate that. But we need to manage the tensions better and draw some of the poison out of the system. Solving the Airbus-Boeing row is a priority because only China gains from the present stand-off. Energising the OECD work could help defuse the digital sales tax issue. Regulation of the big tech platforms will be controversial but there is growing unease about their behaviour also in the US. Dropping US tariffs on steel and aluminium would also help.
What’s changed most in EU trade policy since you were at the directorate?
The single biggest change is the shift from the multilateral to the bilateral or regional approach. The failure to agree a new multilateral deal in the WTO was a major setback for which we are all still paying the price. The EU reluctantly fell back on bilateral trade deals as a second-best option and is now at the centre of the largest network of free trade agreements ever seen, including the granting of unprecedented access to our markets for the least developed countries. Europe has thus been the greatest driver of trade liberalisation in recent years. The EU, nonetheless, remains firmly committed to resuscitating the role of the WTO.
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The UK has secured a trade deal with Canada that will roll over the terms of an existing agreement between the EU and Canada when the Brexit transition period ends on January 1. Boris Johnson, UK prime minister, and his Canadian counterpart Justin Trudeau, settled the agreement in principle on Saturday in a video call. Mr Johnson hailed it as a “fantastic agreement for Britain, which secures transatlantic trade with one of our closest allies”. UK goods and services exports to Canada are worth about £20bn a year.
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German accounting watchdog chief to step down in wake of Wirecard
The head of Germany’s accounting watchdog is to step down following mounting political pressure over corporate governance shortcomings exposed by the Wirecard fraud.
Edgar Ernst, the president of the Financial Reporting Enforcement Panel (FREP), said on Wednesday he would depart by the end of this year. He is the third head of a regulatory body to lose his job in the wake of one of Germany’s biggest postwar accounting scandals.
The collapse of Wirecard, which last summer filed for insolvency after uncovering a €1.9bn cash hole, triggered an earthquake in Germany’s financial and political establishment.
Felix Hufeld, president of BaFin, the financial regulatory authority, and his deputy Elisabeth Roegele were pushed out by the German government in January for failing to act on early red flags suggesting misconduct at Wirecard. Ralf Bose, the head of Germany’s auditors supervisor Apas, was fired after disclosing he traded Wirecard shares while this authority was investigating the company’s auditor, EY. The German government is also working to revamp the country’s accounting supervision and financial oversight.
Meanwhile, criminal prosecutors in Frankfurt are evaluating a potential criminal investigation into BaFin’s inner workings and on Wednesday asked the market authority to hand over comprehensive documents, the prosecutors office told the FT, confirming an earlier report by Handelsblatt. The potential scope of any investigation as well as the individuals who might be targeted is still unclear. BaFin declined to comment.
Ernst came under pressure as the parliamentary inquiry commission uncovered that he joined the supervisory board of German wholesaler Metro AG in an apparent violation of internal governance rules, which from 2016 banned FREP staff from taking on new supervisory board roles.
Last week, the former chief financial officer of Deutsche Post filed a legal opinion to parliament defending his move. He argued that his employment contract was older than the 2016 ban on board seats and hence trumped the tightened governance regulations.
The German government had subsequently threatened to ditch the private-sector body which currently has quasi-official powers.
In a statement published on Wednesday evening, FREP said that Ernst wants to open the door for a “fresh start” that would be untainted by the discussions around his supervisory board mandates. “FREP is losing a well-versed expert in capital markets,” the body said.
Putin and Lukashenko’s ski fun shows cold shoulder to EU
As news of new EU sanctions against Russia began to leak out of a meeting of bloc foreign ministers on Monday afternoon, Vladimir Putin and his Belarusian counterpart Alexander Lukashenko were discussing a different challenge to the Russian president.
“You can try to compete with Vladimir Vladimirovich,” Lukashenko, in ski gear, said to his son, Nikolai. “But you probably won’t catch up,” he added, with a smile to Putin as the Russian leader pushed off down the slope.
Putin and Lukashenko are the men behind Europe’s two repressive crackdowns over the past six months, who have both jailed or exiled their most prominent opponents and seen their security forces violently assault and detain thousands of peaceful protesters.
But in a summit in the snow-covered mountains of Sochi, on Russia’s southern coast, they revelled in their twosome of leaders shunned and sanctioned by Brussels, in a calibrated message to the EU that the cold-shoulder was mutual.
For foreign policy experts there were few details to digest, despite the complex negotiations going on behind the scenes as the two post-Soviet states seek to recalibrate their future relationship.
Putin is keen to deepen integration on Moscow’s terms. Lukashenko is desperate for Russian investment and trade co-operation but is loath to relinquish sovereignty. Yet in place of diplomatic negotiations and policy pronouncements, photographs and video footage of the two leaders enjoying each other’s company were in full display.
At the outset, Putin, in jeans and an open-collar shirt and blazer, greeted his guest with a handshake and a hug. “Even our appearance, clothes and so on, suggest that these are serious negotiations in ordinary clothes,” Lukashenko quipped. “It suggests that we are close people.”
Pleasantries exchanged, it was time for the salopettes and ski boots, and a shared chairlift to the summit. Putin, pushing off confidently, set off down the gentle slope, Lukashenko in his wake.
After a short ride on snowmobiles back to their chalets, discussions continued over more than six hours — and what appeared to be three different sized wine glasses.
“The optics for the international audience is that they have been able to maintain their positions and nothing can be done against them,” said Maryia Rohava, a research fellow at Oslo university specialising in post-Soviet relations.
“Now we’re talking not just about sanctions against Belarus but also against Russia,” she added. “And it seems like they look at that like, ‘Well, we don’t care . . . We’re just enjoying our winter break like autocrats do.’”
To be sure, the fun on the slopes was not wholly without power games. Putin was clear to underscore he was the senior partner, from wrongfooting his guest at the top of the ski lift to releasing photographs of their meeting showing Lukashenko scribbling notes as his host spoke.
But the mood music was in sharp contrast to Lukashenko’s last visit to Russia in September. Then, with protests raging and the Belarusian leader’s position looking shaky, Putin reprimanded his guest for mishandling the unrest and risking the toppling of an ageing post-Soviet regime that could weaken his own.
Then, in a businesslike and cold atmosphere, Lukashenko pleaded with Putin that “a friend is in trouble” and was granted a $1.5bn loan from Moscow — but not before his host remarked that Belarusian people should be given a chance to “sort this situation out”.
The absence of such language on Monday also sent a subtle signal to other illiberal regimes, particularly those on the outer rim of Europe who, like Belarus in the past, find themselves lured towards Brussels by economic opportunities but repelled by the reforms and democratic standards demanded in exchange.
The message to the likes of Georgia, Moldova, Armenia and Turkey is that Putin, whose relations with the EU are at rock bottom, is always ready to talk.
Mitsubishi Motors set to reverse move to withdraw from Europe
Mitsubishi will formally consider the move at a board meeting on Thursday, according to three people with direct knowledge of the matter, following months of fractious discussions with its alliance partners.
A framework agreement between the three carmakers was reached on Monday during an alliance meeting, two of the people said. They added that the deal may still fall apart.
The decision to have Renault produce Mitsubishi cars at its French factories in a manufacturing deal, if finalised, would force the Japanese company to justify the U-turn — and face down accusations it yielded to a Renault campaign to protect French jobs.
The coalition between the three car groups is held together by Renault’s 43 per cent stake in Nissan, which owns 34 per cent of Mitsubishi, the smallest of the companies.
The French government’s 15 per cent stake in Renault has fed longstanding fears at the two Japanese carmakers that alliance strategy would be heavily influenced by French industrial politics.
In July Mitsubishi announced plans to in effect pull out of its lossmaking operations in Europe by cancelling model launches and running down its current line-up. This would lead to the end of all car sales in European markets as early as this year.
Following the announcement, some dealerships have already sold operations in preparation for Mitsubishi’s exit, while others are preparing to become repair garages for the brand instead.
An agreement to build Mitsubishi cars in France would be held up internally as a sign the Renault-Nissan-Mitsubishi Alliance was working under new management teams installed after the arrest and ousting of former boss Carlos Ghosn in 2018.
But people within both Mitsubishi and Nissan have expressed concern about such a deal that would mean Renault building Mitsubishi cars — increasing work for its French plants and providing a political boost in the country, where it is cutting jobs.
Executives were particularly worried about a potential repetition of Renault’s 2001 decision to move the Nissan Micra from the Japanese group’s Sunderland plant to its own underperforming Flins factory outside Paris. This was seen as a political move by the French group to shore up union support.
Mitsubishi said there was no change in its policy to halt development of new models in Europe.
Nissan and Renault said they would not comment “on speculation”. Renault added the alliance always “aims to enhance competitiveness and enable more effective resource-sharing for the benefit of all three companies” and that there “are always ongoing discussions between the three companies”.
Last month, Renault chief executive Luca de Meo suggested in an interview with the Financial Times that a deal could be done, saying: “We have space in our plants; we have platforms.”
De Meo also suggested that Renault could end up building more cars for Nissan in its French plants, something that was resisted by Nissan, according to people familiar with the discussions. That led to pressure being applied to Mitsubishi by both sides of the alliance, the people said.
Before last year announcing its withdrawal, Mitsubishi sold just 120,000 cars in Europe in 2019, giving it less than 1 per cent market share.
The tentative agreement reached on Monday is the first big deal between de Meo, who joined Renault as CEO last summer, and the heads of Nissan and Mitsubishi, and a test of the relationship between the three sides.
Nissan and Renault are focusing on turning round their own businesses as well as repairing the alliance, which came near collapse in the wake of the turmoil that followed Ghosn’s ouster.
De Meo announced a scheme to save €3bn by cutting factory capacity as part of a company overhaul last month, while Nissan aims to save ¥300bn ($2.85bn) through its own turnround plan.
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