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Brexit trade talks: the three big sticking points explained

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Sustained by takeaway burgers, Brexit negotiators tried and failed in late-night talks on Sunday to solve persistent disagreements that have dogged future-relationship discussions since they began in March. 

Michel Barnier, the EU’s chief negotiator, warned EU parliamentarians and ambassadors on Monday morning that outstanding issues could still sink the talks, despite the vast bulk of an EU-UK trade deal having been drafted.

The fate of the agreement now rests on whether the EU can obtain satisfactory guarantees that the bloc’s companies will be able to compete with British rivals on a level playing field, and on whether the two sides can reach an understanding on fishing rights in UK coastal waters. 

Here are the problems that negotiators are striving to solve:

Fish

Mr Barnier told national ambassadors at Monday morning’s closed-door meeting that the two sides remained “objectively” far apart on the fishing issue.

The disagreements concern not just quotas and access rights to UK waters, but the fundamental question of the EU’s demand to link a deal on fish to the wider economic partnership.

The negotiations are broadly over how much of the €650m-worth of fish that EU boats catch annually in UK waters should be returned to UK fleets, both within the deep sea 12-200 nautical mile zone and the shallower coastal 6-12nm zone for smaller boats.

A person familiar with the talks said the UK had offered three years of “status quo” access for the 12-200nm zone, but no access at all for 6-12nm — which is particularly politically sensitive for France and Belgium where small family-run boats are key to coastal communities on both sides. The zone is also home to lucrative species such as scallops and langoustine.

After the three years proposed by the UK, it wants to revert to annual negotiations — a position the EU rejects. Britain also rejects EU demands to link fishing access rights to the wider trading partnership, which the EU wants in order to be able to take retaliatory measures in non-fishing sectors if there is disagreement on fishing rights.

Although the UK proposal would allow three years of access rights to the 12-200nm zone, the proportion of stocks EU boats would be able to catch would be significantly reduced.

The EU calculates that the UK proposal amounts to it surrendering 80 per cent of the €630m-worth of fish caught each year in the 12-200nm zone, so almost all of the non-coastal stocks quotas, in exchange for three-years fishing access to those waters.

By contrast, the person added, Mr Barnier has offered to cede €87m in deep sea stocks and €15m in coastal stocks, which even if expanded upon slightly — as some fishing member states expect — still places the two sides on what one EU diplomat conceded were “different planets”.

The discussions appear to have been further antagonised by a new UK move to ensure that after January 1 foreign-owned vessels registered in Britain would no longer qualify as British for the purposes of obtaining fishing quota. 

The move has particularly concerned the Dutch and Spanish, with one EU diplomat saying in moving to curb international ownership UK prime minister Boris Johnson was “doing a Maduro” — a reference to the self-sufficient economic policies of the Venezuelan leader Nicolás Maduro.

UK officials said that Britain had long been clear that vessels should have genuine economic ties to the flagged country, adding that this was also a concern for EU countries such as France.

UK officials said they had wanted to discuss the issue with Brussels for months but that this had been hampered by the EU’s unwillingness until recently to negotiate on the basis of joint legal texts.

Level playing field

The EU insists that any agreement must commit both sides to detailed, enforceable restrictions on state aid to make sure the UK cannot use subsidies to hand its companies an unfair advantage — Mr Barnier has said this is vital given that the trade deal would grant tariff-free access to the EU’s single market.

The bloc is also insisting on safeguards to tackle competition distortions that could arise if EU and UK labour and environmental laws diverge over time. 

Brussels wants the right for EU companies to challenge alleged level playing field violations in the UK courts. The two sides are split more generally over how any LPF guarantees would be enforced in the UK.

The EU also wants the right to take rapid unilateral measures to protect its market — for example by imposing tariffs on UK goods — if it thinks the UK is guilty of backsliding on regulatory commitments. Brussels argues that traditional arbitration processes are too slow to protect sensitive sectors.

But Britain counters that the demands stray beyond trade deals the EU has signed with other countries and are an affront to its sovereignty. 

One idea the two sides are examining is the creation of an “evolution mechanism” that would foresee consultations if the two sides’ regulatory standards diverge, with either side able to curtail access to its market as a last resort. 

But Britain has argued that the EU proposals are too prescriptive and would pressure the UK to copy and paste EU rules.

Governance and dispute settlement

Brussels wants to be able to quickly take action against the UK if it breaks commitments it has made under the trade deal. The issue that has become even more relevant since Mr Johnson decided in September to violate last year’s divorce treaty with the EU with new laws that override the withdrawal agreement in relation to Northern Ireland. 

One crucial disagreement is over Britain’s resistance to cross-retaliation powers that would, in the event of a dispute, allow either side to take action against one economic sector to punish rule breaking concerning another.

An example often cited by EU officials is that tariffs could be imposed on UK manufacturing should Britain renege on any fisheries agreement. 

Mr Barnier told MEPs and ambassadors on Monday that the UK was still resisting this kind of “cross suspension” weapon. 



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Europe

European Commission upgrades economic forecasts

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The European Commission has sharply raised its economic forecasts for the coming two years, as an accelerating vaccination campaign helps the eurozone recover from the historic blow delivered by the pandemic.

The euro area will expand by 4.3 per cent this year and 4.4 per cent in 2022, Brussels said on Wednesday, compared with previous forecasts for 3.8 per cent growth in both years. As a result, all member states are now expected to regain their pre-crisis output levels by the end of next year, following a historic 6.6 per cent slump in 2020.

The stronger outlook was driven by the rising vaccination rates and the prospect of lockdowns easing across the region, as well as improving export demand driven by a global rebound. Brussels for the first time fully factored in the impact of the €800bn Next Generation EU economic relaunch package, which is expected to begin paying out in the second half of the year.

“The shadow of Covid-19 is beginning to lift from Europe’s economy,” said Paolo Gentiloni, the EU’s economics commissioner. “After a weak start to the year, we project strong growth in both 2021 and 2022. Unprecedented fiscal support has been — and remains — essential in helping Europe’s workers and companies to weather the storm.”

Europe slid into a double-dip recession early this year amid renewed lockdowns and a shaky start to the vaccination effort. However, evidence has been mounting more recently that the economy has “moved up a gear”, according to the commission, which cited improved business and consumer sentiment surveys.

Further easing of containment measures combined with the early payouts from the recovery fund should mean economies would accelerate in the third quarter — including those with big tourism sectors, which should benefit from the return to “quasi-normality of social activities over the summer”, according to the commission.

Stronger global growth, driven in part by the US stimulus packages and improved growth in China, will also help lift the EU’s export sector and contribute to the recovery. The broader EU economy will grow 4.2 per cent in 2021 and 4.4 per cent in 2022, according to the forecast, also an upgrade from the February outlook. The bloc’s unemployment rate will hit 7.6 per cent this year before heading back down to 7 per cent in 2021.

Spain, which was the hardest-hit EU economy last year, losing more than a tenth of its output, will grow 5.9 per cent in 2021 and 6.8 per cent in 2022, according to the new outlook. Italy is set to expand by 4.2 per cent this year and 4.4 per cent next.

Germany, which suffered a much smaller 2020 contraction, could grow 3.4 per cent in 2021 and 4.1 per cent in 2022. France is tipped to expand by 5.7 per cent this year and 4.2 per cent next.

The outlook next year will be supported by the highest public investment levels as a share of gross domestic product in more than a decade. That will be driven in part by the Next Generation EU package, which is meant to start paying out in the summer once member states get their recovery plans signed off by the commission.

In total, the six-year programme should pay out about €140bn of grants over the two years covered by the commission’s forecasts. That should deliver a 1.2 per cent of GDP uplift, according to the outlook.

The crisis will still continue to exert a massive strain on public finances, however, with the overall eurozone deficit set to rise to 8 per cent of GDP this year. That is predicted to halve next year to 4 per cent, but the legacy of the vast government spending programmes will still loom large. The overall euro area public debt-to-GDP ratio will remain above 100 per cent this year and next, the commission said.

EU member states face a tense debate later this year over how to rapidly pare back their stimulus programmes and whether to reform the bloc’s fiscal rules, which are set to remain suspended until 2023.

Among the risks to the outlook, the commission said, was the possibility that governments would decide to start paring back their economic support packages too soon, undermining the recovery. The continued effectiveness of vaccines and the evolution of the pandemic will also play a critical role in determining whether the EU’s upgraded forecast proves justified.



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No, ‘hyperinflation’ is not here

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There’s a lot of concern out there about inflation right now. Including, unsurprisingly, here in Germany. And where not just talking about the Bund yield. This is this morning’s hot take from state broadcaster ZDF:

For non-German speakers, the headline reads ‘Fear of hyperinflation’.

The article is not entirely unreasonable, focusing on the pressures we’ve seen build up in producer prices over the course of the pandemic. As markets this morning are all too aware ahead of an important US print Wednesday, we are likely to see broader consumer price inflation surge in the coming months.

We’re betting that it’ll be a temporary blip. Round about this time last year, the West Texas Intermediate oil contract went sub zero. Twelve months on, we were always likely to see some dramatic CPI readings simply as a result of the slump in price pressures that happened when the pandemic first struck.

To boot, take away stimulus cheques and furlough schemes, and the labour market on either side of the Atlantic is nowhere near strong enough to trigger the sort of wage-price spiral that saw inflation surge into the double digits in the US and UK in the 1970s. Even in Germany, where manufacturing unions are still relatively strong, companies like Volkswagen say they don’t need to pay their workers more. Those are workers who did not get a pay rise in 2020, nor will they get one this year either — though they will see a 2.8 per cent bump from 2019 levels in 2022.

But our main point is this: Even if the price pressures seen in supply chains do spread more widely, and even if higher CPI readings do endure, raising the spectre of hyperinflation — which conjures up the cash-in-wheelbarrows images witnessed in the 1920s to many here — is completely overblown.

The article itself notes that hyperinflation is a phenomenon where prices shoot up by more than 50 per cent. We’re nowhere near that sort of situation — even over the next few months inflation readings are likely to remain in the single digits. To suggest otherwise is nothing short of scaremongering.



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The EU is trailing China’s trade distortions all round the world

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This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the complete newsletter sent straight to your inbox every Monday to Thursday.

Hello from Brussels, and welcome to the first edition of the new and improved Trade Secrets.

We’re still feeling the reverberations from the US’s announcement last week supporting, in principle, a patent waiver for Covid-19 vaccines at the World Trade Organization. The EU’s incredibly indignant that it’s been outspun and made to look like the bad guy, and is letting everyone know about it. The problem is that, being the EU, it’s unable to convey a quite simple and entirely reasonable message — it’s fine to talk about patents, but tech transfer and exports are the main thing — without a bit of a cacophony and strange references to Anglo-Saxons.

The babble managed to overshadow some quite big news at the EU-India summit over the weekend. As the Financial Times predicted last week, Brussels and Delhi launched (or technically renewed) talks on a trade deal, plus ambitious notions about co-operating on digital connectivity, geopolitics and so on, plus an investment treaty of the kind that’s gone down so well since the EU signed it with China. Speaking of which, today’s main piece is on the EU’s determined campaign to create legal tools to take on Chinese trade distortions, complicated by the fact that the problem keeps changing shape.

Charted Waters takes a look at trade flows over the past decade.

We want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at alan.beattie@ft.com

New answers to the ever-changing China question

There’s been a finely tuned humming heard around Brussels over the past few years, like a high-performance engine being run at speed. It’s the legal brains of the European Commission designing new “autonomous” (unilateral) tools to counter what the EU regards as the unfair trade and investment distortions produced by Chinese state capitalism. (They don’t say China, but that’s what they mean.)

Whether you support the campaign’s underlying philosophy — free-traders are sceptical about it — the process is impressive to watch. Frankly, we wouldn’t want the lawyers of the trade and competition directorates after us. The latest contrivance was wheeled out of the hangar last week, in the form of a subsidies instrument to be used against state-supported foreign companies operating in the EU.

Assuming it gets adopted, and depending on how it’s used, it’s a big deal, bringing competition tools to bear on international trade. Essentially, it extends the reach of the EU’s state aid regime abroad where foreign handouts distort the European market. It can be applied to market competition, mergers and acquisitions, and public procurement. 

The anti-subsidy tool is the latest in the following list of China-unfriendly initiatives implemented or proposed by the EU over the past five or so years. If you’re taking notes: sharpening up trade defence instruments (anti-dumping and anti-subsidy duties); allowing those duties to be used against companies subsidised by the Chinese government but exporting from another country; tightening up screening of inward foreign direct investment (FDI) for national security reasons; developing an anti-coercion tool (aimed more at Donald Trump’s administration, to be fair) to use against foreign governments acting illegally; producing a toolbox for member states to manage risky entities (Huawei) from 5G networks; banning imports made with forced labour; and requiring European companies to exercise “due diligence” in eliminating labour and environmental abuses from their supply chains. Quite a list.

You have to admire the commission’s stamina and ingenuity, finding ways to tackle one alleged distortion after the other. You’d also think that, what with China and the EU becoming ever closer trading partners, Brussels’ stance would somewhat rattle Beijing. But it’s hard to conclude that the EU’s tools, along with a bunch of similar actions by the US and other countries, have pushed the Chinese growth model towards a market economy. In fact, President Xi Jinping’s going the other way, with a “dual circulation” growth strategy, one of the aims of which is to use heavy government intervention to build up high-tech capacity in China in an insulated domestic market.

Why? Well, some of the explanations are political. These tools are housed in the commission, but some require EU member state acquiescence to create and/or use. Powers over national security FDI and 5G screening, for example, reside at national level: China can pick off individual countries with carrots and sticks. 

Some explanations are institutional. The ability to use anti-dumping and anti-subsidy duties against Chinese companies based in third countries has been tried just a few times (glass fibre fabric and reinforcements from Egypt and steel from Indonesia and India) and only partially succeeded. Antidumping lawyers grumble that the commission makes it too hard to bring new cases.

Some are practical. The subsidy instrument will involve complex investigations, trying to apply existing EU state aid disciplines to the myriad opaque ways that China hands out money to its companies. The thresholds for action also have to be set high enough not to deter benign investments, especially since a foreign business attempting to acquire a company in the EU may also have to file separate national FDI notifications.

But one of the hardest issues is that the creation of the instruments generally lags behind the evolution of the Chinese trade and growth model by a few years. While Europe’s trade defence tools were being strengthened against exports from China, Beijing was instead building industrial capacity abroad through the Belt and Road Initiative. Then, just as the EU started to apply those duties against Chinese companies outside China, Beijing was rethinking the Belt and Road Initiative and reducing its foreign exposure. The subsidy tool arrives several years after Chinese FDI into the EU started falling and many European governments became disenchanted with China. You can very plausibly argue the EU now needs more rather than less Chinese FDI.

As the EU-China Comprehensive Agreement on Investment shows, China is less interested in getting market access in the EU than securing European inward investment in intellectual property-intensive sectors such as electric vehicles, and we can guess what for. The agreement has provisions to prevent forced technology transfer, and the EU has brought cases on the issue at the WTO, but winning dispute settlement cases rather than wielding a unilateral tool is a slow and uncertain business.

This isn’t a counsel of despair: there are still plenty of Chinese exports and investment in the EU that can be regulated, assuming that’s a good idea. But the EU’s critiques of the latest phase of Chinese development — dominating advanced markets through huge government support and weaponising trade for geopolitical ends — will be even harder to address than the previous ones. And that’s before we get to the question of human rights.

We’ll take a deeper look at the EU’s anti-subsidy initiative in future newsletters: there’s a lot to examine. For now, we’ll just say that there’s been a lot of painstaking legal engineering going on, but the devices that result are already looking a little dated.

Charted waters

This is about as big a picture on global trade as you can get. The data, from the CPB Netherlands Bureau for Economic Policy Analysis, track trade flows over the past ten years and show two things.

Line chart of 2010=100 showing World trade has recovered from the pandemic, but not Trump

First, the good news (for those of you who are fans of globalisation at least). The recovery from the early months of the pandemic has been remarkable, with flows now at their pre-Covid mark.

This is a point that we don’t think is made often enough. While semiconductor chip shortages and high shipping costs often make headlines (including, we confess, in Trade Secrets), global manufacturing and logistics should be given an awful lot of credit for ensuring that the rebound seen over the past three quarters has been so strong.

The bad news is that broader geopolitical tensions were clearly affecting flows in the run-up to the pandemic. We don’t see those tensions dissipating soon, so expect growth to stutter even if we manage to get Covid under control. Claire Jones

Trade links

Welcome to our new Trade Links section, a round-up of the best content we’ve come across over the past few days.

Today’s must-read comes from the European Centre for International Political Economy and covers the trade implications of the radical shift in technology turning manufacturing giants, such as Volkswagen, into software developers. It’s well written and has some great charts that help support the case that, when it comes to trade and technology, the future is now. 

We’d highly recommend this FT piece, which takes an in-depth look at why the Serum Institute of India, the world’s top vaccine maker, is struggling. One of the reasons being that it’s at the sharp end of the vaccine trade wars. Also worth a look is this Big Read from Andrew Hill, explaining why the UK’s services sector is taking a big hit from Brexit. This is a massive deal. And — as Lionel Barber, formerly of this parish, notes — it is a story too few are talking about given that services makes up a whopping 80 per cent of UK output. Expect this to change, and the services sector’s woes to rise in prominence, as economies on both sides of the Channel begin to reopen. 

This morning’s edition of the FT’s excellent Europe Express newsletter focuses on the transatlantic spat over the vaccine waiver, which Mehreen Khan concludes will do little to help poorer countries in desperate need of more jabs. For those of you interested in European policy and politics beyond trade, sign up here for a daily guide to what’s driving the European agenda, available for premium subscribers Monday to Friday at 7am CET. Nikkei Asian Review looks at ($ — subscription needed) why bureaucratic timidity led to the withering of Japan’s pharmaceuticals industry, leaving it reliant on foreign countries for vaccine supplies. For fans of the chip story (who isn’t?), Nikkei has dug into how Korean electronics group Samsung lost its lead to Taiwanese chipmaker TSMC. 

Elsewhere, the International Economic Law and Policy Blog asks what if the US can’t create consensus around a vaccine waiver. (There are some interesting recommendations for further reading in the comments too.) This week’s Economist delves into the topic ($) of vaccine donations. While Covax has made almost 50m vaccination donations, this is well short of its target. One of the reasons for that being the tragedy unfolding in India. China, meanwhile, has doled out 13.4m doses to 45 different countries, and India more than 10m vaccines. Alan Beattie and Claire Jones 

Any recommendations on articles to include in Trade Links? Send your tips here.

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