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EU seeks to turn multinationals into labour rights enforcers

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Hello from Brussels. As of last night the US has a new trade representative- designate, Katherine Tai, the current chief trade counsel to the Democrats on the House of Representatives ways and means committee. Formerly in USTR’s office of China trade enforcement, she is fluent in Mandarin and by all counts smart and easy to get on with. A break with the abrasive Robert Lighthizer machismo, for sure. Also, note, a technocrat rather than a politician.

In other news, President-elect Joe Biden has signalled very clearly he doesn’t want a load of grand new trade agreements: he wants relentless enforcement, particularly against China, in association with allies.

If that means no more pretending that micro-deals about lobster tariffs constitute a new era for transatlantic trade, we’re all for it. In other news, after another Boris Johnson-Ursula von der Leyen meeting last night, Sunday is now the final deadline for a UK-EU trade deal, honestly it is, even more final than the last final deadline, which was pretty final in itself. As the late British author Douglas Adams said: “I love deadlines. I love the whooshing noise they make as they go by.”

Today’s main piece focuses on an EU initiative to turn multinational companies into a global squad of employment and environmental inspectors, more or less, while Tall Tales of Trade is about the UK pretending that it didn’t comprehensively give way on the Brexit question of trade across the Irish Sea.

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

Brussels to corporations: clean up your supply chains

It’s an awkward time for Brussels to be chuntering on about exporting its values around the world through trade: as my colleagues describe, the EU has enough trouble getting them to Hungary and Poland.

Still, the EU institutions and particularly the European Parliament are insistent that trade should advance human rights, in particular labour standards, and protect the environment. It’s fair to say the Brussels old guard, particularly in the trade directorate, doesn’t instinctively embrace this idea. The standard view there is that sanctionable labour and environmental standards make it harder to agree trade deals (see Mercosur), punish developing country producers for what their government is doing and provoke accusations of neocolonialism from said authorities.

Brussels has a new route to try. As well as going through trade deals, the EU is looking at making multinationals responsible for human rights — and perhaps environmental violations — throughout their supply chains. This turns the issue from a trade thing into a due diligence corporate governance thing and puts it into the enthusiastic hands of Didier Reynders, the Belgian justice commissioner, who is super-keen.

Similar laws already exist elsewhere. On top of existing international agreements about criminal sanctions on bribery abroad, the EU has sectoral regulations on conflict minerals and illegally harvested timber, and voluntary initiatives with the textile and garment industries.

Some member states including France (human rights generally) and the Netherlands (child labour) have introduced their own due diligence laws, though there are questions about fairness and effectiveness. In fact, it’s partly the domestic grumbling they have encountered that has provoked them (particularly the Dutch) to push the idea at an EU level. Dutch companies, reasonably enough, have pointed out that if a multinational sited in one country is obliged to monitor and enforce labour standards on pain of hefty fines, it can be undercut by another in a less fastidious jurisdiction.

At an EU level, assuming they will be compulsory, the rules could be implemented by expanding existing corporate reporting requirements. More excitingly, the EU could create mandatory due diligence as a legal standard of care for companies to “identify, prevent, mitigate and account for actual or potential human rights and environmental impacts”, with serious fines for violation.

It’s not an unambiguously productive proposal. Going down the supply chain rather than the trade deal route can still have the same adverse side effect of taking production and jobs away from developing countries. And unlike labour standards in trade deals, it will apply only to those parts of the economy where western companies are operating or sourcing, possibly creating islands of well-treated workers in seas of oppression and pollution. 

On the plus side — as one of Trade Secrets’ favourite members of the European Parliament, the German Green Reinhard Bütikofer, says — a rule would give European companies political cover abroad. “Some companies have said to me that rather than imposing standards on their Chinese suppliers themselves they would much rather be able to go to them and say: this is the law, we have to obey it,” he told us. Bütikofer is a sharp critic of Volkswagen for producing cars in China’s Xinjiang province where many Uighurs live. A due diligence law would also allow European companies to benchmark their supply chain monitoring against others, he says.

So where is this issue going? Last week the member states, guided by the German presidency, called on the commission to design a solid legal framework for corporate due diligence. Getting all the member states on side for the final version will be trickier and could take years. Germany itself, the EU’s manufacturing superpower, is fiercely debating the idea of creating its own law, with ministers openly at odds. Bütikofer says the German government should break the impasse by seeing a domestic law simply as a transition to an EU-wide version.

The due diligence idea does look like it has legs, though how far they stretch remains to be seen. One group of people who may be privately relieved are some of the Brussels trade folks, happy that someone else is sharing the burden of trying to affect what European producers thousands of miles away are doing to their workers and the forests. Running a hypocritical neocolonialist enterprise gets lonely sometimes: it’s nice to have some company.

Charted waters

The UK economic recovery almost stalled in October as the services sector was hit by Covid-19 restrictions before the full November lockdown in England and increased Brexit uncertainty. Output grew 0.4 per cent in October compared with the previous month, down from 1.1 per cent in September and the lowest rate since May, data from the Office for National Statistics showed on Thursday.

Line chart of share of responding businesses in accommodation and food service activities, showing that the UK hospitality sector has been badly hit by the pandemic

Tall tales of trade

A poster in Northern Ireland calling for ‘No Border’ on the island of Ireland after Brexit
The withdrawal agreement introduces border frictions between Northern Ireland and Great Britain where they didn’t exist before © AFP/Getty Images

Soon we won’t have the Brexit process to kick around any more, or not at the same intensity, so let’s make the most of pointing out the tall tales while we can.

This week, separately to the trade deal talks, the UK and EU agreed how the Brexit withdrawal agreement will apply to Northern Ireland, which will remain inside the UK while also applying the EU customs code. A package of trusted trader schemes and temporary waivers on inspections was enough for the UK to withdraw its childish threats to override the agreement and break international law. But let’s be clear: the Johnson government’s promise that trade will flow as freely as before across the Irish Sea between Northern Ireland and Great Britain simply cannot be kept.

Companies will need health certificates for animal and plant products, import declarations and other bureaucracy. The UK claimed last year to have persuaded the EU to back away from its position on simultaneously keeping the Irish land border open and protecting the integrity of the single market by, if necessary, requiring some border protections down the Irish Sea. That was nonsense. It was a UK capitulation, as this week’s discussions are making clear. Cover it up with whatever Potemkin customs arrangement you want: the withdrawal agreement introduces border frictions between Northern Ireland and Great Britain where they didn’t exist before.

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Europe

German regulator steps in as Greensill warns of threat to 50,000 jobs

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Germany’s financial watchdog has taken direct oversight of day-to-day operations at Greensill Bank, as the lender’s ailing parent company warned that its loss of $4.6bn of credit insurance could cause a wave of defaults and 50,000 job losses.

BaFin appointed a special representative to oversee Greensill Bank’s activities in recent weeks, according to three people familiar with the matter, as concern mounted about the state of the lender’s balance sheet.

The German-based lender is one part of a group — advised by former UK prime minister David Cameron and backed by SoftBank — that extends from Australia to the UK and is now fighting for its survival.

On Monday night Greensill was denied an injunction by an Australian court after the finance group tried to prevent its insurers pulling coverage.

Greensill’s lawyers said that if the policies covering loans to 40 companies were not renewed, Greensill Bank would be “unable to provide further funding for working capital of Greensill’s clients”, some of whom were “likely to become insolvent, defaulting on their existing facilities”.

In turn that may “trigger further adverse consequences”, putting over 50,000 jobs around the world at risk, including more than 7,000 in Australia, the company’s lawyers told the court.

A judge ruled Greensill had delayed its application “despite the fact that the underwriters’ position was made clear eight months ago” and denied the injunction.

Greensill Capital is locked in talks with Apollo about a potential rescue deal, involving the sale of certain assets and operations. It has also sought protection from Australia’s insolvency regime.

Greensill was dealt a severe blow on Monday when Credit Suisse suspended $10bn of funds linked to the supply-chain finance firm, citing “considerable uncertainties” about the valuation of the funds’ assets. A second Swiss fund manager, GAM, also severed ties on Tuesday. Credit Suisse’s decision came after credit insurance expired, according to people familiar with the matter.

While the bulk of Greensill’s business is based in London, its parent company is registered in the Australian city of Bundaberg, the hometown of its founder Lex Greensill.

In Germany, where Greensill has owned a bank since 2014, BaFin, the financial watchdog, is drawing on a section of the German banking act that entitles the regulator to parachute in a special representative entrusted “with the performance of activities at an institution and assign [them] the requisite powers”.

The regulator has been conducting a special audit of Greensill Bank for the past six months and may soon impose a moratorium on the lender’s operations, these people said.

Concern is growing among regulators about the quality of some of the receivables that Greensill Bank is holding on its balance sheet, two people said. Regulators are also scrutinising the insurance that the lender has said is in place for its receivables.

Greensill Bank has provided much of the funding to GFG Alliance, a sprawling empire controlled by industrialist Sanjeev Gupta.

“There has been an ongoing regulatory audit of the bank since autumn,” said a spokesman for Greensill. “This regulatory audit report has specifically not revealed any malfeasance at the bank. We have constructive ongoing dialogue with all regulators in all jurisdictions where we operate.”

The spokesman added that all of the banks assets are “unequivocally” covered by insurance.

Greensill, a 44-year-old former investment banker, has said that the idea for his company was shaped by his experiences growing up on a watermelon farm in Bundaberg, where his family endured financial hardships when large corporations delayed payments.

Greensill Capital’s main financial product — supply-chain finance — is controversial, however, as critics have said it can be used to disguise mounting corporate borrowings.

Even if an agreement is struck with Apollo, it could still effectively wipe out shareholders such as SoftBank’s Vision Fund, which poured $1.5bn into the firm in 2019. SoftBank’s $100bn technology fund has already substantially written down the value of its stake.

Gupta, a British industrialist who is one of Greensill’s main clients, separately saw an attempt to borrow hundreds of millions of dollars from Canadian asset manager Brookfield collapse.

Executives at Credit Suisse are particularly nervous about the supply-chain finance funds’ exposure to Gupta’s opaque web of ageing industrial assets, said people familiar with the matter.

The FT reported earlier on Tuesday that Credit Suisse has larger and broader exposure to Greensill Capital than previously known, with a $160m loan, according to two people familiar with the matter.

Additional reporting by Laurence Fletcher and Kaye Wiggins in London



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FT 1000: Europe’s Fastest Growing Companies

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The latest annual ranking of businesses by revenue growth. Explore the 2021 list here — the full report including in-depth analysis and case studies will be published on March 22



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EU plans digital vaccine passports to boost travel

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Brussels is to propose a personal electronic coronavirus vaccination certificate in an effort to boost travel around the EU once the bloc’s sluggish immunisation drive gathers pace.

Ursula von der Leyen, European Commission president, said on Monday the planned “Digital Green Pass” would provide proof of inoculation, test results of those not yet jabbed, and information on the holder’s recovery if they had previously had the disease.

“The Digital Green Pass should facilitate Europeans‘ lives,” von der Leyen wrote in a tweet on Monday. “The aim is to gradually enable them to move safely in the European Union or abroad — for work or tourism.”

The plan, expected to be outlined this month, is a response to a push by Greece and some other EU member states to introduce EU “vaccination passports” to help revive the region’s devastated travel industry and wider economy. 

But the commission’s proposed measures will be closely scrutinised over concerns including privacy, the chance that even inoculated people can spread Covid-19, and possible discrimination against those who have not had the opportunity to be immunised.

In an immediate sign of potential opposition, Sophie Wilmès, Belgium’s foreign minister, raised concerns about the plan. She said that while the idea of a standardised European digital document to gather the details outlined by von der Leyen was a good one, the decision to style it a “pass” was “confusing”. 

“For Belgium, there is no question of linking vaccination to the freedom of movement around Europe,” Wilmès wrote in a tweet. “Respect for the principle of non-discrimination is more fundamental than ever since vaccination is not compulsory and access to the vaccine is not yet generalised.”

The travel sector tentatively welcomed the news of Europe-wide vaccine certification as a way to rebuild confidence ahead of the crucial summer season, but warned that regular and rapid testing was a more efficient and immediate way to allow the industry to restart.

Fritz Joussen, chief executive of Tui, Europe’s largest tour operator, said “with a uniform EU certificate, politicians can now create an important basis for summer travel”. But he added that testing remained “the second important building block for safe holidays” while large numbers of Europeans awaited a jab.

Marco Corradino, chief executive of online travel agent Lastminute.com, said he feared the infrastructure needed would not be ready in time for the summer season: “It will not work . . . at EU level because it is too complicated and would not be in place by June.”

He suggested that bilateral deals, such as the one agreed between Greece and Israel in February to allow vaccinated citizens to travel without the need to show a negative test result, had more potential.

Vaccine passport sceptics argue it would be unfair to restrict people’s travel rights simply because they are still waiting for their turn to be jabbed. 

Gloria Guevara, CEO of the World Travel and Tourism Council, said it was important not to discriminate against less advanced countries and younger travellers, or those who simply cannot or choose not to be vaccinated. “Future travel is about a combination of measures such as comprehensive testing, mask-wearing, enhanced health and hygiene protocols as well as digital passes for specific journeys,” she added.

A European Commission target to vaccinate 70 per cent of the bloc’s 446m residents by September means many people are likely to go through summer unimmunised.

While some countries around the world have long required visitors to be vaccinated against infectious diseases such as yellow fever, a crucial difference with coronavirus is that those inoculations are available to travellers on demand. 

Questions also remain about the risk of people who have already been vaccinated passing on coronavirus if they contract the disease.

 





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