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Britain’s annual Brexit capitulation draws nigh

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Well, well, if it isn’t an approaching surrender in the Brexit talks by the UK disguised as victory. Seems like one comes every year. It’s premature to assume a Brexit deal is getting done, of course: this is Boris Johnson’s erratic government and his eccentric backbenchers we’re talking about, not to mention some EU member states neurotically obsessed with fish who may just, horrible though it is to contemplate, not be bluffing. Still, the chatter is pointing to a fairly obvious potential agreement on the “level playing field” issues. Britain will allow countermeasures in the form of tariffs or other trade restrictions if EU environmental or labour standards end up much stricter than in the UK, and theoretically vice versa.

The plan has dangers, which we described when it was floated six months ago, of perpetual judicial-political conflict. We’ll assume divergence is judged by a WTO-style arbitration panel, since realistically we can’t see the EU getting away with an antidumping-style arrangement where it imposes punitive tariffs based on its own judgment. As it happens, on Wednesday the EU and UK announced a roster of experts to arbitrate the initial Withdrawal Agreement, but that is rather less contentious than the trade deal. The panel members for the latter, if they start authorising tariffs because of carbon taxes or what have you, should prepare for personalised “Enemy Of The People” front pages in the Daily Mail and purple-faced eruptions from the Tory ranks about unaccountable international liberal judicial elites. But better to take that long-term risk than plunge into no-deal now? We’d say so.

Today’s main piece, on a calmer note, is a look back at how globalisation hasn’t imploded in 2020 despite the coronavirus pandemic, and we then return to Brexit for a Tall Tale about how the EU is a touch less evil and manipulative than its foes allege.

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

The death of globalisation is postponed once again

Twenty-twenty was a year in which globalisation nearly imploded, but actually didn’t. To be quite honest, this is getting a bit repetitive. It was going to collapse a couple of years ago as a result of President Donald Trump’s US-China trade war, and before that in 2009 because of the financial crisis, and for your true Depression-redux hipsters it was the Sars epidemic (the first Sars, that is, back in 2002, a very niche virus). 

The second wave of Covid has been vicious for many. But the panic about trade has calmed a lot. In October the WTO’s economists updated their forecast for goods trade and took a big turn towards the optimistic, projecting a 9.2 per cent fall in merchandise trade in 2020 — barely more than a quarter of the 32 per cent collapse that was its pessimistic scenario back in April. Next year it reckons that 9.2 per cent contraction should mainly be undone with a 7.2 per cent increase. It’s unlikely to catch up with lost growth rather than just regain most of the level, but we can live with that.

Services trade has been absolutely hammered — US imports and exports of services are both about a quarter down on where they were in January — but a lot of that is travel and related services and should recover as bans on movement lift. There might be some permanent changes, obviously, Zoom calls displacing the Heathrow-JFK red-eye, but a secular shift in cross-border movement from flesh to pixel isn’t a crisis of globalisation.

Is it all over? Nothing to see? Well, maybe, but there are still some lessons to be learned. For a start, to what do we owe this welcome resilience? Partly, as we may once or twice have said, it turns out that a largely automated capital-intensive trading system can survive a pandemic pretty well. Goods trade has performed much better relative to gross domestic product than during the financial crisis, when it collapsed faster than a Boris Johnson negotiating position.

But also it’s got a lot more to do with macro than trade policy. Apart from a few rather feeble gestures about keeping trade going (weaker than the anti-protectionism pledges during the financial crisis, and we didn’t think much of those either), governments really haven’t built much of a multilateral wall against trade wars. Subtler forms of protectionism have continued to flourish

It was public spending and monetary loosening that did most to rescue trade by softening the blow to GDP, together with public procurement to ease particular shortages and stimulate the production of a Covid vaccine. The medical protective equipment crisis in the early months, for example, was ended by governments procuring more face masks, not by regulating trade to prevent export restrictions, which they emphatically failed to do.

The same is true of the other bits of globalisation. The first few months of the pandemic saw the biggest outflows of portfolio capital from emerging markets on record, part of a general flight to quality. Again, loose fiscal and monetary policy in both advanced and emerging markets came to the rescue, and markets stabilised. Possibly a bit more worrying is the fall in migrant remittances — bigger than official aid or foreign direct investment flows — which the World Bank reckons will next year be 14 per cent lower than in 2019. But then you’d expect the movement of migrant workers to recover more slowly than goods containers and high-frequency air travel, and it’s not a calamitous drop. 

So fine, hooray for the world’s central banks and the finance ministries, some of them. Assuming the vaccine gets distributed en masse and there isn’t a premature shift to removing macro stimulus next year, the biggest immediate threats to globalisation should continue to dissipate.

And then all we have to worry about is the fracturing of global commerce in goods, services, data, capital, people and ideas from the US-China geostrategic conflict, the protectionist moves afoot in many countries to reshore production, the moribund state of multilateral rulemaking and the intense pressure that climate change will put on global models of growth and trade. We’ll come back to those next year. For now: phew.

Charted waters

UK goods exports have lagged behind peer countries this year in both the EU and other significant markets across the world, according to Financial Times research that highlights the scale of the challenge facing Britain as it seeks post-Brexit trade deals. The UK is recording falling market shares in goods exports in many key destinations, according to the analysis. During the six months to October, for example, Italy became a larger exporter of goods to the US than Britain for the first time since records began in 1980.

Bar chart of % reporting improving minus those reporting deterioration,  November 2020 showing UK exporters record deteriorating competitive positions

Tall Tales of Trade

The US-Canada-Mexico deal involves Washington using rules of origin to micromanage hourly wage rates in its neighbours © Susana Gonzalez/Bloomberg

Back to Brexit. The “wah-wah not FAIR” stuff from Brexiters criticising the level playing field rules holds that the EU is trying to dictate regulations to a trading partner in an unprecedented way. (Unprecedented apart from Switzerland, Norway, Iceland, Ukraine etc, but we digress.) The US doesn’t do that to Canada and Mexico, so why does the EU to the UK? Not FAIR. However, as pointed out by Jonathan Portes, myth-buster extraordinaire on trade and immigration, the US-Canada-Mexico deal (USMCA) actually involves Washington using rules of origin to micromanage hourly wage rates in its neighbours. (Check this out for heavy-handed bureaucracy: minute detail on inspections, required documentation, everything.) Even France hasn’t tried to do that to Britain. 

In fact, even with further-flung trade partners, the US is sometimes more neurotic and prescriptive than is the EU, partly because Washington feels it is losing the global regulatory battle to Brussels. The UK can do a deal with the EU and follow whichever food hygiene rules it likes domestically, if it accepts the border frictions. By contrast, Washington’s chemical-washed obsession with dictating sanitary regulations in its trading partners is legendary. The rules on labour and environmental standards in the level playing field talks are a pretty small subset of the regulations that determine trade. If the Brexiters are really going to block a deal on these grounds, it’s either because they’re too ignorant to grasp the issues or cynical enough to pretend they haven’t.

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  • A surge of stockpiling by UK companies before the end of the Brexit transition period on January 1 has triggered road congestion and costly delays in northern France and southern England as lorries queue for cross-Channel ferries and the tunnel on one of the world’s busiest freight routes. The sharp rise in truck traffic to the UK across the Channel — exacerbated by the impact of the Covid-19 pandemic on international freight flows — reflects a drive by UK businesses to stockpile imported products and raw materials in case of border delays caused by the new trade regime.

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  • The Federal Reserve has said it will keep buying at least $120bn of debt per month until “substantial further progress has been made” in the recovery, strengthening its support for the US economy amid a surging coronavirus outbreak. The guidance from the Federal Open Market Committee came at the end of a two-day meeting during which Fed officials upgraded their economic projections but maintained predictions that they would keep interest rates close to zero until at least the end of 2023. 

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Europe

German accounting watchdog chief to step down in wake of Wirecard

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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.



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Putin and Lukashenko’s ski fun shows cold shoulder to EU

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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.



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Mitsubishi Motors set to reverse move to withdraw from Europe

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Mitsubishi Motors is set to reverse its decision to withdraw from Europe and build cars in France after months of pressure from Renault and Nissan, in a sign of fresh rifts within the alliance.

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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