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Brexit Britain goes looking for a new direction

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Hello from Brussels. It seems a bit surreal to be talking about food hygiene regulations and rules of origin when the US just survived a violent insurrection, and yet here we are.

Maybe, fresh from its investment agreement with China (debate about which continues to rumble on), the EU should now pitch a new trade deal with the US to export human rights and democracy there. Those are, after all, fine European values, so long as no one looks too closely at Hungary and Poland. More substantively, the chaos on Capitol Hill will undoubtedly be cited in Brussels as evidence that the EU cannot rely on the US as a stable partner. Anyway, today’s main piece looks at where UK trade policy will go now (answer: the far side of the world), while Tall Tales mops up some of the Brexit nonsense still floating about. Charted Waters looks at how the breakdown in relations between Beijing and Washington did little to dissuade US investors from buying Chinese stocks.

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

Welcome to the UK, new jewel of the Asia-Pacific

Right, so that’s Brexit done. Now what?

If any UK ministry had a good 2020, it was the Department for International Trade. Being kept out of the chaotic Brexit negotiations (handled by the Cabinet Office, the department that supports Downing Street) makes anyone look competent by comparison. But even objectively, DIT’s great horde of civil servants, many learning very rapidly on the job, got a lot done.

They managed to roll over the bulk of the EU’s bilateral trade deals into new agreements with the UK, hugely helped by the deferral of the original deadline of March 2019. Notable successes that looked touch-and-go until quite recently included Japan, Canada, Singapore and, though rules of origin still need fixing, Turkey.

OK, so the UK has proved it can roll over. But can it fetch new deals, or will it just have to sit and stay? (It’s a dog-training metaphor. Sorry.)

There are two big projects for this year: joining the eleven-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and negotiating a deal with the US. The animating idea is to navigate away from the sclerotic EU and towards the fast-growing economies of Asia and the UK’s fellow Anglosphere nations.

The problem with this is evident upon looking at an atlas and briefly perusing the academic literature on trade. The fast-growing economies of the Asia-Pacific are a long way away from northern Europe, and the biggest ones in the CPTPP — Japan, South Korea, Mexico and Canada — already have trade deals with the UK via the EU rollovers. Liz Truss, DIT secretary of state, has insisted that the distance effect in gravity models is smaller than traditionally thought, but she has yet to overturn the standard economic thinking on that topic.

Boris Johnson signs the UK’s trade deal with the EU © Andrew Parsons/No 10 Downing Street

Let’s accept that CPTPP is mainly a signalling device. Will the UK persuade existing members to let it in? Ironically the biggest barriers to entry are probably what Empire-nostalgic Brexiters like to think of as Britain’s Anglospheric cousins, Australia and New Zealand, with whom the UK is also negotiating parallel bilateral deals. Said nostalgics presumably haven’t met many Aussie or Kiwi beef and dairy lobbyists, who have little sentiment about historical allegiances and see two separate opportunities to prise open access to UK markets.

Other potential issues with CPTPP include investor-state dispute settlement (ISDS), on which Japan remains keen. As a founding member, New Zealand negotiated some ISDS carve-outs, but latecomers such as Britain are less likely to get an easy ride. “It’s a matter for negotiation, but basically we will be expecting all the applicants to CPTPP to agree to all the rules,” a senior Japanese official told us. “Our initial perception is that the original contracting parties are somewhat different to new applicants.”

Britain’s problem here is part of a wider one we identified a while back: the government doesn’t know what the public thinks about trade issues and hence ministers find it hard to give directions. There were demonstrations against ISDS outside British hospitals during the EU’s trade negotiations with the US under the Transatlantic Trade and Investment Partnership a few years ago. However, campaigners back then could rouse protesters by citing the threat of rapacious American companies to the NHS. Will they be less concerned about the Japanese? Seems possible, but nobody knows.

There’s another just-as-well-the-Americans-aren’t-here issue in the CPTPP: agriculture. In theory the UK could be subjected to US-style sanitary and phytosanitary (SPS) food hygiene rules, with boatfuls of hormone-riddled beef and chemical-washed chicken turning up in British ports. In practice, though, the actual SPS text in the CPTPP isn’t hugely different to existing World Trade Organization rules. And since the US didn’t join the CPTPP, its government won’t be there to insist on specific promises to let American produce in to the UK.

As for the US-UK bilateral itself, be prepared for a long wait. Trade Promotion Authority, the White House’s ability to put a trade deal to Congress for an unamendable up-or-down vote, expires on July 1 and it’s unlikely the Biden administration will immediately want to take on the big battle of renewing it. That doesn’t leave much time to negotiate an entire trade deal. Given the controversies involved, the UK might even secretly be quite relieved to have talks deferred indefinitely. 

There are other issues (including data flow) and policy forums (including the G7, which the UK chairs this year, and the WTO) where Britain is keen to make a mark. These are big subjects we’ll come back to later. For the moment we’ll just observe that the DIT has assembled a good civil service machine and has a plan to change the subject from Brexit by signing some new trade deals. What it doesn’t have is partners for those agreements large and geographically close enough to Britain that workers and businesses are likely to notice much difference.

Charted waters

Column chart of proceeds from equity offerings by Chinese groups in the US, by year ($bn) showing Chinese companies have raised north of $140bn in the US since 2000

One might think that the breakdown in trade relations between Washington and Beijing might have put global investors off buying equities of Chinese groups listed on US exchanges. That was far from the case in 2020, however. Indeed, as the chart above shows, Chinese groups raised about three times as much from US equity markets last year than they did in 2019. The figure for 2020 was on a par with the level seen in 2014, the year of Alibaba’s IPO.

Tall Tales of Trade

Apologies for raising false hopes in the piece above: Brexit isn’t really done. It never will be. It will continue to involve many tall tales being invented and quickly vaporising on contact with reality.

Prime minister Boris Johnson’s Brexit-related trade claims have a very short consume-by date, generally going rancid in weeks, sometimes days. Euronews has done a fine job here collecting and then disassembling nine of them. Perhaps Johnson’s best was his absurd claim, made on Christmas Eve just after striking the deal with the EU, that there would be no non-tariff barriers to trade. This was so patently wrong he didn’t try to defend it himself less than a week later in the House of Commons.

But the one that had us giggling this week was disintegration of the absurd claim that there would be no trade barriers of any kind down the Irish Sea. It turns out that GB to Northern Ireland exports are already experiencing serious frictions thanks to the extra permissions and paperwork, just as we all said they would. The best bit was a Brexiter that Johnson himself elevated to the House of Lords whingeing and mewling that Northern Ireland was becoming “an economic colony of the EU”. Well, yes. Told you so. It’s one thing to spin tall tales to try to convince the public or confuse the media. It’s quite another to believe them yourself.

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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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