Articles by Guillaume Ferlet on the GC Blog and GC analysis
Something rather important flew under the radar last week, as the US secured a deal with Mexico on NAFTA. With most of the coverage focused on the revamped rules of origin for auto trade, little light was shed on the Trump administration’s other achievements in the auto sector. The deal struck with Mexico reportedly includes a clause allowing the US to charge more than its most-favoured nation (MFN) tariff on auto imports from Mexico which fail to meet the new rules of origin.
US President Trump upped the ante in his trade dispute with China earlier this week by mandating his US Trade Representative to release a list of up to $200bn in Chinese goods on which a new 10% tariff would apply by the end of the summer. Whether this can bring change in Chinese trade practices, or at least force Beijing back to the negotiating table, remains questionable. But what is certain is that it is becoming increasingly difficult for Trump’s trade officials to hit China with new tariffs without also directly impacting consumers.
The EU’s temporary exemption from the Trump administration’s Section 232 tariffs on steel and aluminium comes to an end on June 1st. When Washington first announced it was moving to impose blanket tariffs on steel and aluminium imports, back in March, Brussels was quick to react with warnings of retaliatory tariffs. There was no reason not to treat this as a credible warning, given how successfully it had worked against the Bush administration’s emergency steel tariffs in 2003.
As US-China trade hostilities slowly unfold, the EU is currently watching from the sidelines — mostly silently. But impacts in Europe are possible in the coming months, if only because US-China trade flows do not operate in isolation. Barriers between Washington and Beijing are a potential source of deflection towards other destinations and the EU is an obvious candidate for absorption. How material could this diversion be? How will EU businesses and policymakers respond?
For all of Donald Trump’s flexibility on policy issues, US-China trade is one area where he has demonstrated surprisingly constant views over the years. Unlike the Washington political establishment, Trump and his group of trade advisers not only believe that the integration of the American and Chinese markets since China’s 2001 entry into the WTO has not benefited both countries equally (not an unusual view in Washington), but that the US has not been assertive enough in rebalancing the relationship. The White House’s announcement yesterday of a raft of economic and investment sanctions against China as a response to the country’s “economic aggression”, is Trump’s attempt at doing this.
The UK government has finally started to flesh out what sort of future trade and regulatory relationship it wants to negotiate with the EU. Central to this are a revised set of market access and product standard recognition rights in the EU single market based on what the UK often calls ‘mutual recognition’. This suggestion has been rebuffed in a number of places and ways by the EU. Why is this?
The last few months have seen a growing awareness of the challenge facing both the EU and the UK in adapting their customs processing systems for the reimposition of a hard border between the two sides once they are no longer linked and merged in the EU’s free movement zone for goods. With around 10% of the EU27’s goods exports going to the UK market and around 40-50% of the UK’s currently routed into or through the EU27, this is clearly a big potential shift in the conditions attached to movement of goods and a potential source of new frictional costs for traders.
The baseline for the trade relationship after a no-deal Brexit would be WTO rules. In practice – and depending on the political atmosphere – there would at least be some enhancements to this baseline in the form of bilateral agreements between the EU and the UK on specific issues that are designed to avoid the worst consequences of a no-deal Brexit. Any business or investor that wants to understand their exposure to a no-deal Brexit needs to take a systematic approach to assessing both what operating on WTO terms means and the prospects for enhancements in different areas. This must draw on an understanding of the existing templates that the negotiators could potentially draw on and a realistic assessment of how the legal, political and practical constraints will shape the likely outcomes. This is a complex task, but it can be kept manageable by focusing on the issues that are most critical for the business model or investment thesis.
News this week that the EU and the UK have agreed on a methodology for dividing current farm trade quotas between them was expected at some point. These ‘TRQs’ are in effect a piece of EU property that the two sides needed to agree how to divide. The problem is, of course, that they are used by other WTO members to trade with the EU and the UK, and these members will inevitably have a view on how they should be divided. This week we got the first sight of that view. What did it tell us?
In publishing its NAFTA objectives last week, the Trump administration finally set the stage for a renegotiation after months of delay in Washington. The text of the announcement, which provides some sense of what a Trump-style NAFTA might look like, invites several observations.
The EU and Japan this week announced a political agreement on an FTA between the two sides after four years of negotiating. This is certainly big news in the generally calm waters of global trade negotiations. An agreement between the EU and Japan would create the prospect of the largest free trade zone in the world by GDP - the EU and Japan together account for more than a quarter of global GDP. But this deal had seemed rather becalmed a year ago. So, what is the significance of the ‘political’ in the ‘agreement’?
On Tuesday, US Commerce Secretary Wilbur Ross gave the clearest sign yet that the US administration might have an interest in reviving the TTIP negotiations. Ross told media that it “makes sense” to continue negotiating the deal that slipped into a coma just before the Obama administration left office.
On Wednesday next week, the US Trade Representative will hold a public hearing on whether the US should reinstate retaliatory tariffs on various imports coming from the EU, in retaliation for an EU ban on US hormone-treated beef exports. This is a longstanding trade irritant between the EU and the US, first erupting with a (successful) US complaint at the WTO in 1996. A compromise reached in 2009 allowing greater quantities of non-hormone beef on the EU market temporarily removed US punitive tariffs, but US farmers believe they have not done as well out of these expanded quotas as they should have. Wednesday will see a debate on putting tariffs back.
The EU Advocate General Eleanor Sharpston yesterday delivered an important preliminary conclusion in the European Court of Justice’s (ECJ) review of the ratification requirements of the EU-Singapore FTA. This sounds like an arcane question but is actually a big political issue. Because the question Sharpston has answered is the question of whether or not EU trade deals need to be ratified not only in Brussels, but by parliaments in EU member states. Sharpston has effectively today said that Wallonia should always get a say.
Yesterday marked the deadline to solve the issue of China’s market economy status (MES) and yet nothing has changed in the EU rulebook. However, a reform package is on its way and will probably be agreed at some point in 2017. In the meantime, the EU will likely carry on as usual in anti-dumping investigations. The main takeaway from the MES debate is not the new methodology put forward by the European Commission though, since it is already expected to result in a similar treatment of Chinese imports. It is the revival of the long-delayed reform of the broader trade defence system. This reform, which could not have been possible without the sense of urgency created by the MES debate nor without diminishing UK influence in Brussels due to Brexit, could chart a new course for the EU trade defence system.
GC has just published a report with colleagues from Herbert Smith Freehills and The Boston Consulting Group looking at some of the implications of a ‘hard Brexit’ for traders between the EU and the UK. Media coverage of the report has focused on the headline issue of tariffs being re-imposed on EU-UK trade. But, among many other things, the report flags the important issue of changes to British investors’ rights of recourse in the EU, which is often not well appreciated by businesses.
After a rough week in Namur, Wallonia’s capital, EU member states and EU trade policymakers will be reflecting on what CETA's near death brush with elected politicians means for future trade deals. So what are they likely to conclude?
Alok Sharma’s first visit to China this week as the UK’s new Minister for Asia and the Pacific has been somewhat overshadowed by tensions over the Hinkley point investment. Sharma will no doubt have gone equipped with reassurances that the UK is still committed to a strong relationship with China, including the promise that new Prime Minister Theresa May will make the trip to the G20 in Hangzhou next month. But Sharma will also have been charged with laying some of the preliminary groundwork for a possible future trade deal with Beijing after the UK has exited the EU. UK Development Minister Priti Patel was in India earlier this week with a similar message about the UK’s appetite for future trade relations.