Beijing returns fire against Washington and Brussels

Welcome to Trade Secrets and thanks to Andy Bounds for stepping in last week. His optimistic but realistic take on what the UK might be able to get done to improve trade relations with the EU after its July 4 general election is here. If you’re wondering what the parties are saying about Brexit and trade in the election campaign itself, don’t bother. It’s total silence, like a typical British family’s tacit omerta about that embarrassing incident at a cousin’s wedding last year. Today’s main pieces are on the retaliation game between China, the EU and the US. Charted waters is on the strength of the renminbi.

The Middle Kingdom strikes back

After the offensive, the counterattack. Following the US’s huge increases in tariffs against China and the EU’s antisubsidy investigation into Chinese electric vehicles, Beijing is threatening to respond. The US has presumably taken the calculation that being retaliated against is worth it. The EU, in the form of the trade directorate, has traditionally calibrated its trade defence actions to its trading partners’ expected responses. But Brussels now has other tools that seem to be used with considerably less calculation of the backlash.

To the extent it has discretion over the use of antidumping and countervailing duties (and of course bringing cases to the World Trade Organization), DG Trade traditionally sees them in the context of a wider diplomatic relationship. Its aims: minimise domestic fallout, try to do it by the book, don’t spring massive surprises, shield individual European companies from reprisals.

Hence, the EV investigation targeted subsidies, not dumping (where the duties might have ended up much higher), and was initiated by the European Commission on its own without a company or member state making a public complaint. The South China Morning Post reported recently that the commission had decided to delay the results until after the European parliament’s elections this week. There’s generally more political wiggle-room in the EU’s alleged rule-based system than it acknowledges. (There’s also a fair bit of special pleading by member states, hence French President Emmanuel Macron negotiating a temporary reprieve from Chinese tariffs on cognac.)

Hence also the eyebrow-raising among trade types that the competition (COMP) and internal markets (GROW) directorates have so comprehensively unleashed the foreign subsidies regulation, complete with triumphantly press-released dawn raids, against Chinese companies — and not just any Chinese companies, but politically connected ones. The selection of the Chinese scanner manufacturer Nuctech for investigation was motivated among other things by the fact that it used to be run by a son of former Chinese president Hu Jintao.

The Chinese Chamber of Commerce in the EU recently passed on what was fairly clearly an officially sanctioned threat of retaliation to the FSR on wine and dairy. Sam Lowe of Most Favoured Nation fame, writing for the FT’s Alphaville, goes through what other European products China might hit.

Let’s hope COMP and GROW have gamed out China’s likely response to the FSR, though from what anyone can see from the outside they haven’t done so very comprehensively. Directorates used to dealing with intra-EU cartels and EU member states’ violations of state aid rules aren’t used to thinking about the reaction from governments overseas.

Bring it on

It’s always worth bearing in mind that when Congress was debating the Smoot-Hawley tariff that kicked off the international retreat to protectionism in the 1930s it didn’t actually pay much attention to the potential reaction abroad. That turned out to be a bit of a boo-boo, but it’s indicative of a mindset in some parts of Washington that its trading partners don’t have agency of their own.

It’s not that the US can’t calibrate retaliation with the best of them with relationships it wants to manage. It spent 17 years during the WTO Airbus-Boeing dispute in a highly sophisticated cat-and-mouse game with the EU, with Washington and Brussels regularly swapping the feline and murine roles to clobber each other’s politically sensitive sectors with tariffs. Spirits with geographical indications such as bourbon and champagne were often a favourite target, to the ongoing annoyance of both American and European drinks companies.

But when the US really decides to lash out, it throws such delicate calculation to the winds. Donald Trump obviously didn’t think much about the repercussions when he put hefty tariffs on imports from China. By some calculations he ended up spending more than $60bn on relief to American farmers hit by retaliation from Beijing, almost all the revenue he got from the tariffs in the first place. Still, and this is an important point, it didn’t seem to harm his votes in farm states enough to push them into the Democratic column, while the evidence suggests that his industrial tariffs on China probably did bolster his support in manufacturing areas.

The Biden administration isn’t as reckless as Trump, obviously, but sticking 100 per cent tariffs on Chinese EVs doesn’t look like it was done with a careful calculation about the consequences. I guess if you’re in a trade war and your economies are decoupling anyway then you assume companies are more inured to the possibility of casualties.

Charted waters

The renminbi has been one of the strongest Asian currencies against the dollar this year, though markets are pushing the People’s Bank of China to allow it to weaken.

Trade links

A splendidly spirited blast from former WTO honcho Keith Rockwell for the Hinrich Foundation think-tank about the US Trade Representative’s office under Katherine Tai. (I will come back to this issue in future columns.)

Michael Pettis writing for the FT’s Alphaville argues (correctly in my view) that trade imbalances aren’t caused by traditional comparative advantage.

India is apparently continuing to rattle its sabre about bringing a WTO case against the EU over its carbon border adjustment mechanism.

China has lifted more restrictions on beef imports from Australia as part of the rapprochement between the countries following the trade dispute that started in 2020.

Writing for the Cato Institute, Inu Manak points out that US progressives traditionally supported trade liberalisation. Those were the days.

A paper from the Center for Global Development think-tank looks at whether the supposed $100bn for climate finance is additional to current aid spending. Spoiler: a third of it is from current aid budgets.

Trade Secrets is edited by Jonathan Moules

This article has been updated to clarify the tariffs put on Chinese imports by Donald Trump