TheChek News Flow

Measures that bash Beijing may be challenged by many member states

Hello from Brussels, where we’ve just been told that bars and restaurants can open from next week and life is edging back to normal. That’s the good news, assuming no second wave of infection. The less good news is that Prince Joachim of the Belgian royal family has very definitely let the side down by swanning off to Spain for a party in the middle of the pandemic and getting infected with Covid-19. We at Trade Secrets feel this disappointment as keenly as anyone: Princess Astrid, Joachim’s mother (and sister to the current King Philippe) has several times acted as the royal family’s official trade envoy. This is not the image that trade needs.

This week’s main piece is on how the EU wants to equip itself with competition as well as trade tools to deter predatory Chinese companies, and Tall Tales is on the latest bad Brexit idea — another one! — to have gained currency in Boris Johnson’s government. Charted Waters looks at economists’ predictions for a no-deal Brexit.

So, who in Europe wants to take on China? We mean on the trade front, obviously: the EU’s response to the Hong Kong situation is about as feeble as you’d expect from a bloc that, when all’s said and done, doesn’t really have a foreign policy (feel free to tweet and tell us why we’re wrong, though we’ll take a lot of convincing).

Like many of its trading partners, the EU regards China as not just your typical low-cost exporter but a multi-headed hydra of trade-distorting behaviour. Aside from dumping allegedly underpriced goods on EU markets, its government-subsidised companies use their supposed unfair advantage to snaffle European public procurement contracts and take over EU companies, including those that might be strategically sensitive. Also Huawei and 5G and spying and all that.

A few years ago, when China was regarded as mainly a trading partner and not yet a strategic competitor, there was an instinct in some parts of the Brussels machine to evade the responsibility of dealing with it. The competition directorate (DG Comp) said unfair Chinese corporate activity was basically a trade issue that could be dealt with by antidumping, antisubsidy and public procurement measures, and chucked the ball over the fence to DG Trade.

And then the feeling towards China in EU policy circles — including, importantly, in Germany — shifted towards the sceptical. Suddenly, the unwelcome task of confronting Beijing became a prize possession. DG Trade dusted off an old idea of an “international procurement instrument”, which could apply penalties to subsidised foreign companies bidding for tenders. It reformulated its trade defence measures to allow a more eclectic range of data when constructing an antidumping case against China and thoughtfully put together a “grievance handbook” of distortions in the Chinese economy to help complainants make their case. And it has urged member states to set up foreign direct investment (FDI) screening measures to protect strategically sensitive sectors.

Now the commission’s competition people, no longer standing sniffily on the sidelines, are enthusiastically joining in the China-bashing action by asking for the power to review and possibly block takeovers from state-subsidised foreign companies. Existing disciplines are nothing like strong enough: current EU state aid rules are designed to prevent subsidy battles between member states, not between rival companies backed by EU and foreign governments.

Because competition is a centralised EU competency, these takeover measures ought to give the commission quite a lot of freedom to block state-subsidised marauders. However, it’s still going to suffer to some extent from the problem that all these tools do: a lack of enthusiasm among many member states for beating up Beijing. Competition is a technical legal process, but when it is big enough it also becomes political.

China has long had a good base of support in central and eastern Europe among countries keen for FDI. It earned more fans in Portugal and Greece for its investments during the eurozone sovereign debt crisis, and latterly in Italy. Its face mask airlift diplomacy during the Covid-19 crisis hasn’t done any damage either.

If the EU tries somehow to align all the antisubsidy tools it has within both the trade and competition competencies, it will surely have to make some kind of wider public interest determination akin to the traditional “community interest” test for antidumping. A takeover by a subsidised Chinese company might be permitted if it led to efficiency gains and moved production to the EU, for example. These are delicate and politically charged questions. It seems likely the member states will want to retain a big say. And many will instinctively side with China.

One other thing: the EU is trying to push ahead with a bilateral investment with China that is supposed to be completed this year. It’s awkward timing at the same time to be taking on new powers to block foreign investments. We have a feeling this takeover idea is going to be thrashed around the bureaucracy for a long time before anything concrete comes out of it.

With trade talks between the EU and UK deadlocked, Britain is again confronted by the prospect of a no-deal Brexit come the end of the year, writes Chris Giles. And with the UK economy already ravaged by coronavirus, some economists and policymakers in Britain are wondering whether the effects of the UK failing to secure a trade deal with Brussels could be masked by the impact of the pandemic. Yet a large majority of economists still question why the government should compound its difficulties with unnecessary further pain.

Scarcely possible to believe (and contrary to Trade Secrets’ predictions at the beginning of the year, so what do we know?) but the UK appears bent on declining an extension of the Brexit transition period at the end of the year and leaving, if necessary, with no deal. We and others have pointed out that the kind of bare-bones bilateral trade agreement you could get negotiated by December will in any case feel more like no deal than it will a continuation of the current arrangements.

There’s a feeling afoot among Brexiters that if Covid-19 will be disrupting trade anyway, why not have a no-deal Brexit as well and institute a Year Zero of reformulating supply chains? This brilliant Twitter thread of a few weeks back by the redoubtable Nicole Sykes of the CBI demolishes the idea. A no-deal Brexit means much more paperwork, stockpiling and regulations whether you leave existing supply chains in place or not. And it’s always easier for a business to make changes when it has money rolling in to smooth the transition. There are no economies of scale for hammering your supply chains in two different ways at the same time. The Year Zero suggestion is a lethally bad idea.