Hello from Brussels. Thanks to the EU’s horrendously ill-judged threat to impose vaccine export restrictions based on its agreement with AstraZeneca, everyone here’s suddenly discovering how dull but presumably lucrative (in fact dull and therefore lucrative, compensating differentials and all that, thanks Adam Smith) a career in Belgian commercial contract law would be. Meanwhile, there’s a lot of private facepalming on the EU side about its abortive action. Any pretensions Brussels has to lead the global trading system’s response to Covid-19 will now have great difficulty passing the laugh test.
More generally, we must report with a heavy heart that more bad ideas are afoot in the world of trade. Talking of dead British economists, David Ricardo’s theory of comparative advantage is taking a good kicking. On top of Joe Biden’s Buy American plans, British ministers are briefing willing amanuenses that the UK’s superior performance on vaccine procurement is evidence that there should be a lot more reshoring. Britain should apparently create its own telecoms company capable of rivalling Huawei in making 5G equipment, because . . . what? To supplant Huawei’s rivals Ericsson and Nokia, which hail from those noted hostile states Sweden and Finland? Look for more of this nonsensical self-sufficiency rhetoric in the months and years ahead.
In other British news, a couple of weeks later than we predicted, the UK is applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a deal unfortunately from a trade perspective centred on an ocean 5,000 miles away. Today’s main piece is on the challenge, especially in the EU-China deal, of putting binding labour standards in trade deals. Tit for tat, meanwhile, sees us ask ING’s Joanna Konings about the drivers and implications of the rebound in global trade.
Labour and environmental standards used to be regarded by traditionalist trade types as a presentational garnish to trade deals, the way you might add a sprig of parsley to a fillet of cod. More substantive rules were seen as disguised protectionism — rich country trade unions and farmers suspiciously solicitous of working conditions and groundwater quality in poorer trading partners.
In recent years, the labour standards issue (we’ll come back to trade and greenery in a future newsletter) has gone mainstream and acquired a moral imperative that few would doubt, especially with regard to China. US steel and autoworkers’ unions trying to keep out cheap competition from Mexico is one thing. But as the European Commission and certain governments (Germany, France) are discovering from resistance to the as-yet-unratified Comprehensive Agreement on Investment (CAI) with China, forced labour in Uighur concentration camps to produce exports to Europe is another.
The EU has progressively toughened up its demands for minimum labour standards as a condition of signing investment or trade deals. But the idea that they will by themselves force a substantive reversal in a government like China’s is fanciful, and the contention that the EU will use tough new unilateral tools to back them up untested.
True enough, the CAI’s labour standards are higher than anything else China has ever signed, notably its commitment to make “continued and sustained efforts” to ratify two International Labour Organization fundamental conventions on forced labour. Elaborate procedures for panels of experts to consult and rule on those efforts create a lot of opportunity for campaigners, trade unions and so on to make noise. But even if the panels rule against China, the deal doesn’t allow the EU to withdraw tariff preferences or other concessions.
Two recent examples of EU deals suggest the most effective course is to demand reform as a precondition of signing (amusingly, the labour standards provisions in a third, the post-Brexit deal with the UK, are the most binding of all, but commission officials say they aren’t quite yet a template for countries further afield).
The EU trade deal with Vietnam sealed last year involved a commitment to ratify all the fundamental ILO conventions. Unlike China, Vietnam made a downpayment by ratifying one outstanding convention, agreeing a timeline to ratify the others and overhauling its labour law before the deal was passed. Those who worked on the agreement said it involved going with the grain of some (not all) opinion within Vietnamese government ministries, which was pushing in this direction.
The less positive example is a labour standards case the EU brought against South Korea in 2019 under the bilateral trade deal that went into force in 2011. A recent panel report agreed Korea had failed to meet a promise to ratify ILO conventions. But it also argued that simply tabling a bill before the Korean parliament — even if it never went anywhere — constituted sufficient effort to do so. Brussels now says the ball is in Seoul’s court, but if Korea still fails to ratify the conventions the EU has no recourse except to keep complaining.
Suppose the same happens with the Chinese investment agreement? (It will). We spoke with Desiree LeClercq, a former US trade representative official now at Cornell University. As it happens, she actually thinks the labour standards in CAI are worth pursuing, since they are the furthest anyone has got with China. But she’s under no illusion. LeClercq said: “Under the panel’s process-oriented standard, so long as China advances, even slowly, to place the issue of ratification through its domestic processes, China should have satisfied its obligations.”
The EU has other means of putting pressure on China, including sanctions against individuals because of human rights abuses. But it remains far from clear that it will have the guts to impose them if they jeopardise CAI, especially given the potential political cost to the EU if the deal collapses.
Ultimately, if the CAI labour provisions work, it will be because of a political rather than legal process. Optimists reckon the procedure of public hearings and amicus curiae briefs, by which individuals or organisations express a view on the facts or law of a case, to the dispute panel will create external scrutiny that can be used to press the Chinese government into action. But it requires quite a lot of imagination to think that summits where Emmanuel Macron and Angela Merkel’s successor — or even Joe Biden, if the US adopts similar provisions — lambast Xi Jinping for breaking the provisions of an investment deal to oppress the Uighurs are really going to make much difference.
The treatment of the Uighurs and their use for forced labour is one of the horrors of our age. It’s not an absurd notion that labour standards even without concrete economic sanctions are going to make a material difference, but it’s a highly contentious one.
A month on from the end of the transition period, today’s FT looks at five different areas of Brexit-related disruption. One of which is logistics. Many of us will have seen the pictures of lorries queueing outside the port of Dover, but how bad has the disruption actually been? Not as bad as during the early stages of the pandemic, it turns out.
We asked Joanna Konings, a senior economist focusing on international trade at ING Bank, about the sharp recovery in goods exports.
1. Trade volumes are now at their pre-pandemic level. What lies behind this recovery?
The categories of spending which matter most to international goods trade recovered quickly after their initial steep falls when countries went into lockdown. Global retail sales and industrial production were both at their pre-pandemic levels by the third quarter. This is partly because of a substitution between spending on services and goods as services spending remains impaired by social distancing. It is also thanks to the rapid economic recovery in China. This bodes well for international trade during the current second wave of the virus — we’re likely to see volumes fall back again, but then a relatively quick recovery in demand for imports.
2. Despite the recovery, do you think the pandemic will have some permanent impact on trade flows?
The pandemic has opened up new discussions about resilient supply chains, and what the best strategy is for countries, and companies to protect themselves against shortages and disruptions. There had already been a progressive toughening of the stances countries are taking towards foreign direct investment, motivated by the same concerns: do we want to control more of our supply capacity from within our own borders? A recognition that openness can serve us well, perhaps in combination with better planning for short-term disruptions, would set trade flows on a stronger footing than they were before the pandemic.
3. One side effect of the rebound has been the surge in shipping container rates on some of the key arteries of world trade. Can we expect transportation costs to remain high from now on?
From a position where container shipping has been in near-constant oversupply, the industry is suddenly faced with capacity constraints and again, there are lessons being learned from the pandemic which have long-term effects. In the near term there are simply not enough empty containers for the demand that is in the process of recovering. But even once more of the fleet capacity is back on the water and container supplies increase, we might see capacity cut again more easily in the future, and this will keep prices higher.
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