Tag: Tariffs

Inside the weird and quirky world of building a startup behind a wall of tariffs | TechCrunch

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Think quick — how much does a top-of-the-line iPhone 15 Pro Max cost? If you said around $1,600, you’d be right, but only if you’re based in the U.S. In Turkey, the same phone will set you back almost $3,000. That gap introduces a fantastic opportunity for arbitrage — and a lively second-hand and refurbished market. Getmobil just raised $4 million to legitimize phone refurbishing inside the country.

“The Turkish government wants to decrease the trade deficit,” explains Mehmet Uygun, CEO and founder at Getmobil. “The government wants to create a circular economy. They don’t want the customers to buy brand new phones, because whenever a customer buys a brand new phone, the dollar goes out of the country.”

Global economics and trade policy is deeply fascinating, and can cause some really weird quirks in local mobile phone markets. In 2010, for example, Argentina introduced a set of rules that meant that if you wanted to sell products in the country, you’d have to manufacture there. That had a ton of strange effects; English-language books became almost impossible to buy or insanely expensive (I remember paying $65 for a hard-copy of Walter Isaacson’s biography of Steve Jobs in a Buenos Aires book store — which sold for about $29 in the U.S. at the time). It also meant that Apple yeeted out of the market altogether, choosing not to sell its iPhones in Argentina. And suddenly, long after everybody else had more or less forgotten BlackBerry even existed, the phone brand had a resurgence in the country when it decided to build an assembly plant there.

The same thing is happening in Turkey at the moment; Turkey, desperate to keep its GDP within the country’s borders, has put a hefty import levy on phones. It’s not easy to get around those limitations either — if you sneak a phone into the country, its IMEI will be blocked from the three major networks after 120 days.

The Getmobil team outside of its headquarters and repair lab. Image Credits: Getmobil

Obviously, people still need phones, but, unwilling or unable to pay the incredibly high import taxes, they seek other solutions. Getmobil had its humble beginnings as a modest phone repair shop, and has since evolved into one of the leading e-commerce platforms in Turkey, specializing in the sale of refurbished electronics.

The lead investor, the slightly confusingly named Dutch Founders Fund (DFF), invested in Getmobil’s. “While DFF is based in the Netherlands, our focus at DFF lies in investing in B2B marketplaces during their seed phase,” says Hidde Hoogcarspel, co-founder and managing partner at DFF. “Our portfolio companies are not only located across Europe but also in regions such as Dubai and Egypt. These marketplaces typically operate across borders and sometimes even globally.”

Where there’s friction, there’s opportunity

As the Getmobil founders navigated the complexities of the electronics repair market, they identified a significant gap between the high cost of brand-new devices and the consumer’s desire for more economically viable alternatives. This realization prompted a pivot away from merely repairing devices to refurbishing and selling them, thus laying the groundwork for what would become Getmobil’s core business model.

In putting up high tariffs, the Turkish government created a grey market: People were selling and buying phones with cash, none of which was reported to the government. The good thing was that the money stayed within the country’s borders, but obviously, nobody was collecting taxes along the way, so that caused a new problem: Yes, the money was circular, but none of it was leaking into the country’s tax coffers.

“Turkey is an absolute outlier refurbished market. The price of a new iPhone in Ankara is far higher than in any other place in the world. The government has created a unique and far-reaching regulatory framework and incentive scheme, and imports are limited,” explains Hoogcarspel. “The formal refurbishing sector in Turkey is still in its early stages; the informal trade is thriving and is estimated to surpass the entire market size of $7 billion for new device sales. Tens of thousands of merchants operate within this informal segment.”

Eager to get the situation under control, the government brought in some big changes, including some new regulations, tax incentives and opportunities. In 2021, Turkey introduced a set of regulations that significantly bolstered the refurbished electronics market, creating a more structured and reliable framework for companies operating within this sector. These regulatory changes were framed as encouraging sustainable consumption practices, enhancing the quality and reliability of refurbished devices and reducing the environmental impact of electronic waste.

“[The Turkish government] introduced a refurbishment center regulation. They said ‘if you build the refurbishment center with some specific standards, we will not take 20% in taxes, we will take 1%,” explains Uygun. In addition, the government made it possible for the vetted refurbishment centers to offer installment payments — rather than having to pay for the devices in full. That’s extraordinary, the founders explain, because consumer credit is highly regulated in Turkey. They say that Apple cannot offer installment plans.

Getmobil’s growth trajectory has been remarkable, driven by a combination of strategic foresight, operational excellence and a deep understanding of the Turkish electronics — and regulatory — market. The company’s rise is characterized by its ability to offer consumers high-quality, refurbished electronics at competitive prices, thereby filling a critical market gap. This value proposition helped endear Getmobil to consumers, and has positioned the company as a vital player in Turkey’s electronics sector. And, presumably, the government is excited to be one step closer to being able to regulate the out-of-control second-hand market.

Winners: Local economy and the environment

While there’s little doubt that the main driving force behind the government’s regulations is revenue, forcing a more robust repair and second-hand market has a number of positive side effects, such as a dramatic increase in usable life of devices, and a significant reduction of e-waste.

Before the regulations, the refurbished electronics market in Turkey was chaotic and fragmented, and the quality and warranty coverage of second-hand devices was highly variable. The new frameworks put in place established stringent standards for refurbishing processes, including quality checks, warranty requirements and after-sales services. This legislative environment has played a pivotal role in leveling the playing field. By playing ball with the government’s regulations, Getmobil bought itself an edge — by promising to stick to the rules, adhering to high standards of quality and customer service, the company got itself a tremendous competitive advantage.

By aligning the interest of the customers (cost and quality), the government (ability to keep money inside Turkey, and collecting some taxes along the way) and Getmobil, everybody wins. Reusing, repairing, refurbishing and recycling extends the circular economy to a broader user base and means that the environment gets a little boost, too.

Navigating the intricacies of Turkey’s electronics market presents a unique set of challenges and opportunities for Getmobil. The team tells TechCrunch that the pervasive black market continues to be a big challenge: This shadow economy not only undercuts prices of legitimate refurbished electronics but also often compromises on quality and after-sales services, posing a significant threat to consumer trust. Moreover, staying abreast of and compliant with the evolving regulatory environment in Turkey adds another layer of complexity to Getmobil’s operations.

Dependent on regulation

Of course, the first step toward suppressing the black market was creating an alternative for it, and that’s where the regulations and Getmobil’s round of funding comes in.

For the investors, it remains to be seen whether this is a good investment. DFF clearly believes that there’s a huge opportunity here, but in the process, it is investing in a business that’s essentially made possible by a government regulation that suppresses cross-border trade. Turkey isn’t a member of the EU (conversations stalled out over alleged human rights violations perpetrated by the Turkish government), but if it were to become a member, the entire business model for Getmobil falls apart: EU countries cannot impose trade tariffs for cross-border imports and exports, and without that, it’s easy to imagine the Turkish market getting flooded with used and new electronics priced the same as in the rest of the EU.

Whether or not Getmobil’s future is secure depends entirely on geopolitical events and the direction of tomorrow’s trade tariff winds.

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Haje Jan Kamps

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March 7, 2024
UK finance chief warns Trump: Return to protectionism a ‘profound mistake’

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DAVOS, Switzerland — Britain’s top finance minister Jeremy Hunt has warned Donald Trump that a return to U.S. protectionism would be a “profound mistake” if he wins the U.S. election in November.

Speaking during a press briefing at the World Economic Forum in Davos, Hunt hit out at the Republican party frontrunner’s proposal for a universal tariff on all goods imported into the U.S.

Asked by POLITICO if he was concerned about the impact on the U.K. economy “if the U.S. elects a protectionist candidate for president like Donald Trump”, Hunt replied: “I don’t support protectionist measures. I think they harm the people who introduce them as much as the people they are aimed at.”

Hunt argued that a “huge flourishing of global trade” has helped to lessen poverty around the world, adding: “It would be a profound mistake to move back to protectionism.”

In an interview with Fox News in August last year, Trump floated an automatic 10 percent tariff on all goods imported to the U.S.

During his first term as U.S. president, Trump imposed tariffs on steel and aluminum imports and declared that “trade wars are good, and easy to win.”

Hunt’s comments will be seen as a direct rebuke of the U.S. Republican frontrunner, who has had a mixed relationship with senior U.K. politicians in the past.

Trump was known to hold a low opinion of former PM Theresa May, whom he undermined during her time in Downing Street. The former president was closer to her successor Boris Johnson, however — even giving Johnson his private phone number.

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Zachary Warmbrodt and Andrew McDonald

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January 16, 2024
Taiwan’s new president: 5 things you need to know about William Lai

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TAIPEI — Forget Xi Jinping or Joe Biden for a second. Meet Taiwan’s next President William Lai, upon whom the fate of U.S.-China relations — and global security over the coming few years — is now thrust.

The 64-year-old, currently Taiwan’s vice president, has led the Democratic Progressive Party (DPP) to a historic third term in power, a first for any party since Taiwan became a democracy in 1996.

For now, the capital of Taipei feels as calm as ever. For Lai, though, the sense of victory will soon be overshadowed by a looming, extended period of uncertainty over Beijing’s next move. Taiwan’s Communist neighbor has laid bare its disapproval of Lai, whom Beijing considers the poster boy of the Taiwanese independence movement.

All eyes are now on how the Chinese leader — who less than two weeks ago warned Taiwan to face up to the “historical inevitability” of being absorbed into his Communist nation — will address the other inevitable conclusion: That the Taiwanese public have cast yet another “no” vote on Beijing.

1. Beijing doesn’t like him — at all

China has repeatedly lambasted Lai, suggesting that he will be the one bringing war to the island.

As recently as last Thursday, Beijing was trying to talk Taiwanese voters out of electing its nemesis-in-chief into the Baroque-style Presidential Office in Taipei.

“Cross-Strait relations have taken a turn for the worse in the past eight years, from peaceful development to tense confrontation,” China’s Taiwan Affairs Office spokesman Chen Binhua said, adding that Lai would now be trying to follow an “evil path” toward “military tension and war.”

While Beijing has never been a fan of the DPP, which views China as fundamentally against Taiwan’s interests , the personal disgust for Lai is also remarkable.

Part of that stems from a 2017 remark, in which Lai called himself a “worker for Taiwanese independence,” which has been repeatedly cited by Beijing as proof of his secessionist beliefs.

Without naming names, Chinese President Xi harshly criticized those promoting Taiwan independence in a speech in 2021.

Without naming names, Chinese President Xi harshly criticized those promoting Taiwan independence | Mark Schiefelbein-Pool/Getty Images

“Secession aimed at Taiwan independence is the greatest obstacle to national reunification and a grave danger to national rejuvenation,” Xi said. “Those who forget their heritage, betray their motherland, and seek to split the country will come to no good end, and will be disdained by the people and sentenced by the court of history.”

2. All eyes are on the next 4 months

Instability is expected to be on the rise over the next four months, until Lai is formally inaugurated on May 20.

No one knows how bad this could get, but Taiwanese officials and foreign diplomats say they don’t expect the situation to be as tense as the aftermath of then-U.S. House Speaker Nancy Pelosi’s visit to the island in 2022.

Already, days before the election, China sent several spy balloons to monitor Taiwan, according to the Taiwanese defense ministry. On the trade front, China was also stepping up the pressure, announcing a possible move to reintroduce tariffs on some Taiwanese products. Cases of disinformation and electoral manipulation have also been unveiled by Taiwanese authorities.

Those developments, combined, constitute what Taipei calls hybrid warfare — which now risks further escalation given Beijing’s displeasure with the new president.

No one knows how bad this could get, but Taiwanese officials and foreign diplomats say they don’t expect the situation to be as tense as the aftermath of then-U.S. House Speaker Nancy Pelosi’s visit to the island in 2022 | Annabelle Chih/Getty Images

3. Lai has to tame his independent instinct

In a way, he has already.

Speaking at the international press conference last week, Lai said he had no plan to declare independence if elected to the presidency.

DPP insiders say they expect Lai to stick to outgoing Tsai Ing-wen’s approach, without saying things that could be interpreted as unilaterally changing the status quo.

They also point to the fact that Lai chose as vice-presidential pick Bi-khim Hsiao, a close confidante with Tsai and former de facto ambassador to Washington. Hsiao has developed close links with the Biden administration, and will play a key role as a bridge between Lai and the U.S.

4. Taiwan will follow international approach

The U.S., Japan and Europe are expected to take precedence in Lai’s diplomatic outreach, while relations with China will continue to be negative.

Throughout election rallies across the island, the DPP candidate repeatedly highlighted the Tsai government’s efforts at diversifying away from the trade reliance on China, shifting the focus to the three like-minded allies.

Lai has to tame his independent instinct | Annabelle Chih/Getty Images

Southeast Asia has been another top destination for these readjusted trade flows, DPP has said.

According to Taiwanese authorities, Taiwan’s exports to China and Hong Kong last year dropped 18.1 percent compared to 2022, the biggest decrease since they started recording this set of statistics in 1982.

In contrast, Taiwanese exports to the U.S. and Europe rose by 1.6 percent and 2.9 percent, respectively, with the trade volumes reaching all-time highs.

However, critics point out that China continues to be Taiwan’s biggest trading partner, with many Taiwanese businesspeople living and working in the mainland.

5. Lai might face an uncooperative parliament

While vote counting continues, there’s a high chance Lai will be dealing with a divided parliament, the Legislative Yuan.

Before the election, the Kuomintang (KMT) party vowed to form a majority with Taiwan People’s Party in the Yuan, thereby rendering Lai’s administration effectively a minority government.

While that could pose further difficulties for Lai to roll out policies provocative to Beijing, a parliament in opposition also might be a problem when it comes to Taiwan’s much-needed defense spending.

“A divided parliament is very bad news for defense. KMT has proven that they can block defense spending, and the TPP will also try to provide what they call oversight, and make things much more difficult,” said Syaru Shirley Lin, who chairs the Center for Asia-Pacific Resilience and Innovation, a Taipei-based policy think tank.

“Although all three parties said they wanted to boost defense, days leading up to the election … I don’t think that really tells you what’s going to happen in the legislature,” Lin added. “There’s going to be a lot of policy trading.”

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January 10, 2024
After Brexit, Britain and Europe embrace ever-closer union

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LONDON — It was the gleaming smiles and mutual backslapping of two 40-something banker bros which signalled a new era of U.K.-EU relations.

British Prime Minister Rishi Sunak and French President Emmanuel Macron looked like natural bedfellows as they riffed off one another at a friendly Paris press conference in March, announcing a sizeable £478 million package to deter migrant crossings through the English Channel.

The contrast with the petty name-calling of the Boris Johnson and Liz Truss eras was clear to see.

Sunak’s warm and productive summit with Europe’s most high-profile leader confirmed a more collaborative relationship with the EU and its national capitals after the turmoil of the Brexit era. Less than two weeks earlier, the British PM’s landmark Windsor Framework agreement with Brussels had finally resolved post-Brexit trading issues in Northern Ireland.

“My hope is that [the agreement] opens up other areas of constructive engagement and dialogue and cooperation with the EU,” Sunak told POLITICO en route to the Paris summit.

Six months on, his words have been borne out.

In addition to the Windsor Framework and English Channel agreements, Britain has signed a Memorandum of Understanding with Brussels on regulatory cooperation in financial services, and this month rejoined the EU’s massive €96 billion Horizon and Copernicus science research programs — a major result for the U.K.’s research and university sectors after two years of uncertainty.

Next on the agenda is a cooperation deal between the British government and the EU’s border protection agency Frontex — another move that brings Britain closer to the EU in a small but meaningful way.

The deal, confirmed by the Home Secretary Suella Braverman on Tuesday, is expected to be similar to other deals Frontex has with non-EU countries, like Albania, which allow the sharing of data on migration flows.

“We have seen concrete steps created by a new climate of good faith,” said a London-based European diplomat, granted anonymity — like others in this article — to speak candidly about diplomatic relations.

“We missed that before, and so that’s the Sunak effect. I wouldn’t say he’s done an amazing job, but he’s changed the state of mind — and therefore he has changed everything.”

A new hope

In addition to a renewed focus on relations with fellow leaders, Sunak has impressed EU diplomats with his willingness to face down the vocal Brexiteer wing of his own party, which has long seemed — to European eyes — to hold outsized influence over successive Tory prime ministers.

Britain’s Prime Minister Rishi Sunak proclaimed a “new chapter” in post-Brexit relations with the European Union after securing a breakthrough deal to regulate trade in Northern Ireland | Pool photo by Dan Kitwood/AFP via Getty Images

Earlier this year Sunak enraged Tory right-wingers by abandoning a controversial pledge to scrap or rewrite thousands of EU-era regulatory laws which remain on the British statute book by the end of this year, to the delight of EU capitals.

“The improving relationship is built on the fact there’s now a willingness to find solutions and engage in a way that wasn’t there in the previous administrations,” a second London-based European diplomat said.

Negotiations continue between Sunak’s government and Brussels over other outstanding areas of dispute — chief among them tough new tariffs due to be imposed in January on electric vehicles (EVs) being shipped in and out of the U.K. which do not conform to strict sourcing requirements for electric batteries.

On Wednesday the U.K.-EU Trade Specialised Committee will meet to discuss the issue, with British ministers increasingly hopeful Brussels will agree to scrap the end-of-year deadline after heavy lobbying from German automakers and its own European Commissioner for trade, Valdis Dombrovskis.

Catherine Barnard, a European law professor at Cambridge University, said overall Sunak had overseen a “much more positive relationship” with Europe, albeit one conducted on a “pay-as-you-go basis.”

“This is looking much more positive and it’s putting some meaning on dealing with our European neighbors as friends, rather than as foes,” she said.

“But equally, we’re not talking about a comprehensive and thorough renegotiation — quite the contrary.”

No. 10 Downing Street agrees the shift is less profound than some media observers — or grumbling Tory MPs — would like to think.

A No. 10 aide said Sunak sees his diplomatic efforts as “normal government,” noting that “we’ve just forgotten what it looks like” after the turmoil of the post-Brexit era.

“I know it’s following Brexit and all that nonsense we’ve seen over the last few years, and it’s nice to see any small win or small argument to bridge that divide, but this is just normal government relations,” the aide said.

Labour pains

Sunak, of course, is 18 points behind in the opinion polls and faces an uphill struggle to stay in office at a general election expected next year.

But his opponent, U.K. Labour leader Keir Starmer, has made clear he too wants closer cooperation with Europe should he seize power.

A senior moderate Tory MP said that despite the attacks on Starmer, Sunak is “not overly ideological when it comes to the EU” | Kiran Ridley/Getty Images

Starmer said this month a future Labour government would use the upcoming review of the post-Brexit trade deal, expected in 2025 or 2026, as a chance to reduce border checks through the signing of a veterinary agreement and to increase U.K.-EU mobility for some sectors of the economy.

And he told a conference in Montreal last weekend that that “we don’t want to diverge from the EU” in areas such as working conditions or environmental standards.

These comments were seized upon by Tory ministers as evidence that Starmer would bring the U.K. even further into the EU’s orbit than he has publicly admitted — something the Labour leader denies. Tory campaigners hope to use such comments in campaign attacks painting Starmer as an anti-Brexit europhile.

But some observers suggest such political attacks are ironic, given Sunak’s own direction of travel. Barnard, quoted above, says that “what Keir Starmer was saying in Canada last week is pretty much a description of where we’re at at the moment.”

A senior moderate Tory MP said that despite the attacks on Starmer, Sunak is “not overly ideological when it comes to the EU.”

“There’s always been a belief in Brussels that we would inevitably come crawling back to them, and we’re seeing that a bit now,” they said.

Nevertheless, it is unclear how much closer Britain and the EU can get without a fundamental renegotiation of the terms of Brexit — something all sides insist is off the table.

One area for agreement is the need for enhanced security and defence links, with next year’s European Political Community Summit in Britain providing a potential opportunity for further announcements.

Some in Westminster speculate that this could come in the form of Britain joining individual projects of the EU’s Permanent Structured Cooperation — a body which coordinates the bloc’s security and defence policy. The European Council invited Britain to join its “military mobility project” alongside Canada, Norway and the U.S. in November 2022.

Anand Menon, director of the UK in a Changing Europe think tank , said he’s “not convinced” of the potential benefits for Britain, considering the U.K.’s existing position in NATO and other organizations.

He believes the British government will run out of road in finding mutually beneficial areas of cooperation with Brussels.

“The EU is relatively happy with the status quo,” Menon said. “It’s only in the U.K. where people say we need to move closer … There are so many bigger fish to fry for the EU.”

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Stefan Boscia

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September 25, 2023
Ukraine’s bumper grain exports rile allies in eastern EU

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Ukraine’s farmers played an iconic role in the first weeks of Russia’s invasion, towing away abandoned enemy tanks with their tractors.

Now, though, their prodigious grain output is causing some of Ukraine’s staunchest allies to waver, as disrupted shipments are redirected onto neighboring markets.

The most striking is Poland, which has played a leading role so far in supporting Ukraine, acting as the main transit hub for Western weaponry and sending plenty of its own. But grain shipments in the other direction have irked Polish farmers who are being undercut — just months before a national election where the rural vote will be crucial.

Diplomats are floundering. After a planned Friday meeting between the Polish and Ukrainian agriculture ministers was postponed, the Polish government on Saturday announced a ban on imports of farm products from Ukraine. Hungary late Saturday said it would do the same.

Ukraine is among the world’s top exporters of wheat and other grains, which are ordinarily shipped to markets as distant as Egypt and Pakistan. Russia’s invasion last year disrupted the main Black Sea export route, and a United Nations-brokered deal to lift the blockade has been only partially effective. In consequence, Ukrainian produce has been diverted to bordering EU countries: Hungary, Poland, Romania and Slovakia.

At first, those governments supported EU plans to shift the surplus grain. But instead of transiting seamlessly onto global markets, the supply glut has depressed prices in Europe. Farmers have risen up in protest, and Polish Agriculture Minister Henryk Kowalczyk was forced out earlier this month.

Now, governments’ focus has shifted to restricting Ukrainian imports to protect their own markets. After hosting Ukrainian President Volodymyr Zelenskyy in Warsaw in early April, Polish President Andrzej Duda said resolving the import glut was “a matter of introducing additional restrictions.”

The following day, Poland suspended imports of Ukrainian grain, saying the idea had come from Kyiv. On Saturday, Polish Prime Minister Mateusz Morawiecki, after an emergency cabinet meeting, said the import ban would cover grain and certain other farm products and would include products intended for other countries. A few hours later, the Hungarian government announced similar measures. Both countries said the bans would last until the end of June.

The European Commission is seeking further information on the import restrictions from Warsaw and Budapest “to be able to assess the measures,” according to a statement on Sunday. “Trade policy is of EU exclusive competence and, therefore, unilateral actions are not acceptable,” it said.

While the EU’s free-trade agreement with Ukraine prevents governments from introducing tariffs, they still have plenty of tools available to disrupt shipments.

Neighboring countries and nearby Bulgaria have stepped up sanitary checks on Ukrainian grain, arguing they are doing so to protect the health of their own citizens. They have also requested financial support from Brussels and have already received more than €50 million from the EU’s agricultural crisis reserve, with more money on the way.

Restrictions could do further harm to Ukraine’s battered economy, and by extension its war effort. The economy has shrunk by 29.1 percent since the invasion, according to statistics released this month, and agricultural exports are an important source of revenue.

Cracks in the alliance

The trade tensions sit at odds with these countries’ political position on Ukraine, which — with the exception of Hungary — has been strongly supportive. Poland has taken in millions of Ukrainian refugees, while weapons and ammunition flow in the opposite direction; Romania has helped transport millions of tons of Ukrainian corn and wheat.

Volodymyr Zelenskyy and Poland’s Prime Minister, Mateusz Morawiecki | Omar Marques/Getty Images

Some Western European governments, which had to be goaded by Poland and others into sending heavy weaponry to Kyiv, are quick to point out the change in direction.

“Curious to see that some of these countries are [always] asking for more on sanctions, more on ammunition, etc. But when it affects them, they turn to Brussels begging for financial support,” said one diplomat from a Western country, speaking on condition of anonymity.

Some EU countries also oppose the import restrictions for economic reasons. For instance, Spain and the Netherlands are some of the biggest recipients of Ukrainian grain, which they use to supply their livestock industries.

Politically, though, the Central and Eastern European governments have limited room for maneuver. Poland and Slovakia are both heading into general elections later this year. Bulgaria has had a caretaker government since last year. Romania’s agriculture minister has faced calls to resign, including from a compatriot former EU agriculture commissioner.

And farmers are a strong constituency. Poland’s right-wing Law & Justice (PiS) party won the last general election in 2019 thanks in large part to rural voters. The Ukrainian grain issue has already cost a Polish agriculture minister his job; the government as a whole will have to tread carefully to avoid the same fate.

This article has been updated.

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Bartosz Brzezinski

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April 11, 2023
Germany mulls breaking subsidy taboo to avoid trade war with Biden

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BERLIN — With only six weeks to avoid a transatlantic trade showdown over green industries, the Germans are frustrated that Washington isn’t offering a peace deal and are increasingly considering a taboo-breaking response: European subsidies.

Europe’s fears hinge on America’s $369 billion package of subsidies and tax breaks to bolster U.S. green businesses, which comes into force on January 1. The bugbear for the Europeans is that Washington’s scheme will encourage companies to shift investments from Europe and incentivize customers to “Buy American” when it comes to purchasing an electric vehicle — something that infuriates the big EU carmaking nations like France and Germany.

The timing of this protectionist measure could hardly be worse as Germany is in open panic that several of its top companies — partly spurred by energy cost spikes after Russia’s invasion of Ukraine — are shuttering domestic operations to invest elsewhere. The last thing Berlin needs is even more encouragement for businesses to quit Europe, and the EU wants the U.S. to cut a deal in which its companies can enjoy the American perks.

A truce seems unlikely, however. If this spat now spirals out of control, it will lead to a trade war, something that terrifies the beleaguered Europeans. While the first step would be a largely symbolic protest at the World Trade Organization (WTO), the clash could easily slide precipitously back toward the tit-for-tat tariff battles of the era of former U.S. President Donald Trump.

This means that momentum is growing in Berlin for a radical Plan B. Instead of open tariff war with America, the increasingly discussed option is to rip up the classic free-trade rulebook and to play Washington at its own game by funneling state funds into European industry to rear homegrown green champions in sectors such as solar panels, batteries and hydrogen.

France has long been the leading advocate of strengthening European industry with state largesse but, up until now, the more economically liberal Germans have not wanted to launch a subsidy race against America. The sands are now shifting, however. Senior officials in Berlin say they are increasingly leaning toward the French thinking, should the talks with the U.S. not lead to an unexpected last-minute solution.

Berlin is the 27-nation bloc’s economic powerhouse, so it will be a decisive moment if Berlin ultimately decides to throw its might behind the state-led subsidy approach to an industrial race with the U.S.

Running out of time

The clock is ticking for a truce with Biden that looks increasingly unlikely.

Recent attempts by a special EU-U.S. task force to address EU concerns have met little enthusiasm on the American side to amend the controversial legislation, the European Commission told EU countries this week.

“There are only a few weeks left,” warned Bernd Lange, the chair of the European Parliament’s trade committee, adding that “once the act is implemented, it will be too late for us to achieve any changes.”

Lange said that the failure to reach a deal would likely trigger a WTO lawsuit by the EU against the U.S., and Brussels could also strike back against what it sees as the discriminatory U.S. subsidies by imposing punitive tariffs. Warnings of a trade war are already overshadowing the runup to a high-level EU-U.S. meeting in Washington on December 5.

MEP Bernd Lange Lange said that the failure to reach a deal would likely trigger a WTO lawsuit by the EU against the U.S. | Philippe Buissin/European Union

It’s precisely the kind of spat that the German government wants to avoid, as Chancellor Olaf Scholz hopes to forge unity among like-minded democracies amid Russia’s war and the the increasing challenges posed by China. Earlier this month, Scholz’s government made an overture to Washington by suggesting that a new EU-U.S. trade deal could be negotiated to resolve differences, but that proposal was quickly rejected.

There are sympathizers for the subsidies approach in Brussels, with officials at the EU’s executive saying powerful Internal Market Commissioner Thierry Breton is a leading proponent. Breton is already advocating for a “European Solidarity Fund” to help “mobilizing the necessary funding” to strengthen European autonomy in key sectors like batteries, semiconductors or hydrogen. Support from Germany could help Breton win the upper hand in internal EU strategy discussions over the more cautious Trade Commissioner Valdis Dombrovskis.

Breton will travel to Berlin on November 29 to discuss the consequences of the Inflation Reduction Act as well as industrial policy and energy measures with Scholz’s government.

The German considerations even echo calls from top officials of the Biden administration, including U.S. Trade Representative Katherine Tai, who are urging the EU to not engage in a transatlantic trade dispute and instead roll out their own industrial subsidies; a strategy that Washington also sees as way to reduce dependence on China.

Plan B

Scholz first indicated late last month that the EU might have to respond to the U.S. law with its own tax cuts and state support if the negotiations with Washington fail to reach a solution, lending support to similar plans articulated by French President Emmanuel Macron, who will meet Biden on December 1 in Washington.

Although Scholz does not endorse Macron’s framing of the initiative as a “Buy European Act” (which sounds too protectionist for the Germans), the chancellor agrees that the EU cannot stand by idly if it faces unfair competition or lost investments, people familiar with his thinking said late last month.

Negative economic news, such as carmaker Tesla putting plans for a new battery factory in Germany on hold and instead investing in the U.S., or steelmaker ArcelorMittal partly closing operations in Germany, have increased calls in Berlin to consider more state support to counter a negative trend caused by both the U.S. scheme and high energy prices.

Although the official government line remains that Berlin is still holding out hope for a negotiated solution with Washington, officials in Berlin say that it could be possible to increase incentives for industries to locate the production of green technologies in Europe.

A spokesperson for the German Economy Ministry said that faced with the challenges stemming from the Inflation Reduction Act, “we will have to come up with our own European response that puts our strengths first … The aim is to competitively relocate green value creation in Europe and strengthen our own production capacities.”

The spokesperson warned, however, that both the U.S. and EU “must be careful that there is no subsidy race that prevents the best ideas from prevailing in the market,” and added: “Green technologies in particular thrive best in fair competition; protectionism cripples innovation.”

One important condition that could help Germany and the EU to safeguard said fair competition and to avoid the global free trade system descending into protectionist tendencies would be to ensure that any EU state subsidies remain in line with WTO rules. That means, in contrast to the U.S. law, that those subsidies would not discriminate between local and foreign producers.

German Chancellor Olaf Scholz first indicated late last month that the EU might have to respond to the U.S. law with its own tax cuts and state support | Sean Gallup/Getty Images

Crucially, support is also coming from German industry.

“In the area of industrial policy and subsidies, we could look at measures that are compatible with WTO rules — as the EU is already doing in the chip sector,” said Volker Treier, the head of foreign trade at the German Chamber of Commerce.

Treier also stressed that “there must be no discrimination” against foreign investors, but added: “This explicitly does not rule out the possibility of settlement bonuses, which in turn should be available to investors from all countries who would be interested in such investment commitments in Europe.”

In Brussels, the Commission’s competition department has also made clear that it’s looking with an open mind at upcoming proposals.

“There are no instruments excluded a priori” when it comes to the EU’s response to the U.S. subsidies, the department’s state aid Deputy Director General Ben Smulders said Thursday.

Barbara Moens, Suzanne Lynch and Pietro Lombardi in Brussels and Laura Kayali and Clea Caulcutt in Paris contributed reporting.

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Hans von der Burchard

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November 17, 2022
How Businesses Can Navigate the Treacherous Waters of Trade Wars

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Opinions expressed by Entrepreneur contributors are their own.

In July, world leaders agreed to impose extra import tariffs on Russia during the G7 Summit, but the impact has been felt in other countries, including the U.S., with trade reduced by an estimated 62%, according to an analysis of the economic consequences of war. Russia’s war with Ukraine, and the subsequent trade sanctions placed on Russia, have impacted many businesses that rely on overseas trade. Now, businesses with overseas suppliers need to prepare for the uncertainty of trade tensions, tariffs and even the potential for embargos as the war escalates.

Just look at Shell. When they ceased operation and use of any Russian properties or partnerships for their oil production, they certainly felt the impact. Shell, like many other energy companies, had to fill the void left after they their relationship ended with Russian energy. Ultimately, this led to a rise in oil and gas prices across the world. This isn’t something felt only by big business, though, as everyone deals with the impact of tariffs either directly or indirectly.

If your business is facing tariffs, trade sanctions or the effects of war, here are some strategies to plan against the potential threat it could pose to your business internationally.

Related: Shell to Stop Buying Russian Oil and Gas

Eat the cost of the tariff and take a profit hit

Up until June of this year, the U.S.’s whiskey industry experienced lean times while exporting to the U.K. and EU, as Trump-era disputes over steel and aluminum trade resulted in steep tariffs on American whiskey. The whiskey companies had to monitor their profit margins and the number of tariffs their profits could take.

For international businesses experiencing periods of higher tariffs, it requires analyzing what costs can be absorbed and covered, and what sorts of belt-tightening and cost-cutting could help mitigate the impact of tariffs and to offset their cost on your business. While cutting costs can help improve profit margins, the negative effects of the tariff still exist, but at least consumers won’t see a drastic increase in price of your product. It’s all a matter of how much your business can stand to lose in profit margin and remain profitable domestically and abroad or if it can at all.

Pass the cost onto the consumer

On the other hand, a business always has the option to raise its prices to offset the tariffs’ impact on its bottom line. With that, however, comes the risk that customers may no longer want to buy your product.

Harvard Business Review emphasized that risk can be offset, though, if your business has an honest approach to explaining why it’s raising its prices. Communication is key. Leveling with your customers and being honest regarding the realistic implications of a trade war go a long way.

Related: What the Invasion of Ukraine Really Means for Business

Insure against the risk of a trade war

Transferring the risk by insuring against it is another option. Risks from tariffs can, in many cases, be included in Business Interruption Due to Legislative insurance. However, the trade-related risk is ever-evolving and complex, which can make it difficult and costly to insure in the third-party commercial insurance market. This is where captive insurance can be an option.

Captive policies often have fewer policy exclusions than commercial insurance policies. Captive insurance also negates the perceived sunk cost of paying insurance for a risk that doesn’t materialize.

For example, insuring against tariff risk for 10 years without any losses to tariffs occurring over the course of those 10 years would equate to money out the door. Outside of the comfort of knowing you’re insured, the business really has nothing to show for the premiums paid over that decade.

With captive insurance, however, your business can retain profits when claims aren’t paid. Thus, allowing for a build-up of cash reserves and benefiting the balance sheet of your business. This makes captive insurance a very effective tool especially in times like now where many businesses have been left scrambling after the sweeping sanctions against Russia and high inflation.

Related: This Insurance Strategy Could Save You Thousands

Decide whether to exit a market or category completely or find a supplier not subject to tariffs

Tariffs cut both ways, even though they exist to operate as barriers to prevent competing foreign products and businesses from damaging domestic industries. Just look to the specific industry of washing machines as tariffs introduced by the U.S. during the Trump presidency resulted in washer prices rising by almost 12%, according to economists at the University of Chicago and Federal Reserve.

This resulted in domestic business owners being left having to pay their own domestic government tariffs for buying the products instead of the country they imported them from. As you can imagine, this has implications for international business owners as well, especially in industries like agriculture where the World Trade Organization cites 100% of products as having a tariff.

Related: 2 Years Since Trade Deal with China, Tariffs Aren’t Working for American Businesses

For the businesses and consumers that needed those washers, they were left paying the increased price for them instead of China or other countries targeted by U.S. tariffs. According to UCLA Anderson Review, additional studies have also concluded that the trade war hurt U.S. consumers and companies more than it did China.

The example illustrates why having an international supplier that isn’t affected by the sanctions or tariffs faced by your company or products from your country is very important. This option is, however, mostly reserved for businesses that can afford to move major portions of their supply chain to other countries — making this option limited to few businesses. Partnering with a business in a country without the same tariffs or sanctions is also an option, but again, has many logistical complexities few businesses are prepared for.

Although there are immediate implications concerning the sanctions against Russia that can potentially decimate a supply chain, it’s crucial for businesses to keep in mind that the impact will also be felt long-term. Trade wars typically slow economic growth. Thus, it behooves businesses to start now and conduct a risk assessment in relation to both the sanctions and the potential for an economic slowdown. Even if your business isn’t impacted now, it could be in the future.

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Randy Sadler

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November 9, 2022
Europe racks up record trade deficit. Can it bounce back?

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Europe, the world’s largest economic bloc, enjoyed stable trade surpluses for a decade but the war in Ukraine and the ensuing energy crisis have tipped the Continent into a spiraling external deficit unseen since the launch of the euro.

The terms-of-trade shock maxed out in August, the latest month for which trade figures are available. And, even though energy prices have since eased, European leaders are still scrambling to shore up supplies of affordable oil and gas to replace lost Russian deliveries. A harsh winter looms.

A breakdown of the trade figures shows that the EU’s manufacturing trade surplus has nearly halved this year.

Can Europe bounce back? Or will its industrial base become hollowed out as industry moves offshore? And will the eurozone, and the EU more broadly, end up being saddled with the chronic external deficits that have long plagued the United States and, more recently, destabilized Britain? POLITICO breaks it down for you:

What’s going on?

The eurozone’s negative trade balance with the rest of the world in August stood at €50.9 billion, the highest deficit ever recorded, compared to a €2.8 billion surplus a year ago, according to the latest Eurostat numbers.

The trade deficit for the EU as a whole spiraled to €64.7 billion.

The eurozone’s current account balance — the balance of all trade in goods and services as well as international transfers of capital, such as remittances — hit a €26.32 billion deficit in August, largely driven by the trade deficit in goods, the European Central Bank reported.

Is that a bad thing?

A trade deficit occurs when a country or trading bloc’s imports exceed its exports. A trade surplus is the opposite. Trade deficits are not per se good or bad, although many countries seek a trade surplus, including by setting up tariffs and quotas to artificially boost their trade balance, a practice known as mercantilism.

Is it temporary?

The trade deficit is largely driven by high energy prices, which in August hit a record €350 per megawatt hour. Prices have come down from their peak, trading at around €150/MWh, but they are still a multiple of where they were a year ago.

“Markets have gone from pricing this energy crisis as being temporary, they are now pricing it to be a much longer-term story, albeit not as elevated as it was in August,” said Kristoffer Kjær Lomholt, chief FX analyst at Danske Bank.

“We think that it is a kind of a more long-term thing that is going to weigh on the currencies of economies that are energy importers, where the eurozone, of course, stands out to a very large extent,” he added.

Others believe that the shift, being largely energy related, could resolve itself over time, said Sam Lowe, who covers trade policy at Flint Global.

An EU official also pointed to EU-Russia trade. “The peak in energy prices has made the value of our imports from Russia increase substantially (while the volume of those imports from Russia decreased), and our exports have spiralled down because of sanctions (export controls),” the official said.

Will the EU be less competitive if energy prices remain high?

A negative trade balance and consequently a weaker currency makes imports more expensive. “Net importers will have to pay more for goods and services,” said Lomholt.

On the other hand, a weaker euro could fuel exports, said Matthias Krämer, head of external economic policy at German industry federation BDI. “If the euro currency was a little bit weaker, it could also make Europe’s position on global markets better by making exports cheaper,” he said.

But there’s another way of looking at this. Lowe argued the sustained large eurozone trade surplus was itself problematic, in that it was a function of intra-EU demand being lower than it should be. “Being overly dependent on external demand also leaves the EU quite vulnerable to both external shocks, and political coercion.”

What does that mean for the euro?

“We expect the euro to decline further in coming months as part of this adjustment,” said Robin Brooks, chief economist at the Institute of International Finance.

A negative trade balance or current account deficit puts downward pressure on the value of free-floating currencies, which move with demand of goods: less demand for a country’s exports means less demand for its currency, which in turn lowers its value relative to others. Conversely, strong foreign demand for goods strengthens a country’s currency.

“Foreign investors need to be compensated via a real depreciation of the exchange rate, and generally higher real interest rates,” said Lomholt at Danske Bank.

The Danish lender has recently downgraded its forecast for the € to $ exchange rate to $0.93 in 12 months from virtual parity now, driven in part by the energy price shock. “We have for some time been arguing that €/$ looked overvalued and not undervalued … And just given the additional push to the energy crisis that we got during summer, we saw a case that the euro/dollar [exchange rate] should actually hit even lower,” he said.

Is business freaking out?

A bit.

“The data are not so surprising considering the high energy prices, but they are worrying”, said Luisa Santos, responsible for international relations at BusinessEurope. She called on the EU to try to bring energy prices down and to boost exports by opening new market opportunities via more trade agreements.

Germany, the bloc’s export powerhouse, increased its exports by 14 percent in the first eight months of the year but imports have surged by more than 27 percent, according to national trade figures.

“We’re not performing in a segment which is highly influenced by a cost driven competition,” said Krämer at the German industry federation. “But if this situation will last longer of course some parts of our industry will be more and more under pressure.”

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Paula Tamma and Barbara Moens

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October 21, 2022
Almost everyone’s a loser: EU-UK trade sharply lower than in a world without Brexit

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DUBLIN — Brexit has inflicted deeper opportunity costs on U.K.-EU trade than previously estimated, according to a new Irish study that compares the weakness of actual post-2020 goods flows to a parallel universe where Britain stayed within the single market.

The Economic and Social Research Institute (ESRI) in Dublin found that Britain’s exit has cut the potential value of goods exports to Europe by 16 percent, while EU exports to the U.K. were even more sharply lower, representing a 20 percent loss in potential sales.

The ESRI authors from Trinity College Dublin used a hybrid model that combined U.K. and EU data. They made a central assumption that, had Brexit not happened, U.K. import and export levels with European partners would have closely mirrored the EU’s relatively stronger internal trade performance last year.

The ESRI found that, instead, trade suffered in both directions — but in significantly different ways.

While many U.K. firms producing goods on low profit margins have stopped shipping entirely to the EU, goods flows into the U.K. largely have continued but at reduced volumes. The ESRI said this reflected the contrast in post-Brexit border regimes. While the U.K. has imposed few if any post-Brexit regulatory constraints on EU imports, British exports now face full EU customs and sanitary checks that increase costs and delays, making low-margin products unprofitable.

The ESRI found that U.K. exporters were losing opportunities and market share in most EU countries, most strikingly in their closest trading partner, Ireland, where the value of British goods last year slumped by 40 percent versus the no-Brexit model. Other sharp fallers included Spain (32 percent), Sweden (25) and Germany (24).

The lone EU member to record any U.K. import gains in the ESRI’s model was Luxembourg, up an eye-popping 76 percent. While the ESRI didn’t detail any reason why, the U.K. government pinpointed power generators as its top 2021 goods export to the diminutive duchy.

In the other direction of trade, only two EU nations managed above-expectations gains in exports to Britain: Latvia (38 percent) and Cyprus (33). Several others noted no discernible post-Brexit decline, including food and drink powerhouse Ireland.

But exporters in most EU states last year pruned shipments in line with what the report identified as the reduced appeal and certainty of the U.K. market.

The estimated 2021 value of those exports, compared to the report’s scenario where Britain stayed an EU member, was down most sharply in Malta (46 percent), followed by Finland (33), France and Greece (29), the Netherlands (27), Belgium (26), Poland (21), Portugal (20), Spain and Sweden (19), Germany (14) and Italy (12).

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Shawn Pogatchnik

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October 19, 2022
France plays bad cop as transatlantic trade tensions ramp up

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PARIS — U.S. President Joe Biden needs to watch out; France is resuming its traditional role as Europe’s troublemaker on the transatlantic trade front.

It had seemed like the bad blood between Brussels and Washington was easing on Biden’s watch. Facing a common foe in China, the EU and the U.S. last year struck a truce on the tariffs that former President Donald Trump slapped on European steel and aluminium. Over this year, Russia’s war against Ukraine has meant that America and Europe needed to present a united front, at least politically.

Cracks are now starting to re-emerge, however. The EU is furious that the U.S. is pouring subsidies into the homegrown electric car industry. Accusing Washington of protectionism, Europe is now threatening to draw up its own defenses.

Unsurprisingly, French President Emmanuel Macron is leading the charge. “The Americans are buying American and pursuing a very aggressive strategy of state aid. The Chinese are closing their market. We cannot be the only area, the most virtuous in terms of climate, which considers that there is no European preference,” Macron told French daily Les Echos.

Upping the ante, he called on Brussels to support consumers and companies that buy electric cars produced in the EU, instead of ones from outside the bloc.

There are good reasons why the Europeans are fretting about their trade balances.

The war has delivered a huge terms-of-trade shock, with spiraling energy costs hauling the EU into a yawning bloc-wide trade deficit of €65 billion in August, from only €7 billion a year earlier. In one manifestation of those strains, Europe’s growing reliance on American liquefied natural gas to substitute for lost Russian supplies has re-ignited tensions.

Macron’s comments are a reflection of EU consternation over Washington’s Inflation Reduction Act, which incentivizes U.S. consumers to “Buy American” when purchasing a greener car. The EU argues that requiring that car needs to be assembled in North America and contain a battery with a certain percentage of local content discriminate against the EU and other trade partners.

The European Commission hopes to convince Washington to find a diplomatic compromise for European carmakers and their suppliers. If not, that leaves the EU no choice but to challenge Washington at the World Trade Organization, EU officials and diplomats told POLITICO — even if a new transatlantic trade war is the last thing both sides want to spend their time and money on.

Macron’s comments “are clearly a response against the Inflation Reduction Act,” noted Elvire Fabry, a trade policy expert at the Institut Jacques Delors in Paris. “Macron plays the role of the bad cop, compared to the European Commission, which left Washington some political room to make adjustments,” she noted.

‘American domination’

The Commission hopes to find a diplomatic compromise with the U.S. for European carmakers and their suppliers | Ludovic Marin/AFP via Getty Images

France has traditionally been the bloc’s most outspoken country when it came to confronting Washington on a wide range of trade files. Paris, for instance, played a key role in killing a transatlantic trade agreement between the EU and U.S. (the so-called “TTIP”). Its digital tax angered U.S. Big Tech and triggered a trade war with the Trump administration.

More recently, during its rotating Council of the EU presidency, Paris focused on trade defense measures, which will give Brussels the power to retaliate against unilateral trade measures, including from the U.S.

New tensions are bad news for the upcoming meeting of the Trade and Tech Council early December, which so far has had trouble to show that it’s more than a glorified talking shop.

France won’t be left alone in a possible trade war on electric cars. According to Fabry, these tensions will bring Paris and Berlin closer, as the German car industry is also particularly affected by the U.S. measures.

But the “Buy American” approach is not the only bone of contention. The fact that Europe is increasingly relying on gas imports from the U.S. brought European discontent to the next level.

Although gas import prices fell in September from their all-time highs in August, they were still more than 2.5 times higher than they were a year ago. And, taking into account increased purchase volumes, France’s bill for imports of LNG multiplied more than tenfold in August, year on year, by one estimate.

Economy and Finance Minister Bruno Le Maire last week warned that Russia’s war against Ukraine should not result in “American economic domination and a weakening of Europe.” Le Maire criticized the U.S. for selling LNG to Europe “at four times the price at which it sells it to its own companies,” and called on Brussels to take action for a “more balanced economic relationship” between the two continents.

That very same concern is shared by some Commission officials, POLITICO has learned, but also among French industrialists.

It is “hardly contestable” that the U.S. had some economic benefits from the war in Ukraine and suffered less than Europe from its economic consequences, said Bernard Spitz, head of international and European affairs at France’s business lobby Medef.

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Giorgio Leali and Barbara Moens

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October 17, 2022