LONDON — Three years after leaving the EU to chart its own course, Britain finds itself caught between two economic behemoths in a brewing transatlantic trade war.
In one corner sits the United States, whose Congress in August passed the Biden administration’s much-vaunted $369 billion program of green subsidies, part of the Inflation Reduction Act (IRA).
In the opposing corner is the European Union, which fears Washington’s subsidy splurge will pull investment — particularly in electric vehicles — away from Europe, hitting carmakers hard.
The EU is preparing its own retaliatory package of subsidies; Washington shows little sign of changing course. Fears of a trade war are growing fast.
Now sitting squarely outside the ring, the U.K. can only look on with horror, and quietly ask Washington to soften the blow. But there are few signs the softly-softly approach is bearing fruit. Britain now risks being clobbered by both sides.
“It’s not in the U.K.’s interest for the U.S. and EU to go down this route,” said Sam Lowe, a partner at Flint Global and expert in U.K. and EU trade policy. “Given the U.K.’s current economic position, it can’t really afford to engage in a subsidy war with both.” The British government has just unleashed a round of fiscal belt-tightening after a market rout, following months of political turmoil.
For iconic British motor brands, the row over the Biden administration’s IRA comes with real costs.
The U.S. is the second-largest destination for British-made vehicles after the EU, and the automotive sector is one of Britain’s top goods exporters.
Manufacturers like Jaguar Land Rover have warned publicly about the “very serious challenges” posed by the new U.S. law and its plan for electric vehicle tax credits aimed at boosting American industry.
Kemi on the case
U.K. Trade Secretary Kemi Badenoch has for months been privately urging top U.S. officials to soften the impact of the electric vehicle subsidies on Britain by carving out exemptions, U.K. officials said.
When Commerce Secretary Gina Raimondo visited London in early October, Badenoch pushed her to rethink the strategy. The U.K. trade chief brought that same message to Washington in a series of private meetings earlier this month, including at a sit-down with Deputy Treasury Secretary Wally Adeyemo.
Badenoch has “raised this issue on many levels,” an official from the U.K.’s Department for International Trade said, citing conversations with U.S. Ambassador to Britain Jane Hartley, with Secretary Raimondo, “and with members of the Biden administration and senior representatives of both parties.”
The Cabinet minister has also spoken out in public, telling the pro-free market Cato Institute in Washington earlier this month that “the substantial new tax credits for electric cars not only bar vehicles made in the U.K. from the U.S. market, but also affect vehicles made in the U.S. by U.K. manufacturers.”
U.S. Secretary of Commerce Gina Raimondo | Mandel Ngan/AFP via Getty Images
Badenoch’s comments echo concerns raised by both British automotive lobby group the Society of Motor Manufacturers and Traders (SMMT), and by Jaguar Land Rover, in comments filed with the U.S. Treasury Department.
The SMMT warned that Biden’s green vehicle package has several “elements of concern that risk creating an uneven competitive environment, with U.K.-based manufacturers and suppliers potentially penalised.” The lobby group is taking aim at the credit scheme’s requirement for green vehicles to be built in North America, with significant subsidies available only if critical minerals are sourced from the U.S. or a U.S. ally.
In response to Washington’s plans, the EU is preparing what could amount to billions in subsidies for its own industries hit by the U.S. law, which also offers tax breaks to boost American green businesses such as solar panel manufacturers. Britain faces being squeezed in both markets, while lacking any say in whatever response Brussels decides.
Protectionism that impacts like-minded allies “isn’t the answer to the geopolitical challenges we face,” the British trade department official warned, adding “there is a serious risk” the law disrupts “vital” global supply chains of batteries and electric vehicles.
The conversations Badenoch had this month in Washington were “reassuring,” the official added. “But it’s for them to address and find solutions.”
‘Ton of work to do’
Yet others believe Badenoch will have a hard time getting her colleagues in the U.S. — now cooling on a much-touted bilateral trade deal — to take action. “The U.S. is minimally focused on how any of their policies are going to impact the U.K.,” admitted a U.S.-based representative of a major business group.
While Britain and the U.S. are “very close allies”, they added, those in Washington “just don’t really view the U.K. as an interesting trade partner and market right now.” The U.S. is more focused, they noted, on pushing back against China, meaning Badenoch has “a ton of work to do” getting the administration to soften the IRA.
Nevertheless the U.S. is still working out how its law will actually be implemented, the business figure said, and is assembling a working group on how the IRA impacts trade allies. This has the potential, they added, to “alleviate a lot of the concerns coming out of the U.K.”
Late Tuesday evening, the SMMT called on the British government to provide greater domestic support for the sector as it prepares to ramp up its own electric vehicle production. The group wants an extension past April on domestic support for firms’ energy costs; a boost to government investment in green energy sources; and a speedier national rollout of charging infrastructure and staff training.
In the meantime, Britain’s options appear limited.
Newly manufactured Land Rover and Range Rover vehicles parked and waiting to be loaded for export | Paul Ellis/AFP via Getty Images
The U.K. “could consider legal action” and haul the U.S. before the World Trade Organization or challenge the EU through provisions in the post-Brexit Trade and Cooperation Agreement, said Lowe of consultancy Flint. “But — to be blunt — neither of them care what we have to say.”
Anna Jerzewska, a trade advisor and associate fellow at the UK Trade Policy Observatory, suggested pressing ahead “with your own domestic policy and efforts to support strategic industries is perhaps more important” than complaining about foreign subsidy schemes. But she noted that after a “chaotic” political period, Britain is “likely to take longer to respond to external changes and challenges.”
And in truth, Britain “can’t afford to out-subsidize the U.S. and EU,” said David Henig, a trade expert with the European Centre For International Political Economy think tank.
Outside the EU, Britain could work to rally allies such as Japan and South Korea who are also unhappy with the Biden administration’s protectionist measures, he noted. “But I don’t think we’re in that position,” Henig said, as it would take a concerted diplomatic effort, and the U.K.’s automotive sector would “have to be well positioned” in the first place, not struggling as it is. He predicted London’s lobbying in Washington and Brussels is “not going to get anywhere.”
BERLIN — On a balmy September evening last year, an Azeri man carrying a Russian passport crossed the border from northern Cyprus into southern Cyprus. He traveled light: a pistol, a handful of bullets and a silencer.
It was going to be the perfect hit job.
Then, just as the man was about to step into a rental car and carry out his mission — which prosecutors say was to gun down five Jewish businessmen, including an Israeli billionaire — the police surrounded him.
The failed attack was just one of at least a dozen in Europe in recent years, some successful, others not, that have involved what security officials call “soft” targets, involving murder, abduction, or both. The operations were broadly similar in conception, typically relying on local hired guns. The most significant connection, intelligence officials say, is that the attacks were commissioned by the same contractor: the Islamic Republic of Iran.
In Cyprus, authorities believe Iran, which blames Israel for a series of assassinations of nuclear specialists working on the Iranian nuclear program, was trying to signal that it could strike back where Israel least expects it.
“This is a regime that bases its rule on intimidation and violence and espouses violence as a legitimate measure,” David Barnea, the head of Israel’s Mossad intelligence agency, said in rare public remarks in September, describing what he said was a recent uptick in violent plots. “It is not spontaneous. It is planned, systematic, state terrorism — strategic terrorism.”
He left out one important detail: It’s working.
That success has come in large part because Europe — the staging ground for most Iranian operations in recent years — has been afraid to make Tehran pay. Since 2015, Iran has carried out about a dozen operations in Europe, killing at least three people and abducting several others, security officials say.
“The Europeans have not just been soft on the Islamic Republic, they’ve been cooperating with them, working with them, legitimizing the killers,” Masih Alinejad, the Iranian-American author and women’s rights activist said, highlighting the continuing willingness of European heads of state to meet with Iran’s leaders.
Alinejad, one of the most outspoken critics of the regime, understands better than most just how far Iran’s leadership is willing to go after narrowly escaping both a kidnapping and assassination attempt.
“If the Islamic Republic doesn’t receive any punishment, is there any reason for them to stop taking hostages or kidnapping or killing?” she said, and then answered: “No.”
Method of first resort
Assassination has been the sharpest instrument in the policy toolbox ever since Brutus and his co-conspirators stabbed Julius Caesar repeatedly. Over the millennia, it’s also proved risky, often triggering disastrous unintended consequences (see the Roman Empire after Caesar’s killing or Europe after the assassination of Archduke Franz Ferdinand in Sarajevo).
And yet, for both rogue states like Iran, Russia and North Korea, and democracies such as the United States and Israel — the attraction of solving a problem by removing it often proves irresistible.
Even so, there’s a fundamental difference between the two spheres: In the West, assassination remains a last resort (think Osama bin Laden); in authoritarian states, it’s the first (who can forget the 2017 assassination by nerve agent of Kim Jong-nam, the playboy half-brother of North Korean dictator Kim Jong-un, upon his arrival in Kuala Lumpur?). For rogue states, even if the murder plots are thwarted, the regimes still win by instilling fear in their enemies’ hearts and minds.
That helps explain the recent frequency. Over the course of a few months last year, Iran undertook a flurry of attacks from Latin America to Africa. In Colombia, police arrested two men in Bogotá on suspicion they were plotting to assassinate a group of Americans and a former Israeli intelligence officer for $100,000; a similar scene played out in Africa, as authorities in Tanzania, Ghana and Senegal arrested five men on suspicion they were planning attacks on Israeli targets, including tourists on safari; in February of this year, Turkish police disrupted an intricate Iranian plot to kill a 75-year-old Turkish-Israeli who owns a local aerospace company; and in November, authorities in Georgia said they foiled a plan hatched by Iran’s Quds Force to murder a 62-year-old Israeli-Georgian businessman in Tbilisi.
Whether such operations succeed or not, the countries behind them can be sure of one thing: They won’t be made to pay for trying. Over the years, the Russian and Iranian regimes have eliminated countless dissidents, traitors and assorted other enemies (real and perceived) on the streets of Paris, Berlin and even Washington, often in broad daylight. Others have been quietly abducted and sent home, where they faced sham trials and were then hanged for treason.
While there’s no shortage of criticism in the West in the wake of these crimes, there are rarely real consequences. That’s especially true in Europe, where leaders have looked the other way in the face of a variety of abuses in the hopes of reviving a deal to rein in Tehran’s nuclear weapons program and renewing business ties.
Unlike the U.S. and Israel, which have taken a hard line on Iran ever since the mullahs came to power in 1979, Europe has been more open to the regime. Many EU officials make no secret of their ennui with America’s hard-line stance vis-à-vis Iran.
“Iran wants to wipe out Israel, nothing new about that,” the EU foreign policy chief Josep Borrell told POLITICO in 2019 when he was still Spanish foreign minister. “You have to live with it.”
History of assassinations
There’s also nothing new about Iran’s love of assassination.
Indeed, many scholars trace the word “assassin” to Hasan-i Sabbah, a 12th-century Persian missionary who founded the “Order of Assassins,” a brutal force known for quietly eliminating adversaries.
Hasan’s spirit lived on in the Ayatollah Ruhollah Khomeini, the hardline cleric who led Iran’s Islamic revolution and took power in 1979. One of his first victims as supreme leader was Shahriar Shafiq, a former captain in the Iranian navy and the nephew of the country’s exiled shah. He was shot twice in the head in December 1979 by a masked gunman outside his mother’s home on Rue Pergolèse in Paris’ fashionable 16th arrondissement.
In the years that followed, Iranian death squads took out members and supporters of the shah and other opponents across Europe, from France to Sweden, Germany, Switzerland and Austria. In most instances, the culprits were never caught. Not that the authorities really needed to look.
In 1989, for example, Abdul Rahman Ghassemlou, a leader of Iran’s Kurdish minority who supported autonomy for his people, was gunned down along with two associates by Iranian assassins in an apartment in Vienna.
The gunmen took refuge in the Iranian embassy. They were allowed to leave Austria after Iran’s ambassador to Vienna hinted to the government that Austrians in his country might be in danger if the killers were arrested. One of the men alleged to have participated in the Vienna operation would later become one of his country’s most prominent figures: Mahmoud Ahmadinejad, Iran’s president from 2005 until 2013.
Not even the bad publicity surrounding that case tempered the regime’s killing spree. In the years that followed, the body count only increased. Some of the murders were intentionally gruesome in order to send a clear message.
Fereydoun Farrokhzad, for example, a dissident Iranian popstar who found exile in Germany, was killed in his home in Bonn in 1992. The killers cut off his genitals, his tongue and beheaded him.
His slaying was just one of dozens in what came to be known as Iran’s “chain murders,” a decade-long killing spree in which the government targeted artists and dissidents at home and abroad. Public outcry over the murder of a trio of prominent writers in 1998, including a husband and wife, forced the regime hard-liners behind the killings to retreat. But only for a time.
Illustration by Joan Wong for POLITICO
Then, as now, the dictatorship’s rationale for such killings has been to protect itself.
“The highest priority of the Iranian regime is internal stability,” a Western intelligence source said. “The regime views its opponents inside and outside Iran as a significant threat to this stability.”
Much of that paranoia is rooted in the Islamic Republic’s own history. Before returning to Iran in 1979, Khomeini spent nearly 15 years in exile, including in Paris, an experience that etched the power of exile into the Islamic Republic’s mythology. In other words, if Khomeini managed to lead a revolution from abroad, the regime’s enemies could too.
Bargaining chips
Given Europe’s proximity to Iran, the presence of many Iranian exiles there and the often-magnanimous view of some EU governments toward Tehran, Europe is a natural staging ground for the Islamic Republic’s terror.
The regime’s intelligence service, known as MOIS, has built operational networks across the Continent trained to abduct and murder through a variety of means, Western intelligence officials say.
As anti-regime protests have erupted in Iran with increasing regularity since 2009, the pace of foreign operations aimed at eliminating those the regime accuses of stoking the unrest has increased.
While several of the smaller-scale assassinations — such as the 2015 hit in the Netherlands on Iranian exile Mohammad-Reza Kolahi — have succeeded, Tehran’s more ambitious operations have gone awry.
The most prominent example involved a 2018 plot to blow up the annual Paris meeting of the National Council of Resistance of Iran, an alliance of exile groups seeking to oust the regime. Among those attending the gathering, which attracted tens of thousands, was Rudy Giuliani, the former New York mayor and then-U.S. President Donald Trump’s lawyer.
Following a tip from American intelligence, European authorities foiled the plot, arresting six, including a Vienna-based Iranian diplomat who delivered a detonation device and bombmaking equipment to an Iranian couple tasked with carrying out an attack on the rally. Authorities observed the handover at a Pizza Hut in Luxembourg and subsequently arrested the diplomat, Assadollah Assadi, on the German autobahn as he sped back to Vienna, where he enjoyed diplomatic immunity.
Assadi was convicted on terror charges in Belgium last year and sentenced to 20 years is prison. He may not even serve two.
The diplomat’s conviction marked the first time an Iranian operative had been held accountable for his actions by a European court since the Islamic revolution. But Belgium’s courage didn’t last long.
In February, Iran arrested Belgian aid worker Olivier Vandecasteele on trumped-up espionage charges and placed him into solitary confinement at the infamous Evin prison in Tehran. Vandecasteele headed the Iran office of the Norwegian Refugee Council, an aid group.
Following reports that Vandecasteele’s health was deteriorating and tearful public pleas from his family, the Belgian government — ignoring warnings from Washington and other governments that it was inviting further kidnappings — relented and laid the groundwork for an exchange to trade Assadi for Vandecasteele. The swap could happen any day.
“Right now, French, Swedish, German, U.K., U.S., Belgian citizens, all innocents, are in Iranian prisons,” said Alinejad, the Iranian women’s rights campaigner.
“They are being used like bargaining chips,” she said. “It works.”
Amateur hour
Even so, the messiness surrounding the Assadi case might explain why most of Iran’s recent operations have been carried out by small-time criminals who usually have no idea who they’re working for. The crew in last year’s Cyprus attack, for example, included several Pakistani delivery boys. While that gives Iran plausible deniability if the perpetrators get caught, it also increases the likelihood that the operations will fail.
“It’s very amateur, but an amateur can be difficult to trace,” one intelligence official said. “They’re also dispensable. They get caught, no one cares.”
Iranian intelligence has had more success in luring dissidents away from Europe to friendly third countries where they are arrested and then sent back to Iran. That’s what happened to Ruhollah Zam, a journalist critical of the regime who had been living in Paris. The circumstances surrounding his abduction remain murky, but what is known is that someone convinced him to travel to Iraq in 2019, where he was arrested and extradited to Iran. He was convicted for agitating against the regime and hanged in December of 2020.
One could be forgiven for thinking that negotiations between Iran and world powers over renewing its dormant nuclear accord (which offered Tehran sanctions relief in return for supervision of its nuclear program) would have tamed its covert killing program. In fact, the opposite occurred.
In July of 2021, U.S. authorities exposed a plot by Iranian operatives to kidnap Alinejad from her home in Brooklyn as part of an elaborate plan that involved taking her by speedboat to a tanker in New York Harbor before spiriting her off to Venezuela, an Iranian ally, and then on to the Islamic Republic.
A year later, police disrupted what the FBI believed was an attempt to assassinate Alinejad, arresting a man with an assault rifle and more than 60 rounds of ammunition who had knocked on her door.
American authorities also say Tehran planned to avenge the assassination of General Qassem Soleimani, the head of its feared paramilitary Quds Force who was the target of a U.S. drone strike in 2020, by seeking to kill former National Security Adviser John Bolton and Mike Pompeo, the former Secretary of State, among other officials.
Through it all, neither the U.S. nor Europe gave up hope for a nuclear deal.
“From the point of view of the Iranians, this is proof that it is possible to separate and maintain a civilized discourse on the nuclear agreement with a deceptive Western appearance, on the one hand, and on the other hand, to plan terrorist acts against senior American officials and citizens,” Barnea, the Mossad chief said. “This artificial separation will continue for as long as the world allows it to.”
Kremlin’s killings
Some hope the growing outrage in Western societies over Iran’s crackdown on peaceful protestors could be the spark that convinces Europe to get tough on Iran. But Europe’s handling of its other favorite rogue actor — Russia — suggests otherwise.
Long before Russia’s annexation of Crimea, much less its all-out war against Ukraine, Moscow, similar to Iran, undertook an aggressive campaign against its enemies abroad and made little effort to hide it.
Russian police investigators stand near the body of killed Russian opposition leader and former Deputy Prime Minister Boris Nemtsov | Sasha Mordovets/Getty Images
The most prominent victim was Alexander Litvinenko. A former KGB officer like Vladimir Putin, Litvinenko had defected to the U.K., where he joined other exiles opposed to Putin. In 2006, he was poisoned in London by Russian intelligence with polonium-210, a radioactive isotope that investigators concluded was mixed into his tea. The daring operation signaled Moscow’s return to the Soviet-era practice of artful assassination.
Litvinenko died a painful death within weeks, but not before he blamed Putin for killing him, calling the Russian president “barbaric.”
“You may succeed in silencing me, but that silence comes at a price,” Litvinenko said from his deathbed.
In the end, however, the only one who really paid a price was Litvinenko. Putin continued as before and despite deep tensions in the U.K.’s relationship with Russia over the assassination, it did nothing to halt the transformation of the British capital into what has come to be known as “Londongrad,” a playground and second home for Russia’s Kremlin-backed oligarchs, who critics say use the British financial and legal systems to hide and launder their money.
Litvinenko’s killing was remarkable both for its brutality and audacity. If Putin was willing to take out an enemy on British soil with a radioactive element, what else was he capable of?
It didn’t take long to find out. In the months and years that followed, the bodies started to pile up. Critical journalists, political opponents and irksome oligarchs in the prime of life began dropping like flies.
Europe didn’t blink.
Angela Merkel, then German chancellor, visited Putin in his vacation residence in Sochi just weeks after the murders of Litvinenko and investigative journalist Anna Politkovskaya and said … nothing.
Even after there was no denying Putin’s campaign to eradicate anyone who challenged him, European leaders kept coming in the hope of deepening economic ties.
Neither the assassination of prominent Putin critic Boris Nemtsov just steps away from the Kremlin in 2015, nor the poisoning of a KGB defector and his daughter in the U.K. in 2018 and of opposition leader Alexei Navalny in 2020 with nerve agents disabused European leaders of the notion that Putin was someone they could do business with and, more importantly, control.
‘Anything can happen’
Just how comfortable Russia felt about using Europe as a killing field became clear in the summer of 2019. Around noon on a sunny August day, a Russian assassin approached Zelimkhan Khangoshvili, a Chechen with Georgian nationality, and shot him twice in the head with a 9mm pistol. The murder took place in a park located just a few hundred meters from Germany’s interior ministry and several witnesses saw the killer flee. He was nabbed within minutes as he was changing his clothes and trying to dispose of his weapon and bike in a nearby canal.
It later emerged that Khangoshvili, a Chechen fighter who had sought asylum in Germany, was on a Russian kill list. Russian authorities considered him a terrorist and accused him of participating in a 2010 attack on the Moscow subway that killed nearly 40 people.
In December of 2019, Putin denied involvement in Khangoshvili’s killing. Sort of. Sitting next to French President Emmanuel Macron, Merkel and Ukrainian President Volodymyr Zelenskyy following a round of talks aimed at resolving the conflict in Ukraine, the Russian referred to him as a “very barbaric man with blood on his hands.”
“I don’t know what happened to him,” Putin said. “Those are opaque criminal structures where anything can happen.”
Early on October 19 of last year, Berlin police discovered a dead man on the sidewalk outside the Russian embassy. He was identified as Kirill Zhalo, a junior diplomat at the embassy. He was also the son of General Major Alexey Zhalo, the deputy head of a covert division in Russia’s FSB security service in Moscow that ordered Khangoshvili’s killing. Western intelligence officials believe that Kirill Zhalo, who arrived in Berlin just weeks before the hit on the Chechen, was involved in the operation and was held responsible for its exposure.
The Russian embassy called his death “a tragic accident,” suggesting he had committed suicide by jumping out of a window. Russia refused to allow German authorities to perform an autopsy (such permission is required under diplomatic protocols) and sent his body back to Moscow.
Less than two months later, the Russian hitman who killed Khangoshvili, was convicted of murder and sentenced to life in prison. Russia recently tried to negotiate his release, floating the possibility of exchanging American basketball player Brittney Griner and another U.S. citizen they have in custody. Washington rejected the idea.
The war in Ukraine offers profound lessons about the inherent risks of coddling dictators.
Though Germany, with its thirst for Russian gas, is often criticized in that regard, it was far from alone in Europe. Europe’s insistence on giving Putin the benefit of the doubt over the years in the face of his crimes convinced him that he would face few consequences in the West for his invasion of Ukraine. That’s turned out to be wrong; but who could blame the Russian leader for thinking it?
Iran presents Europe with an opportunity to learn from that history and confront Tehran before it’s too late. But there are few signs it’s prepared to really get tough. EU officials say they are “considering” following Washington’s lead and designating the Islamic Revolutionary Guard Corps, a vast military organization that also controls much of the Iran’s economy, as a terror organization. Last week, German Foreign Minister Annalena Baerbock spearheaded an effort at the United Nations to launch a formal investigation into Iran’s brutal crackdown against the ongoing protests in the country.
Yet even as the regime in Tehran snuffs out enemies and races to fulfil its goal of building both nuclear weapons and missiles that can reach any point on the Continent, some EU leaders appear blind to the wider context as they pursue the elusive renewal of the nuclear accord.
“It is still there,” Borrell said recently of the deal he has taken a leading role in trying to resurrect. “It has nothing to do with other issues, which certainly concern us.”
The transatlantic reset between Brussels and Washington is on life support.
After four years of discord and disruption under Donald Trump, hopes were high that Joe Biden’s presidency would usher in a new era of cooperation between Europe and the U.S. after he declared: “America is back.”
But when senior officials from both sides meet in Washington on Monday for a twice-yearly summit on technology and trade, the mood will be gloomier than at any time since Trump left office.
The European Union is up in arms over Biden’s plans for hefty subsidies for made-in-America electric cars, claiming these payments, which partly kick in from January 1, are nothing more than outright trade protectionism.
At the same time, the U.S. is increasingly frustrated the 27-country bloc won’t be more aggressive in pushing back against China, accusing some European governments of caving in to Beijing’s economic might.
Those frictions are expected to overshadow the so-called EU-U.S. Trade and Technology Council (TTC) summit this week. At a time when the Western alliance is seeking to maintain a show of unity and strength in the face of Russian aggression and Chinese authoritarianism, the geopolitical stakes are high.
Biden may have helped matters last Thursday, during a joint press conference with French President Emmanuel Macron, by saying he believed the two sides can still resolve some of the concerns the EU has raised.
“We’re going to continue to create manufacturing jobs in America but not at the expense of Europe,” Biden said. “We can work out some of the differences that exist, I’m confident.”
But, as ever, the details will be crucial.
It is unclear what Biden can do to stop his Buy American subsidies from hurting European car-markers, for example, many of which come from powerful member countries like France and Germany. The TTC summit offers a crucial early opportunity for the two sides to begin to rebuild trust and start to deliver on Biden’s warm rhetoric.
Judging by the TTC’s record so far, those attending, who will include U.S. Secretary of State Antony Blinken, will have their work cut out.
More than 20 officials, policymakers and industry and society groups involved in the summit told POLITICO that the lofty expectations for the TTC have yet to deliver concrete results. Almost all of the individuals spoke on the condition of anonymity to discuss sensitive internal deliberations.
U.S. Secretary of State Antony Blinken will be attending the TTC | Sean Gallup/Getty Images
Some officials privately accused their counterparts of broken promises, particularly on trade. Others are frustrated at a lack of progress in 10 working groups on topics like helping small businesses to digitize and tackling climate change.
“With these kinds of allies, who needs enemies?” said one EU trade diplomat when asked about tensions around upcoming U.S. electric car subsidies. A senior U.S. official working on the summit hit back: “We need the Europeans to play ball on China. So far, we haven’t had much luck.”
Much of the EU-U.S. friction is down to three letters: IRA.
Biden’s Inflation Reduction Act, which provides subsidies to “Buy American” when it comes to purchasing electric vehicles, has infuriated officials in Brussels who see it as undermining the multilateral trading system and a direct threat to the bloc’s rival car industry.
“The expectation the TTC was established to provide a forum for precisely these advanced exchanges with a view to preventing trade frictions before they arise appears to have been severely frustrated,” said David Kleimann, a trade expert at the Bruegel think tank in Brussels.
Biden’s room for flexibility is limited. The context for the subsidies and tax breaks is his desire to make good on his promise to create more manufacturing jobs ahead of an expected re-election run in 2024. The U.S. itself is hovering on the edge of a possible recession.
In addition, the U.S. trade deficit with the EU hit a record $218 billion in 2021, second only to the U.S. trade deficit with China. The U.S. also ran an auto trade deficit of about $22 billion with European countries, with Germany accounting for the largest share of that.
Washington has few, if any, meaningful policy levers at its disposal to calm European anger. During a recent visit to the EU, Katherine Tai, the U.S. trade representative, urged European countries to pass their own subsidies to jumpstart Europe’s electric car production, according to three officials with knowledge of those discussions.
“It risks being the elephant in the room,” said Emily Benson, a senior fellow at the Center for Strategic and International Studies, a Washington-based think tank, when asked about the electric car dispute.
After a push from Brussels, there were increasing signs on Friday that the TTC could still play a role. In the latest version of the TTC’s draft declaration, obtained by POLITICO, both sides commit to addressing the European concerns over Biden’s subsidies, including via the Trade and Tech Council. Again, though, there was no detail on how Washington could resolve the issue.
Politicians across Europe are already drawing up plans to fight back against Biden’s subsidies. That may include taking the matter to the World Trade Organization, hitting the U.S. with retaliatory tariffs or passing a “Buy European Act” that would nudge EU consumers and businesses to buy locally made goods and components.
Officials and business leaders pose for a photo during the TTC in September 2021 | Pool photo by Rebecca Droke/AFP via Getty Images
Privately, Washington has not been in the mood to give ground. Speaking to POLITICO before Biden met Macron, five U.S. policymakers said the IRA was not aimed at alienating allies, stressing that the green subsidies fit the very climate change goals that Europe has long called on America to adopt.
“There’s just a huge amount to be done and more frankly to be done than the market would provide for on its own,” said a senior White House official, who was not authorized to speak on the record. “We think the Inflation Reduction Act is reflective of that type of step, but we also think there is a space here for Europe and others, frankly, to take similar steps.”
China tensions
Senior politicians attending the summit are expected to play down tensions this week when they announce a series of joint EU-U.S. projects.
These include funds for two telecommunications projects in Jamaica and Kenya and the announcement of new rules for how the emerging technology of so-called trustworthy artificial intelligence can develop. There’s also expected to be a plan for more coordination to highlight potential blockages in semiconductor supply chains, according to the draft summit statement obtained by POLITICO.
Yet even on an issue like microchips — where both Washington and Brussels have earmarked tens of billions of euros to subsidize local production — geopolitics intervenes.
For months, U.S. officials have pushed hard for their European counterparts to agree to export controls to stop high-end semiconductor manufacturing equipment being sent to China, according to four officials with knowledge of those discussions.
Washington already passed legislation to stop Chinese companies from using such American-made hardware. The White House had been eager for the European Commission to back similar export controls, particularly as the Dutch firm ASML produced equipment crucial for high-end chipmaking worldwide.
Yet EU officials preparing for the TTC meeting said such requests had never been made formally to Brussels. The draft summit communiqué makes just a passing reference to China and threats from so-called non-market economies.
Unlike the U.S., the EU remains divided on how to approach Beijing as some countries like Germany have long-standing economic ties with Chinese businesses that they are reluctant to give up. Without a consensus among EU governments, Brussels has little to offer Washington to help its anti-China push.
“In theory, the TTC is not about China, but in practice, every discussion with the U.S. is,” said one senior EU official, speaking on the condition of anonymity. “If we talk with Katherine Tai about Burger King, it has an anti-China effect.”
Gavin Bade, Clea Caulcutt, Samuel Stolton and Camille Gijs contributed reporting.
After six years of chaos and recrimination since Britons voted to leave the European Union, there are signs the country is showing an unexpected outbreak of common sense in its approach to the bloc.
In his first weeks in office, Prime Minister Rishi Sunak — a Brexiteer himself — has sent clear signals that he wants a more constructive relationship with Brussels and Paris, and to avoid a trade war with Britain’s biggest economic partner.
Gone are the nationalist bombast of former Prime Minister Boris Johnson and the sheer havoc wrought by his successor Liz Truss crashing the economy in pursuit of a Brexit dividend. Instead, they have both given way to a sudden burst of pragmatism, as Sunak is seeking practical solutions to festering problems.
This change in outlook may be partly due to the realization that Europe needs to stand united in the face of a threat to its common security from Russian President Vladimir Putin — although that hadn’t stopped Johnson from bragging about how leaving the EU had supposedly freed the United Kingdom to be more supportive of Ukraine than France or Germany.
It may also be due to the dire economic straits Britain is in after the collapse of Truss’ short-lived experiment for a deregulated, low-tax Singapore-on-the-Thames. Or, perhaps, German Chancellor Olaf Scholz’s hard line on any EU deal with the U.K. has had a sobering effect. As may have the shift in British public opinion, which now thinks leaving the bloc was a mistake by a margin of 56 percent to 32 percent.
For whatever reason, it is a welcome start.
In just three weeks, Sunak has signed up to an EU defense initiative to make it easier to move armed forces around the Continent, he’s acted to improve Britain’s relations with Ireland, and he’s created political space for a possible compromise on the vexed issue of trade with Northern Ireland, which has bedeviled relations with Brussels since the U.K.’s exit from the EU.
At their first meeting, Sunak told United States President Joe Biden that he wants to have a negotiated settlement on the Northern Ireland Protocol in place by next April — the 25th anniversary of the Good Friday peace agreement. So, sustained pressure from Washington is starting to pay off as well.
The prime minister has also sought to thaw frosty relations with France, clinching an agreement with Paris to clamp down on migrants crossing the Channel from northern France in small boats. Europe’s only two nuclear powers have now agreed to hold their first bilateral summit since 2018 early next year, focusing on strengthening defense cooperation.
To be fair, after saying “the jury is still out” on whether Macron was a friend or foe of the U.K., Truss had already taken a symbolic first step toward reconciliation by agreeing to attend the first meeting of the European Political Community last month. The geopolitical grouping was dreamed up by Macron to bring the entire European family together — except Russia and Belarus.
What’s more, the torrent of Europe-bashing rhetoric from Conservative ministers has almost dried up — at least for now. Suddenly, making nice with the neighbors is back in fashion, if only to ensure they don’t turn the lights off on the U.K. by cutting energy exports when supplies get tight this winter.
The tone of contrition adopted by Northern Ireland Minister Steve Baker, once the hardest of Brexit hardliners, was one of the most striking signals of this new humility. “I recognize in my own determination and struggle to get the U.K. out of the European Union that I caused a great deal of inconvenience and pain and difficulty,” he told Ireland’s RTÉ radio recently. “Some of our actions were not very respectful of Ireland’s legitimate interests. And I want to put that right.”
Meanwhile, encouragingly, Sunak is reportedly considering deprioritizing a bill by ousted Brexit ideologue Jacob Rees-Mogg to review, reform or automatically scrap some 2,400 retained EU laws, standards and regulations by the end of 2023 — a massive bureaucratic exercise that has rattled business confidence and angered almost everyone. The prime minister now seems receptive to pleas from business to give the review much more time and avoid a regulatory vacuum.
A bonfire of EU rules would inevitably provoke new trade tensions with Brussels — and at a time when the Office of Budget Responsibility, Britain’s independent fiscal watchdog, has just confirmed the growth-shredding damage inflicted by Brexit.
This isn’t the end of Britain’s traumatic rupture with the bloc. Just how neuralgic the issue remains was highlighted when earlier this week, Sunak had to deny reports that senior government figures were considering a Swiss-style relationship with the EU to ensure frictionless trade. He vowed there would be no alignment with EU rules on his watch.
To paraphrase Churchill, it may not even be the beginning of the end. But it is, perhaps, the end of the beginning.
Puncturing the illusion of a deregulated fiscal paradise fueled by borrowing without new revenue has had a sobering effect on the U.K. — offering Sunak a political window of opportunity to start fixing EU ties. After all, the Conservative Party can’t afford to defenestrate yet another prime minister after Theresa May, Johnson and Truss, can it?
But beyond the conciliatory tone, the real test still lies ahead.
Sunak will have to confront the hard-line Protestant Democratic Unionist Party (DUP) to push through any compromise with the EU on the Northern Ireland Protocol.
As the province remains part of the EU single market under the withdrawal treaty, any such deal is bound to involve some customs checks in Northern Ireland on goods arriving from Great Britain — even if they are scaled down from the original plan. It’s also bound to involve a role for the Court of Justice of the European Union as the ultimate arbiter of EU law. Both are anathema to the DUP.
But securing such an agreement would at least open the door to a calmer, more cooperative and sustainable relationship between London and Brussels.
Former United States President Donald Trump was a useful bogeyman for Europe. His successor, Joe Biden, is proving much trickier — a friend who says all the right things but leaves you in the lurch when it counts.
At each new perceived slight, the Europeans express shock, frustration and dismay: How could Washington fail to consult its allies, or at the very least inform them of its plans? Meanwhile, the American response is always some variant of: Terribly sorry, we didn’t even think of that.
The underlying dynamic is one of polite indifference. Despite Washington’s renewed commitment to NATO and massive outlay of arms and funds to help Ukraine defend itself against Russia, the U.S. remains steadfastly focused on what most perceive to be its main existential challenge: China.
In that equation, Europe is often an afterthought. It’s just that many on this side of the Atlantic have failed to get the message — or draw conclusions of what it means for the bloc’s future — instead preferring to act out a script of outrage and remonstrance.
A current example is the blooming transatlantic argument over Biden’s IRA.
Months in the making, painstakingly hashed out on Capitol Hill, the legislation represents Washington’s best bipartisan effort thus far to decarbonize its economy and prepare for decoupling from China. The bill flags $369 billion for energy and climate programs, including billions in taxpayer-funded subsidies for the production of electric vehicles inside the U.S.
It just so happens that it’s a potential disaster for Europe.
Bruised and confused
Amid an energy crisis that has large parts of the European Union economy staring into an abyss, French President Emmanuel Macron has led the charge against Biden’s IRA, accusing Washington of maintaining a “double standard” on energy and trade. He’s called for Europe to respond in kind by rolling out its own subsidy plan, prompting a visit from U.S. Trade Representative Katherine Tai to an EU trade ministers’ meeting in Prague on October 31.
But rather than try to cajole them with concessions, Tai invited them to get on board the China train by rolling out their own subsidies — which isn’t what the Europeans wanted to hear.
According to an EU diplomat who spoke to POLITICO ahead of a trade ministers’ meeting on Friday, members of the bloc still hope that Biden will send the IRA back to Congress for resizing, a prospect U.S. officials say is about as likely as canceling Thanksgiving.
The result is that Europe is now back in familiar territory: Bruised, confused and scrambling for a response while failing to formulate its own cohesive strategy to contend with China. And instead of receiving solidarity from Washington in a time of war, they feel the U.S. has maneuvered itself into a perfect position to suck investment out of Europe.
The outlines of an EU response to the IRA did start to take shape earlier this week, when Paris and Berlin — only recently back on speaking terms after a falling out — jointly called for an EU plan to subsidize domestic industries.
But that plan is likely weeks, even months, away from becoming a reality. And even if all 27 EU countries manage to strike a deal, their leaders will be hard-pressed to inject anywhere near as much money into it as Washington has earmarked, as most EU countries are still howling in pain over the high price of gas — much of which they now import from liquid natural gas terminals in Texas.
Again, Biden’s America is looking after its interests while the EU’s left to groan about missed signals, hurt feelings and unfair practices.
The tragedy for Europe is that this is happening at a time when transatlantic relations are meant to be at an all-time high. Biden’s election, followed by the war in Ukraine and Washington’s massive investment in shoring up NATO’s eastern flank, was meant to signal the U.S.’s decisive return to the European sphere.
But what the Europeans are discovering is that the Ukraine war is just one facet of the U.S.’s larger strategic duel with China, which will always take precedence over EU interests.
That was true under Trump, and it remains true under his successor. It’s just that the message is delivered in a different style.
In the long run, Biden’s polite indifference may prove more deadly.
Europe, the world’s biggest consumer of chocolate, and West Africa, the leading grower of the cocoa beans used to make it, share a common goal to make the sector sustainable.
But they have opposing views on how to put an end to the social, economic and environmental harms caused by satisfying Europe’s sweet tooth, heralding a showdown over who will bear the costs of complying: Big Chocolate or cocoa farmers.
The EU is finalizing regulations that seek to ensure that chocolate entering the market is free from deforestation and child labor. At the same time, Ghana and Ivory Coast, the world’s biggest cocoa producers, are demanding higher prices. That’s vital, they say, to make sustainable chocolate a possibility — and not a pipe dream.
The stakes are high: For the EU, cocoa is a test case for how companies and producers react when the bloc tries to impose higher standards. For producers, the push to set up a cartel could drive up prices in the short term — but also risks stimulating oversupply and ultimately causing a price crash that would deepen the poverty already suffered by most cocoa farmers. Chocolate makers, facing rising costs and greater scrutiny, may reroute supply chains to other cocoa-producing countries seen as less risky.
Doing nothing is not an option, said Alex Assanvo, who heads the joint West African initiative to support cocoa prices.
“We are not asking to pay them more, we are asking to pay them a fair price,” Assanvo told POLITICO in an interview. “If we believe that this is going to create oversupply, well then I don’t know, maybe we should stop eating chocolate.”
Bittersweet taste
Chocolate may be sweet but the industry that makes it is not. Most of the beans used to produce the world’s supply are grown by impoverished West African farmers; all too often from trees planted on deforested land and harvested by children. One problem drives the others. Poverty pushes farmers to chop down forests to produce more beans and profits and to put children to work as they cannot afford to pay wages to adult laborers.
To address this, Ghana and Ivory Coast, which produce 60 percent of the world’s cocoa, formed an export cartel in 2019 modeled on the Organization of the Petroleum Exporting Countries (OPEC). They introduced a $400 per ton Living Income Differential, which aims to bring the floor price up enough to cover the cost of production.
In public, big chocolate manufacturers and traders, including Barry Callebaut, Cargill, Ferrero, Hersey, Lindt, Mars, Mondelez and Nestlé, welcomed the initiative.
Yet behind the scenes many of the firms — which between them account for about 90 percent of the industry’s $130 billion in annual profits — have done everything possible to avoid paying the premium and to drive prices back down, according to the Ivorian Coffee-Cocoa Council (CCC), the Ghana Cocoa Board (Cocobod) and their joint Initiative Cacao Ivory Coast-Ghana (ICCIG).
The companies that responded to requests for comment from POLITICO said that they have paid the Living Income Differential (LID) since its introduction. The Ghanian and Ivorian trade boards and the ICCIG claim, however, that they have negated the LID’s value by forcing down a different premium, the origin differential.
Fed up, these countries boycotted the World Cocoa Foundation Partnership Meeting at the end of October in Brussels. They then gave the companies a deadline: commit to the premiums by November 20 or the countries would ban their buyers from visiting fields to carry out harvest forecasts and suspend their Corporate Social Responsibility programs – which sell well with ethically-minded consumers.
More harm than good?
Another proposed remedy comes from Brussels. Cocoa is one of the products to which the new EU legislation on due diligence — Brussels speak for supply-chain oversight and compliance — would apply.
Under this, large firms operating in the bloc will be forced to evaluate their global supply chains for human rights and environmental abuses, and compensate injured parties. In theory, this should reduce deforestation and child labor and improve the lot of farmers.
Yet, as European ambassadors thrash out the terms — and big players like France push for them to be watered down — concerns are growing that the legislation could turn out at best to be ineffective in practice, and at worst do more harm than good.
Cocoa farmers, and the NGOs that support them, have reason to be skeptical: Back in 2000, a BBC documentary exposed the widespread use of child labor on cocoa plantations in Ivory Coast and Ghana. The resulting media pressure led to a proposal for legislation in the United States forcing companies to certify chocolate bars free of child labor.
Companies pushed back hard, Antonie Fountain, managing director of cocoa NGO coalition The Voice Network, told POLITICO. The proposal was dropped and companies committed instead to a voluntary plan to solve child labor, he explained: “And that turned into a two-decade failure of policy.”
The resulting patchwork of pilot projects failed to transform the sector. Despite an initial decline, nearly 20 years after the framework was introduced 790,000 children in Ivory Coast and 770,000 in Ghana are still working in cocoa, with 95 percent of them exposed to the worst forms of child labor, according to a 2020 report.
Deforestation has meanwhile accelerated.
Ivory Coast has lost up to 90 percent of its forest in the last half century. Between 2000 and 2019 alone 2.4 million hectares of forest was cleared for cocoa farms, representing 45 percent of the total deforestation and forest degradation in the country, according to Trase, a data-driven transparency initiative.
The government’s attempts to safeguard what remains are half-hearted and often undermined by corruption: In 2019 a quarter of Ivory Coast’s cocoa production was in protected areas and forest reserves, the Trase study found. This left the EU exposed to 838,000 hectares of deforestation from Ivorian cocoa. Commodity trader Cargill leads the pack, according to Trase, with its 2019 exports exposed to 183,000 hectares of deforestation.
Over the last decade companies have proposed corporate social responsibility (CSR) initiatives that aim to tackle both ills. For instance, Mondelez, the maker of Cadbury and Toblerone, recently committed $600 million to tackle deforestation and forced labor in cocoa-producing countries, bringing its total funding for environmental and social issues to $1 billion since 2010.
These sums are, however, puny by comparison with the profits earned by those firms, said Fountain. Mondelez returned $2.5 billion to investors in the first half of 2022.
Mondelez is “excited” about its investments, the firm said in a statement. But it is calling for more sector-wide actions and rethinking its incentive model. Cargill did not respond to a request for comment.
Social responsibility
The big numbers that companies cite about their CSR programs’ reach often boil down to one-off training sessions on productivity for farmers, Uwe Gneiting, senior researcher at Oxfam, told POLITICO. This was the case for 98 percent of the 400 farmers interviewed for research recently carried out by Gneiting and others from the charity into the impact of sustainability programs over the last decade in Ghana on farmers’ incomes.
The research finds that CSR initiatives, which companies use to tout their sustainability credentials to European consumers, have not meaningfully increased farmers’ productivity or profits, pointed out Gneiting. In fact, farmers end up shouldering the associated costs, because companies offer the training but do not pay for extra labor or the fertilizer that farmers need to put it into action.
Instead, Ghanian and Ivorian farmers have been hammered by the soaring cost of production and of living over the last three years, finds the new Oxfam research. Fertilizer costs have increased by more than 200 percent, said Gneiting, along with labor and transportation costs. That in turn has contributed to a decline in yields that have also been hurt by climate change, with weather patterns becoming increasingly unpredictable.
All of this has meant incomes have declined close to 20 percent since 2019, said Gneiting, which for farmers already living on the poverty line is “existential.” The decline would have been much worse, he added, if it hadn’t been for the Living Income Differential. Nonetheless, 90 percent of the farmers interviewed say they are worse off than three years ago.
Over the same period, as cocoa prices have fallen, companies have made “windfall gains,” said Isaac Gyamfi, director of Solidaridad West Africa. “The raw material became cheaper for them. But the price of chocolate didn’t change.”
Can Brussels sort it out?
To what extent the new due diligence directive will make a difference depends on the final text that was put to a meeting of EU trade ministers on Friday.
When the European Commission first came up with the draft it was seen as a game changer, but subsequent wrangling over the regulation’s scope has raised doubts. Last week, ambassadors from France, Spain, Italy and some smaller countries voted down the text in the European Council, seeing the value chain and civil liability provisions as too wide and too ambitious.
Two-thirds of Ivorian cocoa is exported to the EU and the U.K. | Issouf Sanogo/AFP via Getty Images
A European diplomat told POLITICO that France supported the proposed directive “very strongly,” and its view that it was important to concentrate on the “upstream” part of the supply chain was shared by a majority of EU member countries.
NGOs take the view that, while it’s positive that the EU is proposing broad legislation, there is a risk that it ends up replicating the mistakes that undermined the voluntary initiatives. One of these is the potential limitation of the companies’ due diligence obligations to “established business relations.”
“What you’re going to get is a whole bunch of companies that are going to try to have as few established business relations as possible, which just makes supplying commodities more precarious, rather than less,” said Fountain.
Analysis from Trase finds that 55 percent of Ivorian cocoa, two-thirds of which is exported to the EU and the U.K., comes from untraceable sources. NGOs working on cocoa and on other sectors due to be impacted by the new directive are calling for it to be applied to business relationships based on their risk rather than their duration.
The civil liability mechanism, which should guarantee compensation for people whose rights have been violated, has also come under scrutiny. The latest compromise proposal debated in the Council, seen by POLITICO, reduces the risk of companies getting sued by stipulating that a company can only be held liable if it “intentionally or negligently” failed to comply with a due diligence obligation aimed to protect a “natural or legal person” — not a forest, for instance — and subsequently caused damage to that person’s “legal interest protected under national law.” But, it states, a company cannot be held liable “if the damage was caused only by its business partners in its chain of activities.”
Earlier this year, the EU, Ivory Coast and Ghana and the cocoa sector all committed to a roadmap to make cocoa more sustainable, which, they agreed, includes improving farmers’ incomes. Yet it remains unclear whether this will be mentioned in the final draft of the due diligence directive.
“Sustainability cannot exist without a living income,” said Heidi Hautala, Green MEP and chair of the European Parliament’s Responsible Business Conduct Working Group. Hautala, who is among those pushing for the reference to a living income to be included in the final text, added that responsible purchasing practices are “a prerequisite for respect of human rights, environment and climate.”
Living income “needs to be a part of it because otherwise you’re in trouble,” agreed Fountain.
“If you don’t look at what does a farmer need in order to comply, if you don’t make sure that a farmer actually has the right set of income, then all you’re doing is pushing the responsibility for being sustainable back to the farmer. And this is what we’ve done for the last two decades.”
In a significant escalation of political unrest, protests against China’s strict zero-COVID policy spread to several cities and university campuses across the country, with demonstrators in Shanghai calling for President Xi Jinping to step down.
After erupting in the Xinjiang region, social media footage indicates that demonstrations have now broken out in Nanjing, Urumqi, Wuhan, Guangzhou and Beijing, where street protesters tore down a physical COVID barrier.
The Chinese Communist Party has pursued a zero-COVID policy, cracking down on any virus transmission by implementing stringent lockdown measures that confine millions of people to their homes for months on end. But case numbers have begun to surge recently.
In Shanghai, police pepper-sprayed around 300 protesters on Saturday night, the Associated Press reported. The demonstrators demanded that President Xi Jinping resign and called for the end of his Communist Party’s rule. Hours later, people demonstrated again in the same spot; police again broke up the protest, the AP said.
According to AFP, students also protested at Tsinghua University in Beijing, where Xi himself studied.
In an unprecedented wave of public dissent, protesters have jostled with lab-coat-wearing officials and held up blank pieces of paper in defiance of the authoritarian regime.
The protests began in the wake of a fire on Thursday night that killed 10 people in an apartment in Urumqi, the Xinjiang regional capital, and that some protesters allege was worsened by the strict enforcement of the lockdown policy. Beijing stands accused of human rights violations against Uyghurs, a Muslim minority, in Xinjiang, a region in the far west of the country.
Amnesty International appealed to the Chinese government to allow peaceful protest. “The tragedy of the Urumqi fire has inspired remarkable bravery across China,” said the group’s regional director, Hanna Young, according to the AP. “These unprecedented protests show that people are at the end of their tolerance for excessive COVID-19 restrictions.”
Some commentators have described the wave of protests as the biggest threat yet to President Xi’s rule, which he consolidated last month by securing an unprecedented third five-year term in office.
European Council President Charles Michel is traveling to China to meet Xi on December 1, as the EU reassesses its economic dependence on China against the backdrop of Russia’s continued invasion of Ukraine, which China has not publicly condemned.
German Chancellor Olaf Scholz acknowledged earlier this month that Beijing’s methods for fighting the coronavirus “differ greatly” from those of Berlin, but that the two governments are aligned in the battle against the pandemic. Scholz announced during a visit to China in early November that the BioNTech/Pfizer COVID-19 vaccine would be offered to expats in China.
The EU is in emergency mode and is readying a big subsidy push to prevent European industry from being wiped out by American rivals, two senior EU officials told POLITICO.
Europe is facing a double hammer blow from the U.S. If it weren’t enough that energy prices look set to remain permanently far higher than those in the U.S. thanks to Russia’s war in Ukraine, U.S. President Joe Biden is also currently rolling out a $369 billion industrial subsidy scheme to support green industries under the Inflation Reduction Act.
EU officials fear that businesses will now face almost irresistible pressure to shift new investments to the U.S. rather than Europe. EU industry chief Thierry Breton is warning that Biden’s new subsidy package poses an “existential challenge” to Europe’s economy.
The European Commission and countries including France and Germany have realized they need to act quickly if they want to prevent the Continent from turning into an industrial wasteland. According to the two senior officials, the EU is now working on an emergency scheme to funnel money into key high-tech industries.
The tentative solution now being prepared in Brussels is to counter the U.S. subsidies with an EU fund of its own, the two senior officials said. This would be a “European Sovereignty Fund,” which was already mentioned in the State of the Union address by Commission President Ursula von der Leyen in September, to help businesses invest in Europe and meet ambitious green standards.
Senior officials said the EU had to act extremely quickly as companies are already making decisions on where to build their future factories for everything from batteries and electric cars to wind turbines and microchips.
Another reason for Brussels to respond rapidly is to avoid individual EU countries going it alone in splashing out emergency cash, the officials warned. The chaotic response to the gas price crisis, where EU countries reacted with all sorts of national support measures that threatened to undermine the single market, is still a sore point in Brussels.
European Commissioner Breton especially has led the pack in sounding alarm bells. At a meeting with EU industry leaders Monday, Breton issued his warning on the “existential challenge” to Europe from the Inflation Reduction Act, according to people in the room. Breton said it was now a matter of utmost urgency to “revert the deindustrialization process taking place.”
Breton was echoing calls from business leaders all over Europe warning about a perfect storm brewing for manufacturers. “It’s a bit like drowning. It’s happening quietly,” BusinessEurope President Fredrik Persson said.
The Inflation Reduction Act is a particular bugbear to EU carmaking nations — such as France and Germany — as it encourages consumers to “Buy American” when it comes to electric vehicles. Brussels and EU capitals see this as undermining global free trade, and Brussels wants to cut a deal in which its companies can enjoy the same American benefits.
With a diplomatic solution seeming unlikely and Brussels wanting to avoid an all-out trade war, a subsidy race now looks increasingly likely as a contentious Plan B.
To do that, it will be vital to secure support from Germany and from the more economically liberal commissioners such as trade chief Valdis Dombrovskis and competition chief Margrethe Vestager.
At a meeting of EU trade ministers on Friday, Brussels hopes to get more clarity from Berlin on whether they are willing to break their subsidy taboo.
France has long been calling for a counterstrike against Washington by funneling state funds into European industry to help industrial champions on the Continent. That idea is now also gaining traction in Berlin, which has traditionally been economically more liberal.
On Tuesday, German Economy Minister Robert Habeck and his French counterpart Bruno Le Maire issued a joint statement to call for an “EU industrial policy that enables our companies to thrive in the global competition especially through technological leadership,” adding that “we want to coordinate closely a European approach to challenges such as the United States Inflation Reduction Act.”
Apart from the trade ministers’ meeting on Friday, the idea will also informally be discussed among competition ministers next week. One official said European leaders will also discuss it on the margins of the Western Balkan summit on December 6 and at the European Council mid-December.
Hans von der Burchard, Giorgio Leali and Paola Tamma contributed reporting.
The photo was taken from left window of commercial airplane, Hong Kong International Airport (Chek Lap Kok International Airport, HKG) to Singapore Changi International Airport (SIN) in the daytime.
Taro Hama @ E-kamakura | Moment | Getty Images
The South China Sea is a vital trade route connecting the main arteries of trade in Southeast Asia, linking waterways from Singapore and Malaysia to Indonesia, the Philippines and Taiwan.
Combined with an abundance of hydrocarbon reserves and marine life — the primary source of animal protein for the region’s dense population — this body of water is critical beyond its boundaries.
Vietnam, home to to 95.5 million people, saw its economy grow to $362.64 billion in 2021, World Bank data showed.
“Vietnam occupies more than three thousand kilometers of coastline on the South China Sea and occupies the largest number of features in the Spratly Islands,” according to Euan Graham, Shangri-La Dialogue Senior Fellow for Asia-Pacific Security with the International Institute for Strategic Studies.
This photo taken on August 19, 2022, shows fishermen sorting a fresh catch of fish on Vietnam’s offshore Ly Son island.
Nhac Nguyen | Afp | Getty Images
“What makes it interesting is its geography in Southeast Asia, which allows for a continental or maritime orientation and creates pressure in both directions,” said the military and geopolitical expert.
“At the grand strategic level, Vietnam is doubling down on its maritime strategy to become an export-dependent economy dependent on freedom of navigation for prosperity.”
Graham said this was a reversal of Vietnam’s history in the last century when it was landward-focused and reliant on continental allies — chiefly the Soviet Union and China. Vietnam was also bogged down by land conflicts with China and Cambodia at that time.
“The opportunity is in the prosperity that exports and foreign investment have brought,” Graham said.
“Organizations are re-orientating supply chains out of China, and South Korea now heavily invests in microchip production in Vietnam. This further benefits Vietnam by giving other countries a stake in its survival.”
Most conversations emphasize resources such as oil, gas and fisheries that everyone competes over —but “the freedom of the sea is what keeps Singapore alive,” said Blake Herzinger, a civilian Indo-Pacific defense policy expert.
“Without the free South China Sea on the other side of Singapore, that becomes a different proposition for their value and national survival,” said the co-author of “Carrier Killer, China’s Anti-ship Ballistic Missiles and Theater of Operations in the early 21st Century.”
The freedom of the sea is what keeps Singapore alive.
Blake Herzinger
civilian Indo-Pacific defense policy expert
With a population of 5.64 million, Singapore’s GDP is estimated at $337.5 billion in 2020, making it the 17th largest goods trading partner with the U.S., according to the U.S. trade Representative Office.
“Although Singapore is not a claimant to any South China Sea maritime features, they sit on the most critical sea lanes of communication (SLOCs) – the Singapore Strait, and the beginning of the Malacca Strait,” said Charlie A. Brown, a regional maritime domain awareness expert and consultant.
Aerial view of fishing boats setting sail to South China Sea for fishing on August 16, 2022 in Yangjiang, Guangdong Province of China.
Liu Xiaoming | Visual China Group | Getty Images
The tiny Southeast Asia nation depends heavily on free trade passing safely through their country and the adjacent waters.
“Singaporean leadership is clear that they are a state that existentially depends on free seas and rules-based order. Absent that, places like Singapore are in a lot of trouble.”
The Straits of Sunda and Lombok in Indonesia, together with the Straits of Malacca and Singapore, are major gateways to the South China Sea.
Indonesia’s archipelagic Natuna Islands overlap China’s nine-dash line — a set of line segments on maps that accompany Chinese territorial claims.
“Indonesia heavily depends on the resources from the North Natuna Sea [within the South China Sea],” said Brown adding that a significant commercial traffic transits its waters.
“Although Indonesia states there are no territorial disputes with China, that is a rhetorical claim contrary to the actual,” he added.
China has pushed claimant states such as Vietnam out of traditional fishing waters and more into the South China Sea, causing excessive overfishing.
Blake Herzinger
civilian Indo-Pacific defense policy expert
Herzinger highlighted that, like the other claimant states, Indonesia’s population of 280 million relies heavily on food security from fish.
Food insecurity in the South China Sea can quickly become national instability in Southeast Asia, said Herzinger.
“One underappreciated aspect is all the seasonal fishing bans that China patrols and has in the East China Sea,” he said.
“Although they claim more than half of the South China Sea, China has pushed claimant states such as Vietnam out of traditional fishing waters and more into the South China Sea, causing excessive overfishing.”
Brown added that it was especially true of Vietnam fishermen “who go into Malaysian and Indonesian waters, partly because China pushes them out of their own waters.”
What happens when the fish stocks are exhausted?
“If that happens, countries will immediately be thrown into food insecurity,” warned the defense policy expert. “And when that happens, you get government insecurity, where hungry people won’t be going after China but rather the central government.”
Southeast Asia’s largest economy had an estimated GDP of nearly $1.2 trillion in 2021, according to World Bank data.
Brown argued that because of Japan’s oil imports from the Persian Gulf region, “they have a long-standing interest in the vulnerability of the sea lanes dating back well before World War II.”
“In modern times, their regional activities support capacity building on issues such as maritime safety and security, protection of resources and infrastructure, and freedom of navigation with countries that border the South China Sea,” Brown added.
A US assault amphibious vehicle (AAV) manoeuvers past Philippine navy’s frigate Ramon Alcaraz during the amphibious landing as part of the annual Philippines and US joint military exercise at the beach of Philippine navy’s training camp in San Antonio, Zambales province northwest of Manila on May 9, 2018.
Ted Aljibe | Afp | Getty Images
Japan has also been sending strong signals to China.
Japan’s largest newspaper, the Yomiuri Shimbun reported that the Japanese navy’s destroyers have sailed past the South China Sea waterway repeatedly, near artificial islands and reefs claimed by Beijing.
An unnamed senior defense ministry official was quoted by the newspaper as saying that the maritime patrols were “meant to warn China, which is distorting international law, to protect freedom of navigation and law and order of the sea.”
Those operations under the Maritime Self-Defense Force started in March last year, the Yomiuri Shimbun said.
South Korea is “intentionally quiet about the South China Sea” as it wants to “maintain favor with China,” Graham said, citing Seoul’s primary focus on the North Korean issue.
“Geographically, compared to Japan, it is harder to divert trade,” he said. “In recognition as a trading nation, and to secure supply lines, including its investment into Vietnam, South Korea has an active ocean-going navy.”
As the world’s 8th largest energy consumer, South Korea imports almost 92.8% of its energy and natural resources consumption, government data showed. In 2021, South Korea spent $137.2 billion on energy imports, the equivalent of nearly 22.3% of its total imports.
With a majority of South Korea’s crude oil imports transiting through the South China Sea, its present strategic importance to national security cannot be understated.
“With the June 2022 launch of China’s domestically designed and built aircraft carrier, Fujian – named after the province closest to Taiwan – dominance and naval supremacy in the Pacific hasn’t been challenged like this since WWII,” Brown said.
“The European conflict has raised concerns about the global trading system,” he said. “Warnings of the effects of a conflict on the South China Sea should be taken seriously. We should all listen to the calls from countries like Singapore and South Korea to avoid it and reduce the tensions.”
From a historical perspective, the South China Sea is the epicenter of the Indo-Pacific. But its significance extends far beyond the region.
Given diplomatic tensions and an expanding global economy, the South China Sea’s strategic importance is expected to continue rising.
In 2021, the United Nations Conference on Trade and Development (UNCTAD) said that more than 80% of the volume of international trade is carried by sea, with 54% of world maritime trade occurring in Asia. However, pandemic uncertainty still carries over in the form of supply chain disruption, changes in globalization patterns, transportation costs, and congestion in ports.
Overall, UNCTAD estimates that world maritime trade recovered by 4.3% in 2021. It also predicted that trade volumes could grow at an annual rate of 2.4% between 2022 and 2026.
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.
The European Union’s ban on seaborne imports of Russian oil, along with the Group of Seven’s plan to cap prices of oil from Russia early next month won’t guarantee that prices for the commodity will see a lasting rally, or that supplies will tighten further in the days ahead.
“In isolation, the sanctions on Russia should be bullish for prices,” says Matt Smith, lead oil analyst, Americas, at Kpler. However, they may have a limited effect, as Russian barrels get “rerouted and not taken off the market,” while a price cap still has so much uncertainty surrounding it that its impact may be “muted due to workarounds or may simply be ineffective.”
BALI, Indonesia — Every European leader at this week’s G20 summit in Bali wanted a one-on-one meeting with Chinese President Xi Jinping.
Not everyone got one.
The Europeans’ desire to meet Xi was driven by the fact that this week was the first opportunity to meet the Chinese leader at a major diplomatic jamboree since the lockdowns of early 2020, when the coronavirus pandemic started in China and spread to the world.
The Europeans always had to accept that they were going to be fighting for the crumbs in terms of the timetable. U.S. President Joe Biden spent three and a half hours with Xi, while France’s President Emmanuel Macron had to be content with (a still perfectly respectable) 43 minutes.
China conspicuously revived its long-established tactic of courting specific EU countries and their national interests, something it has often used to destabilize Brussels. (When Brussels threatened an all-out trade war in 2013 over China undercutting the EU market in solar panels and telecoms equipment, China expertly shattered EU unity by threatening retaliatory action against French and Spanish wine, playing Paris and Madrid against EU trade officials.)
Once again in Bali, China took the canny nation-to-nation approach, meeting Macron, Spanish Prime Minister Pedro Sánchez, Italy’s Giorgia Meloni and the Netherlands’ Mark Rutte, while avoiding European Commission President Ursula von der Leyen and European Council President Charles Michel. A meeting with Michel, at least, had been widely expected in diplomatic circles.
China bristles at the EU designation that it is a “systemic rival” to Brussels, and instead decided to leverage its influence with individual European countries.
Take the meeting with Rutte. The Chinese leader’s main interest was that the Netherlands, home to chipmaker ASML, a company that makes key equipment for microchip manufacturing, should not join any EU-U.S. trade coalition seeking to box China out of new technologies.
“It is hoped that the Netherlands would enhance Europe’s commitment to openness and cooperation,” Xi noted in a readout of the Dutch meeting. Translation: Don’t make trade trouble over microchips.
With Sánchez, Xi played up the importance of China as a motor for tourism in Spain, a sector where Madrid is particularly interested in high-rolling visitors from Asia. “The two sides need to make good preparations for the China-Spain Year of Culture and Tourism to build greater popular support for China-Spain friendship,” Xi said.
Similarly, the Xinhua state news agency quoted Macron saying he wanted more cooperation on business, specifically in the aviation and civil nuclear energy sectors. The Chinese account of the Xi-Meloni meeting was that Beijing would import more “high-quality” goods — presumably of the luxury and gourmet variety — and would cooperate in manufacturing, energy and aerospace.
Macron cozies up to Xi
In a sign that Xi’s diplomatic strategy was paying dividends, Macron took a non-confrontational approach to Xi, even massaging the Chinese leader’s ego.
The Chinese embassy to Paris promoted a video by TikTok’s domestic Chinese equivalent Douyin, in which Macron passed his best wishes to China after Xi secured a norm-breaking new mandate. (Xi was appointed for a third term as Communist Party general secretary in a highly choreographed party congress.)
Macron also hailed Xi as a “sincere” figure who should “play the role of a mediator over the next few months” in stopping further Russian aggression against Ukraine — even though Beijing has shown no sign of being a good fit for such a role since the war broke out in February.
Ignoring China’s deadly Himalayan tensions with India, escalating tension with Taiwan or military adventurism in the South China Sea, Macron declared: “China calls for peace … [There is] a deep and I know sincere attachment to … the U.N. charter.”
Macron also told reporters he planned to visit China early next year. That looks like a riposte to the visit by German Chancellor Olaf Scholz, who visited China earlier this month. Scholz reportedly rejected Paris’ suggestion for a joint Macron-Scholz visit and decided to go alone with a delegation of big businesses.
“Macron needed this air-time with Xi enormously as he couldn’t be seen to be left out by China when the Americans and the Germans have dominated the headlines,” a Western diplomat said.
While Macron claimed that Xi agreed with him on a “call for respect for Ukraine’s territorial integrity and sovereignty,” China’s own readout made no such mention, saying only: “China stands for a ceasefire, cessation of the conflict and peace talks.”
Brussels boxed out
In stark contrast to the French, Spanish, Dutch and Italian leaders, the Brussels-based EU chiefs didn’t get a look-in.
In a show of Beijing’s continually negative view of the European Union, Xi decided not to go ahead with what POLITICO understood to be a near-certain plan for Michel, the one representing all 27 countries, to meet Xi.
That event, had it been allowed to take place, would have been significant in showcasing the possibility for the bloc’s smaller economies to also make their voice heard, since Xi would otherwise be busy dealing with the bigger players.
Xi’s change of heart over a meeting with Michel came shortly after the EU Council president’s prerecorded speech at a Shanghai trade expo was dropped.According to Reuters, he tried to call out Russia’s war of aggression against Ukraine in the speech, a message that was deemed too sensitive to Chinese ears.
In a thinly veiled criticism of China’s approach to the new Silk Road, von der Leyen said: “The [West’s] Partnership Global for Infrastructure and Investment is an important geostrategic initiative in era of strategic competition.
“Together with leading democracies we offer values-driven, high-standard, and transparent infrastructure partnerships for low- and middle-income countries,” she said.
Her tone, though, proved to be a minority among European leaders during the G20 engagement with China.
“There’s no common message from the EU on China,” according to another EU diplomat in Bali. “But then there never was one.”
To the relief of European diplomats, at least Xi did not handle their bosses in the same way he treated Canada’s Prime Minister Justin Trudeau.
“Everything we discuss has been leaked to the paper; that’s not appropriate,” Xi told Trudeau through an interpreter in a clip recorded by Canadian media.
“That’s not … the way the conversation was conducted. If there is sincerity on your part …” Xi said, before Trudeau interrupted him, defending his country’s interest in working “constructively” with Beijing.
Xi took his turn to interrupt. “Let’s create the conditions first,” Xi said.
Donald Trump will seek the presidency for a third time in 2024, the former president announced in a speech from his Florida estate Tuesday night, paving the way for a contentious Republican primary and a potential rematch between Trump and President Joe Biden for the White House in two years.
“In order to make America great and glorious again, I am tonight announcing my candidacy for president of the United States,” Trump said from Mar-a-Lago.
The former president spoke a week after midterm elections that saw Democrats keep the Senate, and a number of candidates backed by him lost their races, such as Pennsylvania Senate candidate Mehmet Oz and that state’s GOP gubernatorial candidate, Doug Mastriano. That’s prompted debate about moving on from Trump as the party eyes its 2024 chances.
Trump — who a House panel has charged with a conspiracy aimed overturning the 2020 presidential election — is likely to face a crowded field in the contest for the GOP presidential nomination, with Florida Gov. Ron DeSantis seen at this stage as his most formidable opponent. Other potential candidates include former Vice President Mike Pence, former South Carolina Gov. Nikki Haley, Virginia Gov. Glenn Youngkin and former Secretary of State Mike Pompeo.
Trump may view DeSantis as posing his most daunting challenge, given the energy he has spent since the midterm elections lashing out at the the Florida governor. The former president remains a popular figure in the Republican Party and has proven himself adept at sidelining rivals for the affection of the GOP base.
Speaking to a crowded room at Mar-a-Lago, Trump bashed the Biden administration and claimed, “we built the greatest economy in the history of the world.” Under Biden, he said, the U.S. is a “nation in decline.” Biden fired back in a video posted on Twitter as Trump was speaking: “Donald Trump failed America.”
“America’s comeback starts right now,” Trump said. “I will fight like I’ve never fought before.”
During his White House term, Trump presided over impressive gains in the stock market, with the 24.2% rise in the Nasdaq COMP, +1.45%
ranking as the best ever during a presidential term since the index made its debut in the early 1970s. The Dow Jones Industrial Average DJIA, +0.17%
gained 11.8% and the S&P 500 SPX, +0.87%
rose 13.7% during the four-year span.
Some of those gains can be attributed to Trump’s signature legislative achievement: a major corporate-tax cut that saw the top federal rate slashed from 35% to 21%, padding corporate profits and making the shares of large U.S. companies more valuable, often via share buybacks.
Investors were less enthusiastic about the former president’s trade war with China — a high-profile standoff that often sent stocks tumbling on news of new trade restrictions, or soaring on the perception of easing tensions.
The arrival of the COVID-19 pandemic shifted the focus of policy makers in both countries, and Biden has largely kept the tariffs his predecessor put in place. Despite these restrictions, the U.S. trade deficit in goods with China set a record of $355 billion in 2021.
Trump on Tuesday said he wants to eliminate the U.S.’s dependence on China, by bringing manufacturing back to the U.S. He also falsely claimed that inflation is at a 50-year high — it is at a 40-year high.
Economic policy often took a back seat to the various scandals that plagued Trump in his tumultuous term in office, when he became the first president to ever be impeached twice by the House of Representatives.
The first impeachment resulted from a 2019 phone call when he asked Ukrainian President Volodymr Zelensky for a “favor” in announcing the launch of an investigation into Biden, then viewed as a likely Trump rival in the 2020 election. Democrats alleged that Trump withheld aid approved by Congress in an effort to ensure an investigation was announced.
The second impeachment of Trump followed the Jan. 6, 2021, attack on the U.S. Capitol, with a bipartisan majority in the House arguing that he encouraged the attack.
The former president’s legal troubles have not abated since he left office, and he’s facing several state and local investigations, civil and criminal, while some experts believe he will be indicted by Attorney General Merrick Garland for mishandling defense secrets and obstruction of justice after an FBI raid appeared to show that he lied to the government about classified documents in his possession.
More than 1 million barrels a day of Russian oil exports are set to be upended by Western sanctions expected to come into force within weeks, shipments Moscow will struggle to redirect elsewhere which threatens to further tighten global energy markets, the International Energy Agency said Tuesday.
Russian crude oil exports, including to the European Union, were largely unchanged last month, despite the prospect of an imminent EU ban on Russian crude oil imports and a separate plan to cap prices for Russian crude oil sales, the Paris-based agency said in a monthly report.
Russian exports to the EU were 1.5 million barrels a day in October, of which 1.1 million barrels a day will be halted when the bloc’s ban comes into effect on December 5, the IEA said.
It was unclear how much of those supplies Russia would be able to redirect to customers elsewhere in the world, the IEA said. India, China and Turkey have snapped up discounted Russian crude shipments, but buying from those nations has stabilized in recent months, the IEA said. Meanwhile, the volume would be too large for the remaining nations to absorb, the agency said.
The warning comes as the IEA predicted additional demand this year and next would come from China as the nation slowly eases its Covid-19 lockdown measures–though global demand growth will be sluggish as economies are expected to struggle.
The agency upped its 2022 global oil demand forecasts by 170,000 barrels a day to 99.8 million barrels a day. For 2023, the IEA raised its oil demand forecasts by 130,000 barrels a day to 101.4 million barrels a day.
Russia’s declining oil output will drag on global supplies which will grow at an anemic rate next year, failing to keep pace with growing oil demand. The IEA said global oil supplies would rise to 100.7 million barrels a day in 2023, 100,000 barrels a day more than it was forecasting last month, but still 700,000 barrels a day short of the world’s expected appetite for oil CL.1, -0.85%
Former Prime Minister to the Commonwealth of Australia and President of the Asia Society Policy Institute Kevin Rudd
Leigh Vogel | Getty Images
For businesses seeking diversification into new markets — especially given the geopolitical risks surrounding China — India, southeast Asia and Mexico are top contenders, former Australian Prime Minister Kevin Rudd said Sunday.
“When I look around the world, I see three sets, three zones of activity which are currently benefiting from let’s call it ‘the great diversification’ or … [the] ‘early decoupling debate,'” he said at the Asia-Pacific Conference of German Business in Singapore.
“One is Southeast Asia, where we are now, the second is India … And certainly from the North American perspective, it’s Mexico, obviously benefiting from the Nafta, or the Nafta-plus economic arrangements.”
India in particular has seen a pivotal shift in economic policies over the past year that could turn it into a new market and manufacturing hub for multinational companies, Rudd, who is also president of the Asia Society, said.
“As someone who’s dealt with India for the last 20 years, for the first time, I became convinced that they are about to attempt a significant policy shift,” Rudd told the conference.
“If they can pull that off, it can turn India into the next China in terms of a large scale consumer market, and also a reliable, global factory,” he added.
Stock picks and investing trends from CNBC Pro:
“Can [Modi] translate that into reality? Again, an open question.”
India, in particular, could potentially provide exporters not just with opportunities to diversify supply chains, but also new end-markets.
The increased competition between the U.S. and China and the disruptions brought on by the pandemic has heightened the importance of diversification for global businesses. It has also heralded new trade alliances and so-called “friend-shoring”— the creation of supply chain networks among allies and friendly countries.
“My German friends constantly underestimate their level of influence on the global debate, and underestimate their level of influence in the China-specific debate,” Rudd said.
“I had a look at Chancellor Scholz’s written statement a few weeks ago … before his visit to Beijing, I think he had the right balance on how he articulated German interests.”
Prior to his Beijing trip, Scholz explained in an op-ed for the Frankfurter Allgemeine Zeitung and Politico that he would not seek decoupling from China, but insteadpursue diversification and economic resilience.
Rudd said it was important that countries do not “walk away” from the difficult job of balancing national security interests, relationships with allies, human rights obligations and an economic relationship with China.
Gunther Kegelk, CEO of German manufacturing multinational Pepperl and Fuchs, who spoke on a panel at the conference, said that German businesses had not been “naive” in setting up supply chains and business relationships in China and elsewhere.
However, Kegelk, who is also president of the German Electro and Digital Industry Association, said businesses might have to start splitting up their companies as part of a new geopolitical playbook.
“And that would be exactly the opposite of what I did 30 years [ago] – [in globalizing] the company … and globalization was right for the company in regards to strategy, in regards to sales … it was also right for the economy,” he said.
“Now all of a sudden, everything is wrong. We were called naive or stupid to bring ourselves into these kinds of relations but we made a lot of money over the years. Not only us, but the entire European and German economies.”
He added that many businesses were now struggling to adjust, especially in the face of the sanctions and trade rules imposed on China by the U.S. and others.
PHNOM PENH, Cambodia — U.S. President Joe Biden offered a full-throated American commitment to the nations of Southeast Asia on Saturday, pledging at a Cambodia summit to help stand against China’s growing dominance in the region — without mentioning the other superpower by name.
Chinese President Xi Jinping wasn’t in the room at the Association of Southeast Asian Nations, or ASEAN, summit in Phnom Penh. But Xi hovered over the proceedings just two days before he and Biden are set to have their highly anticipated first face-to-face meeting at the G20 summit in Indonesia.
The Biden White House has declared Xi’s nation its greatest economic and military rival of the next century and while the president never called out China directly, his message was squarely aimed at Beijing.
“Together we will tackle the biggest issues of our time, from climate to health security to defend against significant threats to rules-based order and to threats against the rule of law,” Biden said. “We’ll build an Indo-Pacific that is free and open, stable and prosperous, resilient and secure.”
The U.S. has long derided China’s violation of the international rules-based order — from trade to shipping to intellectual property — and Biden tried to emphasize his administration’s solidarity with a region American has too often overlooked.
His work in Phnom Penh was meant to set a framework for his meeting with Xi — his first face-to-face with the Chinese leader since taking office — which is to be held Monday at the G20 summit of the world’s richest economies, this year being held in Indonesia on the island of Bali.
Much of Biden’s agenda at ASEAN was to demonstrate resistance to Beijing.
He was to push for better freedom of navigation on the South China Sea, where the U.S. believes the nations can fly and sail wherever international law allows. The U.S. had declared that China’s resistance to that freedom challenges the world’s rules-based order.
Moreover, in an effort to crack down on unregulated fishing by China, the U.S. began an effort to use radio frequencies from commercial satellites to better track so-called dark shipping and illegal fishing. Biden also pledged to help the area’s infrastructure initiative — meant as a counter to China’s Belt and Road program — as well as to lead a regional response to the ongoing violence in Myanmar.
But it is the Xi meeting that will be the main event for Biden’s week abroad, which comes right after his party showed surprising strength in the U.S. midterm elections, emboldening the president as he headed overseas. Biden will circumnavigate the globe, having made his first stop at a major climate conference in Egypt before arriving in Cambodia for a pair of weekend summits before going on to Indonesia.
There has been skepticism among Asian states as to American commitment to the region over the last two decades. Former President Barack Obama took office with the much-ballyhooed declaration that the U.S. would “pivot to Asia,” but his administration was sidetracked by growing involvements in Middle Eastern wars.
Donald Trump conducted a more inward-looking foreign policy and spent much of his time in office trying to broker a better trade deal with China, all the while praising Xi’s authoritarian instincts. Declaring China the United States’ biggest rival, Biden again tried to focus on Beijing but has had to devote an extraordinary amount of resources to helping Ukraine fend off Russia’s invasion.
But this week is meant to refocus America on Asia — just as China, taking advantage of the vacuum left by America’s inattention, has continued to wield its power over the region.
Biden declared that the ten nations that make up ASEAN are “the heart of my administration’s Indo-Pacific strategy” and that his time in office — which included hosting the leaders in Washington earlier this year — begins “a new era in our cooperation.” He did, though, mistakenly identify the host country as “Colombia” while offering thanks at the beginning of his speech.
“We will build a better future, a better future we all say we want to see,” Biden said.
Biden was only the second U.S. president to set foot in Cambodia, after Obama visited in 2012. And like Obama did then, the president on Saturday made no public remarks about Cambodia’s dark history or the United States’ role in the nation’s tortured past.
In the 1970s, President Richard Nixon authorized a secret carpet-bombing campaign in Cambodia to cut off North Vietnam’s move toward South Vietnam. The U.S. also backed a coup that led, in part, to the rise of Pol Pot and the Khmer Rouge, a bloodthirsty guerrilla group that went on to orchestrate a genocide that resulted in the deaths of more than 1.5 million people between 1975 and 1979.
One of the regime’s infamous Killing Fields, where nearly 20,000 Cambodians were executed and thrown in mass graves, lies just a few miles outside the center of Phnom Penh. There, a memorial featuring thousands of skulls sits as a vivid reminder of the atrocities committed just a few generations ago. White House aides said that Biden had no scheduled plans to visit.
As is customary, Biden met with the host country’s leader at the start of the summit. Prime Minister Hun Sen, a former Khmer Rouge commander, has ruled Cambodia for decades with next to no tolerance for dissent. Opposition leaders have been jailed and killed, and his administration has been accused of widespread corruption, according to human rights groups.
Jake Sullivan, Biden’s national security adviser, said Biden would “engage across the board in service of America’s interests and to advance America’s strategic position and our values.” He said Biden was meeting with Hun Sen because he was the leader of the host country.
U.S. officials said Biden urged the Cambodian leader to make a greater commitment to democracy and “reopen civic and political space” ahead of the country’s next elections.
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Traders and shippers say the decline in global consumer demand is not a sign the global economy is normalizing after a frantic post-lockdown consumption rush but a downwards shift in consumption appetites.
What has happened now is that the cargo is ‘on time’ again and hence you’ll see a slowdown in new ordering…
Andrea Monti
Chief executive, Sogese
“There is just not enough depot space to accommodate all the containers,” online container logistics platform Container xChange chief executive Christian Roeloffs said in an industry update this week.
“With the further release of container inventory into the market, for example from the disposal of leasing fleets, there will be added pressure on depots in the coming months.”
Italian container depot owner Sogese chief executive Andrea Monti told Container xChange his depots are full.
“Whatever was coming in and out of, for instance, our Milan depot is quite stuck. And the container volume at the depots is increasing to an extent that we are returning some requests for depot service agreements.”
“We are in a situation where we are not able to accept new clients for some locations.”
Monti told Container xChange that the peak season of goods shipments — as Christmas looms — “technically did not happen this year.” Retailers are cautious about the high level of inventory they have on hand, Monti said.
“There is enough inventory with retailers,” Monti said.
“What has happened now is that the cargo is ‘on time’ again and hence you’ll see a slowdown in new ordering as companies adjust to more efficient turnaround times in ocean freight delivery.”
The latest Drewry composite World Container Index — a key benchmark for container prices — has fallen again to $2,773 per 40-foot container. That’s 73% lower than the peak rate in September last year.
Blank or canceled sailings are also on the rise in what is usually the opposite, as the year’s biggest spending period approaches.
A blank sailing happens when a shipping company decides to skip a port or an entire leg of its schedule to manage changes in demand and capacity.
There is a significant dent in consumer demand which then leads to less demand for freight and cargo, and therefore, a proportionate dent in container demand globally.
Spokesperson
Container xChange
In its latest canceled sailings analysis, Drewry said between late November and early December, 14% of sailings have been canceled across major container shipping routes.
Nearly 60% of the 200 freight forwarders, traders and shippers that Container xChange spoke to in a survey last month said they were grappling with geopolitical, economic and political risks which have imposed downward pressures on consumption and therefore demand for containers.
“We know already that the market is bearish on consumer demand because of multiple factors like recessionary fears and inflationary risks,” a Container xChange spokeswoman told CNBC.
“So of course, there is a significant dent in consumer demand which then leads to less demand for freight and cargo, and therefore, a proportionate dent in container demand globally.”
Shippers are giving containers away to reduce crowding at depots while many have resorted to blank sailings, Container xChange added.
A cargo ship carrying containers is seen near the Yantian port in Shenzhen, following the novel coronavirus disease (COVID-19) outbreak, Guangdong province, China May 17, 2020.
Martin Pollard | Reuters
BEIJING — China’s exports fell by 0.3% in October from a year ago, missing Reuters expectations for a 4.3% increase.
The decline in U.S.-dollar terms last month marked the first year-on-year drop since May 2020, according to Refinitiv Eikon data.
Imports fell in October by 0.7% in U.S.-dollar terms, also missing expectations for slight growth of 0.1%.
The yuan weakened by nearly 3% against the U.S. dollar in October, according to Refinitiv Eikon.
In yuan terms, exports rose by 7% and imports by 6.8%, customs data released Monday showed.
Read more about China from CNBC Pro
Last week, Barclays cut its forecast for China’s economic growth next year on expectations that falling demand from the U.S. and EU would prompt a drop of at least 2% in China’s exports.
This is a breaking news story. Please check back for updates.
BERLIN — Berlin must change the way it deals with China as the country lurches back toward a more openly “Marxist-Leninist” political trajectory, German Chancellor Olaf Scholz wrote in an op-ed on Thursday.
In his article for POLITICO and the German newspaper Frankfurter Allgemeine Zeitung, Scholz defended his trip to China on Thursday but stressed that German companies would need to take steps to reduce “risky dependencies” in industrial supply chains, particularly in terms of “cutting-edge technologies.” Scholz noted that President Xi Jinping was deliberately pursuing a political strategy of making international companies reliant on China.
“The outcome of the Communist Party Congress that has just ended is unambiguous: Avowals of Marxism-Leninism take up a much broader space than in the conclusions of previous congresses … As China changes, the way that we deal with China must change, too,” Scholz wrote.
Germany has faced withering criticism for pressuring Europe into a strategically disastrous dependence on Russian gas over recent years, and Berlin is now having to hit back against suggestions that it is making exactly the same mistakes by depending on China as a manufacturing base and commercial partner.
While Scholz signaled a note of caution over China, he was far from suggesting that Germany was close to a major U-turn in its largely cozy relations with China. Indeed, he clearly echoed his predecessor Angela Merkel in insisting that the (unnamed but obviously identified) United States should not drag Germany into a new Cold War against Beijing.
“Germany of all countries, which had such a painful experience of division during the Cold War, has no interest in seeing new blocs emerge in the world,” he wrote. “What this means with regard to China is that of course this country with its 1.4 billion inhabitants and its economic power will play a key role on the world stage in the future — as it has for long periods throughout history.”
In a thinly veiled criticism of Washington’s policies, Scholz said Beijing’s rise did not justify “the calls by some to isolate China.”
Crucially, he insisted that the goal was not to “decouple” — or break manufacturing ties — from China. He added, however, that he was taking “seriously” an assertion by President Xi that Beijing’s goal was to “tighten international production chains’ dependence on China.”
Scholz is planning to fly to Beijing late on Thursday for a one-day trip to the Chinese capital on Friday, where he will be the first Western leader to meet Xi since his reappointment, and the first leader from the G7 group of leading economies to visit China since the outbreak of the coronavirus pandemic.
The chancellor also sought to counter criticism that his trip undermines a joint European approach to China. According to French officials, President Emmanuel Macron had proposed that he and Scholz should visit Xi together to demonstrate unity and show that Beijing cannot divide European countries by playing their economic interests off against each other — an initiative that the German leader rejected.
“German policy on China can only be successful when it is embedded in European policy on China,” Scholz wrote. “In the run-up to my visit, we have therefore liaised closely with our European partners, including President Macron, and also with our transatlantic friends.”
Chancellor Olaf Scholz echoed his predecessor Angela Merkel in insisting that the United States should not drag Germany into a new Cold War against Beijing | Clemens Bilan-Pool/Getty Images
Scholz said he wanted Germany and the EU to cooperate with a rising China — including on the important issue of climate change — rather than trying to box it out.
At the same time, he warned Beijing that it should not pursue policies striving for “hegemonic Chinese dominance or even a Sinocentric world order.”
Scholz also pushed China to stop its support for Russia’s war against Ukraine and to take a more critical position toward Moscow: “As a permanent member of the [United Nations] Security Council, China bears a special responsibility,” he wrote. “Clear words addressed from Beijing to Moscow are important — to ensure that the Charter of the United Nations and its principles are upheld.”
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LIVERPOOL, England — On the long picket line outside the gates of Liverpool’s Peel Port, rain-soaked dock workers warm themselves with cups of tea as they listen to 1980s pop.
Dozens of buses, cars and trucks honk in solidarity as they pass.
Dockers’ strikes are not new to Liverpool, nor is depravation. But this latest walk-out at Britain’s fourth-largest port is part of something much bigger, a great wave of public and private sector strikes taking place across the U.K. Railways, postal services, law courts and garbage collections are among the many public services grinding to a halt.
The immediate cause of the discontent, as elsewhere, is the rising cost of living. Inflation in the United Kingdom breached the 10 percent mark this year, with wages failing to keep pace.
But the U.K.’s economic woes long predate the current crisis. For more than a decade, Britain has been beset by weak economic growth, anaemic productivity, and stagnant private and public sector investment. Since 2016, its political leadership has been in a state of Brexit-induced flux.
Half a century after U.S. Secretary of State Henry Kissinger looked at the U.K.’s 1970s economic malaise and declared that “Britain is a tragedy,” the United Kingdom is heading to be the sick man of Europe once again.
The immediate cause of Liverpool dockers’ discontent that brought them to strike is the rising cost of living. | Christopher Furlong/Getty Images
Here in Liverpool, the “scars run very deep,” said Paul Turking, a dock worker in his late 30s. British voters, he added, have “been misled” by politicians’ promises to “level up” the country by investing heavily in regional economies. Conservatives “will promise you the world and then pull the carpet out from under your feet,” he complained.
“There’s no middle class no more,” said John Delij, a Peel Port veteran of 15 years. He sees the cost-of-living crisis and economic stagnation whittling away the middle rung of the economic ladder.
“How many billionaires do we have?” Delij asked, wondering how Britain could be the sixth-largest economy in the world with a record number of billionaires when food bank use is 35 percent above its pre-pandemic level. “The workers put money back into the economy,” he said.
What would they do if they were in charge? “Invest in affordable housing,” said Turking. “Housing and jobs.”
Falling behind
The British economy has been struck by particular turbulence over recent weeks. The cost of government borrowing soared in the wake of former PM Liz Truss’ disastrous mini-budget on September 23, with the U.K.’s central bank forced to step in and steady the bond markets.
But while the swift installation of Rishi Sunak, the former chancellor, as prime minister seems to have restored a modicum of calm, the economic backdrop remains bleak. Spending and welfare cuts are coming. Taxes are certain to rise. And the underlying problems cut deep.
U.K. productivity growth since the financial crisis has trailed that of comparator nations such as the U.S., France and Germany. As such, people’s median incomes also lag behind neighboring countries over the same period. Only Russia is forecast to have worse economic growth among the G20 nations in 2023.
In 1976, the U.K. — facing stagflation, a global energy crisis, a current account deficit and labor unrest — had to be bailed out by the International Monetary Fund. It feels far-fetched, but today some are warning it could happen again.
The U.K. is spluttering its way through an illness brought about in part through a series of self-inflicted wounds that have undermined the basic pillars of any economy: confidence and stability.
The political and economic malaise is such that it has prompted unwanted comparisons with countries whose misfortunes Britain once watched amusedly from afar.
“The existential risk to the U.K. … is not that we’re suddenly going to go off an economic cliff, or that the country’s going to descend into civil war or whatever,” said Jonathan Portes, professor of economics at King’s College London. “It’s that we will become like Italy.”
Portes, of course, does not mean a country blessed with good weather and fine food — but an economy hobbled by persistently low growth, caught in a dysfunctional political loop that lurches between “corrupt and incompetent right-wing populists” and “well-intentioned technocrats who can’t actually seem to turn the ship around.”
“That’s not the future that we want in the U.K,” he said.
Reviving the U.K.’s flatlining economy will not happen overnight. As Italy’s experience demonstrates, it’s one thing to diagnose an illness — another to cure it.
Experts speak of an unbalanced model heavily reliant upon Britain’s services sector and beset with low productivity, a result of years of underinvestment and a flexible labor market which delivers low unemployment but often insecure and low-paid work.
“We’re not investing in skills; businesses aren’t investing,” said Xiaowei Xu, senior research economist at the Institute for Fiscal Studies. “It’s not that surprising that we’re not getting productivity growth.”
But any attempt to address the country’s ailments will require its economic stewards to understand their underlying causes — and those stretch back at least to the first truly global crisis of the 21st century.
Crash and burn
The 2008 financial crisis hammered economies around the world, and the U.K. was no exception. Its economy shrunk by more than 6 percent between the first quarter of 2008 and the second quarter of 2009. Five years passed before it returned to its pre-recession size.
For Britain, the crisis in fact began in September 2007, a year before the collapse of Lehman Brothers, when wobbles in the U.S. subprime mortgage market sparked a run on the British bank Northern Rock.
The U.K. discovered it was particularly vulnerable to such a shock. Over the second half of the 20th century, its manufacturing base had largely eroded as its services sector expanded, with financial and professional services and real estate among the key drivers. As the Bank of England put it: “The interconnectedness of global finance meant that the U.K. financial system had become dangerously exposed to the fall-out from the U.S. sub-prime mortgage market.”
The crisis was a “big shock to the U.K.’s broad economic model,” said John Springford, from the Centre for European Reform. Productivity took an immediate hit as exports of financial services plunged. It never fully recovered.
“Productivity before the crash was basically, ‘Can we create lots and lots of debt and generate lots and lots of income on the back of this? Can we invent collateralized debt obligations and trade them in vast volumes?’” said James Meadway, director of the Progressive Economy Forum and a former adviser to Labour’s left-wing former shadow chancellor, John McDonnell.
A post-crash clampdown on City practises had an obvious impact.
“This is a major part of the British economy, so if it’s suddenly not performing the way it used to — for good reasons — things overall are going to look a bit shaky,” Meadway added.
The shock did not contain itself to the economy. In a pattern that would be repeated, and accentuated, in the coming years, it sent shuddering waves through the country’s political system, too.
The 2010 election was fought on how to best repair Britain’s broken economy. In 2009, the U.K. had the second-highest budget deficit in the G7, trailing only the U.S., according to the U.K. government’s own fiscal watchdog, the Office for Budget Responsibility (OBR).
The Conservative manifesto declared “our economy is overwhelmed by debt,” and promised to close the U.K.’s mounting budget deficit in five years with sharp public sector cuts. The incumbent Labour government responded by pledging to halve the deficit by 2014 with “deeper and tougher” cuts in public spending than the significant reductions overseen by former Conservative Prime Minister Margaret Thatcher in the 1980s.
The election returned a hung parliament, with the Conservatives entering into a coalition with the Liberal Democrats. The age of austerity was ushered in.
Austerity nation
Defenders of then-Chancellor George Osborne’s austerity program insist it saved Britain from the sort of market-led calamity witnessed this fall, and put the U.K. economy in a condition to weather subsequent global crises such as the COVID-19 pandemic and the fallout from the war in Ukraine.
“That hard work made policies like furlough and the energy price cap possible,” said Rupert Harrison, one of Osborne’s closest Treasury advisers.
Pointing to the brutal market response to Truss’ freewheeling economic plans, Harrison praised the “wisdom” of the coalition in prioritizing tackling the U.K.’s debt-GDP ratio. “You never know when you will be vulnerable to a loss of credibility,” he noted.
But Osborne’s detractors argue austerity — which saw deep cuts to community services such as libraries and adult social care; courts and prisons services; road maintenance; the police and so much more — also stripped away much of the U.K.’s social fabric, causing lasting and profound economic damage. A recent study claimed austerity was responsible for hundreds of thousands of excess deaths.
Under Osborne’s plan, three-quarters of the fiscal consolidation was to be delivered by spending cuts. With the exception of the National Health Service, schools and aid spending, all government budgets were slashed; public sector pay was frozen; taxes (mainly VAT) rose.
But while the government came close to delivering its fiscal tightening target for 2014-15, “the persistent underperformance of productivity and real GDP over that period meant the deficit remained higher than initially expected,” the OBR said. By his own measure, Osborne had failed, and was forced to push back his deficit-elimination target further. Austerity would have to continue into the second half of the 2010s.
Many economists contend that the fiscal belt-tightening sucked demand out of the economy and worsened Britain’s productivity crisis by stifling investment. “That certainly did hit U.K. growth and did some permanent damage,” said King’s College London’s Portes.
“If that investment isn’t there, other people start to find it less attractive to open businesses,” former Labour aide Meadway added. “If your railways aren’t actually very good … it does add up to a problem for businesses.”
A 2015 study found U.K. productivity, as measured by GDP per hour worked, was now lower than in the rest of the G7 by a whopping 18 percentage points.
“Frankly, nobody knows the whole answer,” Osborne said of Britain’s productivity conundrum in May 2015. “But what I do know is that I’d much rather have the productivity challenge than the challenge of mass unemployment.”
‘Jobs miracle’
Rising employment was indeed a signature achievement of the coalition years. Unemployment dropped below 6 percent across the U.K. by the end of the parliament in 2015, with just Germany and Austria achieving a lower rate of joblessness among the then-28 EU states. Real-term wages, however, took nearly a decade to recover to pre-crisis levels.
Economists like Meadway contend that the rise in employment came with a price, courtesy of Britain’s famously flexible labor market. He points to a Sports Direct warehouse in the East Midlands, where a 2015 Guardian investigation revealed the predominantly immigrant workforce was paid illegally low wages, while the working conditions were such that the facility was nicknamed “the gulag.”
The warehouse, it emerged, was built on a former coal mine, and for Meadway the symbolism neatly charts the U.K.’s move away from traditional heavy industry toward more precarious service sector employment. “It’s not a secure job anymore,” he said. “Once you have a very flexible labor market, the pressure on employers to pay more and the capacity for workers to bargain for more is very much reduced.”
Throughout the period, the Bank of England — the U.K.’s central bank — kept interest rates low and pursued a policy of quantitative easing. “That tends to distort what happens in the economy,” argued Meadway. QE, he said, is a “good [way of] getting money into the hands of people who already have quite a lot” and “doesn’t do much for people who depend on wage income.”
Meanwhile — whether necessary or not — the U.K.’s austerity policies undoubtedly worsened a decades-long trend of underinvestment in skills and research and development (Britain lags only Italy in the G7 on R&D spending). At British schools, there was a 9 percent real terms fall in per-pupil spending between 2009 and 2019, according to the Institute for Fiscal Studies’ Xu. “As countries get richer, usually you start spending more on education,” Xu noted.
Two senior ministers in the coalition government — David Gauke, who served in the Treasury throughout Osborne’s tenure, and ex-Lib Dem Business Secretary Vince Cable — have both accepted that the government might have focused more on higher taxation and less on cuts to public spending. But both also insisted the U.K had ultimately been correct to prioritize putting its public finances on a sounder footing.
It was February 2018 before Britain finally achieved Osborne’s goal of eliminating the deficit on its day-to-day budget.
Austerity was coming to an end, at last. But Osborne had already left the Treasury, 18 months earlier — swept away along with Cameron in the wake of a seismic national uprising.
***
David Cameron had won the 2015 election outright, despite — or perhaps because of — the stringent spending cuts his coalition government had overseen, more of which had been pledged in his 2015 manifesto. Also promised, of course, was a public vote on Britain’s EU membership.
The reasons for the leave vote that followed were many and complex — but few doubt that years of underinvestment in poorer parts of the U.K. were among them.
Regardless, the 2016 EU referendum triggered a period of political acrimony and turbulence not seen in Westminster for generations. With no pre-agreed model of what Brexit should actually entail, the U.K.’s future relationship with the EU became the subject of heated and protracted debate. After years of wrangling, Britain finally left the bloc at the end of January 2020, severing ties in a more profound way than many had envisaged.
While the twin crises of COVID and Ukraine have muddled the picture, most economists agree Brexit has already had a significant impact on the U.K. economy. The size of Britain’s trade flows relative to GDP has fallen further than other G7 countries, business investment growth trails the likes of Japan, South Korea and Italy, and the OBR has stuck by its March 2020 prediction that Brexit would reduce productivity and U.K. GDP by 4 percent.
Perhaps more significantly, Brexit has ushered in a period of political instability. As prime ministers come and go (the U.K. is now on its fifth since 2016), economic programs get neglected, or overturned. Overseas investors look on with trepidation.
“The evidence that the referendum outcome, and the kind of uncertainty and change in policy that it created, have led to low investment and low growth in the U.K. is fairly compelling,” said professor Stephen Millard, deputy director at the National Institute of Economic and Social Research.
Beyond the instability, the broader impact of the vote to leave remains contentious.
Portes argued — as many Remain supporters also do — that much harm was done by the decision to leave the EU’s single market. “It’s the facts, not the uncertainty that in my view is responsible for most of the damage,” he said.
Brexit supporters dismiss such claims.
“It’s difficult statistically to find much significant effect of Brexit on anything,” said professor Patrick Minford, founder member of Economists for Brexit. “There’s so much else going on, so much volatility.”
Minford, an economist favored by ex-PM Truss, acknowledged that “Brexit is disruptive in the short run, so it’s perfectly possible that you would get some short-run disruption.” But he added: “It was a long-term policy decision.”
Where next?
Plenty of economists can rattle off possible solutions, although actually delivering them has thus far evaded Britain’s political class. “It’s increasing investment, having more of a focus on the long-term, it’s having economic strategies that you set out and actually commit to over time,” says the IFS’ Xu. “As far as possible, it’s creating more certainty over economic policy.”
But in seeking to bring stability after the brief but chaotic Truss era, new U.K. Chancellor Jeremy Hunt has signaled a fresh period of austerity is on the way to plug the latest hole in the nation’s finances. Leveling Up Secretary Michael Gove told Times Radio that while, ideally, you wouldn’t want to reduce long-term capital investments, he was sure some spending on big projects “will be cut.”
This could be bad news for many of the U.K.’s long-awaited infrastructure schemes such as the HS2 high-speed rail line, which has been in the works for almost 15 years and already faces a familiar mix of local resistance, vested interests, and a sclerotic planning system.
“We have a real problem in the sense that the only way to really durably raise productivity growth for this country is for investments to pick up,” said Springford, from the Centre for European Reform. “And the headwinds to that are quite significant.”
For dock workers at Liverpool’s Peel Port, the prospect of a fresh round of austerity amid a cost-of-living crisis is too much to bear. “Workers all over this country need to stand up for themselves and join a union,” insisted Delij.
For him, it’s all about priorities — and the arguments still echo back to the great crash of 15 years ago. “They bailed the bankers out in 2007,” he said, “and can’t bail hungry people out now.”
