This article is an on-site version of our Trade Secrets newsletter. Sign up here to get the newsletter sent straight to your inbox every Monday
We’re doing something new, trialling an experiment with audio newsletters read by Microsoft Azure Al. Click here to listen to Trade Secrets and please do share your feedback by completing a short surveyor dropping us a line at email@example.com. Thank you.
I wish I’d been wrong last week that the first wave of sanctions were not enough to deter Vladimir Putin. But if anything it seems I was not optimistic enough that Germany, with its Nord Stream 2 suspension, was finally twigging it had been far too lenient on Russia.
Over the weekend a whole swath of international and particularly European, and particularly German, verities about international relations and trade have been hurled overboard. The disinvestments, asset freezing and travel bans, the Swift payment restrictions, the seizure of Russian central bank assets, let alone the defense spending commitments and arms shipments: all breathtaking.
We’ll see in the days ahead what impact this battery of policies has, though the market reaction this morning suggests “a lot”. The still-missing bit is restricting Russian gas exports to western Europe, which are excluded from the US financial sanctions. Germany and other countries continued, bizarrely on the face of it, to buy gas through the pipelines in the days after the invasion.
Russia can keep going for quite a while on the hard currency from gas exports even if its central banks’ assets are frozen, so to that extent this shoots a big hole in the sanctions package. However, what it also does is severely deter Russia from switching off the gas to blackmail western Europe in case it bankrupts itself. You aren’t much of a monopolist if you do not have the power to cut production.
Below, in a special extended Trade Secrets, we look at how the Ukraine invasion will effect the global trading order, and particularly Europe’s role in it, and the intersection of national security and trade by recalling a recent rather embarrassing incident where the US sided with Russia against Ukraine at the World Trade Organization to punch holes in international law there. Charted waters looks at how regulations have hit cross-border M&A in the pharma sector.
Next Monday, the newsletter will be in the extremely capable hands of Trade Secrets alumnus Claire Jones while I take a short break. In the meantime, I’d like to hear your thoughts on any and all trade subjects: as ever, it’s firstname.lastname@example.org.
Get in touch. Email me at email@example.com
Ukraine, the new world order and the EU role
I’m writing this from Germany. There’s no better place to observe how a new European and international order is being changed in a crisis.
Before the invasion, the 1970s Eastern politics line of engagement rather than confrontation with Russia had a powerful pull. I found a hugely entertaining interview in the New York Times in 1982 headlined “Helmut’s Pipeline”, in which the NYT’s resident conservative William Safire berated the then chancellor Helmut Schmidt of the Social Democratic party for making Germany dependent on Soviet Russian gas. You can still argue engagement with Moscow was the right idea during the cold war, but it was horrendously ill-suited to Putin’s aggressive Russian nationalism, indeed imperialism. Now Olaf Scholz, an SPD chancellor only a couple of months into office, has overturned decades of German certainties.
The EU is changing at lightning speed, its member states arming Ukraine and themselves. It’s particularly impressive given that the EU’s initial response to a new challenge (the eurozone sovereign debt meltdown and the migration crisis) tends to be slow, halting and often wrong-headed.
What else is changing in the international order? Suddenly, as a club of rich democracies, the G7 has a role again in coordinating sanctions efforts. China, whose presence was deemed necessary for any serious conversation about global governance, is in a rather uncomfortable position in lining up with Russia.
Seizing the moment, Ukrainian president Volodymyr Zelensky is applying for membership. A few member states (including, predictably, Poland) immediately weighed in on its behalf.
Before this weekend I’d have regarded Ukraine joining the EU to be somewhat missing the point apart from as a symbolic move to commit Kyiv to looking westwards. As I argued a few weeks ago (it seems like about a decade now), it was the EU assuming that trade on its own could do the job of foreign policy and signing a politicized “deep and comprehensive free trade agreement” (DCFTA) in 2014 that was the trigger for Putin’s seizing of Crimea.
There are still significant issues with meeting a bunch of criteria, even assuming Ukraine will emerge as a free and independent country after the war. The DCFTA has not ended economic dysfunction, and the EU really does not need another corrupt and authoritarian country on its eastern flank.
But you can now imagine the EU playing at least a supporting if not a primary security role alongside NATO, coordinating elements of national armed forces even without running its own. The EU does in theory have its own mutual protection clause, but not all member states have signed up and there’s no mechanism to put it into action. If the EU wants to become a fully-fledged security power to match its powers in trade, it’s got a long way to travel yet. Mind you, the rate it’s going it’ll be there by Thursday morning.
The US’s unwise alliance with Russia at the WTO
Heard the one about how the US backed Russia against Ukraine and punched a hole in the web of international law? In 2016, not long after Putin seized Crimea, Ukraine brought a case to the WTO about Russia blocking trade transit across its territory. Russia argued that its actions were justified under a national security exemption to trade rules and it was illegitimate for the WTO dispute settlement system even to judge what its national security needs might be.
Traditionally, governments have been sparing in the use of the loophole, acutely aware that widespread use of a self-judging exemption would basically destroy the WTO system. Although not directly affected by the case, the US came down strongly. . .on Russia’s sideone of those decisions that looked bad at the time and worse now.
Why back Putin? Because Donald Trump, absurdly, wanted to invoke national security to block imports of steel and aluminum to the US, including those from staunch foreign policy allies like the EU. A makeshift EU-US deal has put that litigation on hold but similar WTO cases brought by other countries remain pending.
The Biden administration continues to maintain some of those tariffs and defend those cases. It says that it’s being reliant on imports at all that’s the problem, even if they’re sourced from allies. But for commodities as generic as steel and aluminum that does not pass the laugh test either.
Russia won the case against Ukraine, though importantly the ruling did establish that in principle it was legitimate for WTO dispute settlement to assess the validity of national security concerns. Now, it’s true that WTO rules aren’t of the same fundamental nature as the UN Charter’s protection of peace, security and self-determination. It’s also true that the idea of self-judging national security interests is an established one.
But that, in a sense, is the point. It’s not a good look for one of the traditional anchors of the multilateral rule-based system, the US, to cheer on a government like Russia’s and misuse national security loopholes itself. If you’re really going to make trade and strategic policy cohere, national security needs to be invoked transparently and judiciously, not to excuse blatant protectionism.
The reshoring crowd will no doubt seize the Ukraine invasion to push their case against whatever imports they and industry lobbyists feel like. But if trade is now a purely unilateral self-determining national security tool you might as well pack up the international order altogether and go back to a system of power relations. Having trade policy try to do national security on its own is a mistake, but then so is allowing spurious national security arguments to dictate trade.
Joe Biden made regulation of drug prices and curbs on mergers and acquisitions in the pharmaceutical sector a priority when he was elected US president.
As Biden prepares to deliver his first State of the Union address to Congress tomorrow, many analysts say that the administration’s efforts to boost the power of consumers at the expense of the pharmaceutical industry have had only mixed success.
Nevertheless, the uncertainties over drug pricing and the Federal Trade Commission’s flagging of tougher antitrust scrutiny have had a chilling impact on dealmaking, as the following chart shows.
The Ukraine crisis has set back hopes of a swift global economic recovery from the pandemic.
The US is trying to cut Russia off from semiconductor supply.
FT journalists assess the possible damage to supply chains from a prolonged war in Ukraine.
Australian winemakers, seeking alternative export markets after being blocked by China, are marketing a new brand in the US advertised by criminal celebrities including Martha Stewart and Snoop Dogg.
Recommended newsletters for you
Europe Express – Your essential guide to what matters in Europe today. Sign up here
Britain after Brexit – Keep up to date with the latest developments as the UK economy adjusts to life outside the EU. Sign up here
Leave a Reply