The US is using trade to reinforce foreign policy goals
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Hi from Washington, where we have both Margrethe Vestager, the EU’s competition and digital policy chief, and Anne-Marie Trevelyan, the UK’s new trade minister, in town.
Vestager is here to launch the US’s and EU’s shiny new initiative on co-operating over tech antitrust policy, while Trevelyan is hoping to gain some sort of traction with US officials on those pesky steel tariffs — one of the subjects of our note today.
Charted waters examines evidence (or lack thereof) of reshoring.
Trade links features a great read from Nikkei that underlines how supply chain snags are affecting even mega companies such as Apple.
From Brexit to spyware, policies pressurise allies
Two story developments this week have highlighted how the US is increasingly using its trade policy as an element of broader foreign policy.
The first is our scoop about the US dragging its feet over striking a deal with the UK to remove Trump-era tariffs on steel and aluminium over the UK’s position on Northern Ireland.
This is, of course, a highly sensitive issue for the UK, and was not a story that either Downing Street or the White House wanted to be made public. For those not following this big trade row between the UK and the EU, the UK has been repeatedly threatening to unilaterally trigger Article 16 of its Brexit agreement with the EU, a safeguard clause in the post-Brexit Northern Ireland protocol that overrides part of the UK’s exit with the EU and would suspend checks on goods travelling to Northern Ireland from the rest of the UK.
Senior US lawmakers and Joe Biden have warned the Brits that ripping up the NI protocol will destabilise peace on the island of Ireland. The UK has retorted that it does not see the two things as linked, and will have to do what it thinks is best when it comes to the delicate issue of the protocol.
This is a deeply unusual situation. Straight-up trade policy, and tariffs imposed on the imports of an ally by a prior administration no less, is being used to pressure an ally to behave in certain way on an arguably unrelated topic.
The second example is the case of the commerce department’s entity listing of Israel’s military-grade spyware group NSO, whose Pegasus software was used to infiltrate the phones of journalists, dissidents, human rights activists and diplomats. The listing, which happened about a month ago, means US tech companies would need US government permission to make sales to any blacklisted companies. The order also covers US-origin technology not in the US, so would cover sales of US tech by companies outside the US.
It was already pretty clear, but there was a suggestion this week that the listing was a straightforward trade retaliation for a national security concern. Reuters reported that US diplomats had been targeted by the software.
The listing is often used to ban the sale of cutting-edge military technology to foreign adversaries, and has been used as such with increasing frequency against various Chinese companies under Trump. In these cases, though, the US has been known to offer licences to allow US companies to continue exporting some US tech, because to totally block it would cripple the US semiconductor industry. In fact, one potentially unintended consequence was that the listing of Chinese chipmaker SMIC funnelled more orders towards Taiwanese foundry TSMC, exacerbating the global chip crunch.
The case of NSO is in some ways simpler, because the company has no value to the US or to global supply chains, and more complicated, because US relations with Israel are much better than US relations with China (to put it mildly). While the US can grant licences and carefully target its export controls, listing also covers the purchase of technology used to run basic business operations, ranging from phones and laptops for staff to the rental of servers and widely used cloud computing services from US companies. One former commerce official said the US could “absolutely” block all of those basic item transactions. Jim Lewis, of the Center for Strategic and International Studies, said that in reality, a listing “signals to everyone that the company is radioactive and shouldn’t be touched”.
About a month after the listing, we’re beginning to see the effects. It seems NSO’s lenders are preparing for a restructuring of the group’s debt. Lenders have said they’ve tried to sell the loan on to other investors but have struggled to find willing buyers even at a discounted price.
So what next? Well, we expect to see more punitive export controls placed on spyware groups. The US has long used Treasury sanctions to cut off individuals and companies from the dollar, now it’s ramping up its use of trade instruments to try to push companies out of the global supply chain.
As for the talks with Trevelyan, we’ll be watching out for any progress, but it seems like they may have risen above the usual trade diplomat channels.
There has been a lot of chatter since the pandemic began predicting the regionalisation of goods trade. The belief is that the pandemic has exposed the vulnerability of countries and companies relying on shipping vital goods from Asia or other production hubs. There are shortages of everything from semiconductors worldwide to glass bottles in the US.
The idea of reshoring trade has taken hold, with those in favour arguing that it’s better to produce things close to where they are consumed than rely on globalisation to deliver the goods. However, the annual DHL Global Connectedness index questions that. It found trade distances continued to increase over the course of 2020.
“If a robust shift toward regionalisation were under way, we would expect trade, on average, to take place over shorter distances,” states the report, compiled by Steve Altman, director of the DHL Initiative on Globalization at NYU Stern, and colleagues. Andy Bounds
Must-read alert. Nikkei tells the story of Apple’s nightmare before Christmas, explaining why ($) the tech giant has not been unable to produce nearly as many models of its iPhone 13 as it would have liked.
Australia has joined the US in boycotting the Winter Olympics, to be held next year in Beijing.
The American Enterprise Institute, a right-leaning think-tank, argues that China tariffs don’t matter to inflation.
The UK wants to ease trade barriers with individual US states, according to Bloomberg ($).
Coffee has hit a 10-year high on the back of supply chain bottlenecks.
China is pretty interested (Nikkei, $) in the result of New Caledonia’s referendum on independence from France on Sunday, with firms here having purchased more nickel and cobalt from the territory in 2020 than the previous four years combined. Aime Williams, Francesca Regalado and Claire Jones