Mon. Dec 6th, 2021

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Greetings from Washington, where your fearless trade reporter is delighted to return from a brief visit to the UK. The queues at Dulles were soul devastatingly long, as always, but seemed to move faster than usual. Perhaps the American customs and border patrol officers sensed the mere joy of our Brits and other European Europeans to travel freely again and let us through with a lighter braai than usual.

Speaking of borders, our note today is on a little more trade friction with Canada and Mexico, which we feel is about to escalate.

Mapped waters look at the statistics on how Brexit affects trade between the UK and the EU.

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Subsidies sour relations with US neighbors

We have previously written on ongoing US-Canada trade talks. Despite a new era of attempt at collaboration by Joe Biden, there was tension over goods such as cheese, wood and solar panels.

There were also some problems with Mexico. energy reforms and some friction over the Latin American country’s implementation of the USMCA Trade Agreement’s labor terms.

Now there’s a new trade battle brewing, in which Canada and Mexico are united in their opposition to America, and it’s about Biden’s plans to provide an incentive for the manufacture of electric vehicles.

In new proposals that are partly industrial policy, partly efforts to make the US greener and the climate cleaner, Biden has outlined new tax credits that are meant to help people afford electric vehicles. For the first five years after the bill is passed, buyers of electric cars will receive $ 7,500 worth of credit, regardless of where the vehicle is made. But for five years after that, the credit will only apply to cars manufactured in the US. In addition, there is a $ 500 tax credit available for any car with a US-made battery, and another $ 4,500 if the car is made in a plant with a union.

It is not surprising that Canada is not very impressed with this, nor is Mexico. Both see the proposed measure as in fact more of Biden’s Buy American sentiment, but this time applying to the North American car supply chain. Canadian Commerce Secretary Mary Ng has argued it would encourage car companies to build new EV batteries plants in the US, unlike Canada. Ng has gone so far as to write to senior U.S. senators and officials complaining that the tax credits could “undermine” decades of Canada-American car cooperation, cause the loss of tens of thousands of Canadian jobs and cause additional damage to U.S. workers.

Meanwhile, Canada’s Minister of Innovation and Industry, François-Philippe Champagne, said last Thursday that Canada would respond “appropriately” to the credits, which sounded ominous to us. “They understand that legislation like this will generate a reaction on the Canadian side,” Champagne said in a statement. interview with Reuters. “We have always responded appropriately to this type of legislation.” Mexico’s top trade official for North America, Roberto Velasco Alvarez, meanwhile also said he is “very worried” on the impact of the proposals on the Mexican automotive sector.

This puts Biden in a difficult place. The North American car supply chain is famously integrated. It does not stop when it turns green. Canada boasts a wealth of minerals needed to make EV batteries, such as lithium, graphite and cobalt, which provide a useful source of minerals that can be imported into the US from countries other than China (or the Congo). , where child labor is known to be use). It is unlikely that the US will be able to become independent when it comes to the minerals needed for EVs, and Canada is going to become an increasingly important supplier. It would be unwise to touch too much of a conflicting relationship with Ottawa over EV manufacturing (or over car trading in general).

On the other hand, these tax credits are a central principle of Biden’s new efforts at green industrial policy, and he will not be able to give them up. Moreover, it fits in with the rhetoric of providing American jobs to American workers. As Ted Alden of the Foreign Relations Council points out, “if you can go to the swing states in the Midwest and say, ‘look, the transition to electric vehicles offers you amazing factory work again,’ it’s a big political issue. ”.

So what now? Well, Canada and Mexico could possibly bring a dispute under the USMCA mechanisms. But it’s hard to see what the lucky solution is – unless the part about the cars to be made in the US is abandoned and exchanged for “in North America”. We suspect this could be another fun trading problem for Trade Representative Katherine Tai to try to fix without balancing the political equation. We’ll see.

Mapped waters

Martin Wolf, our chief economic commentator, wrote his latest column on how Brexit – specifically London’s threat to reject its agreement with the EU – could damage the UK’s trade relations with countries off the coast of Europe.

In today’s Charted waters, however, we focus on evidence of how this has affected the relationship with its largest trading partner, the EU.

The graph below clearly shows an impact, with UK exports to the EU being almost 10 per cent lower over the past three months than they were in the fourth quarter of 2020. There is less evidence that the break with EU relations with the rest of the world, with goods exports more or less at the same level now as at the end of last year. Claire Jones

Line graph of exports of goods (averages over the past three months, Q4 2020 = 100) showing UK exports to the EU has slowed sharply since the Brexit referendum

Foreign Affairs ($) has a interesting piece on the China Shock’s lessons for the green economy. Biden’s chief trading officer Gina Raimondo has said (Bloomberg, $) speaks to the UK and Japan over steel will start soon.

Europe’s largest chipmaker Infineon its profit has almost doubled in the three months to end-September, benefit from the noise for semiconductors amid a global shortage. In a coup for economic security planners in Tokyo, Sony meanwhile signed an agreement (Nikkei, $) with TSMC to jointly build and operate a $ 7 billion chip plant in Japan. Other Asian chipmakers – Samsung, Renesas, SK Hynix and Kioxia – has complied with US request for data – excluding customer information – to help identify supply chain vulnerabilities. Aime Williams, Francesca Regalado and Claire Jones

Trade Secrets Summit – 11 November 2021

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