EU sanctions on Russia: Who would they hurt most?

EU sanctions on Russia: Who holds the key?

EU foreign ministers are meeting today to decide what pressure to put on Russia. However, although trade and economic sanctions have been discussed in the US, the EU is less than enthusiastic. Under the EU treaties trade sanctions are decided unanimously, so all EU states will have a say - and for those wishing to take a harder line, the EU does not hold all the cards.

On paper the EU has a strong hand with Russia. Russia is the third largest trading partner of the EU and the EU is the largest trading partner of Russia and runs a large deficit.


Germany accounts for a large proportion
of the EU's trade with Russia (Eurostat 2013)

Of this EU/Russia trade, Germany is the most important accounting for 30% of the EU's exports to Russia. In addition, there are some states such as Finland who for historical and geographical reasons conduct a large proportion of their trade with Russia, making them vulnerable to an East/West showdown. Through their banking systems, Cyprus and the UK also have important financial and investment links with Russia and Russian individuals.

However, there is another important factor that counts against the EU. For although the EU is a large trading partner, 80% of the EU's imports from Russia are energy. This dependancy is particulay acute for gas - as you can see from the chart below, the Baltic States, the Finns, Czechs, Slovaks and Bulgarians are, according to Eurostat, 100% dependant on Russian gas. A mild winter and a relatively large European stockpile of gas means this risk is perhaps less critical than it might have been in previous years, but it could still cause them severe problems if this dispute were to escalate.

Eurostat (Oct 2012)

So will we see trade sanctions? Well probably not for the practical reasons above, but other sanctions are possible, arms embaragoes are not decided en masse so could be implemented swiftly by the UK, France and Germany. Targeted economic sanctions on individuals are also possible.

So on sanctions, an EU-US good cop/bad cop routine has an element of European self-interest to it.

The Balance of Competence Review: some interesting stuff but this is becoming a painful process for Downing Street

With little fanfare, the Government has today published the second round of Balance of EU Competences reports – now making it 14 reports published in total. We won't accuse the Government of seeking to bury the latest batch of reports in the week of the worst UK floods for decades or a major announcement on an independent Scotland’s inability to use Sterling. Rather, it probably wanted to get them out before parliamentary recess.

However, the reports are a mixed bag with the most controversial one - free movement of workers - still missing. While the individual reports contain tales of dissatisfaction with the status quo and EU over interference within policy areas, the reports remain largely descriptive. None of the reports draws any deep conclusions on the broader balance of power between Westminster and Brussels, which they clearly didn't set out to do.

Some of the other reports are far better than others. The Trade and Investment report is genuinely interesting, for example. While some disagree with the report’s conclusion that membership of the customs union and the single market represents the best option on offer for UK trade, the report does at least engage with the alternatives and key debates, such as whether the EU is trade diverting or creating and the fact that the European Parliament can be a liability in trade talks.

We agree that on trade grounds the UK is at the moment better off inside (a reformed) EU.

The Transport report expresses concern about EU action that “fails to take account of the distinct circumstances of Member States with peripheral geographic locations, such as the UK.” The Environment and Climate Change report also contained some interesting factoids. The House Builders Federation for example noted that “in some areas 85% of Community Infrastructure Levy is required for mitigation of the Habitats Directive 92/43/EEC, leaving little funding for schools and roads, commenting that this is disproportionate and unsustainable.” And that EU rules can add 18 months to the life cycle of a planning application.

These reports present a useful catalogue of the extent to which the EU now permeates almost all aspects of the UK economy and society, and the logical conclusions of the transport and environment papers is that we need to do more to maximise the EU's trade opportunities but also have some seriously effective mechanisms to fight over-regulation, such as "red" and "green" cards for national parliaments.

Still, the desire for these reports not to reach any ‘controversial’ conclusions, whilst understandable on one level, has created another problem for David Cameron. European partners, media and his MPs may eventually ask ‘Why commission a review that seemingly contradicts your own policy?’ And why seek change when the "evidence" shows that everything is all well apart from some problems at the margins. We still think the basic idea behind the BoC is sound but there's a problem with what this exercise has turned into. It's not so much an attempt to assess the balance of powers but a descriptive public consultation. In its attempt to avoid drawing conclusions, it is doing precisely that, even when the wider criteria against which to measure EU involvement - which should be the point of this exercise - is absent.

Consider the Culture, Tourism and Sport report. In places, it reads like a European Commission advert for EU intervention. For example,

“…Over the last 20 years a Media Programme has supported some highly acclaimed British films including This is England (Shane Meadows, 2006), The King’s Speech (Tom Hooper, 2010) and The Iron Lady (Phyllida Lloyd, 2011). In 2010, UK companies received €8.7m to support the production, distribution and screening of films in the UK, and over €6.7m was invested to boost the European cinema releases of over 40 British films.”

That a report drafted by the Department for Culture, Media and Sport with evidence submitted by various organisations drawn from the culture sector should conclude that the EU’s culture competence is “an important source of funding for the sector, as a driver for new creative partnerships, and as a vehicle for promoting the UK’s ‘soft power’” is hardly a surprise.

Some spending on warm and fluffy initiatives such as films may seem like no big deal. But this is one of the fundamental problems with this entire exercise. Because there is no one weighing these micro aspects of EU membership against a wider set of principles it tells us little about the wider UK national interest. I.e. this funding is simply money the UK has already handed over to Brussels and that surely, if these projects should be publicly funded at all, this should be a decision made by people far more accountable to UK taxpayers than EU officials?

The Balance of Competence Review process was meant to provoke debate about the impact of the EU on the UK writ large. Unless he starts a process of putting these individual reports into the wider context of his vision for the EU, this could become a painful process for David Cameron.

Is the CBI right to claim the net benefit of the EU to the UK is 4-5% of GDP?

Is the CBI right to claim
the EU benefits UK GDP by 4-5%?

As we discussed in our previous post, the CBI's report on Europe, published today, makes for interesting and thought-provoking reading. However, the CBI’s estimate of the net benefits of EU membership isn’t the strongest part of the report.

The CBI puts the net benefit at between £62bn and £78bn, or between 4% and 5% of UK GDP. This, it claims, is equivalent to £3,000 per household or £1,225 per individual. Credit to the CBI for trying to inject some hard numbers into the debate. However, putting a single figure on the costs and benefits of such a complex arrangement is notoriously difficult – as we ourselves know too well. The CBI does readily admit that in its report, and to be fair, very clearly qualifies its figure.

 

Still, there are at least three problems with this figure, which in combination means it should be taken with a huge pinch of salt.

 

Arbitrary extrapolation based on a highly limited literature review: Ultimately, the figure is taken from a literature review of previous estimates of the benefits. On average, the literature surveyed puts the net benefit of EU membership at between 2%  and 3% of GDP. The review covers only five pieces of literature with the most recent one being from 2008. This is a very small pool of literature to draw from. More critically, the CBI goes onto assert,

“Since these studies are not mutually exclusive…it is not unreasonable to infer that the net benefit arising from EU membership is somewhat higher than 2–3%, perhaps in the region of 4–5% as a conservative estimate.”

It’s widely accepted that EU membership comes with unquantifiable benefits, but the CBI takes a massive leap of faith here. It seems to suggest that the net benefits of different aspects can be tallied up given that they are not mutually exclusive – and it may well be that dynamic effects triggered by, say, EU market access mean net benefits are often underestimated. However, curiously, the CBI provides no proper explanation or evidence for why it settled on 4% to 5%, leaving us guessing where this extra net benefit actually comes from. Having discussed this with the CBI, it’s clear that they have aggregated the net benefits of various aspects of the EU from different studies.

 

While there is logic in this approach, given the diverse nature of the studies it is tricky to simply add parts of the up, assuming that they work the same together as they do in isolation. After all, there is a reason why these studies have struggled to produce a clear figure for all the areas themselves. Once this approach was chosen more detail should have been included in the CBI report, even if it meant adding a statistical or economic annex (given the hugely sensitive nature of the EU cost-benefit debate).

 

No proper counterfactual is given: What are these net benefits measured against? Does the CBI assume that the UK outside the EU would be left with no trade deal and no single market access? If not, then the net benefit is presumably lower than the 4% to 5% identified. This is the classical shortcoming of most EU cost-benefit studies. In the CBI study, the problem is exacerbated by the fact that the various pieces of literature that it draws from will themselves have diverse counterfactuals.

It’s all the more surprising given that the CBI rightly goes to great lengths to discuss the counterfactuals when it comes to the costs of EU membership, arguing for example that some EU regulations would remain even if the UK left the EU given that they would be domestically needed or pursued by international groups  (which we agree with).

 

Why the same rigour is not applied to its calculation of the net benefits of the EU is not clear. UKIP-types have mastered the art of measuring EU costs with no reference to a counterfactual (see here for a fine example). To a large extent, the CBI study falls into the same trap.

 

Benefits aren’t evenly distributed: Lastly, in an understandable attempt to present an easily digestible figure, the CBI converts its percentage number into pounds and presents it as an evenly distributed benefit over households and individuals. Of course, this is unlikely to be the real benefit felt by households or individuals, with any benefit distributed unevenly and in ways which are nearly impossible to measure.

China launches official investigation into EU wine subsidies

Trade-war back on.

Well, in fairness, we’re not sure it ever went away. It did seem like relations were improving, however, with EU Trade Commissioner Karel de Gucht saying (following a meeting with his Chinese counterpart):

“I believe that both sides have now engaged in a sincere way to work towards an amicable solution. That is the good news…Let be me very clear again here today in Beijing: Europe wishes for an amicable solution.”

The rest of the speech continued in much the same way, striking a very conciliatory tone. For his part, Chinese Minister for Commerce Gao Hucheng said that the talks had been “positive”.

This all helped raise hopes that a deal could be reached ahead of the August deadline meaning the EU tariffs on solar panels could be (largely) avoided and Chinese retaliatory tariffs on wine would never be more than an empty threat.

Unfortunately, that no longer looks to be the case. The Chinese government has now officially accepted the complaint from its wine industry regarding illegal dumping and subsidies from the EU to its wine producers, saying:

"China's investigation department will strictly abide by China's relevant laws and regulations and meet the demands of relevant World Trade Organization rules…In the investigation process, the Ministry of Commerce will follow the principles of openness, fairness and transparency, fully respect all parties' legal rights, and make a fair ruling based on objective fact and the relevant laws and regulations."

We’re not sure that will provide much comfort to France and other countries which fear the imposition of tariffs.

Needless to say then, it seems whatever talks have been going on behind the scenes have not been fruitful. This spat looks set to escalate, not least because the WTO is likely to turn into a battleground with two of the largest economies trading blows and trying to garner support. With the August deadline just over a month away hopes for an “amicable solution” look to be fading.

Why France can hold up EU-US free trade talks

David Cameron wants to use the gathering of G8 leaders in Northern Ireland next week to launch formal negotiations on the planned EU-US free trade agreement. But progress depends on breaking the deadlock in talks today over France's insistence that any agreement must include protections for its film and TV industries against American imports. These talks are to give the European Commission a mandate to start negotiations.

The French, though, have a pretty strong bargaining position. The EU Treaties (Art 207) set out the procedures for opening and concluding free trade agreements under the so-called Common Commercial Policy.

The Commission makes recommendations to national governments, which authorise it to open negotiations. The Commission then conducts the negotiations in consultation with a special committee appointed by ministers.

In principle, trade agreements are negotiated and concluded by qualified majority voting. However, there are a number of exceptions where unanimity (and therefore national veto) still applies, including “in the field of trade in cultural and audiovisual services, where these agreements risk prejudicing the Union's cultural and linguistic diversity.”

In a bid to break the deadlock, the European Commission and the Irish EU Presidency have proposed asking EU member states to give unanimous approval to any parts of the draft agreement affecting the audio-visual industry once the negotiations on that specific sector are concluded. However, Le Figaro quotes a source from the office of French Trade Minister Nicole Bricq as saying, “We already have a veto on the conclusion of the agreement, so [the offer] doesn’t change anything for us.”
 
In a world where trade agreements are increasingly all-encompassing affairs, ranging across the entire economy, this gives France in particular a great deal of leverage.

The China-EU trade war begins, China adopts divide and conquer approach

As expected, China did not take the new tariffs on its exports of solar panels to the EU lying down, nor did it see it simply as an ‘opportunity to negotiate’ as the Commission suggested.

China has announced that it is investigating illegal EU subsidies to the EU wine industry. The rational is, as the Chinese Commerce Ministry put it, because, "Wine imports from the EU enter our market via dumping, subsidies and other unfair trade practices, and have hit our wine production."

Our headline is of course exaggerated for effect but the main point stands. This dispute has escalated significantly with the retaliation now raising the prospect of a tit-for-tat trade dispute.

It’s also been well documented that the EU is divided on this issue, with quite a few countries (led by Germany) openly expressing their opposition to the Commission’s tariffs. Other more traditionally protectionist countries have been decidedly less vocal. With this in mind, it’s interesting that China has launched an investigation which focuses on a sector heavily located in France and the Mediterranean rather than one in Germany. This could be a mere coincidence, but then it could not.

AFP reports that French President Francois Hollande has called for an EU-27 meeting to be convened to discuss the issue and create a united EU position on it (possibly to counter such a divide and conquer approach).

There are a few other interesting points to note with this investigation:

• The Chinese do have a case given the influence of the CAP, which still provides significant subsidies to farms including vineyards.
• It’s hard to say exactly how large the subsidies are. Under the reformed CAP programme in 2008, National Support Programmes for wine growers totalled €2.8bn.
• As with much Chinese data it’s hard to pin down the exact size of the market. The Commission notes that in 2011 China and Hong Kong together accounted for €1.47bn in wine exports from the EU. This has certainly increased since then as China represents one of the largest growth markets for wine. Reuters suggests that Chinese imports of wine amount to €1bn from France alone.
• Whatever the size, this market is smaller than the solar panel one. EU imports of solar panels from China amount to around €21bn.

EU offers China “window of opportunity” to settle solar-panel row but proceeds with watered down tariffs

Soon to be more expensive?

The EU-China trade row over cheap Chinese solar panels flooding the European market has been raging on for several weeks now and is threatening to escalate into a full blown trade dispute. 

On one side, the EU has firmly maintained that it will impose anti-dumping tariffs. On the other, China has postured that any such move will lead to economic retaliation.

Meanwhile, somewhere in between, a number of EU member-states (led by Germany) have come out supporting China, fearful the row could hamper national trade-interests with the Asian monolith.

Against this increasingly tense background, EU Trade Commissioner Karel De Gucht today presented the Commission’s provisional findings in the anti-dumping case on solar panel imports from China, key points from his press conference below.

• There will be temporary tariffs imposed, which will play out in two phases: 11.8% from 6 June, and 47.6% from 6 August.
• De Gucht maintained that this was a “reasonable” decision that had nothing to do with protectionism. He said that Chinese “overproduction” of solar panels had allowed it to flood the European market with a cut-price product, which, he estimated, should cost 88% more.
• So in the short term, the Commission sees the tariffs on China, in De Gucht’s words as an "emergency measure to give life-saving oxygen" to a threatened EU solar industry. In the long term, the Commission says it is upholding to the principles of fair trade.

Open Europe’s take on the decision:

Although De Gucht is probably correct to say he is simply applying the rules as written, we ultimately believe applying the tariffs at such a high level is the wrong decision for a number of reasons:

• Firstly, solar (and renewable energy generally) is subsidised everywhere to some extent. If it didn’t need to be it would be the obvious energy resource for the whole world. This makes it very difficult to judge what the ‘fair’ level of subsidy is or how the market would look without them.
• In this vein, the whole EU market arose due to significant subsidies and would be unlikely to continue without them in some form (see our previous post for more detail). This makes the claim of protecting jobs and the EU solar industry a bit of a misnomer.
• Consumers will lose out as prices could well rise from this. At the very least they will be presented with less choice.
• Many producers and services built around the wider solar industry could struggle as they have become reliant on the cheap Chinese imports.
• These nuances could show that some competition laws (and not just in the EU) need to be reassessed to account for complex and global markets.
• The potential for retaliation remains concerning. This could cause harm to the EU's significant trading relationship with China at a time when Europe can least afford it.
• As De Gucht himself seemed to note, no decision is made in isolation and the political implications of such a decision should be taken on board. There is also an inherent tension here given that, although the power to judge Competition Policy has be passed onto the EU, Foreign Policy and international relations remain very much in national hands (as they should). Policies which cross this boundary must take account of national preferences in this area.

Where do we go from here?

All that said, the Commission has thankfully left itself with an ‘out’ and rowed back significantly on its original hard line position. Using the staggered tariff rate and the two month period for negotiation eases the impact of the decision. Although, relations will likely be tense in the immediate aftermath.

The Commission insistence that the ‘onus’ is now on China will probably not go down well. Whether China will play ball and reach an ‘amicable’ agreement as the EU wishes remains to be seen. It will certainly make for an interesting summer of negotiations.

Would an 'independent' UK get a better US trade deal than the EU?

Could the UK sucessfully negotiate a trade deal with the US?

Yesterday MEPs voted on a resolution to back defensive measures to exclude cultural and some agricultural products, such as genetically modified foods from a proposed free trade deal with the US (TTIP).

Understandably US farmers have already taken exception to what they see as EU protectionism. This raises concerns that the potential gain from an EU/US trade deal may be watered down, delayed or even blocked all together by vested interests on both sides of the Atlantic.

As a member of the EU the UK's foreign trade is governed by the EU's common commercial policy and so has to be done via an EU deal. After the EU the US is the UK's most important trading partner. Some involved in the UK-EU debate - particularly Outers - suggest that if the UK left the EU it could negotiate a deal with the US on better terms than it could potentially gain via the EU. But is that the case? Here are some of the factors that could be important.

UK exports to the US in £bn (ONS 2011) are big...

A mismatch in negotiating power. Although the UK exports a lot to the US, as a % of it's total exports, the US sends only 4% to the UK. So although a trade deal should be mutually beneficial, reaching a solution would be disproportionately in the UK's interests. Therefore, there would be an imbalance of negotiating power. For this the EU's weight could help on issues where the UK's interests are aligned with it.

Would the US want to go through the hassle? Given this asymmetry, and the relative small market the UK is for the US, one question is if the US would go through all the political hurdles -  approval in Congress, taking on the unions etc. Indeed, talk to people in Washington and there's some scepticism about this. (However, the US has signed agreements with 23 states, some very small, so perhaps it is more a matter of the terms you would get?)

But US exports to UK (US BEA 2011) are small...

Fewer protectionist hold ups. At the same time, the US and the UK are more compatible economies than are the US and EU. The UK negotiating on its own account would not be hindered by protectionist issues emanating largely from France and MEPs, that could hold up US agreement or require concessions, such as the protection of agriculture, genetically modified foods or geographical indicators. However the UK is still unlikely to wish to see the US allowed to subsidise its agricultural exports, so tough negotiations would still be required.

Access for financial services could be a tough negotiation. The UK negotiating with the US on financial services would come up against a powerful US lobby attempting to protect its banks from what is New York's main rival - London. However, the UK negotiating on its own would arguably have a better chance to strike a deal on 'reciprocity' with US funds, a more generous arrangement than that which currently exists under regulations such as the AIFM Directive or UCITS. Additionally the UK would not bear the burden of having risky eurozone banks getting in on the deal. In recent negotiations with Singapore the US gained a better deal than the EU on financial services, partly because while Singapore was happy with UK banks it was wary of giving access to all eurozone banks (a big untold story in all of this).

If the idea is that an 'independent' UK can automatically join some gigantic Transatlantic free trade zone, in place of its current EU membership, there will be plenty of hurdles and a good deal is by no means guaranteed. Added to that there's also the small matter of negotiating an equivalent free trade deal with the EU....