Few months have been as trade-intensive as the past September. The EU tries to play stick and carrot with China. The anti-subsidy probe on electric cars paired with Dombrovskis’s visit to Beijing to explore how much cooperation is still possible, while explaining that the EU’s “de-risk” policy is not meant to offend. Closer to home, quarrels over Ukraine grain imports intensify, and the deforestation regulation faces growing criticism from developing countries. 

Check out our activities in the Brussels bubble. Our senior policy colleague Javier Garrido moderated an high-level panel at SpiritsEurope’s review of EU trade policy. On top of that, we have just published a paper on business opportunities in EU-Latin America relations, in collaboration with another, our partner in the region. 

One Big Thing.

The EU electrifies its trade approach to China 

In a trade-defensive State of the European Union speech, one specific announcement grabbed the headlines: the European Commission’s anti-subsidy investigation on imports of Chinese electric vehicles. France had thrown its weight behind this action. It’s no mystery than Paris wants a more interventionist industrial policy, including through protectionist means. By contrast, Germany is worried because its big businesses are highly exposed to Chinese markets, with much to lose from a potential trade war. Indeed, Beijing immediately slammed the move. Its potential retaliation could target sectors that EU countries subsidise and that rely on exports to China, like machinery, aviation and obviously Europe’s own EVs.   

The Commission quickly walked the talk and launched the probe today. The Commission will have to prove whether exporters have received subsidies from Beijing and that these subsidies have been harmful to European industry. If this is the case, the Commission can levy countervailing duties on Chinese EVs. While Member States can block the Commission, this is unlikely given France’s support. Such procedures typically take 13 months. 

The take: As the world increasingly turns to protectionism and state subsidies (take the Inflation Reduction Act), you may want to revise the playbook of EU trade defence. If so, you know where to find us. 

The next: Duties would be applied on an individual basis. Western manufacturers in China are within the Commission’s focus if they receive subsidies, Trade Commissioner Valdis Dombrovskis pointed out. Volvo and Tesla have been forewarned: the former is Chinese-owned, the latter has an agreement with Chinese carmakers to limit competition.  

The plus: The US is probably cheering at the Commission’s announcement, considering its frequent pressure on Brussels to a take more confrontational trade policy over China. Yet, the US should be wary of potential “buy European” policies in EU countries. The usual suspect, France, has just unveiled new incentives for EV purchases, but only if EU-manufactured.   

Second in line.  

How to ease trade tensions in four days 

Trade chief Valdis Dombrovskis had four days to “EU-splain” the Commission’s de-risking strategy to China, meaning the reduction of dependencies on critical supply chains, such as in the green and digital transitions. He chose a carrot-and-stick approach, warning that the EU and China may drift apart if economic and political tensions continue. The €396 billion trade deficit was listed as a cherry on top of issues such as the revamped anti-espionage law, China’s approach to the war in Ukraine and the hostile business environment for European companies. 

Despite China’s big (and worsening) reputation amongst EU business, Dombrovskis reiterated that it is not the EU’s intention to detach completely from China. During his visit, Beijing and Brussels agreed to launch a mechanism to debate export controls, meant to ease the trade tensions. While this and other promises were made (such as China buying more agricultural products from the EU), outstanding issues continue to sour the Sino-EU mood. Most notably, restrictions on gallium and germanium exports by China and the EU’s recently announced anti-subsidy probe into Chinese EVs will be on our radar. 

Foreign Subsidies League: levelling the football playing field  

Companies are running for cover as the EU’s new rules on foreign subsidies are entering into force. From October 12th, businesses have to face heavy reporting requirements, if they have received a subsidy from a third country and want to engage in M&A or public tenders. If you have been following us, you know that the Foreign Subsidies Regulation (FSR) was designed to prevent China from influencing strategic sectors in the EU, like infrastructure or technology. Yet, it is football that is driving the debate on how to start using the regulation. Back in August, La Liga (the Spanish championship) filed a complaint against Paris Saint Germain, which is owned by the Qatari sovereign fund. Manchester City and Newcastle, under UAE and Saudi Arabian funds, have also received complaints. 

Yet,  the FSR lacks a formal complaint mechanism. These complaints might get the Commission’s attention, but DG COMP does not have the manpower to address everything, as admitted multiple times. The Commission will probably have to focus on notifications provided by businesses, rather than launching investigations on its own. 

While not about strategic security, football leagues are an important European brand and a market like any other. In further proof that trade policy is everywhere, it is even on the radar of football aficionados. Especially when once-small teams suddenly start purchasing expensive players.

Ukraine grain spat goes international 

Back in April, Poland, Hungary, Slovakia and Bulgaria imposed bans on Ukrainian grain after claims of market flooding. The Commission objected to the unilateral bans, opting to introduce emergency safeguard measures at the EU level to appease the Poland-led group. However, after the EU decided not to extend the embargo beyond mid-September, Poland, Hungary and Slovakia once again announced unilateral bans on imports of Ukrainian goods, which prompted Kiev to complain to the World Trade Organisation

Now, the Commission finds itself between a rock and a hard place, having to represent the rebels in the international trade dispute while politically in opposition to them. With an election looming, Poland is an especially tough case. The grain issue is non-partisan, as almost all parties agree on the need to stop the inflow of Ukrainian grain into the market, but it is also the incumbent government’s chance for political posturing against the EU

A resolution could be on the horizon, however: Poland, Lithuania and Ukraine have agreed to move sanitary checks of Ukrainian exports from the Ukraine-Poland border to the Lithuanian port of Klaipeda. This should expedite the subsequent transit through Poland. Time will tell what this means for the WTO complaint! 

Dear EU, please soften the new rules on deforestation 

A group of 17 countries sent a letter to EU leaders asking them to mitigate the new deforestation regulation. Big players are among the signatories, like Brazil, Indonesia and Nigeria. Essentially, the legislation obliges companies to prove that the goods they sell to the EU are not produced in areas affected by deforestation. Although the legislation has been adopted, much is still at stake until its entry into force in December 2024. Before then, the Commission will clarify how it will implement it and, above all, it will publish a map ranking countries by their deforestation risks. This what is driving many countries’ concern and motivating their push to soften the application. Dialogue platforms set up by the EU, like the one with Indonesia and Malaysia, are hardly enough to placate criticism. 

This is a further reminder that the Commission is walking a tightrope in promoting environmental policies without harming its trade relations. The stakes are even higher considering that Free Trade Agreement talks are ongoing with some of these countries, like Brazil and Indonesia, and there are already irritancies over the different positions on Russia’s invasion on Ukraine. 

Negotiations on the Due Diligence Directive. Where do we stand?  

The Due Diligence Directive is sparking a heated legislative process. Understandably so, as it will significantly affect companies by holding them accountable for adverse impact of their entire value chains on people and the environment. The European Parliament and the Member States have been negotiating key articles in September, but they are diverging on several issues. These include sanctions, civil liability (the right for individuals to sue companies), the inclusion of the financial sector, stakeholder engagement, and the measures that companies must implement to prevent adverse impact. From the Council side, Germany is particularly concerned given the number of its international enterprises, warning against excessive administrative burden

A partial compromise text seems to be close, but the white smoke has not come yet. The informal deadline for reaching a provisional agreement is next February, considering that MEPs will be campaigning for the 2024 election right after. If no deal is found by then, which is likely, the finish line seems far – Hungary and Poland, next Council presidencies, will not prioritise the file. The next negotiating round in November will tell us more.  

On our radar.

4-6 Oct I Málaga hosts the EU Industry Days to discuss industrial challenges and strategic autonomy with stakeholders from across Europe. 

12 Oct I As CBAM takes off, the EU is thinking how to make it inclusive for developing countries. This hybrid meeting from FEPS focuses on the impact of this policy on EU trade with the Global South

17 Oct I Future of UK-EU Relations to be debated at the British Chamber of Commerce: gain insights from Rudy Aernoudt and Stefaan De Rynck, who were part of the Commission’s team in the post-Brexit negotiations

20 Oct I Mark your calendars for the US-EU Summit in Washington. President Biden is hosting Presidents Michel and von der Leyen for discussions on topics familiar to our readers: steel and aluminium and IRA are on the agenda.   

23 OctIJoin the luncheon-debate with Arancha González Laya, point of reference in EU trade policy, at the Spanish Chamber of Commerce. 

24 Oct I Back to school trade conversation with Trade Commissioner Dombrovskis at Friends of Europe.  

What we’re reading.

There’s a lot of back and forth, but EU-Latin America trade negotiations are gaining momentum. What a better time to learn about what this means for your business? In our new publication, together with our regional partner another, we track the business opportunities that can be unlocked by the EU trade talks with Mercosur, Mexico and Chile

How we learned to stop worrying and love the IRA. A group of French and German economists said, in a recent paper, that concerns of relocation of EU businesses towards the US are overestimated. Even more, the carbon pricing EU’s approach can be less expensive to reduce emissions compared to subsidies. Yet, they argue, Brussels should learn from the IRA and reduce bureaucratic burden on climate projects. 

But let’s conclude with some positive news. The EU sees a trade surplus, albeit small, after 18 months. The main causes are the gradual normalisation of energy prices and the slowdown in China’s exports. 

Still have questions? Drop a message.   

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