Xi’s Visit Tests Macron’s Plans for a Sovereign Europe

Welcome to Trade Secrets. Last week Olaf Scholz was in Beijing; This week Xi Jinping is in the EU and is putting EU unity and especially Franco-German relations to the test. Today I’ll make a few comments about that, and then in Thursday’s “Trade Secrets” column I’ll look in detail at Brussels’ apparent new tough regime on Chinese companies in Europe. The rest of today’s newsletter consists of a question and answer session from former Australian trade negotiator and Trade Secrets favorite Dmitry Grozoubinski about the new book, a rare exception to the rule that nothing interesting on trade never comes out of Geneva. Mapped waters is due to China’s currency.

Xi loves the EU, yes, yes, yes?

The dynamics surrounding Xi Jinping’s EU visit are not exactly difficult to discern. Olaf Scholz’s muted rhetoric during his trip to China last month makes it clear that Germany’s dependence on the Chinese market still prevents Berlin from viewing China as a full economic competitor, let alone a strategic rival.

Emmanuel Macron, whom Xi met yesterday, is more combative and is trying to prevent China from driving a wedge between France and Germany. The French President’s recent speech at the Sorbonne (translated here) set out a strategy aimed at operationalizing “strategic autonomy”, a concept that the EU invented in 2020 and has been trying to define ever since, with a much more interventionist trade and industrial policy, building European industries and active management of supply chains.

But even if Macron’s vision sounds coherent, he will struggle not only because of Germany’s continued dependence on the Chinese market, but also because of a lack of trust elsewhere in the EU. For one thing, Macron has a long history of vacillating on China. It’s not just his infamous comments on Taiwan after his trip to China last year, but also a sudden, last-minute move to support the doomed comprehensive investment deal with Beijing in 2020, ostensibly because France received some trade and investment benefits were brought to mind so that it would shift.

The immediate result of yesterday’s Macron-Xi meeting was that China withheld retaliatory tariffs on cognac, another concession specifically for France. (Meanwhile, Scholz’s trip to Beijing apparently gave him some advantages in German exports of beef, pork and apples: the Chinese approach to buying off trading partners’ dissatisfaction is really not subtle.)

This reinforces the old suspicion, whether justified or not, that France’s EU-wide solutions reflect its own interests. It is less a strategic vision of the EU auto industry that has privately led France to press ahead with the study of subsidies for the import of electric vehicles, but rather that French automakers are suffering more than their German counterparts from Chinese competition.

One of France’s previous attempts to create an EU-wide industrial policy through a sovereignty fund essentially failed, again partly due to the belief elsewhere in the EU that Paris was here again trying to bail out French companies. Macron used a comprehensive analysis to identify pressing problems and suggested some solutions. But France is unfortunately not the best country to promote it, at least as long as Macron does not manage to convince Scholz to also adopt his vision.

Lying trading lies and the lying poles that tell them

Dmitry Grozoubinski’s book “Why Politicians Lie About Trade” will be published in May. If you want a two word review, that’s great. It details official myths and distortions, from exaggerating trade agreements to claiming that distance no longer matters in trade to saying that corporations control the world by infiltrating the WTO. To give you a taste of the tone, the occasional visits by corporate lobbyists to a WTO meeting have resulted in “the confused and slightly horrified ‘What is this?’ “It brings to mind an English policeman arriving on the scene of an out-of-control food fight at the local clown college.”

AWAY They want the book to be “an accessible, worthwhile hard work.” (Obviously a cynical game for the mass market.) Who needs to know this most? Politicians themselves, journalists, companies, voters?

GD My publisher’s preferred answer would be “every man, woman and child on planet Earth,” but that’s probably a little ambitious. I wrote this book for people who care about political issues, be it climate change, job creation, national security, or anything else. Trade and governments’ decisions on it affect all of this.

AWAY Brexit and Trump’s trade wars may be expensive ways to learn about trade, but have they strangely led to a greater appreciation for the issues?

GD Absolutely. One of the reasons it has been so easy to lie about trading in the past is the separation of cause and effect. You sign a free trade agreement today, and ten years from now you can look back and (if you squint) make some guesses about what it actually achieved.

Because Brexit and Trump’s trade wars were about disrupting the existing order, and perhaps very abruptly, they forced all sorts of people to take these issues much more seriously and ask much harder questions about what’s under the hood. There’s nothing like staring at the mile-long border queues and empty supermarket shelves to get everyone from voters to the Prime Minister to ask a few follow-up questions.

AWAY You had a very interesting observation that economists were only brought in at the end of the trade talks to come up with numbers to justify the deal.

GD I have tried to illustrate as gently as possible that trade negotiations and trade policy are primarily about politics and power. In the battle between a policy that economic modeling says will have greater long-term GDP benefits and a policy that policy experts say has the strong support of a large and vocal interest group, I’m putting my money on the latter . Polish farmers are not being coddled with Ukrainian grain imports because a strange econometric analysis from the IMF says so.

AWAY I remember talking to Doug Irwin who once said that NAFTA proponents said it would create half a million jobs and NAFTA proponents said it would destroy half a million jobs. In fact, it was probably unemployed. How much of a problem is exaggeration on both sides?

GD Exaggeration is the biggest problem humanity has ever faced or will ever face. Seriously, yes, I think it is a problem that, especially before the text is published, both supporters and critics of a trade agreement can say literally anything about its effects in an ultimately irrefutable way. A trade deal could do just about anything.

But more practically, I think the challenge is that we are focusing on instruments like trade agreements when we should be having a discussion about the problems we are trying to solve. A trade agreement is not a goal in itself, just as “surgery” is not a goal.

AWAY I literally can’t think of a question to ask you about the WTO. Is that ok?

GD Probably not a great sign for the organization, but totally fine with me!

AWAY If you had to advise governments to make a positive but honest commitment to more trade that they are not currently doing, what would you say?

GD I would say tariffs are taxes on our own citizens for not being patriotic enough in their purchasing decisions, and that seems like a high hurdle to overcome before we resort to them as a political tool.

I would say that climate change requires us to harness the ingenuity, creativity and productivity of the entire world, and we cannot afford to abandon our climate ambitions to the point where all solar panels and electric vehicles are manufactured exclusively in our swing constituencies.

And I would say that people are smarter than the current level of discourse and can be trusted to understand trade-offs when they are explained clearly and honestly.

Mapped waters

China does not want a sharp, destabilizing devaluation of the renminbi, as George Magnus argues here, even if this would theoretically help its renewed export offensive. But downward pressure on the currency from falling interest rates and capital outflows suggests it may not have much choice at some point.

Trade connections

The OECD, WTO and IMF forecast a significant recovery in global goods trade this year, driven by strong U.S. economic growth and falling inflation.

My FT colleagues look at controversial plans by some rich democracies to seize Russia’s frozen assets.

A report from the Center for Strategic and International Studies think tank looks at new tools the US can use to combat Chinese coercion.

The Economist examines how China and the US are trying to win over countries as allies in their dispute with each other.

The EU Agriculture Commissioner has called on China not to target agriculture in trade disputes. This is one of the more quixotic demands from Brussels in recent years and essentially confirms where Europe’s economic vulnerability lies.

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Trade Secrets is published by Jonathan Moules

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