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The EU’s Brexit negotiator has urged the UK to engage with Brussels over Northern Ireland, warning that tearing up their trade deal could damage peace and stability in the region.
Maros Šefčovič, European commission vice-president, was responding to UK threats that it would draw up legislation next week to disapply parts of the Northern Ireland protocol, which governs post-Brexit trade on the island of Ireland.
In an interview with the FT, Šefčovič described the protocol as “a measure for peace”. “I don’t see how this [UK move] is promoting peace, stability and predictability for Northern Ireland and for the island of Ireland,” he said.
The UK government has received legal advice that it would be justified in overriding parts of the protocol in order to support the 1998 Good Friday Agreement that brought peace to the region.
Northern Ireland’s Democratic Unionist party on Friday blocked the election of a new speaker at the region’s national assembly, effectively blocking the formation of an executive, until the protocol was scrapped.
Unionists say the deal undermines the region’s ties to UK because it puts a trade border for goods in the Irish Sea.
Šefčovič declined to say how Brussels would respond to any unilateral UK move on the protocol but said it “unacceptable for us” to change an international agreement that was less than two years old.
“I would say there is a united position of all EU member states and the [European] parliament,” he said.
An EU ambassador told the FT that Brussels would respond calmly “but firmly” to any unilateral action by London. “Constantly attacking the protocol is not just utterly unhelpful, but it’s also quite irresponsible and it’s playing with fire given the risk of polarisation inside Northern Ireland,” the ambassador said.
Diplomats said the EU was likely to wait for any UK legislation on the protocol to pass through parliament before responding. But measures it could take include scrapping the post-Brexit Trade and Cooperation Agreement, which would introduce tariffs on UK exports to the single market.
However, diplomats pointed out that in the meantime Brussels could reactivate legal action against London for failing to implement full border checks in Northern Ireland. It paused the process in July 2021 to bolster the negotiating process.
Šefčovič said Northern Ireland had a “unique opportunity” to grow its economy as a member of both the UK and EU markets, and added that the region’s business community supported the current arrangements. However, he cautioned that uncertainty over the protocol was holding back investment.
“There are a lot of new investment opportunities which are on the shelf . . . because these big investors from the US, Canada, Europe . . . are waiting to see how this would pan out,” he said.
Šefčovič said that if the UK decided to override the protocol, Brussels would have to impose customs and animal health checks on goods, but did not say how or where these checks would take place.
“We, of course, are responsible for the integrity of the whole single market. And I think it’s quite clear that it would be unacceptable to have an unguarded backdoor to the single market,” he said.
Dublin fears unilateral action by the UK could cause disruption to its own trade with the EU. Simon Coveney, the Irish foreign minister, warned in a BBC interview on Friday that Ireland’s economy could become “collateral damage”.
Šefčovič acknowledged that the protocol has affected intra-UK trade and has proposed fewer controls on freight from Great Britain that is destined for Northern Ireland. “If we work together, we know how to reduce the checks by 80 per cent and we are proposing express lanes. The same for customs procedures, cutting them at least by half.”
However, Liz Truss, UK foreign secretary, maintains there should be no controls at all on British freight destined for Northern Ireland.
Šefčovič said he could only discuss such changes if the UK implemented the measures it had already agreed, such as allowing EU officials to access real time, complete customs data.
“This is really a tiny little effort the UK has to do to make sure that this system works,” he said. “There is a basic prerequisite [for concessions] that we have also to feel that the UK is ready to meet us halfway . . . that we would get access to the IT system, that they accept the fact that there has to be some minimal checks.”
He added: “I want this to end well for EU-UK relations because I think we just really need to close this chapter and build a new one.”
Sri Lanka’s central bank has confirmed the country has missed a deadline for foreign debt repayments, the first sovereign default in the Asia-Pacific region this century, according to Moody’s.
A 30-day grace period for missed interest payments on two international sovereign bonds expired on Wednesday, forcing Sri Lanka into what some analysts called a “hard” default as Colombo confronts an economic and political crisis. The last Moody’s-rated sovereign borrower to default in Asia was Pakistan in 1999.
President Gotabaya Rajapaksa’s government said last month that Sri Lanka would stop repaying its international debt to conserve foreign currency reserves for imports such as fuel, medicine and food.
Sri Lanka, which has never defaulted before, owes about $51bn in overseas debt to international bondholders as well as bilateral creditors including China, Japan and India.
At a briefing on Thursday, Nandalal Weerasinghe, the central bank governor, confirmed that Sri Lanka’s creditors could now consider the country technically in default.
“We announced to the creditors, we said we are not in question to pay that. If you even don’t pay after 30 days . . . then probably from their side they can consider it as a default,” he said. “Our positions are clear. We say until they come to restructure we will not be able to pay.”
But the central bank disputed that it was a hard default, calling the move “pre-emptive”.
S&P last month downgraded Sri Lanka’s foreign currency ratings to “selective default” on the missed interest payments.
Analysts said that rising global interest rates, high energy prices and a surge in inflation was piling pressure on import-dependent developing economies such as Sri Lanka.
The island borrowed heavily to fund infrastructure-led growth after the end of its civil war in 2009, but policies including a 2019 tax cut and the loss of tourism during the pandemic left it unable to refinance in international debt markets.
The crisis has triggered widespread pain for Sri Lanka’s population, with a scarcity of fuel leading to long queues for petrol and multi-hour power cuts. The currency has also plunged, exacerbating political unrest.
The cabinet, including Gotabaya’s brother Mahinda, the prime minister, resigned last week as attacks by pro-government supporters against a growing protest movement triggered a wave of violence across the island.
Ranil Wickremesinghe, the newly appointed prime minister, said this week that the Treasury was struggling to find $1mn to pay for imports.
Sri Lanka has begun negotiations with the IMF over a loan programme and is appointing advisers for debt restructuring talks with its creditors. But it lacks a fully functioning government, including a finance minister, and analysts expect any deal to take months.
The missed payments, for interest on two $1.25bn international sovereign bonds maturing in 2023 and 2028, could trigger cross-default clauses that would bring much of Sri Lanka’s debt due before it has begun formal restructuring talks.
A Sri Lankan government bond maturing in July this year is trading at about 45 cents to the dollar, with longer-dated bonds at even lower values.
JPMorgan on Wednesday assigned an overweight rating to Sri Lanka bonds, indicating that it expected bond prices to rise in the coming months.
“Twists and turns are likely to materialise in the months ahead,” JPMorgan wrote. “However . . . we think risk-reward is favourable to start building long positions.”
Additional reporting by Hudson Lockett
US companies are accelerating capital spending despite slower economic growth, as the impact of supply chain disruptions and “deglobalisation” override worries about a looming recession.
A wave of recent disruptions, from coronavirus lockdowns to Russia’s invasion of Ukraine and tensions between the US and China, have led many high-profile investors and executives to predict a reversal of the decades-long trend toward sprawling global supply chains and “just in time” inventory management.
Recent quarterly reports from the largest US companies provide some of the first concrete signs that companies are following through on their plans, putting pressure on their profitability just as the economic recovery begins to lose steam.
With the majority of companies in the S&P 500 index having reported first-quarter results, capital expenditure across its members rose 20 per cent year on year in the first quarter, according to Bank of America data. The proportion of companies providing guidance for higher future spending than analysts had expected also rose. The trend was broad-based, with every sector except real estate increasing spending.
“Onshoring or rejigging supply chain risks — that’s a costly phenomenon,” said Savita Subramanian, head of US equity and quantitative strategy at Bank of America. “Capex is usually something companies can move around or relax a bit in a constrained environment, but in this case they may have to spend more than they otherwise might.”
The US economy unexpectedly contracted in the first quarter, and investors and commentators such as former Goldman Sachs chief Lloyd Blankfein have become increasingly convinced that the Federal Reserve’s efforts to fight inflation will push the economy into recession.
The rising business investment is becoming a burden for some consumer-facing companies, but is also proving a boon for many of their suppliers and infrastructure providers.
Shares in Walmart sank 11 per cent on Tuesday after a disappointing quarterly update that included a 60 per cent rise in capital expenditure to increase automation and strengthen its supply chain through projects such as massive high-tech distribution centres.
Intel’s pledge to build a $20bn chip manufacturing site in Ohio, meanwhile, sparked celebrations from steelmakers, chemical specialists and plumbing suppliers such as FTSE 100 company Ferguson.
Lourenco Goncalves, chief executive of Cleveland-Cliffs, a major steel supplier to the automobile industry, said “deglobalisation is the most important game changer of this decade in the United States”, and he was “encouraged” by Intel’s plans because a better domestic supply of semiconductors would allow carmakers to boost production.
Kevin Murphy, CEO of Ferguson, in March described plans to increase US semiconductor production including Intel’s Ohio project as some of the most “exciting” examples of a broader trend toward onshoring manufacturing production.
Brookfield Infrastructure Partners, one of the world’s largest investors in infrastructure from electricity lines to data centres, estimated that “re-onshoring activity and deglobalisation” would provide “hundreds of billions of dollars” of new investment opportunities.
The writer is dean of the Paris School of International Affairs, Sciences Po
The emerging narrative from the war in Ukraine is that the surge in geopolitical risk will compound existing dissatisfaction with the global trade system and lead to fragmentation. Security will trump efficiency. Integration with like-minded partners will replace multilateralism. This narrative is neither right, nor desirable. There is no doubt that the ongoing conflict is reinforcing anti-trade prejudice. But is this a global trend? The short answer is no.
There is an appetite for trade integration in many parts of the world, especially developing countries. Proof is the expansion of World Trade Organization membership, the rising number of trade agreements and the profusion of large-scale regional initiatives such as the African Continental Free Trade Area and the Regional Comprehensive Economic Partnership. Even in advanced economies, surveys consistently show positive attitudes to integration, indicating that the opposition to trade may be more concentrated in fewer sectors or regions than commonly recognised.
That is not to deny that for many employees, economic conditions have worsened. But one wonders whether this is due to increased trade. If workers in Canada (or other rich countries) are doing better, even though they are vastly more exposed to trade than their US counterparts, it does not make sense to blame trade for the woes of American employees. The US has significant political levers available to improve life for American workers, and it is irresponsible not to use them.
Even if the mood has turned against trade, the laws of economics have not. Trade integration guided by the logic of comparative advantage is painful and efficient; trade disintegration will be painful and inefficient. Using trade and industrial policy to achieve reshoring, or to shift demand towards domestic production in the attempt to favour workers in advanced economies, will only lower productivity growth for all.
Companies will respond to the war in Ukraine by reassessing security risks and restructuring supply chains. But given the investments already made, the cost of alternatives, and factors such as wage differentials across countries, this process is likely to be gradual rather than sudden. Re-shoring or friend-shoring — confining global supply chains to allies — will require protracted government intervention, raising questions about its long-term sustainability.
The targeting principle suggests trade policy is not the proper instrument to deal with inefficiencies that are not caused by trade. Markets need non-market institutions. Trade agreements should expand their scope, as they have done in recent years, to allow for provisions on competition, environment, labour, gender and other issues. This would open markets and promote improvements in domestic policies to address inefficiencies.
More fundamentally, we should ask if fragmenting the trade system would ultimately help achieve non-trade goals such as environmental protection or national security. Fragmentation would make it harder for economies to undertake the huge investment needed to combat climate change. Competing systems would be likely to prioritise short-term gains over long-term environmental achievements. A fragmented trade system also lowers growth opportunities for developing countries, which will struggle to offset diminished demand from advanced economies. Restricting opportunities will only make the world more dangerous and unstable.
This is not the moment to divest from the WTO — quite the opposite. The WTO system was never about liberalisation for its own sake. It was about creating predictable rules and a framework for managing disputes and spillovers. It is clear that international progress will be difficult over the next few years. Advances in digital trade may initially be made regionally. This is not a problem, as long as countries keep investing in the multilateral system. Even in this scenario, the WTO system can provide rules of conduct and crucial enforcement mechanisms. The message for the upcoming WTO ministerial meeting is that global co-operation remains vital to protect against everything from climate change to recurring pandemics.
A return to 2015 is neither possible nor desirable. Some of the more hopeful assumptions of the 1990s and 2000s — that interdependence would not be weaponised, that economic convergence would foster political comity — were wrong. But we’re still better off in a world of international co-operation on corporate taxation, illicit capital flows, carbon pricing, and most importantly effective domestic policies to foster competitive markets with strong social safety nets. All these are preferable to a chaotic retreat from globalisation.
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