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13 May 2021

ONS figures cause confusion

We were studying the latest ONS release yesterday when we noticed something strange. More than £90bn worth of UK trade in goods seems to have vanished from the numbers.

In December 2020, the ONS reported £46.6bn of total exports, and £52.2bn of total imports, for £98.8bn of monthly trade. It also reported that total trade for Q4 2020 reached £291.5bn: £138.6bn of exports and £152.9bn of imports.

The following month, those figures changed. ONS reported total trade in goods fell by £14.2bn in January – including a £5.3bn decline in exports, and an £8.9bn fall in imports – to £54.5bn. ONS January figures show that total exports stood at £22.2bn in January, while total imports were £32.3bn.

Compared to figures from the December release, total trade in goods fell by 44.8% in January: exports by 52.4%, and imports by 38.1%. But the ONS’ January release reported drops of only 19.3% and 21.6%, respectively.

The picture becomes even more confusing when yesterday’s release is taken into account. It reported that total trade in goods reached £177bn in Q1 2021 – £73.2bn of exports, and £103.8bn of imports. Compared to figures from the December release, this amounts to a 47.2% qoq drop in exports, and a 32.1% qoq drop in imports. But the March release reports export and import contractions of only 8.7% and 12.3%, respectively. ONS figures from March show that total trade in Q4 2020 was £198.5bn, but its December release reported total Q4 2020 trade was £291.5bn. Where did the extra £93bn go?

The ONS reports that it will take months to analyse the impacts of exiting the EU, and that the combined effects of Covid-19 national and international lockdown restrictions, EU exit uncertainty and border disruptions have all been contributing factors to the erratic nature of recent UK and global trade. But this does not explain the erratic nature of the data, or the £93bn discrepancy.

We are sure there is a good explanation for it, and we are keen to hear it. What this tells us is that everyone is capable of making mistakes, and that we are still a long way from a clear understanding of what is happening with post-Brexit trade.

On a related note, we have corrected a recent column on UK trade figures to state that while February’s UK trade figures reflected a recovery, trade did not fully recover. It is worth mentioning that the ONS January release showed total exports to the EU stood at £13.7bn in December, against £12.7bn of EU exports reported in March. Still not a full recovery then, but close.  

UPDATE: John Springford, deputy director at the Centre for European Reform, writes: “The issue is that the December series you link to includes services trade, which is reported quarterly. The monthly trade figures are goods only. Services trade makes up around half of UK trade, so that explains the £90 bn difference.” We thank him for clearing up our confusion.

12 May 2021

From her Majesty’s mouth

The state opening of parliament marks the beginning of the parliamentary year - a ceremonial occasion during which the government lays out its agenda in the Queen's Speech. In the past we heard her say things like: get Brexit done. This year she talked about levelling up. We have no idea what that means. But in one area the speech was relative, concrete and important. The government proposes two laws to speed up regulatory divergence from the EU. The first will be a new law on public procurement. The Queen's Speech gave no details. We expect the equivalent of a Buy British policy. The second law will be a new state aid policy, as it is known in the EU, or a subsidy control bill as it will be called in the UK. Again, there were no details. Traditionally, the UK has subsidised its industry less than Germany and France. We don’t expect this to change after Brexit. But the UK might still use its regulatory freedom in a way that could upset competition with the EU, for example in some high-tech sectors. We therefore expect both of those laws to give rise to disputes with the EU. But the prime purpose is not to alienate the EU, but to make Brexit technically harder to reverse in the future, by creating incompatible procedures. Over the remainder of the parliamentary term, we would expect more Brexit-related legislation.

During the trade talks last year, the EU hoped, and failed, to secure a meaningful degree of regulatory alignment with the UK. The UK ended up compromising on fish.

We also noted the UK government’s vague but important focus on the extension of 5G and gigabyte broadband, and the general pledge to focus on the commercial exploitation of scientific discoveries. We see a similar debate going on in Germany right now, where all political parties have realised the long period of high-tech underinvestment has to come to an end. So while there is regulatory divergence between the UK and the continent, politics is converging.

11 May 2021

Apple vs cookies

EU lawmakers working to draft the text of new e-privacy regulations may want to take a page from Apple’s book.

With a tip of the hat to Paul Tang, we note a story by BFMTV detailing how updates to Apple’s iPhone operating system, iOS, require that all applications collect the user’s consent to track their activity outside Apple’s own platform. The iOS system itself now asks users for consent to be tracked using one simple pop-up window created by Apple, and the answer is a simple yes or no. They can also automatically block the tracking of all applications by changing their user settings and unchecking the allow app tracking requests box.

Users must opt in to advertising services in order for them to be used. Since the updated iOS 14.5 system launched on 26 April, only 11-12% of users have chosen to do so. In the US, this figure drops to 4%.

This has prompted an angry response from Facebook/Instagram, and some European sites like Vinted, who have in some cases preceded Apple’s notification with a message threatening to charge users if too many of them refuse to be tracked, according to BFMTV. This proves the old adage that if the service is free, you are the product.

We think Apple is setting a good example – one that the EU might want to follow.

As we reported in February, the EU has been working to replace an outdated e-privacy directive from 2002 with new rules, which will be a separate but complementary addition to 2018’s general data protection regulation, GDPR.

One important component of the new rules is to guarantee privacy of communications over online networks, including metadata and machine-to-machine data in the internet of things services market. As we noted at the time, one controversial element of the new regulations is a provision that would give users the option to whitelist one or several providers in their browser settings, and to withdraw consent to track them using cookies immediately. Users would be given a genuine choice about whether to accept cookies, and sites with required cookies would not be permitted to refuse access, but would have to provide an alternative website with equivalent content and no mandatory cookies.

Telecom operators are opposed to the idea because of the commercial implications it would have for them, but as Apple has now demonstrated, there is enormous demand for such features among users themselves.

The new e-privacy regulations are also likely to keep the legitimate interest concept in place. This is one of six conditions under which organisations can process personal data under GDPR, and it is the most flexible of the six. It can apply to almost anything, including an organisation’s commercial interest. Objecting to legitimate interest tracking is one of the most bothersome aspects of cookie management, since this type of tracking is often hidden or obscured on websites’ cookie and privacy settings sections.

The e-privacy regulation is still being debated in European Parliament. We hope MEPs take note of Apple’s experience.

10 May 2021

MEPs mobilise to kill CAI

The EU-China comprehensive agreement on investment (CAI) appears to be on its last legs, after news broke last week that MEPs have found a way to freeze ratification without actually rejecting the deal itself.

The South China Morning Post reported that MEPs will introduce a motion this month that will ban debate on the deal until Beijing removes sanctions it imposed on a group of academics, think tanks, NGOs and politicians in March. China watchers say this is highly unlikely.

If the motion passes, it would effectively kill the deal. As we noted last week, the CAI does not include investment protection provisions, meaning it does not need to be ratified by national governments to come into effect. The European Parliament is the sole gatekeeper standing in the way of ratification.

The biggest challenge facing the plan to freeze CAI is European Parliament itself. We also argued last week that national governments in France, Germany and Hungary are likely to support the deal. In European Parliament, both the Greens and Socialists and Democrats have said they will not ratify it until sanctions are lifted, but others parties’ positions are less clear: Renew, which is the third-largest party with 97 seats, has strongly condemned the sanctions without committing to blocking the deal until they are lifted. The European People’s Party, with its 178 seats, continues to support the agreement. ECR’s position is less clear – Poland holds 27 of its 62 seats, and it is likely to favour ties with the US and Nato over the CAI, meaning it might support the motion. But as it stands now, the Greens and S&D only hold 170 seats. They will need much more support to block this deal. 

This might not be impossible. In Germany the Greens' star is rising, with recent polls showing Annalena Baerbock standing a very good chance of becoming the next chancellor. Baerbock’s party has taken a much more hardline stance towards China, and she has said her party's position on China aligns closely with the US, meaning it would not support the CAI. In France, where Emmanuel Macron is ramping up his own election campaign, strong public support for the CAI is extremely risky, particularly since one of the sanctioned politicians, Raphael Glucksmann, is both French and a loud opponent of the deal. Marine Le Pen might join him in voicing opposition, and Macron himself has kept quiet about CAI since signing off on it late last year. 

Italy, Greece and Portugal have all witnessed significant FDI inflows from China over the previous decade, but rising concerns over protection of critical infrastructure could prompt a change of heart. Concerns about Chinese debt trap diplomacy are equally salient for these countries, particularly given Montenegro’s recent experience with a €1bn highway to nowhere. It remains to be seen whether the Greens and S&D will muster the support they need to stop the deal, but the tides are certainly shifting.

7 May 2021

Merkel vs Biden: the patent debate

Outrage yesterday as Angela Merkel broke with the US and opposed Joe Biden’s plan to back a waiver on vaccine patents. Biden’s announcement was billed as an important step towards boosting vaccination production in developing countries such as India and South Africa. Since the beginning of the pandemic, these countries have called for a waiver of the World Trade Organisation’s Trips agreement on intellectual property rights for vaccine patents, arguing it would contribute to scaling up vaccine production at a global scale.

The World Health Organisation welcomed Biden’s announcement as a step towards greater global equity, but Merkel threw cold water on those plans yesterday when her spokesperson told media that Biden’s plan has significant implications for vaccine production as a whole, and that the limiting factors in vaccine production are production capacities and high-quality standards, not patents. Translation: waiving intellectual property rights on vaccines will stifle innovation without fixing the problem.

The incident demonstrates that US-German relations remain at an extremely low point – as bad now as they were under Donald Trump – with Merkel and Biden increasingly at odds over everything from Russia and the Nord Stream 2 pipeline, to economic dependency on China.

But what about her argument against the patent waiver?

She’s right and wrong. Economic arguments for intellectual property protection have hinged on the fact that innovation is expensive. Should other firms be permitted to copy a new treatment, its price would fall lower than the marginal cost of production, leaving the original developer to foot the bill.

This argument is nonsense, as the Economist highlighted in a recent article, because there is no evidence that strengthening intellectual property protection boosts subsequent innovation. In the US, patents offer big profits to pharmaceutical firms, even though private investment accounts for only a third of spending on American biomedical research. Other incentives such as financial prizes could yield breakthrough drugs at a lower cost. And the Covid-19 pandemic is an extreme event that is currently killing more than 13,000 people a day.

It is legally possible for Biden to force pharmaceutical companies to share information with each other under the Defence Production Act, which gives his administration the authority to address national defence needs, including systems important to national public health. Under this act new Covid variants pose a threat to public health, making global vaccination an issue of national security. As Amy Kapczynski at the Yale Law School writes, such a waiver would be quite limited, only temporarily ensuring that international law does not stand in the way of efforts to manufacture, export, and import Covid vaccines and therapeutics.

But neither health nor defence are EU competences, so it falls to member states and their leaders to decide what to do about Trips.

The real problem, as European leaders including Macron and Merkel, as well as German start-up BioNTech have highlighted, is that patents are not the limiting factor for vaccine production. Manufacturing mRNA vaccines is an extremely complex process that took years to develop, and countries like India and South Africa simply do not have the same manufacturing capacities as developed nations. Waiving intellectual property rights is a good idea in theory, but it would not kick-start a flood of new production because most of the world’s vaccine manufacturing capacity is already in use. The limited availability of raw materials and expertise is also a serious constraint to boosting vaccine production in the global south. The biggest obstacle to expanding capacity is not patents, but resources and know-how that are not shielded by patents.

Ursula von der Leyen was right to point out that Europe is the only democratic region in the world currently exporting vaccines on a large scale, and indeed, pharmaceutical companies in the EU have exported far more vaccines than the US or UK. The US does not have the moral high ground here, and furthermore, it did not inform its allies that it was planning to make the waiver announcement, which it could have done at this week’s G7 summit in London.

But this pandemic will not be over in the near-term. If raw materials and know-how are bigger challenges, Europe and the US should be working to remove those obstacles as well. And while Germany might be keen to protect companies like BioNTech and CureVac, patent protection should not supersede its responsibility to protect human life. South Africa and India will eventually have the materials and expertise they need to boost domestic manufacturing – patents should not be a hurdle when that day comes.  

6 May 2021

Baerbock, the anti-Merkel

It is in foreign policy where the Greens are at their most radical. They are accusing Angela Merkel of siding with human-rights abusers worldwide to foster short-term commercial interests. Whether the Greens will have an opportunity to implement their policies will depend on the post-election coalition. We see two scenarios in which this is possible. The first is a Green-led coalition with the CDU; the second is a Green-led coalition with SPD and FDP. These are, from today’s perspective, possible outcomes, but both are premised on the assumption that the Greens will be able to keep their formidable momentum. So far they have. At this point in the 2017 campaign, Martin Schulz, the SPD’s candidate, had already lost a good deal of the momentum he had at the beginning of the year, with the SPD trailing the CDU by some 5pp, but still at a respectable 25-30% range. They ended up with 20.5%. Big swings are not only possible, but based on past experience very likely.

No matter whether the Greens will succeed or fail, or end up somewhere between the two extremes, they will shape the political agenda. The constitutional court last week mandated a shift in emissions reduction targets. We expect this to happen even if the Greens are not in government. The CDU has also borrowed the Green’s and SPD’s idea of a separate €500bn investment fund. That, too, will happen. A Green-led government would reinforce this trend to a significant degree. In the unlikely event of yet another grand coalition between CDU/CSU and SPD, one should only expect the minimum.

Foreign policy, by contrast, is more binary. A good example of the Green’s exasperation both of EU and German foreign policy is this article by Reinhard Bütikofer, a former party leader, and now an MEP. He said Merkel was completely disinterested in Chinese human rights violations. Germans preach the value of human rights, but

"… the Chancellor’s Office stated that the often invoked common values are of no operational significance for German foreign policy."

In Germany, foreign policy is not a matter for the foreign ministry, which has a much reduced role since the days of Hans-Dietrich Genscher. The main actor is the chancellor. One reason is the upgraded significance of the European Council. If Armin Laschet becomes chancellor, we would expect German foreign policy to go from bad to worse. He is a big fan of the Nord Stream 2 pipeline project, and, like Gerhard Schröder before him, sees the role of politics to enable commerce. A Green foreign minister at his side would make almost no difference.

If Annalena Baerbock becomes chancellor, the situation would change dramatically. Foreign policy is the area of her expertise. She holds similar views to those of Bütikofer. It is the one policy area where the chancellors pull all of the operational strings. It is the operational stuff that matters more than abstract policy strategies.

In the case of a coalition with the CDU/CSU there are two plausible scenario. The Greens comes first, Baerbock becomes chancellor, and Friedrich Merz becomes finance minister. The investment fund would happen, but German fiscal policy would tighten otherwise. Or if the CDU/CSU come ahead, Laschet becomes chancellor, Baerbock becomes foreign minister, and Robert Habeck beomes finance minister. In that scenario, Habeck would be the main green power player in the coalition. Fiscal reform would be high on the agenda. Foreign policy less so. There is a lot at stake.

5 May 2021

Russian military might in the Arctic

The Arctic is fast-becoming an economically relevant region, and Russian militarisation is gathering pace there, too. The Arctic is made more accessible by climate change and offers new opportunities for trade routes. Russia is now projecting military power with increased deployment, exercises and patrols into the Central Arctic, Bering Sea, and North Atlantic.

During the past decade Russia has refurbished Soviet-era airfields and radar installations, constructed new ports and search-and-rescue centres, and built up its fleet of nuclear- and conventionally-powered icebreakers, a Pentagon spokesman told CNN. Its most recent deployment of MiG-31BM interceptors—supersonic, long-range aircrafts capable of destroying air and ground targets, to the Rogachevo Airbase on the Novaya Zemlya archipelago, is of major concern, as this map from the Centre for Strategic and International Studies, CSIS, shows:

Amid increased military activity in the region, CSIS has started an Arctic tracker that lists all active military activities by Russia and Nato allies and partners. Nato allies like Sweden and Finland have stepped up their own regional military capabilities too, with a significant uptick in exercises, deployments, patrols and capability investments.

There is rarely a week without a new Russian deployment, exercise, missile test, air operation, or naval patrol. The uptick in military exercise,  as well as the testing of the hypersonic missile capabilities in the White Sea, with its wide range capacity, suggests that this power projection is not strictly defensive. 

We already discussed the Arctic as a strategic route for trade, spanning all the way from Norway to Alaska. Using this route would halve the time it currently takes from container ships to reach Europe from Asia via the Suez Canal. This, together with the militarisation along its routes, is why it is a region of upcoming strategic importance. Watch the space.

4 May 2021

What if a country votes no on recovery fund?

There is no contingency plan if a country rejects the recovery fund. The German constitutional court could have blocked ratification, but decided not to. Germany is not going to be the problem, at least not this time. But Finland might be. Just last week the parliamentary committee on constitutional affairs decided that a two third majority will be required in parliament to approve the recovery fund. This means the government will need the votes from opposition parties. What if they do not get the votes? 

The Finnish prime minister wanted to find out what a rejection means, and asked the European council's legal service. There was a resounding response from the council: if a member state fails to ratify, the structure would collapse and the member state would suffer dire consequences, unprecedented reputational damage and political pressure from other member states.

This threat revealed by YLE is now making the waves through Finnish media and may provoke what it was intended to prevent: a No vote. 

What we know is that the European Commission and member states have no plan B if the recovery plan is rejected in a member state. In principle it means that they have to start all over again. New proposals, new ratification procedure. Rejecting the stimulus package would also overthrow the EU's seven-year budget agreement. 

The Finnish government could try and come up with some political statement or bring to parliament another proposal. But these are grey zones and on shaky legal grounds. The fact of the matter is that if one country rejects the recovery fund, the whole fund won't be able to go ahead.

The public debate will have to assess what it means for Finland to reject the recovery fund. External threats usually do not go down well in national debates. They may provoke a demonstration of power by those elected by the Finnish people, only compounding the problem for the EU as a whole.

30 April 2021

Vaccine crisis over, but no joy

Germany is now entering the phase of the third wave where vaccination rates are accelerating, infection rates are falling, but where the lockdown persists. The fall in reported infection rates during the Easter holidays proved to be a statistical mirage. But now they have come down for real - from a peak of 165 infection per 100,000, to about 155. On Wednesday, the number of people who got vaccinated reached a new daily record of 1.1m.

But Germans are discovering, as the Brits did before, that there is still a long slog ahead.

This morning, the Robert-Koch Institute reported a fall in the national average infection rate to 153.4, with 306 fatalities. On our own calculations, there are 158 regional districts where infection rates are still above the critical level of 165 - the one that triggers the automatic closure of schools under the new federal pandemic law, which came into this force last weekend. We observe some similarities with the economic downturn. The biggest danger is not the crisis itself, but the aftermath, when companies declare bankruptcy, or in this case, when people realise that their freedoms going forward are likely to be more curtailed than they imagined.

The government is now considering legislation to pacify the growing unrest, by allowing those who have received their second vaccination to go out on a night-time stroll, and to meet indoors with other people who have been vaccinated twice. This is going to be a nightmare to police. Based on the current evidence, the vast majority of infections occur indoors. The closer we get to the elections, the greater the temptation for the government to relax the measures.

29 April 2021

Waiting for Godot - vaccine passport edition

The Germans were shocked to discover that the government and the federal states made no progress on the vaccine passport - the ticket to freedom as it is portrayed in the media. The European Commission yesterday warned against giving privileged rights to those who are vaccinated, or those who recovered from the illness. We agree. We think the vaccination passport debate in Germany in particular is where the pandemic response has gone wrong. People still regard vaccination as a medical contract between yourself and the state, something that buys you privileges. They don't see it as a step towards herd immunity. Where the UK succeeded is not only in its vaccine procurement and the fast roll-out of vaccines. The far bigger success is the UK government's decision, and the support it received, to link the lifting of the lockdown to the total numbers of vaccinations. In Germany, people are jumping queues to get vaccinated. They demand privileges. They even go to the Constitutional Court to defend what they consider to be their fundamental rights. In Germany, the notion of public health is almost non-existent in the wider public debate.

We agree with Didier Reynders, the EU's justice commissioner, who told the European Parliament that the EU should not open up the borders to those who are vaccinated. What about virus mutants that are resistant to the vaccine? As FAZ reports, Reynders also rejected calls from a majority of MEPs who demanded an immediate end to the restrictions of travel in the Schengen area, and that the EU should set up free testing at the borders. FAZ noted in its coverage that there are big differences in opinion between Commission, Council and Parliament on vaccine passports. To get a vaccination certificate ready in time for the summer holiday, the EU would need to find a compromise by the end of the May. In the meantime, some member states are pressing ahead with national certificates. What can possibly go wrong?