Category: Europe

Brexit. The final act?

Image courtesy AFP

Next week the status of the United Kingdom’s withdrawal from the EU will become clearer. This final act in the Brexit negotiation process will determine if there will be a Brexit deal or not. 

The European Commission will meet on October 15, a deadline set by the United Kingdom’s Prime Minister Boris Johnson, to decide the matter. Still, the outcome remains uncertain. Johnson was clear on September 7, “If we can’t agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on”. 

For the moment, the UK remains a member of the single market and customs union until December 31. Deal or no deal, the UK will be out of the EU at the end of the year.

Whether there is a deal or not, Brexit will present opportunities for some businesses just as it will threaten others. The uncertainty among the business community is ongoing.  Businesses that have not moved operations to continental Europe in light of the Brexit referendum in 2016, but remain in the UK, are making noises about being compensated by Downing Street if there is a no deal Brexit.

Politics have always been at the center of Brexit. The process is now further complicated by the social and economic consequences of the Covid-19 pandemic. 

So, where do things stand one week out from the October 15 meeting that is set to decide the matter?

Complications, something smells fishy…

Access to fisheries has long been, and remains, a key sticking point. This was emphasised by President Macron of France at the start of the year. Since 2016, this issue alone has been an indicator that these negotiations were never going to be anything other than messy at best. 

The essence of the matter is that the EU wants a framework that will allow its fishing vessels, in particular French vessels, ongoing access to British waters. By contrast, Britain sees this as impinging on its sovereign territory. London wants to revise existing arrangements to its advantage. Britain, as it is entitled to do, wants to control the terms of access to its waters. 

Similarly, British sovereignty informs the most recent complication. The UK has decided to take a renewed hardline position on Northern Ireland and this is where the latest split has appeared with the EU.

In September the UK Government submitted the United Kingdom Internal Market Bill which flouts the Protocol on Ireland / Northern Ireland. The original agreement with the EU meant that there would be no hard border between Ireland and Northern Ireland. In effect, Northern Ireland would be part of the EU single market. This does not sit well with Johnson who sees the new Bill as something of a lever. He is angling for additional British gains in the final stages of the withdrawal process.

Westminster’s action contravenes Article 5 of the Withdrawal Agreement between the UK and EU which came into effect on February 1. It is a gambit that has further upset the EU. The EU response has been to issue a legal infringement against the UK. This further sours the chances for a smoother Brexit.

Implications

A no deal Brexit will have a cascade of implications that will only become apparent after the event. It is certain however that Brexit is going to cost businesses and industries time and money. Time, because moving product across the border will take longer as a result of delays through customs checks, clearances and processing. Money, because of tariffs in the short term and the likelihood that it will simply be harder to do business with the UK in the longer term. By this measure, the UK has more to lose than the EU.

As the business community knows all too well, time equals money. Delays are always costly and business likes to operate along paths of least resistance. Especially when there are alternative, more efficient, supply chain options available.

If Britain leaves the EU with no deal it will result in Britain having to trade with the EU under the rules of the World Trade Organisation. This means there will be no favoured status or preferential treatment. It will be made to trade with the EU like any other nation anywhere in the world. 

Some experts warn that Brexit will hamper Britain’s ability to form a cohesive foreign policy. Britain played a central role in building the post-1945 liberal world order. This was the foundation that globalisation and freer international trade has been built on. Since the GFC of 2008 however, this system has been under increasing pressure. A diminished Britain will not help revive it. 

France’s Secretary of State for European Affairs is warning that the EU is preparing for a no deal scenario. The French, historically staunch defenders of their industries, are being the most vociferous of the EU nations on this point. In Berlin, the message is more subdued but the sentiment is no different. Germany views a no deal scenario as irresponsible and remain open to finding common ground. Nevertheless, it is preparing for a no deal resolution.

A recent press release from Downing Street is pessimistic that any agreement will be reached. It appears that there is little political will to arrive at a workable Brexit solution.

So, what might this portend?

Heading for no deal and more competition?

This obfuscation, and recent brinksmanship on Britain’s side, is all about the politics. Britain is prepared to leave the EU with no deal; as Johnson has frequently said since he became Prime Minister. The European governments want to protect their own businesses and interests. Why make life easier for the British who are responsible for the mess? In the competitive arena of international politics states seek advantage over others. No quarter is given. This is what is happening with the Brexit negotiations.

Unless an agreement can be made on October 15, and assuming there is no last minute reprieve, Britain and the EU will have no agreement in place from December 31. There will be significant and costly repercussions. How businesses ready themselves for a no deal situation, and how sound their strategic planning to cope with such an outcome is, will largely determine the extent to which they impacted.

Pandemics, great power rivalries and political upheaval

An op-ed I wrote for Monash University Lens. As Covid-19 starts to inflict serious economic chaos political chaos will follow. In the past, such conditions have provided fertile ground for nationalism and extreme-right ideologies to flourish. World leaders must set aside their geopolitical competition to co-operate and avoid the pitfalls of the past.

Bad for business! Trump’s trade policies and the fracturing Transatlantic Alliance.

Image courtesy Jonathan Ernst/ Reuters

There is a lot riding on the current G7 Summit in Canada. It will show the obvious and further erosion of the Transatlantic Alliance resulting from the trade policies of the Trump administration. On June 1, Trump’s highly contentious steel and aluminium tariffs came into effect. The EU will soon be retaliating with measures of its own. This bodes ill for international relations and global trade. It is imperative that business considers the implications of this.

A quick look back.

Let us briefly consider the history. The Transatlantic Alliance was a construct of the Allies that dates back to the Bretton Woods conference of July 1944. It came from a common belief that the postwar world needed to prevent a recurrence of the sorts of conditions that gave rise to the crippling depression of the 1930s, destructive nationalism and a second world war.

A key pillar of the alliance was a trade and monetary regime (World Bank, IMF, GATT etc). This was largely defined by the United States and Britain. Since the end of World War Two, the United States and Europe, in general, have been on the same page in their commitment to freer trade and market liberalization. This is no longer the case.

Trump and Transatlantic turbulence today.

Today, President Trump appears to be bent on breaking what has been a fundamental pillar of American foreign, economic and strategic policy for 74 years.

To be fair, he is fulfilling the promises he made during the 2016 election campaign. As the president he is doing what he was elected to do. He is making America great again. However, it is important to consider the wider implications of his policy objectives.

Many of America’s closest allies in Europe are losing faith in the relationship and in Washington’s credibility as a reliable partner. Trump is testing some key constructs on which transatlantic relations, and indeed world order, have rested. Very real cracks are starting to appear.

Key leaders of the European Union have openly declared a frustration over the policy choices taken by President Trump. Angela Merkel of Germany openly stated that the United States could no longer be seen as a credible partner and that Europe had to be bold enough to pursue its own interests.

Emmanuel Macron of France has also been explicit in declaring that the time had come for the European Union to chart a course independent of the United States. Importantly, Macron warned in September 2017 of the dangers of protectionist policies and about the withdrawal of the United States from the transatlantic relationship.

These pointed observations by Europe’s most powerful leaders are increasingly gaining currency.

The result of American policy under Trump is a further erosion of Washington’s ability to influence world events. American credibility is rapidly waning. This will assuredly create opportunities for aspiring challengers to impose their own influence, for better or worse, on Europe and the wider international system. Trump’s statement today that Russia be reinstated as a G8 (G7+1) member will only have further destabilizing effects on the transatlantic relationship. Furthermore, it will embolden Russia and will exasperate many Republicans and Democrats on the US domestic front.

 The Iranian nuclear complication

The fracturing transatlantic relationship will further be tested by the politics of nuclear weapons. In this context the trade card is already being played. On May 8, the United States withdrew from the so called Iran nuclear deal ( formally known as the Joint Comprehensive Action Plan).

Subsequently, the White House and the US Ambassador to Germany pointed out that sanctions may be imposed on those nations and businesses who continue to trade with Iran. This riled the Europeans. It has added to the wider trade dispute with Europe as many businesses in European Union member states, in particular France and Germany, want to do business with Iran.

This development is something to monitor carefully as it may have further destabilizing consequences in transatlantic relations.

Where to next? US-EU division means bad news for business…

The current G7 Summit seems to be demonstrating how the United States and Europe are moving apart. The President of the European Council, Donald Tusk, said as much himself.

On the eve of the G7, White House leading trade advisor Larry Kudlow dismissed the trade dispute, especially in relation to Canada, as family bickering.

I disagree with Kudlow. This is going beyond a mere squabble. It is evident that the growing divide between the US and Europe is becoming serious. The apparent atrophy of the Transatlantic Alliance should not be taken for granted. There are many implications that go beyond trade. The most important being strategic and defense related.

The Transatlantic Alliance has been essential to the creation and maintenance of the international order under which so many nations have benefitted. Business has benefitted greatly from the liberal, rules based international order. That Trump, and some of his key advisors, shows scant regard for its history and the importance of what the alliance has facilitated is truly astonishing.

With the United States mid-term elections only months away trade will continue to be an important issue. I do not expect Trump to soften his position. He needs to energize his base to have a reasonable chance of maintaining a Republican majority in the House. He will continue to argue that by snubbing some of Washington’s closest allies he is putting America first and creating American jobs.

As the Transatlantic Alliance continues to diverge, the global business community will find itself operating in an uncertain and increasingly chaotic international political environment. History shows repeatedly that politics wins out over economics. If there is one thing business leaders do not like, it is uncertainty.

Trump’s confrontational attitude at G7 serves to further undermine transatlantic relations and, ultimately, American interests. In the medium to longer term Trump’s policies, and the tit-for-tat protectionist responses that are likely to follow, will become a major problem for business.

 

 

 

 

 

European Politics and the General Data Protection Regulation

Anybody with a subscription to a European based service provider or business will have recently seen emails along the lines of “Privacy checkup” or “Update to our terms and privacy policy”. This relates to a policy that sees the European Union implement new and rigid privacy regulations.

With the deadline for the European Union’s GDPR (General Data Protection Regulation) falling on May 25 there has been a flurry of activity as businesses race to ensure they are compliant. The GDPR is a good example of how international politics have tentacles that are long and largely unseen to business.

The EU describes the purpose of the GDPR as a tool to “… harmonize data privacy laws across Europe”.  Data flows between businesses move across sovereign boundaries. They travel globally going far beyond the EU. They are analogous to many everyday business operations such as the functioning of a global supply chain and international financial transactions.

The politics of the GDPR were settled when it was drawn up in 2016. There has been ample time to get ready. How many business leaders, particularly those outside the EU, took any notice of this at the time? Probably not many given the noise presently reverberating in the corporate capitals of the world.

Recent events in the United States have given adoption of the GDPR much more urgency. The Facebook/Cambridge Analytica scandal and the 2016 American election has shone a very bright spotlight on how personal data is used and abused.

Many businesses across the world, including the giants (Google, Facebook, Microsoft et.al) have acknowledged they will be adopting the EU’s GDPR measures.

This is not solely an issue for businesses in Europe. Globally, any businesses that have an exposure to, or presence in, the EU –  collecting personal information, processing data relating to goods and services to individuals – must be aware of the GDPR requirements and the penalties for non-conformance.

Data privacy is now a very hot political issue. It will continue to be on the political radar given the mid-term elections due in the United States in November. From an international relations perspective this all adds fuel to the already heated debate over interference by foreign actors in the democratic processes of sovereign states. Australia is not immune and the issue of data privacy will surely come up when the next federal election is called.

For the official GDPR document click here.

White House to revisit steel and aluminium tariff exemptions

Author: Daniel Steedman

May 1 will be an important day for the business community because the United States will decide whether or not to maintain its tariff exemptions on steel and aluminium. This will signal the next development in the so called emerging trade war.

Australian producers will be impacted. So will producers in other nations allied to Washington. They include Canada, Mexico and the European Union.

The exemptions were announced on March 22, however nobody can be sure what happens after May 1. It is up to President Trump to decide.

Some sources in Washington indicate that the exemptions will be extended. Each nation will be considered individually. Canada and Mexico have made some progress with the talks to renegotiate NAFTA so they are likely see an exemption granted.

What does this mean for Australia?

I believe Australia will also be granted an exemption. Let me qualify this by stating that, under the present administration, there will be a quid pro quo somewhere down the line.

Australia is looked upon favourably and is a highly regarded partner by many in Washington. Nevertheless, those who have a stake in Australian steel and aluminium will be watching nervously. The questions for industry leaders in preparing a strategy are twofold. For how long will the exemption be extended ? What comes after that?

Taking a broader view, all Australian industries that rely on significant export driven revenues should be closely watching how the steel and aluminium tariffs unfold. Either way, Trump is changing the field on which the game of international business and commerce is played. In doing so he introduces more volatility into the market.

Competition with China

But there is more to the story. Trump was clear, his tariff measures were aimed squarely at China. This was an oft repeated theme in his election campaign. It is how he has sought to implement them that needs to be understood.

The tariffs were implemented under Section 301 of the Trade Act. That means they were imposed unilaterally by the President. This is permitted in circumstances, among others, where the actions of foreign governments may restrict or hamper the commerce of the United States. Trump is free to act as he sees fit on this matter without the need for the support of Congress. It is this degree of independence Trump has that is a concern.

Another crucial point to understand is that these tariffs have an inherent national security element under Section 232 of the Trade Expansion Act. This too is a cause for concern. It suggests that the Trump administration is looking to use trade, or economic statecraft, to impose its will on other states in strategic terms.

Under the auspices of Section 301 Trump has found room to move independent of Congress and in a manner that may well have implications beyond international trade. This goes to elements of foreign and strategic policy which can, and do, change the nature of international relations. The present state of Sino-U.S. relations is a telling example.

Domestic politics at play

Trump has been adamant since his election campaign that China has ripped America off. This was an important pillar in his narrative to “Make America Great Again” and to bring jobs back for U.S. industries. It plays to those who voted for him.  Trump’s position on international trade is about domestic politics. Don’t forget, the mid-term elections are not far away. Trump’s future legislative agenda relies on the Republicans maintaining the House majority. The recent tariffs make him look tough and show that he is fulfilling his promises to those who voted for him in 2016.

Changing the game of international trade and commerce

President Trump is going firmly against more than 70 years of foreign and economic policy tradition. This has been upheld by Democrats and Republicans alike. A fundamental pillar of this is a commitment to freer markets and greater international trade. In seeking to strengthen his domestic base it could well be that Trump is undermining not only America’s standing in the international system, but the international system itself. Trump’s apparent zero sum approach to trade, and international relations more broadly, means more challenges lie ahead for the business community.

Germany: a grand coalition in a changed political landscape

Author: Daniel Steedman

Four months after the federal election took place Germany is on the cusp of forming a new grand coalition government. After a period of intense discussion the Christian Democrat Union (CDU), it’s Bavarian conservative relative the Christian Socialist Union (CSU) and the opposing Social Democrat Party (SPD) have agreed to a draft agreement to form a coalition government. In days the matter is expected to be formally decided.

A grand coalition is not new to German politics but on this occasion the circumstances are different. In this case, it has been made necessary by the election of the far right Alternative für Deutschland (AfD).  This marks an important change in the German political landscape. It is the first clear sign of the political discord the AfD brings to Berlin. It will not be the last.

What caused the grand coalition? 

German grand coalitions are nothing new. The have occurred in the past when the CDU and SPD joined to form government. The two parties are the largest and the most dominant in the German political system. They also oppose each other. The CDU being centre right and the SPD being centre left.

When either wins an insufficient number of seats to govern in their own right they seek a partnership to effectively make up the required number. For example, the SPD partnered with the Greens under Chancellor Gerhard Schröder in 1998 to form a government. The CDU partnered with the SPD in 2006 under Chancellor Angela Merkel in a grand coalition.

In the 2017 elections Merkel’s CDU won 33% and the SPD, under Martin Schultz, won 20.5% of the vote. The CDU lacked the numbers to win a majority of the vote and form government. It needs a partner, which it has not yet found, to make up the numbers. However the picture is more complicated than numbers alone. Immigration policy and a nationalist sentiment in parts of the electorate are influencing political allegiances. The CDU has been wary of being dragged too far to the right.

This is an important reason for the formation of another CDU/SPD grand coalition. In the case of the 2017 election the CDU has no desire to join with far right parties such as the AfD. Hence the likelihood of another grand coalition with the SPD. Even so, it should be noted that the Bavarian CSU, with a more conservative agenda, does pull on the CDU centre right position at times. Merkel, resisting this, is aware that a stable centrist government is in Germany’s interest.

The SPD party congress will vote on whether or not to accept the terms of the proposed grand coalition government on January 21. This will be a pivotal decision. Not only for Germany but also for the integrity of the European Union which, according to French President Macron,  needs a strong and united German government.

The critical issue for Germany is that this grand coalition has been made necessary by the election of a far right party. This has upset the traditionally stable dynamic of post-war German politics. The AfD is now an important actor on the political stage. It is evident that the policies of the far right are now influencing German politics just as they do in many other parts of Europe.

The AfD and a step to the right 

Clearly the arrival of the AfD in the Bundestag ushers in a new era of German politics. It won 12.5% percent and is now the third biggest party in the Bundestag on the back of a far right platform not seen in Germany for over 70 years. The 2017 election marks the first time that post-war Germany has seen a right wing party enter parliament.

Although the rise of the AfD has been relatively quick it is not unexpected. In the 2013 election they won only 4.7% of the vote, an insufficient number to enter parliament. But things changed markedly between 2013 and 2017 as refugees from flooded in to the European Union. In Germany this proved a decisive factor for the growing support of the AfD.

Support for the AfD is connected directly to the issues of immigration and anti-Islamic sentiment. This mirrors political developments in many other parts of Europe. Remember, these were important themes in Britain, France and the United States. They produced unexpected electoral results. Germany has proven to be no different and the AfD has capitalised accordingly.

Arguably the most important issue behind the ascendance of the AfD, and support for the far right more generally, was Merkel’s controversial 2015 decision to let some one million refugees into Germany. Merkel herself acknowledged this decision was largely her own. The decision was as divisive in her own party as it was across Germany. Many pundits predicted she was finished.

This set off a divisive debate in Germany. It added fuel to the fire of rising nationalist sentiment seeping into Europe. The AfD capitalised. Merkel’s decision provided the launching pad the AfD needed to garner much wider support.

Elements of the right are firmly in control of politics in Poland, Hungary and now Austria. The AfD is motivated to influence German politics in a similar manner. With the introduction of their first bill into Germany’s parliament squarely aimed at an immigration issue the AfD has shown politics is Germany has changed.

What can be concluded? 

German politics has long been held up as a bastion of stability. Today it appears to be following the pattern of many other nations in Europe that have witnessed the impact of right wing populism. Merkel, pending the outcome of the SPD vote on January 21, will soon have a grand coalition government in place. However the AfD will challenge long held societal and political norms in Germany. Chief among them a pro-immigration stance, religious freedom and ethnic diversity.

Germany’s political stability in the past months without a fully formed government is testament to the strength of its institutions. Many countries in similar circumstances would teeter on the edge of chaos. But Germany is relying on a stable grand coalition being formed. So too is the European Union.

Nevertheless, with the AfD firmly entrenched in the Bundestag the German political landscape in undergoing its biggest political shift since reunification and possibly since 1945. Where Germany goes from here, and what the AfD means remains for its politics, remains to be seen.

To find out how we can assist your business understand and navigate the highly complex issues arising from international political developments please get in touch by clicking below.