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THINK TANK: UK election and trade, CBAM, China de-risking 

This week’s think tank reports cover the United Kingdom’s trade policy as it goes into elections; new issues with the European Union’s carbon border mechanism, and prioritising between China de-risking or greening the economy. 

 By Maia Wilson and Iana Dreyer.

Sandbag: CBAM needs to capture intermediate inputs 

The European Union’s carbon border measure “might hurt industrial manufacturers based in Europe more than those based in third countries,” write Adrien Assous, Meili Vanegas Hernandez, Aymeric Amand, Fausto Zaccaro and Emilie Cocco in a new report from think tank Sandbag 

“EU manufacturers of intermediary or final goods using more expensive raw materials might become less competitive than their peers located in third countries,” the authors write.  

Currently, most imported finished goods are not covered by the CBAM and can therefore be sold in the single market with no additional cost. 

If the transitional period rules stay in place, products made from recycled metals such as steel and aluminum will be exempt from CBAM charges.  

This opens the door to resource shuffling where non-EU manufacturers export their low-emission goods to Europe and their high- emission goods to other markets.  

Carbon costs will increase for importers and EU manufacturers as the CBAM is phased in and the free allocation under the EU emissions trading system is phased out.  

“In a scenario where non-EU manufacturers engage in “resource shuffling”, importers could even manage to profit from the system, by avoiding to pay carbon charges equivalent to their EU competitors while selling their products at the new high prices.” 

“According to our calculations, in this ‘resource shuffling’ scenario, EU importers of Chinese goods would make a net profit of €32 million,” the authors write.  

In cases of unchanged export flows to the EU where the correct CBAM charges are applied and in a no reporting scenario the report finds that both situations “result in a net loss of €245 million and €350 million respectively for EU importers of Chinese good”. 

CBAM was designed as a moving instrument with reviews and revision clauses.  

“Rather than spending time arguing about winners and losers, a more constructive approach would consist of collectively working at fixing the problem the CBAM and EU ETS were created for in the first place: tackling greenhouse gas emissions,” the report says. 

UKTPO: UK political parties need a trade strategy 

“The UK cannot afford to give trade policy short shrift”, writes the UKTPO lead team ahead of the country’s elections in early July, not least in an era of entangled geopolititcs.  

But international trade policy is missing from both Conservatives and Labour party programmes, deplore the UK Trade Policy Observatory’s Ingo Borchert, Michael Gasiorek, Emily Lydgate and Alan Winters 

Both should “publish a trade strategy, which should elucidate principles as well as concrete policy objectives and intentions” and “recognise the importance of both goods and services trade policy for the UK economy, nationally and across the regions.” 

The UK needs to strengthen democratic oversight of free trade agreements and have a board of trade that is independent.
 London also needs to “ensure and commit to transparency in UK trade data, good access to data for researchers and be transparent about the analyses undertaken by government.” 

UK in a Changing Europe: Trade needs to be an all-of-government issue 

A comparable line of argument was taken in a new report published the think tank UK in a Changing Europe, co-authored by the uniquitous trade experts and consultants Sam Lowe and Sally Jones.

The report takes stock of the UK’s trade performance post Brexit and its trade policy strategy.  

there is no doubt that recent UK trade performance has been poor, particularly in goods trade, compared both to historic trends and to other advanced economies”, the authors write. 

“In the future, the UK will need to articulate a clear trade strategy that includes its strengths in services but also acknowledges and is realistic about the more protectionist global environment it now finds itself in.” 

The underlying message is that the UK should seek to build on the existing EU-UK Trade and Cooperation Agreement to improve food trade through SPS agreements, align with the EU’s emissions trading scheme.  

More broadly, to help boost the UK’s strength in services, it needs to seek mobility agreements allowing the movement of professionals across borders. 

Opportunities for new FTAs beyond those that already exist with Japan, Australia, New Zealand and CPTPP membership are limited. Reaching an agreement with countries such as India is proving difficult. 

Last but not least trade needs to become an all-of government issue.  

Trade does not operate in a vacuum; trade policymaking should not do so either. Fiscal, foreign, education, science and innovation, mobility, and even environmental policy should all feed into trade policy and vice versa – but there are currently no formal mechanisms allowing a cross-fertilisation of policy to occur,” write Lowe and Jones. 

Policy-makers should also focus on implementing new FTAs, gaining better knowledge of trade and supply chains and the government better organized to raise concerns with trade barriers with foreign governments. 

ECFR: China de-risking vs green tech 

Green the economy or de-risk from China: the EU needs to decide which to prioritise, when and how. 

“Policymakers need to define politically where the risks are greatest and what constitutes a tolerable dependency, actively seek partners in the world to preserve competition, and communicate clearly about the necessary trade-offs,” write Alexander Lipke, Janka Oertel and Daniel O’Sullivan from the European Council on Foreign Relations.  

Instead of using incentives and trade tools randomly and insufficiently, member states should offer strong political leadership, enhanced EU-level coordination and clear prioritisation supported by credible arguments. 

“A key question for Europeans to ask immediately is whether they trust Chinese companies to form the backbone of Europe’s green transition. The answer will determine the options available to them.” 

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