International perspective: May

The inevitable zero-covid chaos has now reached Beijing and offices are shut, public transport has been suspended, working from home is in place and there is no sign of an exit strategy in sight.

The economic and social consequences of these severe policies have been devastating and economists now doubt whether China will even get close to a 3.8% GDP growth target for 2022, let alone the original 5.5% target demanded at the Two Sessions Meeting earlier in the year.

Recent assessments by Chinese economists estimate that the damage to China’s economy of the current zero-covid strategy is in excess of $2trillion – and growing.

Where does this leave British, European, US, Japanese, Korean and other international businesses operating on the mainland in terms of their China strategy?

The good news first. Most companies are remarkably resilient and have been making the necessary commercial decisions and adjustments over the past two years. China remains their long-term market priority. However, in the short to medium term, the ongoing uncertainty following the unprecedented lockdown of the country’s commercial and business hub for nearly two months, has begun to take its toll.

The stress and strain on businesses (both international and domestic) of a meltdown in logistics, dearth of raw materials and personnel, accompanied by skyrocketing costs, has seen both profitability and business confidence slump.

For the past three decades China’s extraordinary growth ‘miracle’ has been based upon economic and social stability delivered in full by the CCP (Chinese Communist Party). But over the past 18 months, and particularly since the technology and education crackdown from June 2021 onwards, there has been a startling shift away from this stability.

Instead, the zero-covid strategy and left-leaning economic policies of the leadership, heavily reliant on traditional Marxist-Leninist thought, has utterly overturned the status quo. Add in too China’s ambiguous response to the invasion of Ukraine and its ongoing support of Russia and there is also the potential risk of western sanctions on Chinese business.

It is therefore unsurprising to hear that many investment experts and analysts have begun to declare that China is ‘uninvestable’ in the current febrile climate.

There have been recent encouraging developments with Premier Li Keqiang emphasising the importance of private enterprise and emphasising the ‘platform economy’ (shorthand for e-commerce and domestic giants such as Alibaba and Tencent) but the fear is that irreversible damage to private enterprise has already been done.  

All the while China’s neighbours are reopening their borders. And this week even North Korea has publicly acknowledged the presence of Covid. Yet China has not been this isolated from the world since those pariah years following the 1989 Tiananmen Square massacre on 4 June.

As to be expected, the big focus for EU leaders remains the Russian war in Ukraine. At the beginning of May, European Commission President von der Leyen presented a sixth package of EU sanctions in response to Russian’s aggression against Ukraine. Key amongst the proposals is a complete EU-wide ban on Russian oil, seaborne and pipeline, crude and refined. In addition, the proposals include banning Sberbank – by far Russia's largest bank – from SWIFT, as well as banning accounting and consulting services from being provided to Russian companies.

Nevertheless, reaching an agreement between Member States on the sanctions, notably the oil ban, has proved challenging. Hungarian Prime Minister Viktor Orbán is opposed to the current proposal due to the consequences it would have on the Hungarian economy. Despite efforts at all levels to reach an agreement, a deal is not yet in sight and there is talk of the EU moving ahead with the other elements of the sanctions package and putting the oil ban on hold, marking a significant lowering of ambition.

In parallel, on 18 May the European Commission is due to publish its RePowerEU Plan which will set out a plan to reduce dependency on Russian fossil fuel imports. Within the strategy, we can expect an “EU Save plan” focussing on short-term energy savings through behavioural change and mid- to long-term structural energy efficiency measures, as well as a communication on tackling high energy prices. They will also set out plans to increase binding energy consumption reduction targets and to increase domestic hydrogen production.

The politics over the Northern Ireland Protocol has intensified following elections to the Northern Ireland Assembly which resulted in the Nationalist party Sinn Fein coming top for the first time since the Assembly was created. The second-placed Democratic Unionist Party has said that it will not re-join the power-sharing Executive in Northern Ireland until the Northern Ireland Protocol is “dealt with”. Meanwhile the UK Government appears to be preparing unilateral action on the Protocol that would remove checks on goods moving between Great Britain and Northern Ireland.

The CBI in Northern Ireland has emphasised that the Protocol is working for majority of businesses, although there are outstanding challenges which need to be solved. It is crucial that the UK Government and EU find common solutions on consumer facing issues that lead to a landing zone for power sharing agreement. The CBI is working with all key political stakeholders to ensure business’ voice is heard. Only flexibility on both sides through joint dialogue can lead to sustainable, long-term solutions that work for all communities in Northern Ireland.

Following Prime Minister Boris Johnson’s visit to India, the third round of FTA negotiations concluded on 6 May. During the visit, Boris Johnson outlined his hopes for getting a deal done with India by Diwali, demonstrating increased ambition on both sides to get a comprehensive FTA signed at pace.

The first round consisted of scoping out respective high-level positions; the second round built on that foundation. The UK tabled a draft treaty text ahead of the third round across a wide policy scope, enabling more focused discussions between teams to identify points of convergence and difference. Four chapters were closed in round two, which included trade and gender, trade and development, innovation and SMEs.

Technical experts from both sides came together for discussions in 60 separate sessions, covering 23 policy areas. Some of the tricky areas that still need to be hashed out include data localisation, intellectual property rights, procurement, and investment, with India’s biggest ask being on mobility and mutual recognition of professional qualifications to enable more Indian nationals to study and work in the UK.

There is a good chance that in the next few rounds, less contentious areas will be concluded. This includes the simplification and clarity of customs procedures, reduction of tariffs particularly on UK wines and spirits and commitments for a greater use of international standards in India.

The fourth round of negotiations is due to be hosted by the UK in June 2022.

On 9 May 2022, the CBI signed a memorandum of understanding (MoU) with its counterpart in India, the Confederation of Indian Industry (CII). This includes launching a UK-India Industry Taskforce to increase cross industry collaboration and to push the UK-India trade deal over the line.

The MoU was signed by CBI President Lord Bilimoria and CII Director-General Chandrajit Banerjee,  in the presence of three past CII Presidents, and other high-level delegates.

This MoU gives both organisations a framework to collaborate and share insights on mutually agreed areas including tech and digital, sustainability, education, engagement at multilaterals and FTA priorities. This will enable both organisations to maximise the benefits for businesses from the UK-India bilateral relationship and the ongoing FTA negotiations.

Both the UK and Indian government have expressed the ambitious aim to deliver the FTA by the end of October 2022, and there is huge momentum in the UK-India corridor.

The CBI’s relationship with the CII has been strong – spanning over 40 years of collaboration. There will be further exciting opportunities for members and stakeholders to collaborate, including delegations to each market, and the CII Tech Summit later this year.

Will McGarrigle, CBI Head of Global Trade, attended the second meeting of the US-UK Trade Forum in Aberdeen from 24-25 April. Chairing the event were Secretary of State Anne-Marie Trevelyan (UK SoS for International Trade) and Ambassador Katherine Tai (US Trade Representative).

While both sides have not agreed to resume full trade deal talks at this time, there was lots of appetite to deliver short-term measures to simplify and streamline UK-US trade (e.g. paperless trading) and collaborate on supply chain resilience and innovative sectors. The formal talks were positive, and we expect concrete measures implemented before the end of the year, particularly to support small business efforts to trade internationally.

The CBI Washington office was pleased to organise the return of the CBI’s Executive Leadership Programme to Washington, D.C. from 24-26 April, for three days of meetings with sister US business associations, think tank experts, and members of the Washington policy community. The group discussed major areas facing business on both sides of the Atlantic, such as US-UK trade and investment relations, the current political climate in Washington, and the impact of supply chain challenges on both economies.

They also met with UK Deputy Ambassador Michael Tatham to talk about the current geopolitical climate, and engaged with scholars from Harvard University, the Brookings Institution, and the American Enterprise Institute for a discussion on workforce development and skills gap issues in the US and UK.

Over the past few months, the CBI Washington office has partnered with its network in the Latin American business and government community to launch a podcast series on trade and investment opportunities for UK firms in Latin America. Produced exclusively for CBI members, this series looks to educate and inform members about how they can take advantage of the enormous potential that these markets present in the 21^st century economy.

Listen to the first two podcasts

The team is also launching two additional podcasts on opportunities for UK investment in infrastructure and advanced manufacturing in Latin America. They will be available through the CBI’s podcast channels soon.

May marks the start of UK negotiations for new and improved free trade agreements with both Canada and Mexico. The CBI continues to engage with members and with UK government officials on the best possible negotiating strategy for the UK's trade relationships with Canada and Mexico. If your business has concerns about either relationship or the contents of a new trade deal, please contact John Bleed.