International perspective: October 2022

The 20th National Congress of the Chinese Communist Party (CCP) concluded on 23 October, following CCP General Secretary Xi Jinping addressing the congress and emerging as China’s strongest and most authoritarian leader since Mao.

Xi Jinping’s control of not only the Party but private enterprise will have a lasting impact on the world - China’s emerging ‘fortress economy’ mentality will lose much of its entrepreneurial spirit and economic growth to ideological dogma and State control.

Key takeaways from the congress:

1. The ‘securitization of everything’

Xi’s comprehensive ‘national security concept’ includes more than 16 distinct fields including culture, technology, space, and overseas interests. Party and State bodies will build a ‘fortress China’ to withstand US and Western economic and supply chain ‘threats’ in areas such as high tech and food security.

Firms can expect to see yet more dual-use, R&D scrutiny from western governments whilst there will be no domestic easing of regulations relating to internet platforms.

2. Shift in Party’s mandate

Compared to Xi’s 2017 Congress speech the words ‘modernization, security and people’ were mentioned the most whilst the words ‘reform, economy, market and innovation’ were used fewer times.

We can expect to see a shift away from the economy and private sector to perceived internal and external threats. This will no doubt impact business as China’s private sector remains in the Chinese Communist Party’s ideological crosshairs.

3. Green Transition

The continued focus on the green transition means there is opportunities for business in renewable energy and electric vehicle production. Moreover, the emphasis on ‘high-quality growth’ means that sustainability will remain a focus as opposed to economic growth targets.

China’s share of coal as a proportion of its overall energy mix continues to fall with a relative increase in the use of alternative energy sources.

There are many areas within China’s ‘green transition’ that play to UK strengths, from offshore wind and renewables to design and standards. This is a positive step forward and energy firms could benefit – as and when zero-covid restrictions are eased.

4. Taiwan

On Taiwan, the reiteration that China will use force to incorporate the country into the People’s Republic. Despite the concerning headlines and rhetoric, this was not seen as a sign of imminent invasion but rather a warning to the Biden administration and the Taiwanese President.

In the context of Russia’s invasion of Ukraine and dismal US-China relations this high-profile warning caused significant market unease.

The increasingly thorny Taiwan question will be on the minds of global CEOs as they attempt to futureproof their China strategies. Very few businesses have begun contingency planning in the event of a sudden Sino-Taiwan flareup. This will have to be a key business priority in the coming months.

5. Zero-Covid

China’s approach to the Covid-19 pandemic was praised by Xi claiming that it will maintain its ‘unswerving insistence to dynamic zero’.

Firms will have to continue to operate with zero-covid policies for some time and manage the impacts such policies are having on the economy and people. The international business community can only hope that there will be an incremental easing of travel and quarantine restrictions during Q1 and even Q2 of 2023.

For more information, please contact CBI’s Head of China, Guy Dur Drury.

European Commission sets out ambitious legislative agenda for the year ahead

On 18 October, the European Commission set out its work programme for 2023, laying out plans to adopt 43 new legislative initiatives furthering the green and digital transitions and tackling the energy crisis. 

The new initiatives include the decoupling of electricity prices from energy market prices and the creation of a European Hydrogen Bank to support the renewable hydrogen market.  Additionally, the Commission is proposing a European Critical Raw Materials Act to secure the supply chains of critical minerals for the deployment of essential technologies for the green and digital transitions.

Other new initiatives include the Digital Euro and a Framework for Income taxation (BEFIT) intended to create a single EU corporate tax framework which businesses operating in the EU will have to comply with.

Whilst there are many new initiatives in the pipeline, there is also a real focus on the ongoing initiatives, including the Forced Labour Products Ban and the Corporate Sustainability Due Diligence Directive, to the Carbon Border Adjustment Mechanism and revision of the EU Emissions Trading System.

CBI continues to engage closely on EU policy developments, working with stakeholders on both sides of the channel, to ensure that trade with the EU remains as open and frictionless as possible. If you wish to get involved or understand the impact of these policy developments on your business, get in touch with the CBI Brussels team.

Redefining rules for the EU gas market

The European Commission released a new gas package on 18 October as a further emergency measure, aiming to stabilise the EU energy market and address the volatility of gas prices.

The package includes a mechanism allowing for the joint purchase of gas across the EU, and the creation of a new complementary benchmark for LNG imports. Further to this the package sets out a dynamic price ceiling to use in the Dutch Title Transfer Facility (TTF) spot market, a push of on demand reduction and default solidarity rules for EU countries.

However, the implementation details are still vague, and more discussion is expected in the coming weeks. A key area of contention was over the gas price cap. Whilst we are still lacking detail on what the dynamic price ceiling will look like, it is not the price cap on the wholesale gas market that many Member States wanted. 

CBI is closely monitoring the debate and working to understand the impact for both EU and UK energy markets, as firms grapple with skyrocketing energy prices. To find out more, get in touch with Carolina Mazzone.  

EU Retained Law Bill progress through parliament   

The Retained EU Law Bill (REUL) is currently going through Parliament which, once passed, will give Ministers the power to retain, amend, or repeal over 2,000 EU-derived laws on the statute book. Ministers will need to decide what to do with relevant laws by the 2023, or they can delay the ’sunset’ by three years.  

The CBI has three main priorities on the REUL Bill once the decisions are moved to Government departments.

1. First, where regulation may affect market access for companies trading with the EU, divergence is generally harmful, particularly where it could introduce further red tape and friction.
2. Secondly, businesses are not clamouring for a bonfire of regulations, so it is important that the Government ensures that the UK’s high standards are maintained.
3. Finally, in some cases, the UK is right to explore how reforming regulation can help economic growth and resilience. 

Given the scale of the Bill, the CBI is interested in hearing members’ views on their key concerns and opportunities. Please get in touch with Lewis Keller if you have views on this you wish to share.   

Signs of positive progress for EU-UK relations?

There have been signs of progress on the Northern Ireland Protocol in recent weeks. Formal talks between the EU and UK have resumed, with reports that the 25th Anniversary of the Good Friday Agreement is the deadline both sides are working towards. Major questions remain over the potential jurisdiction of the European Court of Justice in Northern Ireland, the need for checks on goods moving between GB and NI, and the contents of the NI Protocol Bill, which is currently going through Parliament. Resolving issues over the Protocol is crucial in order to re-open the Northern Irish Executive, prevent a trade escalation from the EU, and open up opportunities on the UK-EU relationship.  

The UK’s participation in the new European Political Community is also seen as evidence of a warming of relations. The new grouping seeks to provide a platform for European government on areas of cooperation such as on energy and their opposition to the war in Ukraine.  With the resignation of Liz Truss, it remains to be seen what this means for the future direction of EU-UK relations.

CBI engagement at the B20 Summit in Indonesia

CBI’s International Director, Andy Burwell, will be in Indonesia for the B20 Summit 13 - 14 November ahead of the G20 Summit.

The B20 brings together the most important business organisation in each of the B20 nations alongside a range of industry and government stakeholders. 

Whilst the B20 tends to have limited impact on the G20, it does help signal how global industry can commit to address specific challenges e.g. the green transition. It is also an opportunity to build on existing partnerships and trading relationships with our sister organisations. 

Andy will also be in Singapore after the Summit meeting members to understand how supply chains are restructuring and to support the growing digital partnership with Singapore.

If you want to find out more or to get involved, get in touch with Hannah Collins.

The free trade agreement negotiations between the UK and India have been delayed, as echoed by the Secretary of State for International Trade, Kemi Badenoch, who emphasised CBI member concerns around substance over speed, at a recent distillery visit.

The understanding from the Truss government is that the negotiations will be delayed until next year now, going past the original Diwali date (24^th October) for signing a trade deal. This development has been largely welcomed by the CBI India working group (which was convened on 14^th October), as this gives the UK industry more time to help develop UK’s negotiation approach on more challenging areas of the FTA.  

The UK must take a balanced approach and ensure that it doesn't compromise on delivering a comprehensive and ambitious trade deal for UK businesses, whilst also ensuring progress on negotiations with one of the most challenging negotiators in the world.

The CBI will be continuing to engage closely with the UK government in ensuring that member asks are accurately prioritised in the remaining negotiating rounds. We have actively fed in key reflections and questions posed by the CBI India working group members to the Director General for trade negotiations – Amanda Brookes. And will be working closely with her team over the next few months to address challenging areas of the FTA.

We will also be ramping up our engagement with the Indian Industry, through our partnership with the CII, to push our respective governments on shared areas of interest.

Outside of the FTA engagement, the CBI are planning a business delegation to India in February 2022.  CBI’s Chief Economist will be leading the delegation, to explore opportunities in the market and enhance knowledge on India’s business ecosystem. To register your interest, get in touch with Hannah Collins.

How the midterms could impact US trade policy

The midterm elections are expected to be a challenge for the Democrats and their slim majorities in both chambers, as it is for most parties in power during the midterms.

The midterms will see a newly shaped Congress, and firms will be hoping to see a renewed focused on trade policy which could bring the US-UK relationship into a new dynamic.

To date, the Biden administration has chosen to engage on trade issues with allies outside of the traditional market access debate, focusing instead on issues related to supply chain security, data privacy, and technology standards. This has been seen most strongly through the US-EU Trade and Technology Council and more recently the Indo Pacific Economic Forum with its Asia-Pacific allies.

However, following the midterms we could see pressure from a new Congress for President Biden to change his approach. While the Republican Party has shown scepticism of late on free trade initiatives, the committees of jurisdiction in the House and Senate over trade policy are likely to be led by traditional, pro-market members. Both of these committees will hold the keys on trade in Congress and drive a positive agenda forward.

The committees of jurisdiction could also put pressure on the White House to accelerate discussions over supply chain security or even to restart limited FTA talks with a few specific allies like the UK.

What the midterms mean for global markets

The US has shown willingness to shape global supply chains through robust industrial policy and the midterm election results in November could accelerate this trend significantly. We have already seen a sharper focus from Washington on placing domestic content requirements within trade deals such as the US-Mexico-Canada Agreement, which required a certain number of finished products in the automotive sector to be made in NA to qualify for tariff free treatment. The US has already used tariffs on sensitive industries like steel and aluminium in hopes of boosting domestic industry and enacted sweeping new import bans on regions deemed guilty of human rights violations. Furthermore, they have expanded export control measures to prevent sensitive technology from reaching geopolitical rivals.

It's important to recognise that of these trade measures have been welcomed across the Republicans and Democrats, with both parties eager to shape industrial policy and secure supply chains in an era of increasing geopolitical tensions. Firms can also expect policies go further with more export controls being enacted on sensitive US technology and finance subsidies for rare earth mineral exploration. The US may also look to cooperate with allies on shared vulnerabilities.

A new Congress after the midterms will likely show far more interest in industrial competition policy than traditional FTAs. A policy of major interventions in sectors deemed critical to national performance and national security will impact its trading relationships abroad, as it urges more economic activity to grow in North America at the expense of other regions.

CBI state level engagement accelerates

The CBI continues to engage across state level politics and as part of the State of Colorado’s delegation to the UK, the CBI is hosting the Michael Hancock, Mayor of Denver for a private discussion on trade and investment ties between the UK and Colorado.

With an annual GDP of nearly $200 billion and expected population of 3.6 million in 2030, Denver is a major US success story for creating vibrant clusters of growth and holds massive investment partnership potential for UK firms.

The discussion will focus on Colorado’s major economic sectors such as the aerospace, life sciences, and green energy sectors. After hosting the Governor of Minnesota and Lieutenant Governor of California in recent years, this initiative continues a CBI priority of engaging with US state and local governments to build trade ties below the federal level. For more information, please contact CBI's Senior Policy Adviser, John Bleed.