International perspective: September 2022

Key political events in China

China's most important political event in a decade, the 20th Party Congress will be taking place on 16 October. The 20th Congress will see UK and international business carefully watching what new policy outcomes will be announced as China's leader, Xi Jinping, secures a further term in office.

His continued leadership comes at a time of more than 90 cities, representing around 12% of China’s GDP output, are currently in some form of lockdown. These measures continue to supress consumer demand, impact supply chains and irreparably damage economic growth.

However, there is light on the horizon with seven districts in Chengdu, the capital of southwestern China's Sichuan province, having tentatively opened after nearly 14 days of lockdown.

COVID-19 Lock downs continue

Despite some flights reopening, at the start of August, a strong 6.9 magnitude earthquake was felt in the South West Chinese province in Sichuan, in the capital city Chengdu, by its more than 21 million locked-in residents. Unable to flee their apartments or compounds due to strict zero-COVID restrictions many took to social media to vent their frustration, asking whether an actual earthquake was more dangerous than the potential risk of contracting COVID.

The cycle of lockdowns and restrictions with seemingly no end in sight has already suppressed consumer demand, dented business confidence and restricted domestic travel and tourism flows.

COVID is also limiting movement of people for key events, including the Mid-Autumn Festival, also known as the Moon Festival or Mooncake Festival - a traditional festival celebrated in Chinese culture. For these celebrations residents in Beijing were told to remain within the city limits.

HRH Queen Elizabeth II death

Following the death of HRH Queen Elizabeth II, China pay been paying its respects with many citizens across China signing the Book of Condolence at UK diplomatic posts or leaving online comments.

Vice-President Wang Qishan visited the British Ambassador’s Residence in Beijing to share his condolences, and he will be visiting the UK for the State Funeral, taking place on 19 September.

Her Majesty was a great Diplomat, and her impact was felt in China, especially during and following her visit in 1986. Her ground-breaking visit to Beijing, Xian, Kunming, Guangzhou and Shanghai in October 1986 came at a diplomatically sensitive time for both the UK and China as negotiations regarding the future of Hong Kong were taking place in the background.

She remains, to this day, the only reigning UK monarch to have visited China and was instrumental in securing and maintaining positive ties between both nations.

European Commission President makes case for European values in State of the Union speech

This September, European Commission President Ursula von der Leyen gave her annual state of the Union speech, in which she runs through the Commission’s record, and most importantly sets out policy priorities for the year ahead. This year, against the backdrop of the Russian war in Ukraine, as well as the energy and economic crisis, the focus was on protecting European values and democracy. So, what was proposed?

• No new sanctions against Russia or military support to Ukraine, however support of 100€ million for the rehabilitation of Ukrainian schools
• Measures to address the ongoing energy crisis (see below)
• A European Critical Raw Material Act to respond to the demand of raw materials and rare earth and achieve greater EU resilience
• Renewed emphasis on trade deals with reliable partners and key growth regions - (trade agreements with Chile, Mexico, and New Zealand to be put forward soon for ratification)
• A new “Defence of Democracy” package, including an Act on Media Freedom

The EU faces a challenging winter ahead, with divisions amongst Member States starting to solidify. Within the current geopolitical context, the direction of travel at EU level will have a real influence on businesses across Europe as well as internationally, impacting everything from supply chain resilience to energy prices. CBI will continue to work closely with partners across Europe, and support greater EU-UK collaboration when addressing these challenges. Get in touch with CBI’s Europe team for more information.

The EU prepares for a challenging winter

European Commission President Ursula von der Leyen has also announced further emergency measures to tackle the rise of energy prices. The plan includes a revenue cap to €180MWh (stricter in the UK) for companies producing electricity at low costs and a “solidarity contribution” at 33% of all 2022 profits for the fossil industry. Commission expects to raise 140 billion euros to be redistributed among the most vulnerable consumers. In parallel, the Commission unveiled a mandatory electricity demand reduction target of 5% during peak hours, and a long-term reform of the electricity market, such as in the UK.

von der Leyen justified the package as a response to the unprecedented time we are living in. As a result of the measures, business investments in renewable energy sources may be disincentivised, a levy on excess profits could have a distortive effect on the market, and the additional electricity demand reduction may prove complex to implement. EU countries will give the final approval to the proposed package at the end of September, but a lot of debate is still expected. CBI is following the EU developments closely, to understand implications for the UK. Get in touch with Carolina Mazzone for more information.

Elections in Europe: far right on the rise?

September has seen a number of elections taking place across the Europe. Italy’s election has focussed on tax cuts, emergency energy measures for households and businesses as well as the current geopolitical context. At the time of writing, polls give Giorgia Meloni’s far-right Brothers of Italy as the most favoured party, and a right-led coalition is expected.

In parallel, following Sweden’s General election on 11 September, former Social Democrat prime minister Magdalena Andersson resigned paving for the way for Sweden’s centre-right opposition leader Ulf Kristersson to try to form a coalition government. Kristersson’s most likely partners are the far-right Sweden Democrats (SD), who saw huge gains in the election with 20 percent of the vote, as well as the liberal party. Faced with a small majority and tensions between coalition partners, Kristersson faces a number of challenges.

With war in Ukraine, and a looming energy and economic crisis, now is the time for European unity. However, with a rise in support for the far right across Europe, it remains to be seen what impact this will have for the EU.

India overtakes UK to become world’s fifth biggest economy

India leaped past the UK in the final three months of 2021 to become the fifth-biggest economy. The ranking is based on GDP figures compiled by the International Monetary Fund. A decade ago, India ranked 11th among the largest economies, while the UK was 5th.

The Indian economy is forecast to grow 7% this year highlighting strong growth in services, although underpinned by inflation. On an adjusted basis and using the dollar exchange rate on the last day of the relevant quarter, the size of the Indian economy in “nominal” cash terms in the quarter through March was $854.7 billion. On the same basis, UK was $816 billion.

The IMF’s own forecasts show India overtaking the UK in dollar terms on an annual basis this year, putting the Asian powerhouse behind just the US, China, Japan and Germany. In the post-pandemic world, India’s economy is at a golden cusp of consumer-led growth which has made it a prominent player in global value chains. Businesses can leverage this productivity of resources such as infrastructure, mobility, tech and innovation by tapping into India’s offering of the young demographic dividend.

India to host the Shanghai Cooperation Organization (SCO) in 2023

With India now the fifth biggest economy, it is timely that the presidency of the Shanghai Cooperation Organization (SCO) has been handed over to India and Delhi will host the 2023 SCO summit (alongside the G20 Summit later in 2023). The SCO of the eight-nation that includes India, Pakistan and four ex-Soviet nations in Central Asia. The security alliance was created as a counterweight to U.S. influence.

This year’s SCO Summit Council of Heads of State, hosted in Uzbekistan, focused on agreements on regional engagement, including inducting Iran as a member – broadening the SCO dialogue partners to West and South Asia and highlighting the importance of regional integrity. The SCO has opened a new horizon of multilateralism with willingness of countries in the region to pursue stronger relations with Russia and China.

Despite the broadening membership, the focus was on the attendance of Russian President, Vladimir Putin, and Chinese President Xi Jinping. Meeting on the sidelines of the SCO, the two leaders discussed the Ukraine war, oil prices and economy, as well as how the two nations can work together. Observers say Russia will likely grow increasingly reliant on China as a market for its oil and gas as the West moves to establish a price cap on Russian energy resources and potentially cut their imports altogether.

It's also worth noting, in trying to strengthen an alliance with China, Moscow has strongly backed Beijing amid tensions with the U.S. that followed a recent visit to Taiwan by U.S. House Speaker Nancy Pelosi.

Prime Minister Narendra Modi also met his President Putin and expressed concern over the war in Ukraine, something that Putin said he understands. Find out more about the business response to the war in Ukraine via the CBI’s Ukraine crisis hub.

Looking ahead to India hosting the 2023 summit, we can expect India to ensure the participation of all SCO members including China and Pakistan, despite recent tensions. India’s pitch to the SCO pushed regional trade connectivity and the development of the Chabahar port through Iran to avoid US sanctions, while still competing with the China-Pakistan backed transit routes through Gwadar region.

HRH Queen Elizabeth II death – reflections from India

Following the death of HRH Queen Elizabeth II, as a mark of respect to the departed dignitary, the government of India held a one-day state mourning on September 11 throughout India. National flags at Red Fort and Rashtrapati Bhavan fly at half-mast on the state mourning day. Many citizens paid respects across India signing the Book of Condolence at British High Commission and Deputy posts.

India’s External Affairs Minister S Jaishankar visited the British High Commissioner’s Residence in New Delhi to share his condolences, and recently elected new President of India, Smt. Draupadi Murmu visited the UK for the State Funeral.

Her Majesty’s passing has evoked memorable visits to India including three State visits in 1961, 1983 and 1997.

The US Congress passes the Inflation Reduction Act

In August, the US Congress passed the largest and most expansive piece of climate legislation in US history, totalling $437 billion of spending over 10 years. UK businesses should be aware that this bill reflects a willingness from Capitol Hill to reorient global supply chains by force, even at increased costs to business. The knock-on effects will likely have a direct impact on the global green energy transition.

The project, largely driven by West Virginia Senator Joe Manchin, the swing vote in a 50-50 Senate, contains ground-breaking government support for the energy industry in both the renewable and hydrocarbon spaces. It is highlighted by a major consumer tax credits for electric vehicles ($4,000 for lower income individuals who buy used EVs and up to $7,500 for new EVs) provided they match strict rules of origin requirements in battery parts and critical minerals.

For qualifying vehicles, 40% of the battery must be mined, processed, and recycled in North America or a US FTA partner country (increases to 80% in 2027). The tax credit is not open to cars who contain critical materials mined, processed, or recycled in “foreign entities of concern” like China. Conversations with CBI stakeholders in Washington have revealed that it will be challenging for even US-based automakers to make their vehicles eligible for these tax credits right away, but that there remains bipartisan support for wielding US trade policy to pull value chains out of adversary economies, and that a potential UK-US FTA will face similar debates.

The bill also includes:

• A $10 billion investment tax credit for new manufacturing facilities that build EVs, water pumps, wind turbines and solar panels
• $2 billion in grants to help automakers transition to clean vehicle production
• Up to $20 billion in loans for EV manufacturing facilities 
• $9 billion in home energy rebate programs to help people electrify home appliances
• 10 years of consumer tax credits to encourage Americans to install heat pumps, rooftop solar panels, electric HVAC, etc in their homes.
• A nuclear power production tax credit to encourage greater private financing into advanced nuclear energy projects, plus financial support to maintain existing nuclear power plants 
• New tax credits for carbon capture technology that could allow coal or gas-burning power plants to operate at lower emission levels.
• A requirement for the federal government to prioritise oil and gas development projects over renewables when leasing federal land for energy projects and auction off more contracts for offshore oil and gas drilling in the Gulf of Mexico and Alaskan coast.

The CBI will continue to monitor the federal government’s implantation of the IRA and its impact on global supply chains for UK industries and firms, particularly in the automotive sector. For any questions or concerns, please contact John Bleed.

The future of UK-Canada trade

The CBI's Washington office spent the summer engaging with stakeholders and members in Canada to discuss the future of the UK-Canada trade and economic relationship, from the ongoing free trade negotiations to potential areas of cooperation in supply chain security and critical mineral exploration. Read more on the latest CBI insight here.

CBI international director in Mexico City

Andy Burwell, CBI international director, will be in Mexico City for meetings with business and government from September 26-27 for the purposes of supporting UK free trade negotiations with Mexico and to develop market insight on Mexico's role in changing global value chains. As high value manufacturers in medicine, aerospace, energy, and infrastructure increasingly see Mexico as an investment opportunity, it will be vital for CBI members to be engaged in this discussion to ensure UK competitiveness on the world stage. For more information on the CBI's work in Mexico or to discuss your business's UK-Mexico trade ties, please contact John Bleed.