Europe gets Chinese car factories rather than roads and railways

Welcome to Trade Secrets. Looks like we’ll have to wait a while for the resolution of the Turkish election and what it might tell us about political trends in the big emerging markets. It’s notable though (as I wrote last year) how Recep Tayyip Erdoğan, like Narendra Modi in India and Jair Bolsonaro in Brazil, is a modern breed of populist who likes liberal (ish) trade if not liberal politics, unlike earlier generations of authoritarian protectionists. It’s some comfort, I suppose. Meanwhile, the G7 heads of government summit is at the end of the week. I wrote last Thursday about the Japanese hosts aiming for a joint approach against economic coercion by the likes of China, and why it’s not that likely to happen. The main pieces in today’s Trade Secrets are on China changing its angle of attack to penetrate the EU economy, and what a rivalry in lower-division Belgian football tells us about the battle against state-subsidised foreign companies in the single market. Charted waters is on why now is a good time to be a supply chain manager.

Meloni’s BRI announcement is less than a bombshell

It’s not a gigantic shock that Giorgia Meloni’s government wants Italy to leave China’s Belt and Road Initiative. If anything it’s more surprising that it considers the affiliation sufficiently meaningful to take the diplomatic hit of irritating Beijing by leaving.

Then again, maybe the signalling is the point. Italy joined the BRI in March 2019 under the administration led by Five Star Movement prime minister Giuseppe Conte, to widespread dismay in Washington and Brussels. Since then Rome has shuffled back towards foreign policy alignment with the rest of the EU and the US.

Italy’s BRI membership doesn’t seem to have done much: the country attracted a lot of Chinese investment before joining, which has largely dropped off since, and the agreement didn’t stop Conte’s successor Mario Draghi vetoing multiple Chinese FDI bids for strategic reasons. More generally, the environment for Chinese investment in Europe has become a lot frostier. Some countries (predictably, Hungary) are still keen, and Olaf Scholz has just shown that mercantile advantage still often trumps strategic autonomy in Germany by over-ruling colleagues to allow the Chinese company Cosco to operate part of the port of Hamburg. But in general, Chinese FDI into Europe has been dropping sharply.

One big exception, as I wrote the other week: Chinese greenfield investment has risen sharply in electric vehicles. The latest estimates of Chinese FDI into the EU from the Rhodium Group consultancy are below.

But these are generally private businesses, or as private as businesses can be in China: the leading car company BYD is listed, and part-owned by Warren Buffett. They don’t have to be part of a big state-driven BRI infrastructure initiative to get a foothold. Chinese companies aren’t gone from the EU, but their presence is changing shape, and Italy leaving the BRI won’t make much difference.

A red card for Gulf state subsidies

It wouldn’t be the first time that the obscure recesses of Belgian football made EU legal history. HEY, COME BACK RIGHT NOW, THIS IS INTERESTING. The Bosman ruling of 1995 transformed footballers’ freedom to transfer between clubs, after RFC Liège midfielder Jean-Marc Bosman won a European Court of Justice ruling against his employer.

Now RE Virton of Belgium’s second division is asking for a case (hat tip to Bregt Natens at Baker McKenzie in Brussels, who wrote about it here) under the EU’s brand-new foreign subsidies regulation, which opens for business in July. The FSR is a potentially very powerful tool: it essentially extends the EU’s tough state aid regime to any government-subsidised foreign company operating in the EU, constraining them from undertaking mergers and acquisitions, bidding for public procurement contracts or indeed simply competing by selling goods and services in the single market. Particularly intriguing: the M&A and procurement bits are based on notification requirements but European Commission officials can start cases under the broader competition bit on their own initiative.

The FSR obviously has China in mind, but not just China. Virton says its rival Lommel SK was unfairly subsidised by an injection of €16.8mn by its owners the City Football Group, which also owns Manchester City and is ultimately owned by the Abu Dhabi royal family. (Here’s the final table from footystats.org for the Belgian First Division B: Lommel finished top of the relegation play-offs and Virton bottom. Not that they’re bitter.)

Traditional state aid disciplines certainly apply to football: the European Court of Justice ruled in 2021 that FC Barcelona and Real Madrid would have to pay back millions of euros they got in tax breaks from the Spanish government. And there’s plenty more Gulf state money in European football: Paris Saint-Germain is owned by a subsidiary of Qatar’s sovereign wealth fund.

OK, so Virton’s case faces big legal and institutional hurdles. It’s not clear whether the company would count as state-owned, or whether the money was a one-off recapitalisation or an ongoing subsidy, or whether the payment distorts competition at the EU level.

My go-to Brussels competition lawyer, Alec Burnside at Dechert, notes other constraints: “The commission is short of staff to fulfil their responsibilities under the FSR. To begin with they will probably start in low gear and focus on what they have to do in M&A and public procurement. I can’t imagine them taking up many own-initiative cases, and if they do it’s probably going to be something more momentous than Belgian second-division football.”

Still, it’s the kind of case that ought to get us thinking. There’s an awful lot of government-directed money from China and the Gulf states washing around the European economy, and not just football clubs. Look at Gulf-owned airlines, a longstanding target of European complaints about subsidies. If the commission gets tooled up and starts its own cases, there will be some bigger matches to watch than RE Virton vs Lommel SK.

Charted waters

These disrupted times have been bad for many people. But there are of course always those that find their services in greater demand during such periods. The chart below shows how this has become a good moment to be a supply chain manager.

The reason is the difficulty in sourcing items, from computer chips to food staples. If you can solve this problem, you might now find yourself on a company board.

The spike shown above in LinkedIn postings for US jobs is replicated on specialist employment websites, according to data compiled by Financial Times supply chain reporter Oliver Telling.

For instance, jobs website Indeed recorded a 22 per cent rise in UK vacancies between 2019 and 2021, when trade issues peaked for many companies. Demand continued to rise last year, when openings were 36 per cent higher than in 2019.

It might not be worth making a career switch to fill such roles, however. Kory Kantenga, senior economist at LinkedIn, told the FT that the most intense demand for supply chain professionals had eased as global pressures receded in recent months. (Jonathan Moules)

Trade links

Emmanuel Macron writes in the FT about the need for an EU industrial policy.

Germany tempts the Swedish battery manufacturer Northvolt to set up there via lavish state subsidies. Relatedly, the FT writes at length on the German government’s plans to encourage semiconductor manufacture in the country.

Kimberley Clausing, former Biden administration official, on the protectionist flaws in its industrial policy.

A fascinating account of how the World Bank managed to damage the deployment of solar power in sub-Saharan Africa by mis-selling its achievement there.

The chair of the OECD’s development assistance committee, the body that oversees the reporting of aid, notes that a sharply increased share of overall aid is European nations’ spending on refugees in their own countries. (It’s highly arguable in my view whether this should be counted as aid at all.)

Trade Secrets is edited by Jonathan Moules