Welcome to Trade Secrets. Not for the first time, Donald Trump taking a wrecking ball to the global trading system seems a little secondary. The FT has prescient stuff here from markets columnist Katie Martin and instant reaction from US financial commentator Rob Armstrong on the US president’s assault on the independence of the fundamental anchor to the global financial system, the US Federal Reserve. It’s absolutely bizarre that it represents moral and even physical courage for the Fed chair to make a televised statement backing central bank independence against presidential bullying (my term, not Jay Powell’s), and yet here we are.
Later this week (probably) we’ll get the US Supreme Court decision showing if the institution underpinning the country’s rule of law has had the guts to strike down Trump’s absurd “international emergency” tariffs.
Today’s newsletter is on whether Europe can do its geopolitical bit. EU governments last week had a straightforward opportunity to make a symbolic show of strategic intent by agreeing the trade deal with the South American Mercosur bloc of countries, which has been a quarter of a century in the negotiating. Charted Waters, where we look at the data behind world trade, is on the Venezuelan currency.
Get in touch. Email me at alan.beattie@ft.com
Reconstructing the Mesozoic Mercosaurus
It’s essentially the premise of Jurassic Park. The behemoth EU-Mercosur deal, which has a good claim to be the largest preferential trade agreement in history, was widely written off as extinct. But it has been reconstructed from its original DNA and is now close to being released into the wild.
(Incidentally, former FT colleague Jim Brunsden and I claim authorship of the dinosaurian sobriquet, though this artistic rendition comes courtesy of Björn Grözinger of Mercedes-Benz, one of the companies that will do well from the deal.)
Last week EU member states voted in favour of the deal. It has now just got to get through the European parliament, which is unlikely to block it.
Now, I’ve long been a sceptic of the idea that trade deals necessarily reflect foreign policy alignment or are a good way of furthering it. (If trade guaranteed peace, we wouldn’t have had the first world war.) Famously, despite the strategic imperative of combating Chinese influence in the Asia-Pacific, the US Congress stonewalled US membership of the CPTPP agreement a decade ago on mundane commercial grounds, including protecting America’s tobacco industry.
But the world has changed a great deal since then, and any substantive treaties between governments now have more strategic significance. While the EU is painfully trying to construct collective military and foreign policy functions, despite these areas traditionally being the preserve of individual member states, it does have bloc-wide competency in trade.
A deal including Brazil and Argentina should at the margin increase the EU’s credibility among low- and middle-income countries at a time when the US is alienating them, and their relationships with China are often fraught. It also provides an alternative pole of alignment for Trump’s best friend in Latin America, President Javier Milei, who has dropped his original plan to smash up Mercosur now he sees that he might get something out of it.
A weak and divided response
I’ve said before that if the EU can’t pass Mercosur it can’t really do anything geopolitical, so I guess it’s good that the deal went through. But the manner of its agreement last week didn’t give the impression of a collective iron will.
The deal passed the EU council of ministers of the member states by qualified-majority voting. Five countries opposed it: not just the perennial naysayers France, but also Ireland, Austria, Hungary and Poland. Belgium abstained, and the nations in favour represent an uncomfortably small majority of the EU population.
France’s continued objections in particular are concerning, because Paris is always banging on about the EU being geopolitically more assertive. Instead, it voted against the deal because of the same agricultural protectionism the country has demonstrated with every trade pact stretching back to the Cretaceous period. In their latest iteration, French farmers tried to insert “mirror clauses” into the agreement that would compel foreign growers and food processors to match EU environmental and animal welfare standards.
The other naysayers were opposed on similar grounds. Ireland hit the “eject” button at the last minute, also intimidated by flak from protesting farmers, despite the country’s Europe minister publicly lamenting Irish opposition to the deal.
The issue here isn’t particularly the substance of the agreement, which doesn’t assert strategic power much itself. The EU has long prided itself on being a regulatory superpower by exporting its standards through trade. But, as geopolitical credibility goes, the “Brussels effect” doesn’t really cut it in a hard-power world where the US is threatening to invade Greenland. On its own, the substance of the deal isn’t exactly going to pull South America irrevocably into an EU orbit. Brazil and Argentina will continue to sell the vast majority of their soyabeans to China, and the future for their auto markets will be orientated towards attracting Chinese electric-vehicle manufacturers to set up production outfits locally rather than importing conventional combustion-engine cars from Europe.
However, governments delivering a unanimous vote and overriding domestic producer interests for the geopolitical good would have sent an encouraging signal. To a disturbing degree, they failed to do so. The European Commission might like to badge this deal as strategic, but in fact it is essentially another commercially orientated agreement in which export market access is traded off against domestic import penetration. It’s good that it got through, I guess, assuming it doesn’t become an ongoing liability for French President Emmanuel Macron and drive votes towards the populist extremes. But it doesn’t represent a big shift towards EU trade policy becoming an instrument of geopolitical self-assertion.
Charted waters
Whether or not Trump really does care about the Venezuelan economy (he doesn’t), his military intervention has set its recovery back further. As of Friday, the black market currency rate had fallen by nearly 20 per cent since the capture of President Nicolás Maduro.
Trade links
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My colleague Martin Sandbu says the EU should assert its independence from the US, and is more optimistic than I am that the Mercosur deal can help.
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US Treasury secretary Scott Bessent, displaying a comically unconvincing conversion to the cause of international co-operation, says the G7 rich nations should co-ordinate on securing supplies of critical minerals.
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The US trade deficit fell in October, though as in September that was affected by the quirk of higher exports of non-monetary gold.
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The FT looks at the resilience of south-east Asian countries to Trump’s tariff war.
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Trump has ordered a mass pullout by the US from a wide range of international organisations.
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A report from December by John Kunkel of the US Studies Centre of the University of Sydney looks at how Australia, a country with one of the most sophisticated approaches to economic security, should be adjusting its strategy.
Trade Secrets is edited by Harvey Nriapia