China’s scattergun sanctions show the limits of EU engagement

3

Hello from Brussels. It takes something to bring the EU and UK together in solidarity these days but you have to hand it to Xi Jinping, he’s nailed it. The sanctions Beijing announced last Monday on an array of EU policymakers and China experts were followed on Friday by action against a similar collection of Brits, and yesterday a smaller number of Americans and Canadians.

Below we discuss not just the obvious, that it jeopardises the ratification of the EU-China Comprehensive Agreement on Investment (CAI), but how it erodes altogether the EU’s hitherto preferred model for labour standards issues in trade deals.

Tit for tat asks John Butler, president and chief executive of the World Shipping Council, three questions about the implications of the Ever Given becoming wedged in the Suez Canal.

It’s good to talk, but it’s not good enough

If we didn’t know better, we might think that China was doing this satirically. In January, a few days after the CAI deal was announced, Beijing arrested 53 Hong Kong pro-democracy politicians. Beijing’s announcement last week of travel and business sanctions on various EU types came less than two weeks after publication of the full market access details showing what the agreement actually meant.

The choice of targets for sanctions was, let’s say, a bit random, suggesting a less than perfect knowledge of how the EU works: various members of the European Parliament (MEPs) and national legislatures, a scattering of academics, committees of the EP and the council of member states (how you put sanctions on a committee is beyond us) and, most oddly, the respectable Merics think-tank. In the UK it went after a similar grab-bag of not particularly heavy-hitting politicians together with academics and lawyers.

Now of course, China was responding to the Magnitsky sanctions, not the timing of CAI. But it’s shown huge recklessness about whether CAI gets passed. Its targets in the EP, the main locus of opposition to CAI inside the EU, include at least one MEP from four of the five biggest political groupings, ensuring broad-based outrage. Of course, Beijing might lift the sanctions at some point, but it’s naive to assume they won’t be reimposed later.

Indeed, as we said from the outset, the episode underlines a touching faith within the EU, or perhaps a going-through-the-motions cynicism, in how CAI is supposed to promote labour standards and human rights. When we talked earlier this year to officials from the European Commission and member states, they were well aware that those provisions had weak enforcement mechanisms. They also accepted China was extremely unlikely to sign up to the International Labour Organization (ILO) conventions on forced labour, one of the supposed conditions of CAI, by the time the deal comes up for ratification next year.

But the important thing, apparently, was for China to take concrete steps towards ratifying the conventions, and more broadly to create a political process to oversee the deal. Supposedly, the commitments on labour standards, backed up by transparency and monitoring mechanisms, would allow EU leaders to hold China to account at meetings like the G20 and so on, cajoling and shaming it into compliance.

China’s actions across a range of issues, and the “wolf warrior” aggression of its distinctly undiplomatic diplomats, suggest it’s not about to be shamed or cajoled into anything. Beijing wasn’t exactly global flavour of the month before the pandemic and has got a lot more unpopular since, all that face mask diplomacy apparently having failed. Spraying out sanctions on foreign officials and academics like water from a leaky hose will surely make that worse, but Beijing appears not to care. 

It’s hard to imagine what irrevocable action China could take at this point that would convince an appropriately sceptical observer (eg, us) that it was serious about labour standards and human rights in CAI. Believing that self-interest will ultimately deliver is naive: China’s feeble access to the EU market doesn’t give it much to lose economically if the deal fails. 

The EU’s traditional approach to labour (and environmental) standards is to make them subject to dispute settlement but not sanctions, hoping that findings of violation will trigger negotiations and discussion in the partner country that presses the government to comply. This approach was already looking a bit feeble. In a test case with South Korea under the EU-Korea bilateral deal, a disputes panel found that Seoul had the obligation to ratify the ILO conventions it had promised to, but gave it an awful lot of leeway in doing so. If public pressure and debate isn’t going to sway an advanced democracy such as South Korea, it probably isn’t going to shift China.

Since the CAI deal was signed at the end of December, the commission has muted its boasting about the labour standards provisions and emphasised instead its separate “autonomous” (= unilateral, but the EU doesn’t like that word) measures such as creating the power to block imports outright on grounds of forced labour. One idea is that those autonomous measures and CAI might come as a package, the right to ban imports tempering the balancing the market access. But if China continues to act like it did last week, we are more likely to see the first and wait in vain for the second to follow.

This episode suggests a direction that the issue of labour and environmental standards in EU trade deals could go in from here. You want to use trade policy to protect labour standards and the environment abroad? You need to make preferences in the deal strictly conditional on meeting those standards and/or just ding the trading partner with unilateral actions. The idea of labour standards in trade deals whose enforcement consists of starting a conversation is losing credibility.

Tit for tat

John Butler, president/CEO of the World Shipping Council
John Butler, president and CEO of the World Shipping Council, said the increase in size of liner vessels is driven by increased demand for shipping services

We asked John Butler, president and CEO of the World Shipping Council, what the Suez incident means for megaships and freight costs

Does the incident raise fundamental questions about the use of large container ships on canals that were never designed to accommodate them? 

The canals have indeed been designed and expanded expressly to accommodate larger vessels, so there is no question that they are fit for purpose. Large vessels transit the canals daily with no issues. The shipping industry is continuously working to increase safety and prevent incidents, and this incident will certainly inform research and influence vessel operations. The increase in size of liner vessels is driven by the increased demand for shipping services, together with carriers’ desire to keep emissions as well as the cost of transport down.

Diagram showing the increasing size of container ships from 1968 to 2021

There will always be a wide range of vessel sizes, but a larger vessel emits far less CO2 per unit kilometre of goods transported than a smaller vessel, which is why they are used for transport between the main hub ports of the world. Without them we would have a much less efficient and more polluting supply chain.

Are there any longer-term implications here for container ships that rely on the Suez Canal? Do we begin to see bigger vessels use alternative routes? 

This incident will be thoroughly analysed and learned from to prevent a recurrence, but I would be surprised if it changes traffic patterns to any major extent. The fact remains that using the Suez Canal on a sailing from Asia to northern Europe rather than going around Africa reduces the distance travelled by 43 per cent. That is 10 days and many tonnes of CO2 emissions avoided.

We have seen shipping costs soar since the pandemic. What do you think will be the impact on prices on the East Asia to northern Europe and US East Coast routes? 

Short-term spot rates for liner shipping fluctuate in line with supply and demand. The market will determine whether there is an impact.

Don’t miss

  • The skyscraper-sized container ship that has blocked the Suez Canal for almost a week has been partially refloated, raising hopes that one of the world’s most important trade routes may soon reopen and allow the backlog of vessels to pass through.
    Read more

  • The weekend Big Read on why the stuck container ship symbolises the problems many supply chains are facing after a year-long pandemic.
    Read more

  • The Bank of England is demanding that lenders seek its approval before relocating UK jobs or operations to the EU, after becoming concerned that European regulators are asking for more to move than is necessary for financial stability after Brexit.
    Read more

Tokyo talk

The best trade stories from Nikkei Asia

  • Japan is looking to end government loans for exporting coal-fired power plant technology, following two of the country’s largest private banks and coal financiers. 
    Read more

  • American dependence on semiconductors made in Taiwan is creating another risk for the US as China takes an increasingly aggressive posture towards the island. 
    Read more

View original post