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Sarah Sands on submitting the GEAC report to the German Chancellor Olaf Scholaz

We talk at Hawthorn about being a values driven company and sometimes we get the chance to take a stand. Last year, I chaired the G7 gender equality advisory council under UK presidency and this year I was invited back by Germany to sit on the council. I had two particular interests. First, how we measure progress and so I was delighted that Germany took up the UK proposal last year for a dashboard to provide data on how G7 countries are performing on topics ranging from the number of female led businesses to feminist diplomacy and the care economy.

Second, the searing subject of war rape, made more vivid this week by the testimony of the Ukranian first lady, Olena Zelenski. I have followed this subject since William Hague and Angelina Jolie held a summit in 2014 when I was editing the Evening Standard and I accompanied them to the DRC.

This week, the Foreign Secretary James Cleverly convened a summit on the subject of conflict related sexual violence; I was invited to compere some of the sessions and chaired one on media ethics, with a panel including journalist Christina Lamb, film maker Leslie Thomas and a survivor of Isis kidnap, called Hala.

It was harrowing to listen to the experiences of the Yazidi women, who were kept as slaves by Isis. But amidst all the economic trials and political quarrels at the moment, it was also inspiring to see the UK showing moral leadership on this subject.

Report 2022

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Name Role

It coincided with the presentation of the GEAC report to the German Chancellor Olaf Scholz in Berlin on Thursday. My small contribution was towards this same issue of war rape and, while wrapped in diplomatic language and stopping short of a new commission, which we would have liked, it has the best chance of strengthening response to this most barbaric weapon of war.

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Uranium’s return? Dier’s Day and Emirati geo-economics

Policy preview: Uranium’s return?
In September, uranium spot prices returned to levels last witnessed in 2012, spurred by hopes that Japan would be restarting its investment in the sector a decade after shutting it down following the March 2011 Fukushima Daiichi nuclear power plant disaster. Nuclear power has been on the lips of politicians elsewhere as well, with many proposing renewed nuclear investment as a key component to the climate crisis. The UK’s Boris Johnson has been a keen proponent, and since assuming office in 2019 has repeatedly floated a plan for a dozen or more ‘miniature’ nuclear reactors.

The past decade has been brutal for the sector. Westinghouse, once America’s flagship nuclear firm, filed for bankruptcy in March 2017 and was later purchased by investor Brookfield Business Partners, though it has been accused of failing to reinvest in the business and dithering on whether to seek an exit. The UK’s pre-Boris nuclear strategy is broadly seen as a failure, with Hinkley Point C beset by repeated delays, knock-on effects for its French state-owned parent EDF’s other projects as well. Russia’s Rosatom has had more success, but its flagship project – near the Lithuanian border in Belarus – has caused the Baltics to limit electricity trading with Russia and Belarus over security concerns. China is the sole outlier, having invested heavily in building new reactors over the last decade, though its efforts to export its building technology have not met success.

Japan restarting its nuclear reactors would provide a new breath of life to the sector but would hardly prove sufficient. The crash in uranium prices that began in 2012 was also driven by Germany’s abandonment of nuclear power, one of outgoing Chancellor Angela Merkel’s most controversial legacies. There have been some hopes that a coalition without her Christian Democrats (CDU) could revisit the decision, but this should be dismissed – the result of the September election means that the Greens are all but assured a role in any government. The party traces its origins to the anti-nuclear movement that inspired much of mainstream student and youth politics in the 1970s. They are more likely to agitate for an EU ban on nuclear power – something the party’s representatives in the European Parliament have previously called for – than allow the resumption of nuclear power plants in Germany.

Uranium is not dead yet, and nuclear power investments may ultimately form a key part of the climate crisis response. But headwinds remain – just look to Japan where the opposition has campaigned on the nuclear power plant restart ahead of the 31 October election, seeking to cast the government as irresponsible.

“Following Fukushima we had to acknowledge that even in a highly technologically-developed country like Japan the risks of nuclear power cannot be safely mastered”. Chancellor Angela Merkel

Power play: Dier’s Day
Eric Zemmour has seeped through French politics this autumn like water from a burst dam, dominating conversation even, and often especially, amongst those most opposed to his right-wing nationalist vision for France. Perhaps the only major political force in the country to successfully ignore him thus far is his right-wing rival, Marine Le Pen and her National Rally (formerly the Front National) party, though this has not proven effective in terms of maintaining Le Pen’s spot in the polls. All this before Zemmour has even formally declared his candidacy. A mix of quasi-literary invectives, national pride, culture war invectives and the effectively-timed leaking of an affair with his assistant have proven irresistible to French media. Zemmour is certainly his own man, but at the genesis of this media frenzy stands one of his closest political advisors: Antoine Diers.

Diers is, like Zemmour, not an elected politician. He also formally does not work for the non-candidate, at least not yet, and serves as chief of staff to the mayor of the upscale Paris suburb Le Plessis-Robinson. He has served as a counsellor himself, in Dunkirk, for the various iterations of France’s traditional main right-wing party, now known as the Republicans, amid the heydays of Nicolas Sarkozy’s presidency. Diers combined this work with a simultaneous stint in student politics (which in France still includes a fair number of right-leaning associations, and neo-Gaullist movements, contrary to popular perception).

Diers, however, quickly moved to the right, becoming a follower of Philippe de Villiers, a former Republican who had broken with the party over what he saw as its insufficient criticism of the influence of Islam in France and Euroscepticism. He was also associated with the right-wing activist Pierre Meurin go on to be director of the academy set up by Marion Marechal after she broke with her aunt Marine Le Pen amid Le Pen’s attempts to detoxify the Front National. Bluntly, he studied with many of France’s most polemic and assertive figures, with experience in new form media and more accustomed to raucous debate than the formal-yet-acerbic debates of the old French intellectual right-wing from which Zemmour hails.

Diers has forced Zemmour into the centre of the national conversation, appearing more often on critical television and radio stations that more established right-wing figures have long considered unworthy of their time. Diers is widely tipped to become Zemmour’s spokesperson once his candidacy is formalised. Even if Zemmour’s candidacy ultimately does fail to win the presidency, Diers has set an example for how the right can seize the French national conversation – experience that will keep him in high demand.

“I have come to the conclusion that politics are too serious a matter to be left to the politicians.”

Charles de Gaulle

Dollars and sense: Emirati geo-economics
The United Arab Emirates (UAE) has recalibrated its foreign policy in recent years to ensure a greater focus on economic diplomacy, all the while assisting its endeavour to diversify its economy away from dependence on oil.

We have already seen the effects begin to play out with the recently-announced partnership and investment relationship between the UAE and the UK. This is to include Emirati investment in the UK’s green energy and life sciences sectors, but also a tie-up to invest in and expand ports in Senegal, Egypt and Somaliland. The UAE has long had a strategy of investing in African ports, but the partnership with the UK’s Commonwealth Development Corporation helps put it at the centre of Britain’s own ability to project power in the region.

There is precedent for the UAE to use economic ties as a bridgehead for deepening its political links. Last October, it was the flagship Gulf signatory of the Abraham Accords – an agreement between Israel and a number of Arab states to normalise diplomatic relations. This had been preceded by substantial Emirati investment into Israeli business and in particular its services sector. Once unthinkable, UAE and Israeli embassies have opened up alongside formal channels of communication and cooperation.

This diplomatic cooperation paves the way for further partnership in strategically-important sectors. The two countries have proposed cooperation on security matters, and though progress will likely fall short of a full defence pact, Israel’s decision not to intervene to oppose the US’ recent sale of weapons to the UAE points toward further cooperation.

The Abraham Accords also gives further political space for the UAE to promote business ventures with Israel and other international partners. Just last week Israel, India, the US and UAE formed a quadrilateral forum for economic integration, helping them work together on sectors including infrastructure, digital infrastructure and transportation.

Indeed, a joint article by Abdullah bin Zayed Al Nahyan and Yair Lapid, the UAE’s minister of foreign affairs and international co-operation and the foreign minister of Israel, respectively, highlighted the extent of these bilateral partnerships. The pair noted they ranged from an association between the Israeli D’Vaish health food company and the UAE-based Al Barakah Dates Factory, as well as a $1bn investment by Emirati sovereign wealth fund Mubadala into Israel’s Tamar gas field.

UK-UAE economic partnership is following a similar course, with the Emirati state pledging to invest £10bn in the UK’s strategically important clean energy, tech and infrastructure. The UAE has already invested £1.1bn in British companies and funds, including £500m in telecoms infrastructure firm CityFibre. Meanwhile, Mohamed bin Zayed, the UAE’s de facto leader, plans to sign an agreement with the Prime Minister to strengthen trade and collaboration across a wider range of sectors including climate change and regional stability (read: defence and security).

The UAE’s increasing appetite for collaboration and strategic partnerships between the UK and the UAE is only set to increase, providing opportunities for British firms in key sectors both in the UK and internationally.

“As two of the world’s most dynamic and advanced countries, the UAE and Israel together can help turbocharge economic opportunity by pushing for deeper regional integration.” UAE and Israeli Foreign Ministers Abdulla bin Zayed and Yair Lapid

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Double Irish surprise, small-town hero? Corporate income tax a la française

Policy preview: double Irish surprise
Ireland’s political economy is set to undergo a rather momentous shift. As a result of the 8 October agreement brokered by the Organisation for Economic Co-operation and Development (OECD), states are to set out a global corporate tax regime that will see a minimum 15% tax on corporate earnings instituted for multi-national enterprises. Ireland had been a hold out to the pact when it was first teased earlier this year but was reportedly brought on board by a commitment that this rate would not be later increased. Nevertheless, for an economy that has attracted numerous multinationals over the last two decades precisely due to its 12.5% corporate tax rate, though often even a fraction of that because of Irish rules around ‘patriating’ foreign earnings, this marks a potential significant departure.

The Irish government has acknowledged as much in its budget, presented by Finance Minister Paschal Donohoe on 12 October. Corporate taxes will indeed rise from 15% for large corporations, albeit only from 2023. Given Ireland has so long been a jurisdiction of choice for multinationals, rather than necessity, the Finance Ministry warned that move that Ireland has warned will cost at least £800m in tax revenues – imply what you will about what this says about the ministry’s confidence in the 15% minimum tax actually being globally enforceable.

Although the government has not directly tied the two tax shifts to another, Donohoe’s budget announcement did include a new tax that should be able to fill this gap in the budget; a zoned land tax, also due to come into effect in 2023. It is nominally instead meant to replace a vacant sites levy and similarly designed to address a national shortage of homes, but in reality sets a platform for local authorities to radically revisit Ireland’s zoning practices. The rate will be 3% but the power for local authorities to reclassify major swathes of the country as having the potential for development will see the land tax base expand significantly.

The move may well ultimately be successful in raising tax revenues and spurring new development in Ireland. But it is not the first time that Ireland has relied on a mix of land development and tax incentives to expand government spending. A similar mix fuelled the Irish real estate bubble that so dramatically burst in the global financial crisis – one would hope this serves as enough of a warning to ensure the same mistakes are not repeated. Irish debt to national income soared to 108% in 2020, but Donohoe has pledged the new budget will see it fall to 99% in 2022. Whether this bears out may well prove a significant bellwether, or early warning sign.

“Tax competitiveness has brought our country the only prosperity we’ve known”. Bono

Power Play: Small-town hero?
Central Europe is experiencing a wave of political change -the last week has seen the erstwhile wunderkind of Austrian politics Sebastian Kurz resign his premiership amid a corruption probe and in the neighbouring Czech Republic, populist billionaire Andrej Babis’ premiership has also apparently come to an end with an opposition coalition forming after the 10 October elections in the country. Both departures stand in contrast to the relatively orderly ongoing departure of Germany’s Angela Merkel. All three moves, however, hang heavy over the future of Europe’s second-longest serving leader after Merkel, Hungary’s Viktor Orban.

Orban has faced repeated corruption scandals, much like Kurz, though so far has been impervious. He has reshaped Hungarian politics to solidify his Fidesz party’s grip on power, shifting the parliamentary system and engaging in gerrymandering that has outraged liberal opponents – something Babis tried, but failed, to do. However, Hungary’s opposition has finally begun to unify after over a decade of repeated splits. Much as the Social Democrats, Greens, and liberal Free Democrats in Germany are now holding coalition talks that have the potential to put Merkel’s Christian Democratic Union in opposition for the first time in 15 years, Orban’s political opponents have shown a willingness to cross traditional ideological divides in an effort to ‘reset’ Hungarian politics.

Hungary’s opposition has even organised a primary contest to choose a united nominee for prime ministership in the election due to be held next spring. But in a shock turn of events, the contest’s most prominent figure – Budapest Mayor Gergely Karacsony – withdrew from the race on 8 October. Karacsony has built a name for himself at home and abroad as the driving force behind the ‘Pact of Free Cities’ an alliance between mayors across central and eastern Europe that has often challenged their more nativist governments in recent years. Yet in withdrawing, he endorsed the conservative Peter Marki-Zay, mayor of the small town of Hodmezovasarhely.

Marki-Zay had finished behind Karacsony in the first-round of the opposition primary, but the pair are united by a belief that Klara Dobrev, a left-leaning MEP who edged out Karacsony, will be unable to defeat Orban in the national election. The second round is already underway, with votes due by 16 October but Marki-Zay is seen as the favourite. There is precedent in the region for a small-town mayor to upset a political stalwart, in neighbouring Romania Klaus Iohannis did just that in 2014, defeating Prime Minister Victor Ponta in a race for the presidency in 2014. Marki-Zay will be hoping he can likewise make his mark on the region’s politics.

“To tell the truth, I have always seen the 20 years between 2010 and 2030 as a unified era” Hungarian Prime Minister Viktor Orban

Dollars and sense: corporate income tax a la française
Emmanuel Macron is not often hailed for his successes. He has been pilloried from the left and the right domestically, while he has had little success in winning over France new allies internationally – and has arguably further strained relations with both the UK and fellow EU members. His self-perception and actions have earned him the sniggering sobriquet Jupiter. Yet four years into his presidency he has one unalloyed success on which he should be proud to rest his laurels: France’s effective top-end corporate income tax rate has fallen from 44.4 per cent to 28.4 per cent.

The tax is set to fall even further to an effective top rate of 25.8 per cent in 2022. Although the COVID-19 pandemic has strained France’s finances just as it has for so many other economies, Macron has steadfastly insisted that he will maintain the cut plan. This is in contrast to many of his would-be rivals, with Paris Mayor Anne Hidalgo coming out in favour of renewed higher taxes (in particular the ‘wealth tax’ on the highest earners that Macron also abolished). The far-right’s perennial candidate of the last decade, Marine Le Pe, is also in favour of a higher tax rate, though it is unlikely to be a major area of her campaign. Those vying for the nomination of the Republican party, the latest iteration of France’s traditional centre-right party, have been critical of Macron’s debt binge, but hesitant to call for further tax rises out right.

Yet despite the headline success, Macron is not expected to make the tax cuts a key feature of his 2022 presidential campaign. Macron is reportedly wary of being seen as too business friendly, least this shift votes to a more left-leaning candidate such as Hidalgo in the first round of the election, or cause the left to stay home in a potential run-off against Le Pen.

But rumours have been circulating that a second Macron presidency would seek to plug the gap in the French budget through a one-off corporate tax, enabling Macron to avoid an embarrassing permanent reversal of his signature success. Macron has already shown himself willing to engage in such taxation accounting fudges – in 2017 the very year he began his cut agenda, a one-off tax of 10.7 per cent on firms with revenues over €250 million. Plus ça change, plus c’est la même chose.

“Can a people tax themselves into prosperity? Can a man stand in a bucket and lift himself up by the handle?

Winston Churchill
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Internal activism, Afghanistan’s last bastion and hydrogen hopes

Dollars and sense: internal activism
‘Green’ investment funds and public pressure are forcing big oil firms to change their behaviours, but immediate material change will be limited, while we await and expect further regulatory changes.

This year’s AGM season provide tumultuous for the world’s largest publicly-listed energy firms. Activist ‘green’ hedge funds have used their positions to compel major players to progress on their decarbonisation credentials. Such firms have always been vulnerable to criticisms from climate activists and environmental NGOs.

But the rising salience as climate change as a political issue, coupled with the trend toward a greater focus on companies’ social and environmental credentials, has lent credibility to climate activists operating in the financial world.

Hedge funds such as Engine No. 1 have led the charge by forcing board appointments and environmentally-conscious resolutions at some of the biggest oil firms, including Chevron and Exxon Mobil. These efforts are positioned as moves to maximise shareholder returns and to ensure that energy firms are well-equipped to weather global transitions to renewables. This is a trend we will doubtless see continue as climate change’s impacts are further felt across the world and activists emulate the like of Engine No. 1.

We are also seeing developments of the regulatory environment around listed firms’ environmental reporting requirements in both the UK and the US. For example, the next few years will see the progress along the FCA’s roadmap concerning firms’ obligations around climate and ESG reporting. The roadmap includes reporting requirements for listed entities aimed at preventing greenwashing. From this accounting year, it is already the case that large publicly-listed firms should report their approach to measuring and managing climate-related impacts and risks, and the FCA looks committed to expanding the set of firms affected.

Across the Atlantic, the SEC appears similarly committed to mandating that public companies report climate risks around their behaviours. Although it is already the case the case that oil and gas firms must report on their carbon emissions in the US, this regulatory shift is symptomatic of greater desire by regulators and governments to force companies to disclose the climate impact of their activity. As a sector long negatively associated with carbon emissions, we expect more stringent regulatory mandates to be placed on oil and gas firms in the coming years.

Major economies’ efforts to reach net zero carbon emissions are proving politically contentious across the world. Mandating more open climate reporting will help provide governments with greater political cover to make necessary policy changes. The tightening of ESG reporting requirements, however, can shift the onus for action to a fight between business and government to one within the boardroom.

Though oil majors have been exploring how they can convert their existing facilities to expand their renewable energy production capacity, ‘green’ policies by firms will only go so far. Increased regulation, both in the form of reporting requirements and of minimum climate standards necessary for listing, will likely be a permanent fixture. Governments and activists will both look to listing requirements to bring the battle to the boardroom.

“We welcome the new directors to the board and look forward to working with them—constructively and collectively on behalf of all shareholders.”

Exxon Mobil spokesperson, in response to election of Engine No. 1’s nominees Gregory Goff and Kaisa Hietala.

Power play: Afghanistan’s last bastion
The stunning fall of the Afghan government over the last week has sent shockwaves rippling across Western governments, with 20 years of military, human, and financial capital appearing to have been for nought in the fight for control of the country.

US President Joe Biden has made clear that he sees no more direct role for US forces in the country despite acknowledging the surprising speed and scale of the Afghan government’s defeat. And while UK Defence Secretary Ben Wallace too has bemoaned the state of affairs in the country, the reality is that there is no political will in Britain. However, one pocket of resistance to the Taliban remains – Afghanistan’s Panjshir Valley.

Panjshir’s most famous son, Ahmad Massoud, announced on 16 August that he planned to lead a new anti-Taliban movement from the region, the sole territory that has not fallen to Taliban control over the last week. The Panjshir has welcomed fleeing minorities from other parts of the country, special forces units abandoned by their military leaders, and vice president Amrullah Salleh, one of the only senior leaders from the Western-backed government not to flee the country. Protected by significant peaks and a loyal population, it is not the first time that resistance to the Taliban has been left to the Panjshir Valley.

The region famously never fell to the Taliban in the pre-US invasion civil war. It became the core of the ‘Northern Alliance’ against the Taliban that was led by Ahmad Massoud’s father, Ahmad Shah Massoud, better known as ‘the Lion of Panjshir’.

Ahmad Shah Massoud was assassinated two days before the 9/11 attacks, by al-Qaeda operatives posing as Western journalists. The killing was ordered by Osama bin Laden as assistance for his Taliban hosts and to shore up the al-Qaeda-Taliban alliance before the terrorist attacks that did so much to change Afghan and world history. That his son is now left to fight the Taliban without direct Western assistance – effectively the same situation which Ahmad Shah Massoud found himself in, having pleaded for support at the European Parliament just months before his assassination – demonstrates how little impact Western intervention has had on Afghanistan’s underlying divisions.

The younger Massoud notably finds himself without the same broad alliance among Tajiks and Uzbeks that his father was able to rely on. Even before the government’s collapse, the Taliban made inroads in northern Afghanistan far beyond what it ever achieved before the US-led invasion. Meanwhile the Taliban has made clear it seeks international recognition, and even made noise about adjusting its medieval practices ever so slightly to such support. However, it ultimately remains the reprehensible terror group that it has always been.

If there is to be any international support for an anti-Taliban effort now or in the future, Ahmad Massoud and the Panjshir Valley may prove the sole conduit for hope that Afghanistan can avoid another decade of darkness under Taliban rule.

“This situation over the short and long-run, even in case of total control by the Taliban, will not be to anyone’s interest. It will not result in stability, peace and prosperity in the region. The people of Afghanistan will not accept such a repressive regime. Regional countries will never feel secure and safe.”

Ahmad Shah Massoud, ‘Letter to the American People’ (1998)

Policy review: hydrogen hopes
The UK government launched its first its plans for a ‘world-leading hydrogen economy’ on 17 August, declaring its intent to secure more than 9,000 jobs in the sector and unlock £4 billion in investment by 2030. Hydrogen has long been linked with the green agenda, as the gas produces no carbon emissions when burned.

However, hydrogen comes in various varieties – and the debate over how to support the sector’s development largely breaks down into two camps over these: advocates of ‘green hydrogen’ derived from electrolysis and ‘blue hydrogen’ derived from natural gas but in which the carbon dioxide in this process is captured and securely stored or disposed.

The government’s hydrogen plan declares its preparation to offer subsidies in support of hydrogen production but crucially demurs on whether it will subsidise green or blue hydrogen, or both, only “committing to providing further detail in 2022 on the government’s production strategy”. A public consultation on “a preferred hydrogen business model” is now underway.

Advocates of both forms of hydrogen production will be lobbying the government in line with their preference, with ‘blue’ advocates keen to demonstrate its lower cost and ‘green’ supporters advocating for its potential as a carbon-free energy source, with no long term storage costs even if presently it is significantly more expensive.

The cost difference to the UK could be significant, as the government’s strategy lays out that it plans to offer effective ‘feed in tariffs’ in which hydrogen producers receive a payment to bridge the difference between the cost of production and the price at which they sell it on the market. It does caveat that this market price cannot be lower than the price of natural gas, but the price differential between gas and ‘green’ hydrogen is significantly wider at present than between gas and ‘blue’ hydrogen.

Blue hydrogen’s advocates, however, have an additional tool at their disposal in addition to the cost basis, which will be subject to advancing economies of scale in electrolysis technology (though some have already voiced concerns about reliance on Chinese technology in this space). Namely that blue hydrogen offers a route to extending the lifeline of the North Sea’s hydrocarbons industry – something already endorsed by the UK’s oil and gas industry.

With the public purse under post-pandemic pressure and the Conservative’s levelling up agenda, subsidies for blue hydrogen may well prove a potential panacea for a number of areas of concern, but selling their potential will require a sustained and joined up effort from both legacy industry and new hydrogen players.

“I believe that water will one day be employed as fuel, that hydrogen and oxygen will constitute, used singly or together, will furnish an inexhaustible source of heat and light” Jules Verne

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Charging growth, a red herring between the Pacific and Atlantic and a one-tax world

Dollars and sense: charging growth
“Lithium is common. (The) hard part is turning Lithium salt or clay into extremely pure LiOH”. Elon Musk

Far from the headline news around Brexit and its aftermath – so centred on the Northern Ireland protocol, governance and rules for the financial services industry, customs declaration (or the lack thereof) and British-EU travel as the COVID-19 pandemic appears to be waning – Brussels and Westminster have been competing fiercely on an issue less headline-grabbing but likely at least as important to their economic futures: the development of a European battery industry.

This importance of this competition can be best summed up in Nissan Motor’s 1 July announcement that it would spend some £1 billion pounds developing a new battery plant at its hub in Sunderland alongside Chinese partner Envision AESC. It will also produce a new all-electric crossover vehicle, the details of which have yet to be announced, at the plant, where its legacy Qashqai crossover and its all-electric LEAF are already produced.

The announcement marks a stark reversal from electric car industry stalwart Tesla’s 2019 announcement that it would invest US$4.4 billion in a battery production plant outside Berlin, a cost that has since risen to closer to US$7 billion. It also marks a stark turnaround from 2016, when Tesla first announced it was exploring such an investment, and when Nissan warned it could pull out from the UK entirely if voters backed Brexit.

Nissan’s investment is being generously supported by subsidies; at least €100 million from the government, plus further support from Sunderland City Council. However, the ultimate difference between producing new electric car batteries in the UK versus on the Continent comes down to refining lithium, a matter that may prove familiar to long-term readers of Hawthorn Horizons as in November we covered the challenge facing the Portuguese government in the first-half of 2021, namely whether and how to push ahead with a Lithium mining and refining project in its far north that had attracted considerable local opposition.

Lisbon proved unwilling to do so, and in April scrapped plans to develop the site. In contrast, the UK’s British Lithium has made strides towards launching a lithium mine in Cornwall, as has Cornish Lithium, by securing UK government backing. In a sign of growing confidence, start-up Green Lithium announced last week that it had secured seed funding for a lithium refinery (on the back of a government-backed investment in April).

As things stand, lithium appears set to charge British growth – while a lack thereof could seriously damage Europe’s auto industry.

Policy preview: a red herring between the Pacific and Atlantic
“I’m a big fan of bitcoin…regulation of money supply needs to be depoliticised” Al Gore, former US vice president

El Salvador recently became the first country that set to accept Bitcoin, with President Nayib Bukele approving legislation in early June that mandated that businesses and individuals accept Bitcoin as payment effective 7 September. Just days earlier, he had announced the move at a conference in Miami that more closely resembled the ongoing of a nearby nightclub than the IMF summits in Washington D.C. or central bank summits in Jackson Hole, Wyoming, where monetary policy announcements are more frequently made.

Bukele’s new law unsurprisingly contains a major loophole, namely that all El Salvadorean firms and individuals who lack the technology to process Bitcoin transactions – well over 99% of each – will be automatically exempt from the regulation requiring they accept it. Nonetheless, the move has been hailed by many crypto-advocates as the first example of Bitcoin supplanting the US dollar – El Salvador does not have its own currency, and has been dollarised for quite some time. Bitcoin’s most ardent believers also argue that the move therefore helps restore some of El Salvador’s sovereignty, though the reality is that were Bitcoin ever to become the country’s de facto currency, El Salvador would still lack the ability to set an independent interest rate.

El Salvador’s central bank nonetheless has a significant role to play in the new crypto-friendly country, namely Bukele has tasked it with overseeing a fund that is responsible for ensuring convertibility between the dollar and Bitcoin. This effectively forces it to take on price risk, and as bitcoin’s significant volatility this year has shown, that may well prove to be quite the daunting task. It is made all the more concerning by the fact that El Salvador is currently in negotiations with the International Monetary Fund (IMF) for US$1 billion in desperately-needed hard currency funding.

The IMF has suspended negotiations as a result of El Salvador’s decision, concerned that El Salvador’s bitcoin regulations could see it effectively become a hub for those seeking to convert Bitcoin to dollars, and it is unwilling to see disbursed funds go to this market. For all the fanfare that El Salvador has received, the move is likely to be dashed, at least in practice by the IMF’s demands and US opposition.

It would not be the first time such an experiment has failed – then-Ohio Treasurer Josh Mandel announced in 2018 that the state would accept bitcoin to pay state taxes. His successor, Robert Sprague, shut the programme down in October 2019 citing procurement irregularities. It processed fewer than 10 transactions during its 11-month lifespan.

Cryptocurrency may be here to stay, but it will not be displacing the dollar anytime soon, even in El Salvador.

Power play: a one-tax world

“With deregulation, one sector of the economy after another is liberated to capital’s unominotred authority”

Economist Herbert Schiller

The G7’s June embrace of a global minimum tax proposal advocated by US Treasury Secretary Janet Yellen brought the campaign out of the shadows and into global headlines. We first discussed the issue in Horizons in March and noted that Washington was likely to use the Federal Reserve’s currency swap lines instituted at the onset of the COVID-19 pandemic as a sweetener to bring +EU nations on board. It has indeed done so, announcing just after the Carbis Bay meeting that it would extend the lines until the end of the year.

The Federal Reserve also concurrently extended swap lines to other central banks – including Brazil, Mexico and Australia’s. At the start of July, the Organisation for Economic Cooperation and Development (OECD) announced that its members too had backed the proposal, a far more significant move than the G7’s endorsement as the OECD has the ability to shape policy not just among the G7 but far beyond, even if it has long been reticent to use its legally-enforceable decisions to pressure member states.

So far only nine states have opted out – most notably Ireland but also Barbados, Estonia, Hungary, Kenya, Nigeria, Peru, Saint Vincent & The Grenadines, and Sri Lanka. Dublin’s reticence will remain a major sticking point, but the OECD, unlike the G7, has notably already agreed to exempt most financial services from the tax, which may ultimately be extended in a manner that allows Ireland to remain an attractive base for multinationals.

The global minimum tax is still a far way, likely at least a couple of years, away from becoming a reality. But as it appears on the horizon, it is important to consider how states will look to compete, and who may be poised to gain. One potential beneficiary is Canada, and its model may soon be adopted by others.

Canada has long made itself an attractive destination for corporates, particularly in the commodities sector. While its regulatory environment was shaped by its own mining sector, miners from Kyrgyzstan to Brazil to Indonesia have long seen Toronto and its stock exchange as their preferred destination.

The Canadian model leaves securities regulation and oversight to its Provincial governments, meaning it does not have a federal equivalent of the US’ Security and Exchange commission or the UK’s Financial Conduct Authority. They do have an umbrella organisation, the Canadian Securities Administrators (CSA), which aims to harmonise regulation.

In late May, the CSA announced a series of proposed amendments on continuous disclosure obligations, effectively reducing them by combining a set of three disclosure and filing requirements into one annual disclosure statement.

The institution of a global minimum tax will spur further such moves, as regulatory competition will supplant tax-rate competition for attracting multinationals.

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Poll tax, redux? Much ado about Chesham and Amersham and a Swiss family affair

Dollars and sense: Much ado about Chesham and Amersham
“Like one that draws the model of a house, beyond his power to build it; who, half through,, gives o’er and leaves his part-created cost, a naked subject to the weeping clouds, and waste for churlish winter’s tyranny” William Shakespeare

The Chesham and Amersham by-election raises serious questions for the future of the Conservative Party’s planning and homebuilding policy. The Liberal Democrats’ overturning of a 16,233-vote majority on a campaign built off of local opposition to new house construction and the HS2 high-speed rail line (despite the party backing both on a national level) highlights just how salient such issues are in the Conservatives’ ‘Blue Wall’. British by-elections are renowned for producing shock results, but they often belie the state of national politics.

The Chesham and Amersham vote is one such result. While suburban London and much of the home counties are undoubtedly fertile ground for Liberal Democrats, tactical voting – which saw the main opposition Labour Party win just 600 votes – is far less common during general elections. A so-called ‘Lib-Lab’ coalition has never seriously manifested itself, least of all at election time, despite repeated efforts.

As a result, papers are aflutter with talk of whether Prime Minister Boris Johnson will reverse his proposed planning bill and other manifesto commitments aimed at increasing the number of new homes built by 300,000 a year. Many Conservative party stalwarts have proposed just that, and some MPs such as Theresa May, Johnson’s predecessor as prime minister have been pushing for such a reversal since well before the by-election was called.

The crux of the matter is the fact that Britain’s strict planning permission requirements – while ostensibly aimed at sustaining greenbelts, protecting architectural heritage, and providing local communities with democratic input over their own development – are also a key driver of house price appreciation. The Conservatives traditionally do far better in areas with high home ownership, with Labour’s strength historically in urban areas with high rent share.

However, the fate of the ‘Red Wall’ should cast doubt upon these assumptions. Home ownership rates are fairly high in the north-east seats where the Conservatives saw such success in 2019. House prices are crucially far lower than in the area around London, but the price differential was far smaller during Labour’s heyday under Tony Blair even as home ownership rates were broadly similar to their present levels. House price decreases in northeast can in part be attributed to low population growth compared to the rest of the country, driven by employment decreases.

New home construction in areas where population has increased may decrease the rate of house price appreciation, but the north-east demonstrates this does not spell doom for Conservative hopes. As the population grows elsewhere, new homes will have to be constructed to eventually bring more voters onto the property rolls. Expect Johnson to continue with his planning reforms – it would not be the first time he has discarded the advice of May and her ilk.

Policy Preview: Poll tax, redux?
“The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title” John Stuart Mill

Planning policy is not the only significant change to the UK’s housing and property market that has been in the public debate in recent months. Property tax change proposals have been bandied about at a rate not witnessed since 1991, when the ‘poll tax’ was withdrawn in the face of significant public opposition just a year after its introduction, helping to end Margaret Thatcher’s prime ministership along the way.

The 2019 Conservative manifesto raised the spectre of such a change in its call to “redesign the tax system so that it boosts growth, wages and investment and limits arbitrary tax advantages for the wealthiest in society”. Council tax are among the most tangible example of such policy to many voters: the four lowest council tax rates are all found in central London while the highest rates are found in far less wealthy, and even relatively impoverished, areas. For example, Hartlepool, which the Conservatives won in a by-election in May for the first time, has the fourth highest council tax rate despite being the 11th most deprived area in England.

Given the Conservative shift to the north, and the aim to solidify the former Red Wall as a new Tory heartland, it is therefore no surprise that Bright Blue, an independent think tank advocating an agenda of liberal conservatism, in late May published a report declaring an ‘annual proportional property tax (is) the best system for levelling up the country,” employing Downing Street’s favoured phrase for its Northern-friendly policies.

Bright Blue is by no means alone in calling for such a system, which will be familiar to American readers, in which property taxes are directly tied to the value of a home. The present council tax system was also meant to partially take home value into consideration, hence its ‘bands’ but the valuations were set in 1991, where they remain frozen (except in Wales), and rates for bands are directly tied to one another.

Numerous Labour MPs have called for a proportional property tax, and even making the tax payable by the home owner (council tax is paid by residents, including renters, rather than home owners) as has former Liberal Democrat leader Sir Vince Cable.

While the government sets thresholds for council tax increases, policy is otherwise left largely to the councils themselves. Recent Conservative governments have increased local tax authorities’ powers by also expanding the ability of local councils to retain tax on local businesses for local spending, part of its devolution agenda.

It is this policy that one should expect to be reversed. Johnson may well look to have the government redirect funds raised from business rates tax to fund his levelling up agenda. A tax on commercial land tied to its value is also a serious possibility. But the backlash that would result from a proportional residential property tax in the ‘Blue Wall’ would provoke a backlash that would risk escalating the post-Chesham and Amersham Conservative squabbles into a potential re-run of the party’s poll tax crisis. It shall not pass.

Power play: a Swiss family affair

“The best inheritance a father can leave his children is a good example”

John Walter Bratton

The Swiss Federal Council’s decision in late May to abandon negotiations with the European Union over a new framework agreement to replace the dozens of treaties that currently facilitate Swiss access to the single market, and EU citizens’ right to seek employment in Switzerland among other matters, was the result of years of strained negotiations. Yet it marks the crowning achievement of one man, long the eminence grise of Swiss politics, Christoph Blocher.

Blocher is a unique political figure, in a unique political system. While UK audiences may see commonality between his Euroscepticism and his right-wing Swiss People’s Party’s rhetoric and the role that Nigel Farage has played in UK politics over the last 20 years, Blocher’s role in reshaping Swiss politics goes far beyond. Although he only ever sat on Switzerland’s seven-member Federal Council, the executive government body in the country, for one four-year term from 2003 to 2007, in Europe only Germany’s Angela Merkel and Hungary’s Viktor Orban have spent a comparable amount of time at the pinnacle of national politics.

Blocher is arguably even more controversial than Farage. His narrow 2003 election to the Federal Council over incumbent Ruth Metzler marked the first time an incumbent member was not re-elected since the 19th century, breaking Switzerland’s tradition of amicable cross-party politics. The second, and final time, a councillor has failed to secure election came when Blocher himself was ousted four years later when other parties placed a cordon sanitaire over his candidacy although his Swiss People’s Party (SVP) won a record number of seats in the National Council, the lower house of the Swiss parliament.

Notably, Blocher has never formally headed the SVP. Though it split in 2007 when another party member accepted a seat on the council in Blocher’s stead, and again a few years later, the SVP has remained the largest party in Swiss politics by some margin ever since.

At 80, with the idea Switzerland would inevitably be drawn closer to the EU now firmly in the rear-view mirror, Blocher has indicated he may be ready to give over the reigns of the party he has never officially led. The party’s current president, Marco Chiesa, is another figurehead and not the likely heir.

Instead, his daughter Magdalena Martullo-Blocher, a SVP representative in Parliament, is his heir apparent. There is already precedent for such a succession, she took ownership of chemicals firm Ems-Chemie decades ago as her father entered politics, and formally succeeded him in 2008. She has clearly had success, with Bloomberg estimating her to be worth $8.6 billion, a gargantuan fortune even by Swiss standards. Despite unconvincing denials of any such interest by father and daughter, Martullo-Blocher will seek an even more commanding role atop Swiss politics than her father ever held.

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Sarah Sands on chairing the G7 Gender Equality Advisory Council and addressing the G7 leaders

While the match between England and Croatia was at its most exciting, I was poring over the final communiqué of G7. I had a stake in this, as chair of the gender equality advisory council for G7. On Friday, I presented 14 recommendations to G7 leaders on behalf of the council. They were warmly received, especially by President Biden, Prime Minister Trudeau, President Macron and the President of the European Commission Ursual von de Leyen. Boris Johnson said that he personally endorsed them.

But I have learned a trick or two about summits in the three months that I have been working with GEAC and the first thing is to check what is in print. In the past, rhetoric has not translated into action. During the French G7, in 2019, there were more than 70 recommendations and little to show for it. The following year, President Trump scrapped the GEAC.

So this year, as chair, I was determined to make something happen, or what is the point of us? We had a far shorter period for preparation than is customary, so the overwhelming mission was evidence-based focus. Work out what G7 can actually deliver and make sure that women are central to discussion.

The pandemic was an example of what happens when women become an afterthought. Women were on the front line as health workers, teachers and carers yet also expected to hold the home together. Maternity services were not thought through – there is still contradictory advice on whether pregnant women should have the vaccine. And there was not enough attention paid to the shadow pandemic of domestic violence. There is a huge data gap for women.

The composition of GEAC this year was the making of us. It was packed with scientists and economists who were used to problem solving. I looked at the list and wondered how any of them would have the time. The names included Dame Sarah Gilbert, of the Oxford vaccine team, Dr Fabiola Gionotti, Director General of Cern, the Harvard professor Iris Bohnet, Ursula Burns, leader of the White House Stem programme, Dr Ritu Karidhal, from the Indian Mars mission, Dr Dambisa Moyo, the global economist.

The civil service secretariat also set up meetings with leaders in their field to inform our recommendations and report. For instance we spoke to Alison Rose, chief executive of NatWest and author of the Rose Review about access to capital and scaling business. Every female leader we spoke to asked simply: How can I help?

We divided our subjects into education, empowerment and eradicating violence and found of course that the three are inextricably linked. I presented our recommendations to the G7 leaders alongside the Congolese gynaecologist Dr Denis Mukwege, a Nobel laureate who tends the horrifying injuries caused by sexual violence in conflict. He asked first for war rape to become a red line, triggering international condemnation. And second that we keep girls in school to make sure that they are safe.

The communiqué was as satisfying to me as the England Croatia result. It acknowledged, as we asked, that women and girls had been set back by the pandemic and needed to be central to the economic recovery. It pledged to increase the number of girls studying STEM, which will unlock for them the jobs of the future. This is not a good time to ask world leaders for funding, but the Global Partnership for Education, which we backed with our council member Alice Albright, got the lion’s share. We have been asked to produce a report by September that will both work out the international structure for dealing with sexual violence in conflict and the mechanism of a progress index, by which we can track with data what is improving for women and girls, and what is not. This will include targets and representation. When the prime minister used the odd phrase about the world becoming more feminine, I reckon he was referring to our recommendation about getting more women in decision making roles. Even at G7.

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Boris’ social test, raise the roof and potash play

Policy preview: Boris’ social test
“Providing better social care for older people who need it is a cause worth fighting for” Ex-prime minister Gordon Brown

Prime Minister Boris Johnson marks two years in office come 24 July – regardless of potentially partisan views on how he performed on them, there is little disputing that he has faced a series of serious tests to his leadership: Brexit and the COVID-19 pandemic foremost among them. However, seems to have yet another test. As laid out in the Queen’s Speech this May, the government plans to lay out proposals on social care reform in this Parliament.

It will be the first time the Conservatives have seriously put forward such proposals since then-prime minister Theresa May included in the party manifesto a policy that would see the government claw back some spending on elderly care from the value of the home. It was stingingly, and lastingly, labelled a ‘dementia tax’. The policy – or at least the attention it received, its justification by critics to label May as ‘cold,’ and, perhaps most importantly, the unease it caused with homeowners, arguably the key Conservative constituency – was seen as critical in the loss of the Conservative majority in the June 2017 general election.

One can be certain that Johnson will not be reviving May’s policy, from which she was forced to backtrack during the campaign. There has been little attention to just how high a pedestal Johnson has placed on such reform even as he made its priority quite clear by declaring that “We will fix the crisis in social care once and for all” outside Downing Street on his first day as prime minister.

Spending on social care remains well below its 2011 levels, and while the Conservative Party is expected to return to its budget-conscious roots more broadly, this is one area where even libertarian-inclined Conservatives such as Jacob Rees-Mogg have endorsed further investment. Having turned on the spending spigot to fight COVID-19, which has raised the political weight of public health and wellbeing issues significantly, Johnson may well feel justified to do so with regards to elder care. The political push for such action may grow as claims by Johnson’s former advisor, Dominic Cummings, that Health Secretary Matt Hancock saw COVID-19 patients returned to care homes without negative tests are investigated.

Johnson has been cool on a mandatory-contribution scheme to fund such care in the past, and is likely to again hold off now. A blank cheque pledge from the state to meet all social care costs is also unlikely, but Johnson is clearly not afraid of being seen as a statist. Expect his proposals to include substantial investment in state-run social care, and an entitlement to certain levels of in-home support, with the state overseeing a regulated system of insurance-style schemes available to those over a certain age limit. To make them more attractive, tax advantages are likely to be offered to buyers.

Dollars and sense: potash play
“Our country has become a conduit for security and stability in the centre of Europe” Belarusian President Alexander Lukashenko

The European Union is going to impose its most serious sanctions yet on Belarus, following a meeting of the bloc’s foreign ministers at the end of May. Outraged by Minsk’s tactics in arresting an opposition journalist – apparently calling in a fake bomb threat to a Ryanair flight from Greece to Lithuania, both EU members, to forced the plane to divert to Minsk – the ministers agreed to punish strongman ruler Alexander Lukashenko by sanctioning key industries in the country, where most businesses are still state run. According to Luxembourg’s foreign minister, this is to include potential sanctions on its exports of potash, a mined fertilizer that is the sole natural resource Minsk produces in abundance.

Washington has been more circumspect, although it typically imports fairly little potash from Belarus, with sizable North American producers such as Canada’s Nutrien and US-based Mosaic rivalling Belarus’ state-run Belaruskali among the world’s largest producers. Washington is concerned such a move could push Minsk into an even more reliance on Russia, its key benefactor, and also increase Europe’s resource dependency on Russia given its largest alternative potash sources are all Russian. Nevertheless, US Secretary of State Tony Blinken has made coordination of sanctions policy with Europe a key policy priority and will not oppose any such move.

There is precedent for sanctions on key commodity producers to rile markets, with the most recent such example the 2018 sanctioning of Russia’s Oleg Deripaska, which risked affecting his metals firm Rusal, causing major tumult on aluminium and bauxite markets as prices spiked overnight. A similar situation is less likely to result if the EU blacklists Belaruskali or otherwise seeks to restrict its ability to sale in the EU market because potash spot markets are not nearly as important to the trade, and pricing outlook, of potash.

Belaruskali, however, itself is very significant in setting potash prices because for much of the last decade it has traditionally agreed annual supply contracts with China and India before any other competitors that are seen as setting the ‘price floor’ for the market. Western sanctions on Belarus could see Minsk accept a bottom barrel price next year. Responding to Minsk in this manner may inadvertently pull out the proverbial rug underpinning the profitability of other potash producers as well.

Power play: raise the roof?

“I always think a debt ceiling is a good tool to carry something”

Senator Mith McConnell, Republican Minority Leader

Fights over the US debt ceiling – a legal limit on how much the federal government can borrow – were a key feature of domestic American politics for much of the Obama presidency. The downgrade of the US’ credit rating in August 2011 set off a round of political fighting that repeated itself every year, with fiscally Conservative Republicans seeking to constrain president Barack Obama’s budgets, and spending on his flagship health care agenda, throughout his term in office. As deficits continued to grow under the Trump Administration – with federal revenues falling due to his flagship legislation, tax cuts – debt fights slowly faded from the agenda. In 2019, Congress passed a mechanism tying the debt ceiling increase to the budget, aiming to settle the matter once and for all.

2020 quickly put paid to that plan, with the massive deficit and in turn debt increase caused by the trillions of dollars in stimulus both the Trump and Biden administrations have put at the core of their response to the pandemic. Congress did agree to suspend the debt ceiling last year, but that suspension expires on 1 August. With the Republicans in opposition in Congress, a renewed debt fight is to be expected. Lawmakers such as Senators Ted Cruz (R-TX) and Lindsay Graham, (R-SC) have already floated potentially policy concessions from the Biden Administration in exchange for their support.

However, the lawmaker most set to benefit from the debt battle is not a Republican, but rather Arizona’s Krysten Sinema, arguably the sole budget-wary Democrat remaining in the Senate. Because debt ceilings can be tied to the budget, the Senate’s ‘Byrd Rule’ applies, which allows a simple majority to pass legislation. With the Democrats holding 50 Senate seats, and Vice President Kamala Harris the tie-breaker, Democrats could adjust the debt ceiling without any Republican votes.

However, centrist Joe Manchin (D-WV) has demonstrated the political rewards on offer by threatening to be the sole holdout. Less than five months into the Biden presidency, he has arguably become the most powerful figure in the Senate. This not only helps him not only secure benefits for West Virginia but also to maintain his political position in the state, which voted overwhelmingly for Trump, given his perceived independence from the Democratic agenda.

Sinema’s home state of Arizona is, in contrast, a key swing state. She will threaten to hold out to seek political benefits there as well, hoping it solidifies her support among centrists ahead of her re-election campaign in 2024 when Arizona is again expected to be among the most contested states. Ultimately, however, she will support such an increase, likely extracting some directed spending towards Arizona in the process.

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Der Kingmaker, the debt ceiling and Lithium in coalition

Policy preview: ending the debt ceiling?
The US’ debt ceiling is among the most despised institutions of US politics, from the perspective of the Democratic Party. The ceiling formally institutes a limit on how much the US government can borrow – but in practice it has never done so, having been consistently raised since its introduction just over 100 years ag, even in the 1990’s when then-president Bill Clinton managed to run a rare surplus.

The ceiling is once again in the news after the Republican Party refused to support raising it in a procedural vote on 27 September. The ceiling was of course consistently raised under former president Trump, when Republicans controlled the Senate, and it was formally suspended for two years in August 2019. While this may well have avoided its politicisation during the COVID-19 pandemic, the vast government spending rapidly required by the initial response to the virus highlighted the potential risks in retaining such a limit.

Democrats argue that the Republican Party politicises the limit every time that it is out of power, pointing to the government shutdowns that resulted from refusals to raise the limit when Barack Obama was president and former Republican House Speaker Newt Gingrich’s 1995 move to separate the increase from the annual budgetary process. But at the same time the Democrats have been wary of publicly calling for its elimination, which could be perceived by voters as embracing fiscal irresponsibility.

Treasury Secretary Janet Yellen has warned that failure to raise the ceiling could lead to a formal default, declaring this would push the US back into recession. Federal Reserve Chair Jerome Powell – who former president Donald Trump nominated to replace Yellen in that post – has made the same point.

Republican Senate Majority leader Mitch McConnell has used the latest standoff to say that the buck stops with the Democratic Party this time, given the party’s control of both houses of Congress and the presidency. He is correct in that the Democrats can use the budget reconciliation process – which would override the Republican ability to filibuster such a vote – to eliminate the debt ceiling. Yet the Democrats are seemingly unwilling to open the 2022 budget resolution to do so, which could galvanise opposition to increased spending from centrist Democratic Senators Joe Manchin and Kirsten Cinema, already engaged in a standoff with their own party over a US$3.5 trillion social policy and US$1 trillion infrastructure bill.

The Democratic Party may therefore have an interest in allowing a brief crisis over the debt ceiling even as they control all branches of government. Previous shutdowns have failed to significantly affect domestic political trends. McConnell’s relationship with Trump and the less fiscally cautious wing of the party that has been so ascendant since his 2016 election victory is strained, with Trump reportedly seeking to stoke a leadership challenge among Republican Senators. Despite McConnell’s declarations, the intricacies of Senate parliamentary process are not of interest to most American voters.

Strange as it may seem, if Democrats are hoping to lay the blame for any fallout at McConnell’s feat, in hopes it will engender an environment in which they can finally push through the debt ceiling’s abolition in 2022.

“Democrats have every tool they need to raise the debt limit. It is their sole responsibility”. Senate Minority Leader Mitch McConnell

Power play: Der Kingmaker
Germans went to the polls on Sunday, and the election appears to already have a likely winner. The leader of the Social Democratic Party (SDP), Olaf Scholz, is look set to be the next Chancellor. However, the two smaller parties he will need to support his governing coalition will have to find a lot of compromise.

The SDP won the most seats in the election in a disappointing night for the Angela Merkel’s governing Christian Democratic Union (CDU).

The party sitting closest politically to the two largest parties, the SDP and the CDU, and thus natural coalition partners in the next government is the FDP, whose leader Lindner has been described as a ‘kingmaker’ who must choose the next leader of the Republic.

However, a coalition made up of the CDU, FDP and Greens, is politically implausible. The CDU suffered a heavy defeat on Sunday, losing a quarter of its support compared to the last election in 2017. Their leader is already facing calls to resign from within his own party, and is no longer a serious contender for the Chancellery.

The most likely outcome is a ‘traffic-light’ coalition between the Greens, the SDP, and the FDP. The SDP will need to form a coalition with these parties in order to form a government. But while the Greens favour statist intervention, the FDP is more aligned to a laissez-fair economic doctrine, preaching faith in markets to solve the climate crisis.

So while Lindner may no longer the ‘kingmaker’ – with little tangible choice over who will be the next Chancellor – more significant may be areas where the Greens and the FDP can find common ground. Whereas the Greens and SDP largely align on economic policy, the FDP support significant tax cuts and adherence to the debt brake. Division over climate issues such as the future of the car sector, Nord Stream 2 gas pipeline, and how to best protect households from the impact of climate policies, may prove to be sticking points.

However, early signs suggest compromise is possible – the Greens and FDP already have entered negotiations between themselves to better enable them to present a united front. To give just one example, Lindner has called for a state investment fund, separate from the federal budget, borrowing and invest with higher returns. The Greens may well see this as the route to climate infrastructure investment without having to increase national debt to unacceptable levels.

Perhaps Lindner will not be kingmaker, with Scholz apparently already Chancellor-in-waiting. But the success of Germany’s next government will depend on how much compromise can be reached by the FDP and the Greens – and early signs are promising.

“For me, it is always important that I go through all the possible options for a decision”.

Chancellor Angela Merkel

Dollars and sense: Lithium in coalition
Germany’s Green Party is all but certain to enter its next government after the 26 October elections – having come in third, both the first-place Social Democrats (SPD) and the runner-up Christian Democratic Union (CDU) have they want to discuss forming a coalition with the party. Any realistic coalition other than a renewed CDU-SPD grand coalition, which both have said they wish to avoid, would require the Green’s participation. The Green’s environmental agenda has been embraced by both as well, but one major question facing any new coalition will be how they balance environmentalism and NIMBYism.

Pollsters reported that more Germans identified climate change as their primary concern going into the elections, rapidly overtaking COVID-19 as the summer progressed. The German auto industry has also undergone a rapid shift to supporting the electric transition for the sector as well, spurred on by Tesla’s development of a ‘gigafactory’ outside Berlin – something the outgoing grand coalition pushed for. The CDU’s chancellor candidate, Armin Laschet, even met with Elon Musk in mid-August, seeking to brandish his parties green credentials.

Incidentally, Laschet posed a question to Musk that said gets to the heart of Germany’s green agenda: “hydrogen, or electric?”. Musk laughed it off, endorsing the later (on which he has staked his company) wholeheartedly but that such a question could still be posed in German politics highlights the quiet discomfort many at its peak express with regards to a core aspect of the transition: the supply of lithium batteries.

Demand for lithium has grown exponentially over the past decade, but Europe has repeatedly failed to develop its own sources. Plans for lithium mining in Portugal collapsed in April, and while the UK has made some very early tentative progress towards exploiting its own lithium, post-Brexit competition and EU rule-of-origin and tariffs mean that integrating European auto manufacturing with UK battery production is unrealistic at present.

Despite the enthusiasm for the green agenda, the Green Party has been at the forefront of opposition to lithium mining. At the European level, the party has fiercely opposed the US$2.4 billion Rio Tinto led Jadar mine project in Serbia over concerns it will degrade the local biodiversity and agricultural fertility and in solidarity with local protests.

Whatever coalition is formed in Germany, it will have to deal with the reality that Berlin risks being left behind if Europe remains without a significant local lithium supply. Otherwise, its auto industry risks being left behind.

“We have to think of where the raw materials come from… but we want to further develop and expand electro-mobility here in Germany, particularly with the production of batteries”. Annalena Baerbock, co-leader of the Green Party

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Crypto, leverage and regulation, a red star rising? Paris’ role in china’s lending

Policy preview: crypto, leverage and regulation
“Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve” Bitcoin founder Satoshi Nakomoto

The age of cryptocurrencies appears to be well and truly upon us: 2021 has seen crypto-exchange Coinbase enter public markets at a market cap of roughly US$85 billion, in line with the market cap of HSBC; the cryptocurrency Ethereum which is positioned as building bloc for a host of digital applications is up some 450% year-to-date as of 12 May, and even the Bank of England Governor, Andrew Bailey, has been forced to discuss their value in a recent press conference. Bailey warned that cryptocurrencies “have no intrinsic value” and said punters should “buy them only if you’re prepared to lose all your money”.

Crypto-evangelists would surely disagree, but Bailey’s comments raise an important consideration for the market that must be considered – who assumes its liquidity risk – as crypto-currencies increasingly enter the main stream. Most crypto-currencies – and certainly the most prominent pair, Ethereum and Bitcoin – are marketed as decentralised and outside of financial regulators’ control . Many supporters argue that central bank officials like Bailey are so critical of cryptocurrencies precisely because of this, and passionately believe that the fact cryptocurrencies exist outside the traditional monetary system is a feature, not a bug.

While it is outside the scope of this column to argue the merits and criticisms of the arguments for cryptocurrencies, their recent stratospheric growth means that it behooves investors, regulators, and market participants to consider the risks of a cryptocurrency collapse. Bitcoin notched a market capitalisation of some US$1.12 trillion this April, up from $160 billion last April, growth of 700% – if it experiences a similar spurt of growth at any stage, it would reach a market cap of nearly US$8 trillion – larger than all of the US stimulus spending since the onset of the COVID-19 pandemic by a considerable margin – and nearly 10 times the US’ 2008 bailout.

Cryptocurrencies’ volatility is well known; and the amount of liquidity available to even the least practiced of traders has received increasing attention in recent months, particularly in light of the market activity around GameStop, which even resulted in a Congressional hearing in mid-February. Whether or not cryptocurrencies are truly independent of other monetary regulation, at their current levels of growth – and given the traditional financial institutions involved in enabling the leverage supporting this – they are becoming systemic.

Regulators may not like crypto-currencies and crypto-enthusiasts may not like regulators, but if they continue to ignore one another, the level of systemic risk will only continue to grow. If it does, and central bankers like Bailey are ultimately proven correct – or even if there is a market crash again as witnessed in 2018 – the pain will be felt far beyond the crypto corner of the financial markets.

Dollars and sense: Paris’ role in China’s lending
“Paris isn’t a city, it’s a world” King Francis I

At the end of March, the College of William & Mary’s AidData research lab, the Kiel Institute for World Economy and the Peterson Institute for International Economics published what is arguably the most extensive examination of Chinse loan contracts with foreign governments around the world, simply titled “How China Lends”. Beijing’s use of credit to drive investment into markets ranging from the frontiers of Zambia to central European infrastructure to Chilean mines has garnered significant attention in recent years, particularly after the formal launch of its ‘Belt and Road’ policy in 2017, though Beijing has itself largely ceased to use the phrase. This has increasingly led to accusations of ‘debt trap diplomacy’ in Western coverage, amplified by concerns over Beijing’s own holdings of Western debt.

Yet Beijing is too often described as an emerging player when the reality is that it has now been the key global creditor for over a decade. Already by 2010, China’s official government lending was well in excess of the World Bank’s lending, and Chinese lenders demonstrated a willingness to lend to frontier markets well before Western investors got comfortable with them. While this has led to a number of headaches for Beijing, particularly in Angola and Venezuela, it is only in the aftermath of COVID-19 that China’s lending policies have the potential to upend international capital systems.

Among the most striking revelation in the AidData report is the fact that China’s loans to many emerging markets include clauses requiring them to refuse requests to take the loans to the Paris Club, an informal international institution that includes every major Western government and which aims to facilitate sovereign debt restructurings by working together to agree terms. Its key stipulation is that all government loans be restructured on the same terms.

The clause in Chinese debt contracts therefore runs counter to the Paris Club’s attempt to address the collective action problem of sovereign debt. Beijing has argued that many of these loans are not subject to the same terms because they are commercial, not intergovernmental, in nature – a position opposed both by Western commercial and intergovernmental creditors.

For all the damage wrought by the US-China trade wars in recent years, a major spat between China and the West over how to prioritise emerging markets’ loans in the aftermath of the pandemic would risk even more significant economic and geopolitical disruption.

Power play: a red star rising?

“You don’t have to live the blues to play the blues”

Herbie Mann

The Labour Party has not been on the receiving end of many uplifting headlines in the aftermath of the UK’s May local elections, a familiar turn of events for a party that has been out of Westminster government since 2010. Silver linings have been found in some local races – for example in the Cambridge and Peterborough mayoralties – which will give some hope to those arguing that Labour must expand into the suburbs and commuter belt if it is to halt the impact of Conservative gains in northern England’s former Labour heartlands.

Labour’s other relative bright spot was the re-election of London mayor Sadiq Khan, though his share of first-preference votes fell slightly from 44.2% to 40.0%, far more votes first-round votes were lost to the left-leaning Greens than the Conservative candidate Shaun Bailey. Khan had a turbulent campaign and a series of senior aides resigned in the aftermath of the vote, with Khan set to bring in a new cadre of advisors that could position him as a future Labour leader, particularly if incumbent Keir Starmer’s authority continues to be questioned.

Khan’s first hire was Richard Watts, who has served as leader of the Islington Council since 2014. The council has been (in)famous in the past for its far-left leanings – famously flying a red flag in the 1980s and even through the mid-1990s – and he appears to have his pulse on the matter of voter-relevant issues: he lead a 2014 paper calling for free school meals for students to be expanded long before famous international footballer Marcus Rashford made the issue a prominent one amid the COVID-19 pandemic last year. Watts’ appointment should be seen as an effort to put a London jobs policy at the forefront of the COVID-19 pandemic recovery.

While hardly a household name, Watts is perhaps best known within political circles for his instrumental role in formulating the “Workforce Focus” paper on upskilling residents published by the Local Government Association. His new appointment, as Khan’s deputy chief of staff, will very much be in this vein, as he will chair the newly-announced ‘London Recovery Task Force’.

Watts’ profile may be unlikely to give him a national profile, but the fate of his policies may well be at the core of Labour’s electoral success in the coming years. If his agenda succeeds in putting London at the fore of the economic recovery – a particularly challenging brief given expectations the ‘work from home’ trend will continue beyond the pandemic – it might just help to convince increasingly socially-liberal voters in the country’s suburbs and commuter belts to put their faith in Labour’s economic policies as well.

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Mutually assured construction, supply chain finance after Greensill, breaking the iron plate?

Policy preview: mutually assured construction
“Gentlemen, you can’t fight in here! This is the War Room!” Dr. Strangelove, or How I Learned To Stop Worrying And Love The Bomb

The Trump Administration formally named China as a ‘currency manipulator’ in January 2019, but withdrew the designation January 2020 after striking the ‘Phase 1 Trade Agreement’. As part of the deal, both sides also agreed to honour currency related commitments undertaken through their G20 membership – effectively a pledge not to seek to interfere in the market to adjust the value of the renminbi, or the US dollar, to the advantage of one side over the other. The trade pact’s purchase agreements have effectively gone by the wayside due to the COVID-19 pandemic.

Despite the trade agreement’s fragile state, and the Biden Administration’s continuation of an openly confrontational stance vis-a-vis Beijing, the Treasury Department under its new Secretary Janet Yellen has not re-applied the currency manipulator label to Beijing.

Even if Chinese-US relations further deteriorate, however, one should not expect the Biden Administration to re-impose the designation even amid escalating claims that Beijing’s intervention in currency markets is stepping up as demand from Beijing plays a key role in driving the recovery from the pandemic.

The reason is straightforward, if counterintuitive. The Biden Administration sees Beijing’s intervention in currency markets as evidence of China’s continued dependence on US capital markets. This is where the ‘new Cold War’ differs significantly from the Soviet-Western Cold War to which it is so often compared. The Soviet Union was not integrated into Western capital markets, and while its trading relationship with the West grew steadily from the 1970’s until its collapse, it was primarily in raw materials, never reached even a fraction of the supply-chain integration that has developed between China and the US.

The diversification of US supply chains away from China will likely continue, the Biden Administration has effectively called for it to do so even if in a less direct manner than Trump did. Continuing to maintain Beijing’s integration into US-led Western capital markets under such circumstances, however, can be seen as one of Biden Administration’s policy goals as well, and one where it differs significantly from its predecessor.

Labelling China as a currency manipulator authorised the Trump Administration to take punitive measures in response, but it never seriously did so – using other frameworks to justify its tariffs regime. That may have been at least in part because of the long-held belief China could respond by selling off its US Treasury stock. However, the capital markets integration discussed above means that this would be all-but certain to collapse key Chinese markets as well.

Under Biden, Washington appears to believe the status quo – of China needing to keep the renminbi at a relatively low value, buying foreign exchange in the process – leads to an effective form of economic deterrence.

Dollars and sense: supply chain finance after Greensill

“Sooner or later, everything old is new again.”

Stephen King

The collapse of Greensill Capital in recent weeks had political, reputational and economic implications for a wide swathe of the United Kingdom. The future of some of its largest steel plants has once again been thrown into doubt, its employment of a host of civil servants and former prime minister David Cameron has led to a series of embarrassing revelations, and questions are being raised about the process in which it became involved in managing certain National Health Service (NHS) payments to staff and pharmacies. Additionally, a misunderstanding of Greensill’s business, or at least its purported business, risks having a further negative affect on the supply chain finance industry – and in this case it is very much not deserved.

Supply chain finance rarely makes it into the public forum but is a bedrock of the modern global trading system. It is best understood as payments ahead of delivery of a product – think of a farmer borrowing to pay for seed and repaying with the crop – and is arguably the oldest form of finance. Its expansion helped fuel the mercantilist era beginning in the 16th century and the industrial revolution thereafter.

This is precisely why Greensill’s proposition of ‘disrupting and growing the supply chain finance sector’ failed to pass the sniff test amongst many critical journalists – the fact that it is such an established legacy form of financing means that it has effectively been a shrinking market for decades, potentially more.

As global financial markets have become more complex, derivatives markets have grown, and all manners of financing have become available, they effectively have squeezed the space for supply chain finance. This is not to be bemoaned but combined with the thin margins resulting from the short-term nature of most supply chain loans and the record low interest rate margins means the sector was an unlikely place to find a firm selling itself as a tech unicorn as Greensill did.

Greensill’s collapse was precipitated by revelations that it was not really a supply chain financier. It was effectively offering long-term unsecured loans mislabelled as supply chain financing. No other significant lenders have been implicated in the scandal.

In fact, the Greensill revelations come exactly at a moment when supply chain finance has the potential to expand. The trend against globalisation may seem an unlikely driver of growth but with the US remaining hostile to China despite the presidential transition, the post-Brexit ‘global Britain’ agenda, and the pandemic-induced realisation that diversification of supply sources can add significant resiliency, supply chain finance will play a key role.

It would be unwise to tar the entire sector with the black brush that has painted over Greensill – doing so could limit the post-pandemic recovery and the effort to make supply chains more resilient to another bout of trade wars or in the face of future global health concerns.

Power play: breaking the iron plate?
“Hillary used the word ‘glass ceiling’ … but in Japan, it isn’t glass, it’s an iron plate” Tokyo Governor Yuriko Koike

Japan faces a key test in hosting the rescheduled 2020 Olympics this summer, after a year’s delay to the COVID-19 pandemic, yet it lags similarly-developed nations in its immunisation programme by some distance, with just 1% of the population inoculated as of the time of writing. It is a potential make-or-break moment for the ruling Liberal Democratic Party (LDP) and its relatively new prime minister, Yoshihide Shuga, who took office last September when predecessor Shinzo Abe stood down citing health concerns.

Abe’s eight years as prime minister broke a trend of short-lived premierships but the present challenges may re-ignite the trend. Japan is scheduled to host elections for its key lower house this October and Shuga’s popularity has fallen from near 70% during the handover from Abe, which came as Japan was relatively unaffected by COVID-19, to closer to 30% for much of 2021 as COVID-19 infection numbers rose and the vaccination programme lagged. These were compounded by a series of corruption scandals involving LDP parliamentarians and officials, although it should be noted that Abe himself brushed off a number of similar revelations.

Shuga, in contrast, does not have the reputation as a solid economic manager that Abe had garnered. His greatest challenge may not be at the ballot box, however.

The LDP has governed Japan almost unbroken since 1955, only falling out of government between 1993-1994 and in 2009-2012. Although the party is generally conservative and right-leaning, it has accomplished this impressive feat in no small measure due to its sense of political opportunism and ability to read the prevailing political winds. Shuga is up for re-election as party leader on 30 September.

Shuga may find some comfort in the fact his party is bereft of other major political challengers, or at least ones not affected by the same issues he faces. However, this provides a key opening from a position adjacent to the party, that of Tokyo Governor Yuriko Koike.

A former LDP MP, she ran to become the party’s leader in 2008, finishing in third. Citing then-US presidential candidate Hillary Clinton’s reference to the ‘glass ceiling,’ she said she aimed to break the ‘iron plate’ for female politicians in Japan. This comment appeared to be reinforced by the fact the LDP withheld its approval of her ultimately-successful candidacy for Tokyo Governorship in 2016.

Koike created her own party to run in the 2017 national election, though did not stand herself, but relations were somewhat healed when the LDP endorsed her re-election in 2020. She retains significant popularity within the LDP, and in contrast to Shuga, has received plaudits domestically for her efforts to combat the pandemic. The Olympics will also offer her an opportunity to grow her international profile. By the time the election comes around, she may well not just be back in the LDP, but sitting atop it.

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The fate of Brazil’s petrol taxes, the key to Britain’s hydrogen agenda and the core of OPEC+

Policy preview: the fate of Brazil’s petrol taxes
“Brazil, Land of the Future and always will be!” Stefan Zweig

Brazil is not set to hold its next presidential election until October 2022, but the campaign is very much already in full swing with incumbent President Jair Bolsonaro, a right-wing firebrand, facing a stern challenge from former president and Workers’ Party (PT) leader Lula da Silva, a left-wing firebrand. The pair are all but certain to face one another in the second round (Brazil’s presidential elections include a run-off between the two most popular candidates if no one receives a majority in the first round). There are ample tales, told elsewhere, about both candidates’ alienation of the centre ground, but at this stage one can bank on one theme uniting them: changes to Brazil’s unpopular PIS/COFINS taxes.

The PIS/COFINS taxes are among the most important in the Americas, essentially serving as Brazil’s equivalent of a European-style value-added tax (VAT). As with all tax matters, they are actually significantly more complex, but distilled most simply the two duties amount to a 9.25% levy on the price of end-stage goods that is used to finance the country’s societal programmes and welfare system.

Both Lula and Bolsonaro are populists, and neither will campaign for a reduction of the programmes PIS/COFINS is used to finance. But Bolsonaro has already made clear that he desires to eliminate the applicability of the two taxes to fuel prices. Indeed, he unilaterally suspended the taxes on diesel for March and April and said that he would remove it from household gas bills. The suspension of the tax on diesel has been a demand of the country’s truck drivers strike movement, which brought much of Brazil to a halt in the months before the 2018 presidential election after oil prices were liberalised.

Lula is also likely to campaign on such a policy, though he has not formally announced it yet. During his first term as president, he passed and signed legislation making not just key food staples such as rice and beans exempt from PIS/COFINS, but also key agricultural inputs such as fertilisers and seeds. Lula must win back those voters who abandoned his PT following the corruption scandals under his successor, Dilma Rousseff, who was ultimately impeached and removed from office. Their defection to Bolsonaro put him over the top in 2018 and Lula knows winning them back will be key to his electoral hopes. Pledging to lift the PIS/COFINS taxes on all retail petrol sales may well be his play to do so.

Bolsonaro plugged the hole caused by his temporary suspension of the tax on petrol by raising bank taxes, something Lula himself would approve of were it not for the country’s highly polarised political environment. Fuel taxes may well be set to vanish from Brazil’s landscape, but what replaces them is unlikely to be preferable to most investors.

Dollars and sense: The key to Britain’s hydrogen agenda

“Water will one day be employed as fuel, that hydrogen and oxygen which constitute it, used singly or together, will furnish an inexhaustible source of heat and light, of an intensity of which coal is not capable.”

Jules Verne

With the UN Climate Change Conference that the UK is set to host, better known as COP26, beginning on 1 November, speculation is rising as to how UK Prime Minister Boris Johnson aims to set the stage. The conference offers the opportunity to turn the page on the Brexit debate and the COVID-19 pandemic, with a new launchpad for the government’s agenda of ‘levelling up’ the north and laying out a framework for how the economy can grow robustly while making the progress necessary to make the target of net-zero emissions by 2050 feasible.

If the Ministry of Business, Energy and Industrial Strategy (BEIS) is to be believed, hydrogen will be at the fore of the UK’s push into the new green economy.

On 8 April, BEIS Secretary of State Kwasi Kwarteng announced a partnership between Norway’s Equinor and Britain’s SSE to explore building a hydrogen-powered power station at a cluster of new sites – known as the Humber Renewable Energy Super Cluster Enterprise Zone – outside Hull in northern England. The announcement undoubtedly raised a few eyebrows, given that there are no commercially viable hydrogen power plants in operation anywhere in the world.

Nevertheless, SSE and Equinor are not alone in exploring hydrogen’s promise, with Scottish Power announcing on 12 April that it is seeking to build a renewables-powered facility to produce hydrogen, on the outskirts of COP 26’s host city, Glasgow. A number of other firms have stated their intention to explore the market as well.

Hydrogen has long been seen as a potential balm to the emissions issues of energy generation. The argument has been boosted by the development of infrastructure to transport and implement liquefied natural gas (LNG) for power generation over the last decade, largely displacing far more polluting coal. However, hydrogen is significantly more expensive than LNG, and the export of LNG has been effectively subsidised by a number of countries as they squabble for market share.

What then is driving the economics behind Scottish Power considering producing hydrogen, and SSE and Equinor considering building a power plant powered by the stuff? Much the same solution, subsidies, in the form of ‘contracts for difference’ (CfDs).

CfDs are essentially pledges to maintain a stable price to the generator. Given hydrogen power plants’ cost of generation is likely to be above the prevailing market price until the sector is developed, CfDs would provide security to the developers of such power plants that they can recoup their investment. CfDs have already been used to fund other green investments in the UK. Their use will need to expand significantly to develop a hydrogen market, but if COP26 is to mark a new page for both the UK economy and the global climate challenge, the launch of such a policy is precisely what to expect.

Power play: the core of OPEC+
“Now we have a chance not just to produce and sell as much as we need to, but to throw American shale overboard. Our budget is much more stable than Saudi Arabia, and is ready for low oil prices, unlike the Kingdom’s.” Dmitry Kiselyov, Head of Russian State Media, February 2020

Russia and Saudi Arabia are the two countries with the most at stake in the global crude markets. True, the United States has produced more barrels of crude for much of the last decade – driven by the shale boom – but its economy is more diversified and better able to resist the volatility seen in crude prices in recent years. This logic is not new – it underlined the 2016 agreement for Moscow to effectively join the Saudi-led cartel, the Organisation of Petroleum Exporting Countries (OPEC), in a structure known as OPEC+. The partnership undergoes regular spats, and there were genuine concerns it would rupture until the COVID-19 pandemic again put oil prices in a tailspin at the start of 2020.

As the pandemic appears to be receding in the face of the global vaccination programme, however, the chafing is very much back. When OPEC+ agreed its latest continued cuts at the beginning of March, Russia received a small increase to its output limit, some 130,000 barrels per day (bpd). The partnership is not necessarily set for immediate rupture: Russian oil officials have quietly said they will be willing to extend cuts further, if another small increase in Russian production is allowed.

But the release of a report on the country’s oil industry from the Russian Ministry of Energy (MinEnergo) this month highlights that it is not long for this world.

Put simply, Russia has had too little investment in new oil production over the last decade. Its efforts to expand into deep-offshore and shale drilling have been stymied by US sanctions imposed on such activity since 2014. While state oil company Rosneft has grown into one of the world’s largest producers (second on a bpd-basis behind Saudi Aramco), this has largely been through consolidation of the domestic Russian oil industry’s existing ‘brownfield’ sites rather than development of new ‘greenfield’ oil resources.

The MinEnergo report notes that Russian oil production is currently set to peak in 2027-2029, and rapidly decrease from there on. While the OPEC+ deal continues for now, Moscow will be looking to Saudi Arabia’s own wind-down of its further voluntary cuts, which will see 1 million bpd come back online by July. Russia is therefore unlikely to be able to fight for market share in the short term, let alone the medium and long-term. On the other hand, the importance of the fight for oil market share is growing to the Saudi leadership, as a possible lever to respond to the Biden Administration’s calls for human rights reforms.

OPEC+ is not necessarily set for an immediate end – it may stumble on to deal with the pandemic a while yet. But Moscow and Riyadh are ultimately likely to again compete for market share, a move that could effectively constrain oil prices over the long term.

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Washington’s weapons in tax treaty fight; Tobin tax’s latest turn and Madrid’s Diaz Ayuso

Policy preview: Washington’s weapons in tax treaty fight
“If the U.S. came down on tax havens in the same way they come down on countries that trade with Iran and Cuba, we’d have no tax havens in the world.” Professor Ha-Joon Chang, University of Cambridge.

US Treasury Secretary Janet Yellen is looking to work with finance ministers from around the world to agree on a global minimum tax rate for multinational corporations. This quiet effort has only just begun, but if successful it could prove among the most significant foreign policy and regulatory moves since the end of the Cold War.

This move is not without its challenges, and comes on the back of a round of recent competition by states to lower their corporate tax rates, which surprisingly saw France cut such levies under President Emmanuel Macron. Yet Britain has announced plans to buck this trend. The European Union has sought to restrict its own internal tax havens, and ensuring that technological multinationals pay their ‘fair share’ is a policy popular with all flavours of government from Canberra to Ottawa.

Perhaps the most underappreciated feature of the discussion thus far, however, is the carrots that the US can offer to other countries for their support for such an effort. The potential sticks – sanctions, tariffs and regulatory restrictions – are far better known, though at least until recently Washington has been hesitant to use these tools to target those it accuses of violating international business norms. It is unlikely that the Biden Administration will use such threats at this stage, though the precedent set by Trump’s actions on China means it cannot be ruled out that Washington will eventually use these tools for such purposes.

The key carrot also results from the US’ central role in international trade and financial markets. More significantly, Washington has already made ample, but quiet, use of the carrot over the last year. Specifically, the US Federal Reserve has offered ‘swap lines’ to key allies since last April, initially an effort to mitigate against the risk that the COVID-19 pandemic would cause a global debt crisis.

Historically, only very few countries – such as the UK – had access to such swap lines and they were only used to respond to the 2008 financial crisis. Today South Korea, Mexico, Singapore, and Brazil are among the biggest beneficiaries. If the US were to withdraw these lines, which would essentially mean that the Fed would treat local currency state debts as fungible with US debts, it would risk prompting a debt crisis. As a former Fed chair herself, Yellen is keenly aware of this.

Expect the US to offer making such swap lines permanent, in exchange for a global tax treaty.

Dollars and sense: Tobin tax’s latest turn
“This idea (of a financial transaction tax) has been around for a long time…I think frankly the experiences are mixed”. Former US Treasury Secretary Timothy Geithner, 2009

Discussions of so-called Tobin taxes once dominated considerations of how states should respond to the Global Financial Crisis and Eurozone Crisis. A few years later, they again turned heads in response to the rise of high-frequency traders, which entered the mainstream with Michael Lewis’ 2014 book Flash Boys. The Tobin tax is also known as a financial transactions tax (FTT) and is essentially a levy charged on a securities trade, either a fixed charge or as a percent of the value of the security. The debate appears to be returning again.

Although France did enact such a tax in 2012 – charging 0.3% of the value of certain stock trades, and some high-frequency trades at the lower 0.01% rate – Europe has not followed suit, with only Finland instituting a similar tax. The United States continued to oppose such a policy as well, under both the Obama and Trump Administrations.

However, the Tobin tax has recently received some attention once again, due to the high-profile Game Stop market madness. This saw a small US video games’ retailer’s stock become among the most volatile financial assets in recent months, driven by day-trading users on increasingly popular share trading applications and platforms. These in turn are dependent on selling their order flow to high-frequency traders, who some blamed for causing massive losses for small retail investors when trading in Game Stop shares was first suspended in late January.

In February, the Chair of the Financial Services Committee, Maxine Waters (D-CA), said she was willing to consider such a move. The Congressional Budget Office’s prediction that a 0.1% securities transactions tax could raise as much as $777 billion over 10 years has helped it garner further support. House Democrats are now expected to propose exactly such a tax.

However, such a proposal has little-to-no-chance of advancing in the Senate. The Biden Administration is unlikely to spend political capital on such proposals. Coverage of the tax will only grow through the rest of this year as budget debates and structural economic reforms dominate in Washington. But as with previous proposals, this game too will soon peter out and stop.

Power play: Madrid’s Diaz Ayuso

“It bothers me enormously to lose, I can’t stand it. And I’ve spent many years, with some friends, devoting almost all of our political activity to thinking about how we can win”

Pablo Iglesias, Head of Podemos

Isabel Diaz Ayuso was little heralded when she assumed the presidency of the community of Madrid, the governorship of the greater capital region, in August 2019. She had to hobble together a coalition between her centre-right Popular Party (PP), and the then-rising centrist Ciudadanos faction, as well as the nationalist Vox party. In the election held that May, she led PP to win just 30 of 132 seats in the Chamber, finishing behind the Socialist Party (PSOE), and with Ciudadanos securing 26 seats. The result was the PP’s worst performance in Madrid’s regional elections since the fall of the Franco dictatorship.

A little over 18 months later, Diaz Ayuso has called snap elections that will now be held on 4 May. Nearly 35% of voters plan on backing her PP in the vote, up from 22.23% in 2019. She said she called the vote to prevent Ciudadanos from switching to an alliance with the PSOE. Meanwhile Ciudadanos, which won 19.46% last time around, is polling on the verge of falling below the 5% electoral threshold.

Diaz Ayuso’s likely success tells the story not just of her masterful management of Madrid’s politics, but also of her prominent public opposition to the national minority government of PSOE leader Prime Minister Pedro Sanchez. Sanchez ousted the PP government in 2018 in a series of parliamentary no-confidence votes and won the most votes in the two general elections held in 2019. However, the PP has never been able to form a majority coalition and remains dependent on left-leaning Catalan independence parties for support.

With pro-independence parties winning a majority of votes in Catalonia’s 11 February elections this year, but chafing at the PSOE’s first-place finish, it is more-likely-than-not that that another election will have to be called before December 2023. Pablo Casado, PP’s national leader, has failed to capitalise on Sanchez’s troubles, particularly his regular spats with his leftist coalition ally, Deputy Prime Minister Pablo Iglesias of the Podemos party.

Iglesias announced this week he will step down to lead Podemos in the Madrid elections, vowing to challenge Diaz Ayuso. He may be able to lift Podemos above the 5% threshold it appears at risk of falling below, but it will be Diaz Ayuso who uses the election as a platform to raise her national profile. She may well lead the PP ticket by the time the next general election is called.

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Boundary review blues? A (r)evolutionary framework and Dutch days

Policy preview: boundary review blues
Britain is overdue for a parliamentary constituency boundary review. Two efforts to do so since 2010 were both ultimately abandoned, following opposition from both sides of the floor and amid the tumult of the 2016 Brexit vote and its aftermath. In 2021, however, the process is due to get off the ground, with potential major implications for the next general election.

The groundwork for the new boundaries has already been laid by the Parliamentary Constituencies Bill 2019-2021, which received Royal Assent last December. It abandoned previous plans to reduce the number of MPs from 650 to 600 and set the boundary review to be completed by mid-2023, on the basis of registered electorates from last December. Constituencies aim to be within 5 per cent of 73,393 voters, meaning that more than half of the current parliamentary constituencies will have to be redrawn.

This work is to be undertaken by the Boundary Commission, which is non-partisan. Nevertheless, the moves are certain to raise opposition from affected MPs and parties. These tensions may play out in relation to the centrifugal sentiment prevailing in parts of the UK, particularly Scotland, which is set to lose at least one, more likely two, of its 59 MPs. Wales may lose as many as eight of its current 40 seats (though the constituency of Ynys Mon / Anglesey was enshrined as a protected constituency in last year’s Parliamentary Constituencies Bill).

The redistribution of seats around urban-rural divides is likely to have the most significant impact on the political fortunes of the Conservative and Labour parties. While the continued trend towards urbanisation and growing population in London and other major cities may help Labour where new seats are created, population shifts in other areas may help the Conservatives. A number of so-called ‘Red Wall’ seats won by Prime Minister Boris Johnson in the 2019 election, in many cases bucking decades of consistent Labour victories, are areas that have seen population decline. While this means some seats may fall by the wayside entirely, the geographical footprint of the remaining constituencies is likely to expand, picking up rural and less-populated areas, where historically voters have been more Conservative-leaning.

Although Johnson has also vowed to do away with the Fixed-Term Parliaments Act, his sizable majority means that it is more likely than not that the next election will only be held after the new seats come into effect.

Dollars and sense : A (r)evolutionary framework
In February, Zambia became the first country to request that it be allowed to restructure its debt under the so-called Common Framework. The nation’s fiscal and economic challenges are not new, and it had already fallen into default last November, setting the stage for a clash between its private creditors and China, by far Lusaka’s largest creditor, over how to make Zambia’s debt sustainable. The International Monetary Fund also started talks with the Zambian government last month, further complicating the picture. But it is the test of the Common Framework that will have the most far-reaching implications.

The Common Framework of the Group of 20 Nations is one of the various initiatives that governments have taken over the last year to help one another through the Covid-19 pandemic. The first major such effort – also organised through the G20, with the support of the IMF and World Bank – is the Debt Service Suspension Initiative (DSSI). This was launched last March and has seen debt repayments to the G20 creditors from 45 developing countries suspended, with a further 28 countries eligible for such relief.

The DSSI has been so significant because China has agreed to take part, although it had historically refused to cooperate with the informal grouping of mostly Western creditors known as the Paris Club. There has been significant concern in recent years over Beijing’s use of ‘debt trap diplomacy’ following its assumption of control of the Hambantota port in Sri Lanka, strategically located in the Indian Ocean, in 2017, but fears that the pandemic would see it seek to escalate such efforts have so far proven unfounded.

The Common Framework was announced at last November’s G20 Summit in Saudi Arabia and builds on the DSSI by establishing a unified set of rules for how sovereign nations’ debts such be restructured. Though the summit was held largely virtually due to the pandemic, supporters of the framework have insisted that support for it among G20 members is strong and unified. They will have to be for the framework to succeed. There has never before been lasting international agreement on sovereign debts, despite repeated attempts to set up a sovereign bankruptcy court. is Zambia presents a strong early test case for the Common Framework.

Private holders of Zambia’s bonds have telegraphed that they hold a blocking share of the debt, which could hinder any restructuring. They have demanded the terms of Chinese debt restructuring be disclosed before agreeing to any of their own. The Common Framework should enable this, although Beijing has demurred from publicly stating how its loans to Zambia are even constituted. If the Common Framework can even make moderate progress in bridging this gap, however, it may prove a key tool in government bankruptcies, particularly in the developing world, going forward.

Power play: Dutch days
Dutch voters go to the polls on 17 March, following the resignation of Prime Minister Mark Rutte’s government in January, prompted by the revelation that it wrongly accused thousands of families of welfare fraud. However, Rutte’s People’s Party for Freedom (VVD) has only built its lead in polls in subsequent weeks. 35% of voters appear poised to vote for the VVD, up from the 21.3% it received in 2017. Only Geert Wilders’ far-right Party for Freedom (PVV) is also above 20 per cent in the polls, and then just barely, but as with other previous Dutch elections, most other parties have ruled out considering a coalition with the PVV.

Rutte therefore appears set to head another government, almost 11 years after he first became prime minister. With German Chancellor Angela Merkel not standing for re-election as chancellor in Germany’s federal elections, expected on 26 September, Rutte is poised to become the elder statesman of the European Union.

If Rutte’s VVD performs as well as current polls predict, it will have its choice of coalition partners, but the most natural allies would be those with whom he formed the previous government and who have overseen the interim cabinet in the run-up to the current vote. These are the liberal D66. centre-right Christian Democratic Appeal (CDA) and centrist Christian Union. Some polls indicate the CDA will win enough votes to open up the possibility of a two-party coalition between the VVD and CDA. The centre-left and left are unlikely to play a major role at all, with the Dutch Labour Party (PvdA) a shadow of its former self, having never recovered from the global financial crisis and Eurozone crisis.

Heading a unified centre-right government would set the stage for a more conservative agenda, and if past evidence is any indication, Rutte would likely seek to carry this over into his unofficial role as Europe’s elder statesman (and formally on to the European Council, which guides the EU’s policy agenda). Rutte’s governments had traditionally been allies of the British in their opposition to the idea of ‘ever closer union’ while the UK was still an EU member. More recently, he led resistance to the ‘coronabonds’ mutualising EU debt amongst members, and if a government of only his centre-right allies, would further increase support for Dutch leadership of the ‘Frugal Four’ within the EU. With Merkel set to leave the scene, and Rutte set to secure his position, Europe’s leadership itself may soon be changing to a more cautious tack.

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Net neutrality and the war over internet regulations, a tin coup and ambassadorial ambitions

Policy preview: net neutrality and the internet regulation fight
Perhaps the greatest US regulatory battle of the last decade – even more significant than the political fights around emissions targets or banking regulations – has been the fight over so-called ‘net neutrality.’ The term refers to the principle that internet service providers (ISPs such as AT&T and Comcast) treat all data fairly and do not throttle or accelerate speed for certain upstream or downstream actions. President Joe Biden pledged to restore the policy, but the path will not be as clear as he hopes. Net neutrality falls under the provisions of the Federal Communications Commission (FCC) – which also oversees the implementation of other increasingly controversial regulations such as the Section 230 rules on whether social media companies bear responsibility for the content they share. The fight over the FCC and net neutrality has only begun.

The Obama administration’s FCC put net neutrality at the core of its tech agenda. Proponents have credited it with enabling the growth of the tech giants Facebook, Amazon, Netflix and Google, collectively known, alongside Apple, as FAANG. Republicans opposed the policy as limiting market options and raising costs for consumers, and Trump’s appointee to head the FCC, Ajit Pai, moved to unwind net neutrality from the outset of the Trump administration. Pai surprisingly announced last November that he would resign at the end of Trump’s term. He duly did so and Biden appointed Pai’s fiercest critic, Jessica Rosenworcel, as acting chair.

The FCC is overseen by five commissioners. Following Pai’s resignation, the body is evenly divided, with two Republicans and two Democrats, including Rosenworcel, with a drawn-out appointment fight all-but-certain over the fifth. Biden’s supporters, and allies in the tech sector, have already called for the resumption of net neutrality. ISPs have largely opposed it. But issues around Section 230 and internet regulation more broadly have come to the fore of the political debate in light of ex-president Donald Trump’s criticism of social media companies, the 6 January attempt by to storm Congress, and the role of tech platforms in the election and in spreading misinformation.

The Republican party can use the debate around FCC nominations to wrest control over the narrative of these issues, at least on their side of the aisle, from Trump himself. The narrow Democratic control of the Senate enables them even to hope for political victory on the appointments and to stymie Democratic attempts to shrine net neutrality into law. The battle over internet regulation has only just begun.

Dollars and sense: a tin coup
On 1 February, global tin prices surged to a new high, reaching levels not seen since early 2014. Tin has surged on the back of the global commodities boom witnessed over the last half-year, with the COVID-19 pandemic proving little challenge to metals’ best performance in years. Prices in numerous metals have already topped market expectations for the year, though there are concerns that headwinds will emerge if Beijing dials down spending later this year – a rather widely-held assumption.

In particular, there is the potential for major further volatility in tin markets. China is the world’s largest refiner as well as the largest miner of tin ore. If China does rebalance expenditures, the commodity may be particularly affected by declining demand. China’s 2019 shift to emphasize production of higher-value goods and the trade war helped see Indonesia’s PT Timah replace China’s Yunnan Tin as the world’s largest refined tin producer.

But while Beijing is the driving force of global tin production, it is only one of the Asian countries with sizable stores of tin ore, with Indonesia, Malaysia and Myanmar also major mining hubs. Data on tin production in Myanmar is particularly difficult to pin down, given the fact that many of the country’s largest mines are in territory along the Chinese border under the effective control of local militaries who frequently clash with the Myanmar military. Nevertheless, the US Geological Survey estimates it to be the third largest producer of tin ore, responsible for just over 14% of global production.

The 1 February coup in Myanmar threatens to recast the domestic environment in the country. The Western response is likely to include sanctions and a push away from businesses linked to the military, with Myanmar moving closer to China – which holds no qualms over the anti-democratic nature of the coup. Beijing could pressure the forces along its border back into talks with the Burmese military, should it so desire, including by using tin sales as leverage. In the early days it appears as if the Burmese military has already consolidated power but this is by no means guaranteed. Aung Sang Suu Kyi and the country’s democratic forces have already held some degree power for five years, and they will be loathe to give it up entirely – a statement attributed to Suu Kyi leaked in the aftermath of the coup called on the people to defend their nascent democracy.

While 2021 is already being seen by many as a boon year for commodities across the world, events in Myanmar risk superseding global market dynamics when it comes to tin prices.

Power play: ambassadorial ambitions
The announcement of Sir George Hollingbery as the incoming ambassador to Cuba has raised eyebrows, least of all because while the move was announced on 22 January, he will only take up the post in 2022. The move is even more of radical departure from standard practice at the Foreign, Commonwealth and Development Office (FCDO) in that Hollingbery is not a career diplomat, but rather a former Conservative MP, having represented the Meon Valley from 2010 until he stood down ahead of the 2019 general election. His appointment has set aflutter rumours about plans to change the nature of the UK’s diplomatic core.

The move was criticised by the civil servants’ union, the FCA, and in response the FCDO pointed out that Hollingbery is my no means the first such appointment. Indeed, many politicians swapped roles as ambassadors in the 19th century, even if such appointments have been relatively uncommon in the United Kingdom over the last seventy years.

While the diplomatic core and civil service are resistant to such moves, there is evidence that political appointments can be effective. This has particularly been the case with Her Majesty’s Ambassador in Washington, D.C., where political appointees have been relatively common, from ex-Labour MP John Freeman, later an editor of the New Statesman before being named ambassador, to Peter Jay, the son-in-law of then-prime minister James Callaghan. Both were perceived to have managed.

Another recent political appointment has been received with aplomb, that of Edward Llewellyn, named as Her Majesty’s Ambassador to France in 2016. He too came from outside the diplomatic core, having held a number of political roles including Chief of Staff to David Cameron. Hollingbery was in government under both Cameron and his successor, Theresa May, for whom he served as Parliamentary Private Secretary. While there has been significant criticism domestically and abroad of the US practice of appointing political (donor) ambassadors, these appointments are very much not in the same light.

It is unlikely that the appointment of political ambassadors will become de rigueur. But there is an argument to be made that delicate relationships can at times best be handled by those who have the ear of decision makers in their own capital, to whom their competence is known. We may just see a handful more appointments that put this thesis to the test.

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Putting the green in German, the future of working from home and New York’s next star?

Policy preview: putting the green in German
“Germany is Europe’s heart.” Yanis Varoufakis, former Greek Finance Minister

German voters are set to go to the polls by 26 September, in elections that have garnered significant attraction because Chancellor Angela Merkel will not be the lead candidate of her Christian Democratic Union (CDU) for the first time since 2005. At the helm of various coalitions in that time with the centre-left Social Democrats (SPD) or the libertarian-leaning Free Democrats (FDP), Merkel’s coalition deal-making has been an underappreciated feature of her political nous. Her successor as party leader Armin Laschet also has shown the necessary coalition-building skill to be an effective premier, brining in the FDP to form a regional government in North Rhine-Westphalia following the state’s 2017 vote.

However, if polls are accurate, the September election will throw up new coalition possibilities heretofore unseen in German politics at the federal level. The reason for this is two-fold, first the rise of the Alternative for Germany (AfD) party, which all other parliamentary German parties have placed a ‘cordon sanitaire’ over that is unlikely to be lifted anytime soon. The second factor is the rise of the Green Party, which has sapped votes from both the CDU and the SPD. In many polls in now leads the latter and could well become the second-largest party in the Bundestag come October.

The Greens will have clear environmental demands. However, less attention has been paid to the fact that the Green Party is expressly in favour of the further mutualisation of European borrowing and has little regard for the ‘Black Zero’ policy of balanced budgets that held throughout so many Merkel governments until the COVID-19 crisis. In fact, the speed with which Germany has abandoned both this domestic borrowing policy and its reticence to mutualised European debt marks a profound paradigm shift not just in German politics, but for all of Europe.

Whether the Greens negotiate with the CDU and its more-conservative Bavarian sister party, the Christian Social Union (CSU), or with the SPD, as to forming a coalition, expect it to demand an explicit endorsement for further European financial federalisation, and for stimulus packages inspired by the recent Biden Administration package. The latter is a more natural coalition partner, though it would likely require the pair to at the least also bring in the FDP or the Left, more likely both, a daunting challenge. A Green-CDU coalition is therefore more likely, but for this to be successful it would have to cast off the remaining vestiges of Euro-trepidation that marked previous Merkel governments.

Dollars and sense: the future of working from home
“If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.” US President Ronald Reagan.

For many readers in the UK, and much of the rest of the Western world, it has been over a year since daily attendance at the office place was expected. Some have enjoyed the comforts of home; others eagerly await escaping its confines. How and when to support, advocate, and demand a return to the office remains a politicised question, and one on which no consensus has yet emerged, even in the UK where half of all adults have now had at least one dose of the COVID-19 vaccine.

It is little surprise that there appears to be growing demand for guidance or an answer on what the future of work-from-home will look like. The scale and the extent to which last year’s normal becomes ‘the new normal’ will have major ramifications not just for individual employers, but for public transportation and its finances, for the values of commercial prime real estate, and even for graduates coming out of university, amongst many others.

There is, however, no one-size-fits-all answer for how to reincorporate office life into the work routine for those able to work-from-home. As it is judged safe to do so, individuals keen to return to the office will begin to do so – in some places, particularly the United States – this is already well underway. Others may well seek to retain their home offices a while yet, and some even seek to make them permanent. There had been a slow trend of increased work-from-home practices in recent years already, the pandemic simply gave it the mass testing needed for acceptance, rather than hesitancy to become the standard.

That is not to say that we are entering a work-from-wherever-one-likes world. Taxes so often based on residency and place of employment will complicate the dreams of many would-be digital nomads. In that same vein, expect governments to institute programmes aimed at maximising the benefits of the increased number of people seeking to work from home. These will very from country to country, but examples ae already appearing on the horizon. In Spain where rural depopulation has been a trend for decades, discussion is already underway on how to incentivise some employees to stay outside the cities. In the UK, government minds are aflutter with discussion over how to link the benefits of increased work-from-home with its ‘levelling up’ agenda.

One certainty is that work-from-home numbers will increase, even if the extent is unclear. But even small changes on the margins can reshape the economy.

London has a workforce of 5.2 million, whereas Birmingham, the UK’s second largest city, has just half-a-million. If just one in five working Londoners, spends one day a week working outside London, it will be the equivalent of distributing all of Birmingham’s work force across the country. Governments will be keen to ensure they can manage the distribution of that pie.

Power play: New York’s next star?
“I don’t care who does the electing as long as I get to do the nominating”. William ‘Boss’ Tweed, former head of New York’s ‘Tammany Hall’ political machine

The last year has proven to be one of extreme turbulence for New York Governor Andrew Cuomo. Initially hailed on the left side of the US political aisle, and even on occasion by Republicans for his stewardship of the COVID-19 pandemic in his state, now facing bipartisan calls for his resignation over sexual harassment allegations. His great rival, fellow Democrat Bill de Blasio, saw his presidential campaign flop even before the first primary – and he will be replaced in the November New York mayoral election. De Blasio is all-but-certain to carry one of the lowest-ever approval ratings for a New York mayor on his way out of office.

While Cuomo has vowed to fight on, and at the end of March brokered an agreement in the State Legislature to legalise cannabis – a move many have correctly identified as a ploy to make good on an often discarded campaign pledge to regain some popularity – he may well still be forced to give up plans to run for a fourth term as governor in 2022.

New York needs a new political star. It has a long tradition of creating such creatures, even before it served as a springboard for Donald Trump’s rise to celebrity and then politics. Trump’s departure from the city predated De Blasio and Cuomo but was solidified when he announced he would move to Florida after his presidency, with the threat of state criminal investigations and his family’s unpopularity amongst the city’s social elite key factors in pushing him out. The pull of New York City on the state means that anyone looking to find their way up in state politics is likely to have to come from the left of the aisle, as with Cuomo and De Blasio.

Alexandria Ocasio-Cortez goes some way to filling the gap, though her profile is more national than regional given she how she has used her seat in the House of Representatives to campaign for a left-leaning progressive agenda. The New York City mayoral election provides the most natural proving ground for any aspirant-star, and former presidential candidate Andrew Yang has eagerly seized the mantle. He holds a narrow, but steady, lead in the polls for the 21 June Democratic primary.

Yang may well prove to be the man of the hour. However, one of his closest competitors is Scott Stringer, currently New York’s Comptroller, known for his mastery of the Democratic Party machine. The primary vote will be the first to determine the winner through ranked-choice voting. With some 50% of voters still undecided according to the latest vote, and Stringer’s experience in local organising, he may well prove victorious. A weakened Cuomo would be little match for a victorious Stringer, whereas Yang has little experience with the local Democratic Party. New York may soon be Stringer’s oyster.

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The forthcoming filibuster fight, leaseholds and cladding and Israel’s once-and-future kingmaker

Policy preview: the forthcoming filibuster fight
The US Senate’s ability to only corral 57 votes to convict Donald Trump on impeachment charges on 13 February highlights the incredibly high bar needed to pass major legislation, with 60 votes in the Senate required to end the filibuster. There have been repeated tweaks to Senate rules over the last two presidencies – with Democrats doing away with the filibuster for most judicial appointments when Barack Obama was president and Republicans expanding this to include Supreme Court nominees under Donald Trump. The legislative filibuster, however, has remained in place, despite attracting far more controversy than all others combined, with both parties fearing that the other will ram through legislation as soon as it retakes narrow control of Congress and the White House.

Now that Democrats have precisely that narrow control, the Biden administration has been muted on calls to end the filibuster. Moderate Senate Democrats such as West Virginia’s Joe Manchin, Arizona’s Kyrsten Sinema and even California’s Dianne Feinstein have pledged to retain the filibuster, so although the Democrats could technically jettison the rule with just a majority vote, there is not yet a path to do so.

Progressive activists, many of whom have long campaigned for the filibuster’s abolition, have remained surprisingly quiet over the matter to date. But that belies the strategy they have adopted to seek to push the change through. Amongst left-leaning and Democratic activist circles in Washington D.C., efforts are underway to revive a bill first introduced to the previous Congress – dubbed House Resolution 1, or HR1 – and to use its passage as a cri de cœur to abolish the filibuster once and for all.

Democrats easily passed HR1 in 2020, but Republicans who still held the majority barred it from even being considered in the Senate. The bill is essentially a wish list of Democratic party goals: regularised mail balloting, expanded voter registration, campaign finance reform and reforming the uber-partisan and increasingly controversial congressional redistricting process. After the dust settles on Trump’s impeachment, and once Biden’s administration is in place, Democrats will reintroduce the bill. It may be packed with even more radical – but broadly popular – sweeteners, such as authorising a pathway to statehood for Washington D.C. and Puerto Rico, in an effort to show that while such legislation polls extremely well, it cannot get through the Senate while the filibuster remains.

Later this year – either in the summer or, more likely, the autumn – Democrats will push the package, not in an effort to bring Republicans on board, but to convince the aforementioned Senate holdouts to abandon the filibuster. If they succeed, it will radically reshape US politics forever. If – as is more likely than not – they fail, the opening of a rift within the Democratic Party may finally create room for moderate Republicans to emerge as leaders of the opposition after four years of being stifled by Donald Trump.

Dollars and sense: leasehold and cladding challenges
The lockdowns and government policies announced in the wake of COVID-19 make clear that real estate and housing remain at the core of Britain’s economy. Estate agents’ offices have been one of the only non-healthcare or essential service industries to remain open throughout the latest lockdown, and the stamp duty holiday announced by Chancellor Rishi Sunak has helped drive transaction volume to a 13-year high, despite the pandemic. Two key pillars of housing policy, however, have proven politically contentious and vexing to the government, though by tackling them together it may just find a pathway forward.

First is the issue of cladding, which has become something of a national scandal as thousands of buildings were found to contain hazardous or non-standard material in the investigations launched after the Grenfell Tower tragedy in 2017, which left 72 dead. Second is the issue of leasehold reform, something the Conservate Party has dabbled with since even before Margaret Thatcher’s Right to Buy reforms were launched in 1980. Proving it can be done, Scotland has effectively eliminated leaseholds over the last two decades.

The government has set in motion processes to address both issues over the last few weeks. On 11 February, the government announced £3.5 billion in funds to remove unsafe cladding from buildings over 18 metres high, and a loan programme for flat-owners in shorter buildings aimed at capping the cost of refurbishment work at no more than £50 per flat per month. On 7 January, Housing Secretary Robert Jenrick announced a plan to allow leaseholders to extend their leaseholds by 990 years, up from 90 for flats, and 50 for houses, at zero ground rent.

The overwhelming majority of flat-owners, and particularly those in multi-family houses, i.e. those affected by the issues with cladding, are leaseholders, not freeholders. Aiming to smooth the process, the government’s leasehold reform also includes a policy of abolishing calculations of ‘marriage value’, which had aimed to reflect the greater combined value of a freehold held with a leasehold. The right to extend without ground rents aims to counter the recent trebling of many such charges at recently developed leasehold properties and incentivises leaseholders to extend by lowering their annual costs.

The millions living in properties affected by cladding issues have argued the government’s new repair fund is insufficient, and that it fails to reflect higher insurance costs they have had and will continue to bear as repair work is underway. There are already quiet rumblings of what more can be done.

One suggestion that appears to be gaining traction is for the government to buy out freeholds and transfer them to non-profit companies, allowing leaseholders to obtain a proportionate interest in them when they extend their lease. Taking on the cost of doing so for properties affected by cladding, or at least those uncovered by the current fund, may just provide the government with an opportunity to make major progress on leasehold reform and mitigate the cladding issue’s ability to further disrupt real estate markets, particularly for new builds.

Power play: Israel’s once-and-future kingmaker
Israelis go to the polls on 23 March, the country’s fourth election in two years. The vote is widely seen as yet another referendum on Prime Minister Benjamin Netanyahu, who has narrowly held on through the last three votes by forming ever-shifting coalitions, most recently with the Blue and White Party of Benny Gantz, who had vowed before the last election never to countenance such a government and lost most of his own allies in agreeing to the coalition.

Netanyahu has received plaudits for his management of relations with Israel’s Arab neighbours and getting the Trump Administration to recognise the annexation of the Golan Heights and Jerusalem as Israel’s capital. He heads into the vote on the back of arguably the world’s most successful COVID-19 vaccination programme to date. However, he is also embroiled in a long-running corruption scandal and has faced allegations of putting his interests before the nation’s. Netanyahu’s Likud Party is expected to win the most seats, but current predictions show the conservative parties he has traditionally aligned with well short of a parliamentary majority. Gideon Saar, who unsuccessfully challenged Netanyahu for the Likud leadership in 2019, quit the party last year and his New Hope party goes into the elections as one of Netanyahu’s strongest challengers. Yet even if the Saar-Netanyahu split can be healed, seat predictions suggest they will be short of a majority.

Netanyahu’s fate may therefore very well be determined by another jilted former coalition partner, Avigdor Lieberman. A Russian immigrant and former nightclub bouncer, the populist Lieberman has often been dubbed ‘Israel’s Trump’. He has vowed never to sit in a government backed by the Arab Joint List, but also bitterly opposes the military service exemptions for the ultra-Orthodox and has arguably become Netanyahu’s fiercest public foe despite previously serving as his deputy prime minister, foreign minister and defence minister, among other posts.

Lieberman’s refusal after the March 2020 election to join a coalition led by Netanyahu or back the only other viable alternative – a Blue and White-led government backed by the Joint List – forced the brief and tempestuous marriage between Netanyahu and Gantz. Burned by the experience, Gantz’s party is at risk of falling out of the Israeli legislature altogether in the next vote and certain not to countenance renewed support for Netanyahu.

Although Lieberman’s Yisrael Beiteinu party is expected to only win seven or so of the Knesset’s 120 seats, expect Lieberman to dominate coalition discussions. His positions may just prove sufficiently intransigent as to force yet another election.

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Monetary policy and the Treasury, trust and the Troika and spotlight on the Senate Parliamentarian

Policy preview: monetary policy and the Treasury
Indications of government policy do not always come from ministers briefing journalists or from whispers in Whitehall – occasionally they come via the civil service’s job board. To that effect, earlier this month HM Treasury posted a call for applicants for a new role as the department’s Head of Monetary Policy. While the posting may seem anodyne, it in fact raises serious question about how Prime Minister Boris Johnson and Chancellor of the Exchequer Rishi Sunak view the independence of the Bank of England.

Monetary policy is traditionally the remit of central banks. Economic orthodoxy for most of the last century has held that central banks’ ability to set monetary policy independently of the government is crucial to ensuring the long-term economic stability. The thinking has long been that if governments had the ability to set interest rates, they would be motivated to do so in a myopic manner designed to boost their electoral performances, such as by slashing interest rates to stimulate growth ahead of elections.

The breakdown in the relationship between unemployment, interest rates, and inflation – which has failed to run at an average of 2 percent or higher in developed economies despite over a decade of near-zero interest rates – has left many economists scratching their heads. However, so long as serious deflation is avoided, there are not many political opponents of low inflation. Yet concerns abound about how the poorly understood nature of this relationship is impacting monetary policy, most clearly evidenced by the conclusion issued by the Independent Evaluation Office on 13 January that the Bank of England did not have an explanation for how its quantitative easing policy worked, hindering its ability to build “public understanding and trust” in the programme.

Given the centrality of quantitative easing to not only the UK’s response to the COVID-19 pandemic and its economic impact but that of every other major central bank, renewing research efforts regarding monetary policy is indeed something that the Treasury and other Finance Ministries should prioritise. While the QE that followed the global financial crisis failed to result in inflation, the government has a responsibility to not just assume it will continue to have a non-inflationary impact.

The pandemic portends a crisis driven by a downturn in the real economy, whereas the post-2009 economic impact was demonstrative of the financial economy’s ability to precipitate a crisis in the real economy. Modelling how monetary policy may respond – in the face of renewed inflation or if it continues to remain absent – will be central to developing the government’s decision on whether austerity or continued deficit spending is preferable in the pandemic’s aftermath. The Bank of England’s independence will not go away, but with monetary policy to set to remain the driving tool in shaping the economy, the Treasury official tasked with interpreting its impact will prove extremely influential.

Dollars and sense: trust and the Troika
The global container shipping industry stands in a remarkably healthy position as the rollout of a number of vaccines means there is an end to the COVID-19 pandemic on the horizon. After being caught up in market turbulence as the virus spread across the world in the first quarter of 2020, shipping rates recovered substantially in the second half of 2020. As an billions faced unprecedented lockdowns, one common theme emerged – they still wanted to consume even if they could not venture out or splurge on services.

The resulting demand has proven a boon to the shipping industry, which had faced a torrid decade in the aftermath of the global financial crisis. Global trade peaked as a share of GDP in 2008 and has not recovered even as the world appeared to have put the worst impacts of the global financial crisis behind it before the pandemic and the industry was hampered by overinvestment on extremely large container ships that proved less adaptable to the new economic paradigms that emerged. Dozens of major businesses filed for bankruptcy, leading to industry-wide consolidation.

Some 85 percent of global container shipping is now controlled by three shipping alliances. Maersk and Mediterranean Shipping operate an alliance responsible for roughly one-third of container shipping. China Ocean Shipping Company, France’s CMA CGM and Taiwan’s Evergreen make up another alliance, responsible for nearly another third. The tie-up between Hapag-Lloyd and Ocean Network Express, Yang Min and Hyundai Merchant Marine controls another 20 percent.

If the promise of vaccines bears fruit, these firms stand to benefit further. Little new investment into container shipping has been made from outside these alliances as financing has proven hard to come by and the capacity glut caused by the long time-horizon of ship-construction has only begun to fade away.

Meanwhile the demand for shipping is likely to grow further as manufacturers seek to prioritise optionality, constructing multiple supply chains to hedge against the risk of further trade wars. While such a scenario should spell a return to boon times for the industry, the sector’s consolidation raises the spectre of renewed scrutiny.

In 2017, the US Department of Justice launched an antitrust probe into the global shipping industry. It quietly dropped the investigation in 2019, a result of political pressure and concerns that action could further strain the impact of trade tensions. While such a new probe is not likely until the pandemic is in the rear-view mirror, expect regulators in Washington and elsewhere to re-examine the industry’s competitiveness over the coming years.

Power play: spotlight on the Senate Parliamentarian

The post of US Senate Parliamentarian rarely garners significant attention. The officeholder’s role is to interpret the Senate’s own standing rules as well as its ethics and practices. Only six people have held the post since it was introduced in 1935. The incumbent, Eizabeth MacDonough, has held the post since 2012 when she replaced Alan Frumin, under whom she had previously served as senior assistant parliamentarian. The 50-50 divide between seats held by Republicans and those held by Democrats in the Senate, however, will see the role take on a significance not seen in the 20 years at least until the 2022 midterm elections.

MacDonough is not seen as party-political. Appointed by then-Senate Majority Leader Harry Reid, a Democrat, she was retained in the post by Mitch McConnell after Republicans took the Senate majority in 2014.

MacDonough may have successfully navigated the increasingly poisonous political environment in the Senate in recent years, but her largest challenges are still to come. Perhaps the parliamentarians’ most influential role relates to the interpretation of the so-called Byrd Rule, a longstanding Senate convention that allows certain bills to be approved by a simple majority rather than the 60-vote threshold required to overcome a single senator’s filibuster. Legislation is only eligible for passage under the simple majority if its primary impact is on government outlays, typically over the next ten years, rather than policy.

MacDonough faced a handful of rebukes from those on the Republican party’s right wing in recent years as they sought to repeal the Affordable Care Act through such a simple majority, which she ruled against. However, the ruling that most portends events in the coming Congress was the approval, then denial, of a motion brought by Republican Senator Josh Hawley last June. She initially ruled in favour of a move that he had brought requiring a Senate vote on withdrawing from the World Trade Organzation last June, although it rested on a technicality. Yet two weeks later she reversed her position, after the senior Republican and Democratic Senators on the Senate Finance Committee shared a new analysis of the move.

Hawley has since become a household name in the past month for his vocal endorsement of attempts to stop the certification of Joe Biden’s win in the November 2020 election. He has refused to apologise for his perceived role in fomenting unrest at the Capitol on 6 January, having welcomed the crowd as it gathered outside Congress. Hawley and his allies are likely to further seek to challenge the Senate’s established practices, and potentially seek to politicise the parliamentarian’s role. The fact Democrats lack a substantive majority, relying on incoming Vice President Kamala Harris, to serve as the tie-breaker will only heighten the importance of MacDonough’s interpretations of the Byrd rule and other Senate procedures.

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The rock in a hard place, offshore national security and state of the census

Policy preview: the rock in a hard place
The UK’s transition period out of the EU formally ended on 31 December, just a week after the EU-UK agreement on their post-Brexit trading relationship was struck. Although Parliament has already signed off on the package, the new year does not mark the end of negotiations between Brussels and London. Much will still be haggled over and adjusted.

Another UK-EU agreement has indeed already been struck: on 31 December Gibraltar Chief Minister Fabian Picardo, Spanish Foreign Minister Arancha González Laya and her British counterpart Dominic Raab announced an agreement in principle for maintaining trading relations and open borders between Gibraltar and Spain. The deal will see the territory become part of the Schengen Zone, enabling visa-free travel, policed by EU border guards from the bloc’s Frontex agency for four years. After that, further negotiations will be required. Picardo and Raab both hailed the agreement as upholding UK sovereignty over Gibraltar, and claimed the territory will still control access to its borders, with Frontex guards at the territory’s airport to oversee just approval for onward travel. The likely requirement that British nationals be subject to passport controls on arrival in Gibraltar will surely prompt some opposition in Parliament.

However, no agreement was published and all sides said none would be until a formal treaty on the matter between the UK and EU was written up and ready to be presented in 2021. While Spain and Britain have spared over Gibraltar’s sovereignty for decades, other issues are sure to arise from any such treaty that do not appear likely to have been settled by the last-minute agreement – and which could prove difficult to manage in setting out a formal treaty.

Gibraltar’s unique tax status has long made it an attractive hub for businesses. With a legal system based on English law, investors have long felt secure basing operations in the territory and non-resident businesses do not pay income tax on income earned outside the territory. Furthermore, there is no capital gains tax or VAT. It is also famed for its beneficial tax rates for gambling firms. Even if Spain is happy with the information sharing agreement to avoid Gibraltar outlined as part of the deal, other EU countries are likely to push for more stringent oversight. The debate over the future of Gibraltar’s regulatory regime has only just begun.

Dollars and sense: offshore national security
The US Senate overrode President Donald Trump’s Veto of the National Defense Authoritzation Act (NDAA) of 2021 on 1 January, the first time it has done so since Trump became president. The House of Representatives also voted to override Trump’s veto three days prior, meaning the NDAA is now law. The annual NDAA legislation has for some time been the only bill on which regular bipartisanship could be expected, perhaps unsurprisingly given its centrality to funding the military. Yet this year’s NDAA includes provisions that have the potential to reshape the US financial and real estate landscape.

In recent years the NDAA has also become something of a catch-all bill for other legislative priorities, including ones that may be too politically awkward or challenging for legislators from either party to vote for in stand-alone legislation. For example, the 2017 NDAA included provisions mandating sanctions against Russia that Republican Senators had refused to back as a standalone bill amid Trump’s public opposition. Despite the increased partisanship around the recent election, the 2021 NDAA likewise saw legislators unite to pass reforms, but this time with a far more wide-reaching impact. This NDAA includes over 200 pages of amendments to the US’ Bank Secrecy Act and other anti-money laundering laws.

Foremost among these is a requirement that corporations, limited liability companies and other similar entities disclose their beneficial owner to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Most strikingly it requires such disclosure from non-US entities that do business in the US. Though a number of financial services companies are exempt, as are large corporations that already report such data in other forms, the amendments mark a remarkable reversal of the US’ recent turn towards corporate anonymity, whether it be through Delaware corporations or in Nevada or South Dakota, which the Financial Times dubbed the ‘new Switzerland’ in 2016.

Another section of the NDAA aims to combat the use of US real estate as a haven for offshore capital – a status that has long benefited ultra high-end development in New York City and around Florida.

The Treasury will be required to consider a new national register and to institute new customer due diligence requirements for real estate firms and law firms, which have long been broadly exempt from anti-money laundering provisions.

President-elect Joe Biden has indicated he will take further action to ensure those considerations become requirements. There appears to be the political will for passing such reforms, though they may have to wait until the next NDAA to find an opportunity for similar bipartisanship.

Power play: sense of the census
The US Census Bureau is responsible not only for overseeing the US’ decennial population count, but also the distribution of seats in the House of Representatives to the states. That makes it a highly politicised agency, even if it has received less attention than in previous decades due to the widespread tumult that marked US politics in 2020. Yet despite the quiet, it is arguably the most important political issue ahead of the presidential transition on 20 January after yesterday’s Georgia Senate runoffs.

The Census Bureau, for the first time in its history, missed its 31 December deadline for completing the population count and distributing Congressional seats. It has since said it aims to complete the process by 9 January, although employees have quietly been saying they doubt this is possible even as the political leadership Department of Commerce, of which the Bureau is a part, has pushed for weeks for the process to be ramped up. Whether or not the process is completed before or after Joe Bide takes up the presidency will have significant ramifications for how seats are distributed.

Donald Trump’s outgoing administration raised the stakes by moving for the first time to exclude undocumented residents from the official population count, a move that could see New York and California’s representation in Congress decline, as well as Texas’, likely granting those seats to midwestern and Mountain states. Furthermore, given that undocumented migrants overwhelmingly reside in urban areas, it could benefit the apportioning of seats within those states to more rural areas, which are more likely to vote Republican.

In early December, the Supreme Court balked at ruling on the legality of the effort ruling, stating that a “judicial resolution of this dispute is premature” as it is not yet clear how the Trump administration planned to ensure the exclusion of undocumented migrants. The ruling was a 6-3 split along partisan lines, however, and Democrats have expressed concern the conservative-majority court would uphold whatever action the Trump Administration takes.

Biden’s campaign has refused to publicly comment on how it would approach the Census if the deadline fails to be met, though it has quietly intimated that it shares concerns about how the data was collected, and could even seek to order a redo of significant portions of census data collection. Any such move would also be sure to face a legal challenge from conservatives.

The Trump Administration will likely do all it can to get the census over the line before 20 January, a move that could even tip the balance of the House – where Democrats currently hold just an 11-seat majority – in the Republicans’ favour in the 2022 mid-term election.

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Return of the World Trade Organisation, Europe’s lithium litmus test and offshore national security

Policy Preview: Return of the World Trade Organisation (WTO)
US President-elect Joe Biden will seek to rebuild the global trade infrastructure that Donald Trump has sought to dismantle – starting with the World Trade Organisation. Not too long ago, the body was the core international trade institution, but the Trump Administration effectively neutered its ability to hear disputes by refusing to support the appointment of new judges to its appellate body. Three are required to hear disputes, but currently just one is in office. Just before the election, the White House also blocked the appointment of Ngozi Okonjo-Iweala, a former Nigerian finance minister and World Bank economist, as the WTO’s director general.

Expect the Biden Administration to back Okonjo-Iweala’s appointment within weeks of the 20 January 2021 inauguration. It will also begin negotiations with the bloc’s other member – including China – about the appointment of new appellate judges. This will not be straightforward – Democrats and Republicans alike have long voiced concern over the WTO court’s handling of dumping issues as well as the slow nature of the process. The Obama Administration also blocked new appointments to the court in the second term as a result.

Biden has made it clear that he does not envisage new trade agreements as a priority – and as discussed in the previous Hawthorn Horizons, Republicans may still deny him the opportunity to pursue such pacts if expedited trade authority is not renewed before its June 2021 expiration. However, the past four years have highlighted the fragility the Western-led international institutions built up over the last seventy years are, particularly when they are under threat from within the West itself.

Reforming the WTO is likely a non-starter, the same challenges with expedited trade authority would still apply and Beijing’s ability to exert leverage over the other 162 members regarding the terms of any new deal is far greater than when it joined the bloc in 2001. But the Biden Administration will act on his comments to support the ‘rules based international order,’ and strengthening the WTO will prove essential to this agenda.

Ironically, Trump’s own tariff actions may have given the Biden Administration the leverage to also secure appointments it considers more favourable. If the appellate courts are reinstated, even the most US-friendly arbitrators would likely eventually find that these tariffs violate WTO rules. But China and other countries are keener to have them lifted than the Biden Administration will be. Removing these tariffs in exchange for appointing friendly appellate judges, restoring the WTO’s dispute-resolution function, is a bargain that Biden’s team will see as making sense for all sides.

Dollars and sense: Europe’s lithium litmus test
The European Union has for nearly a decade operated a ‘critical raw materials strategy’ aimed at shoring up access to and developing sources of key commodities. It has long been seen as ineffectual and now faces arguably its greatest challenge yet, following the inclusion this year of lithium for the first time. The increase in secure supply needed is drastic, EU Commissioner Maros Sefcovic in September decaled that the bloc “would need up to 18 times more lithium by 2030 and up to 60 times more by 2050”.

Lithium is the key to the battery and energy storage industries, hence the expectation for a rampant increase in demand. However, it has not been found in commercially-viable quantities within the EU anywhere other than Portugal’s Barroso mountains. Two mining concessions have been granted, one to UK-listed Savannah Resources and to Portugal’s own Lusorecursos. Yet the project has faced significant resistance from local residents and various Portuguese NGOs. They have also sought to block still-in-development plans to build lithium refineries in the region, necessary to enable the metal’s use in batteries.

Portugal’s government has repeatedly stated that it intends to get the approval of the lithium mines finalised, and Prime Minister Antonio Costa has endorsed the EU’s agenda wholeheartedly. However, after Costa’s Socialists won the 2019 election, securing 106 of the lower house’s 230 seats, they did not continue the support pact they previously struck with the Communists and Left Bloc.. Instead, these two far-left groups provide the government with support on a bill-by-bill basis. It is also occasionally backed by the environmentalist PAN and Green parties, which hold another five seats combined. To continue the development of the country’s lithium prospects, Costa will not be able to rely on these allies, who all oppose lithium extraction. And while the main opposition centre-right Social Democrats (PSD) do support lithium extraction, the extent of this does not extend to a willingness to support Costa.

Costa’s government is already facing challenges – it passed its 2021 budget on 26 November only after the Communists agreed to abstain; all other parties voted against, even after Costa agreed a new environmental review process, including for lithium projects, earlier in the week. Yet there is little chance the left will seek to a new confidence vote over the next six months, given Portugal’s assumption of the EU presidency in January. Costa’s priorities will be enacting reforms to the bloc’s fiscal and economic union that have dominated the past year, and the left will be unwilling to give these up. The EU’s critical resource strategy may remain ineffective in and of itself, but the fortuitous timing of the rotating presidency will give it a much-needed boost. Expect Lisbon to finalise a new law sharing revenues with municipalities and for ground on key projects to be broken by the end of 2021.

Power play: offshore national security
The 11 November publication of the UK’s National Security and Investment Bill (NSIB) laid out the processes by which the government will review inbound foreign investment, and the requirements for UK firms in certain sectors to notify the state about proposed foreign takeovers. Its passage through parliament is all-but assured, and it is expected to become law early next year. The new powers it grants the government will almost entirely be invested in the Secretary of State for Business, Environment and Industrial Strategy (BEIS), currently Alok Sharma. Unlike the US’ Committee on Foreign Investment (CFIUS), which provides a recommendation to the president who then makes the final decision, the NSIB in its present form grants this power to the Secretary of State, not the prime minister.

But even before the introduction of the NSIB, the government signalled its intention to take a more proactive stance on such interventions. In December 2019 then-Secretary Andrea Leadsom announced a review of the Chinese-owned Gardner Aerospace Holding’s attempt to purchase aerospace components manufacturer Impcross. Leadsom also reviewed US private equity firm Advent’s purchase of another defence firm, Cobham, though it was relatively swiftly approved. Gardner on the other hand abandoned its takeover in September, in response to the government scrutiny.

In other words, the new process and requirements for foreign takeovers contained in the NSIB are its most significant components.

The legislation does require such interventions consider acquirer risk, but also for firms in sensitive industries to pre-emptively disclose potential takeovers. Furthermore, the structure of the takeover has to be considered by the Secretary of State in any review.

In the debate over the bill, Sharma noted that “those who seek to do us harm have found novel ways to bypass our current regime by either structuring a deal in such a manner that it is difficult to identify the ultimate owner of the investment, or by funnelling investment through a UK or ally investment fund”. There is a growing recognition of the importance of the structure of any takeover, not just in the UK. The legislation underlining the US’ 2021 defence budget, the National Defense Authorization Act (NDAA), is set to pass in the coming weeks and sources close to the process have said it too will include expanded reviews for the offshore control of companies seeking to invest in the US.

Once NSIB becomes law, Sharma’s approach will set the precedent for how the legislation is applied. A loyal supporter of Prime Minister Boris Johnson, his approach will not stray far from the government’s messaging, yet the NSIB does grant the power for Sharma to review changes in ownership even before majority control is established, as well as after the fact. The extent to which he applies these powers over offshore ownership may have a great influence over sectors far beyond defence.

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The other transition deal, stage set for surge of sovereign lawsuits and the man reshaping Treasury’s tools

Policy Preview: The UK’s other transition deal
On 14 December, the UK Government released its much-awaited Energy White Paper, laying out a simultaneous pledge to seek a net-zero basin for the UK Continental Shelf by 2050 and the pioneering of “a new British industry dedicated to (carbon) capture and return under the North Sea”. No mean feat by any measure, and the debates on how to achieve this remains very much under wraps. Yet, the paper did give the Government one deadline, agreeing a ‘North Sea Transition Deal’ in the first half of 2021.

A more bankable date arguably is 1 November 2021, when the UN Climate Change Conference in Glasgow kicks off – a key event that Prime Minister, Boris Johnson, believes can be used to recast his global image. Regardless of timing, however, what the White Paper and other recent government statements have made clear is that the transition – deal or no deal – will be painful.

One area of hope has been the Government’s spending plans, particularly the £1 billion fund Johnson announced last month for establishing carbon capture, utilisation, and storage (CCUS) facilities in four “SuperPlaces” (the Government’s term). However, only one will be in Scotland, the hub of the UK’s existing offshore energy industry. The outlook for support for legacy industries there is poor. The White Paper explicitly states that, “Government support is in the context of our net zero target”. The only policy directly tied to the offshore fields is Government’s commitment to seeking the North Sea Transition Deal include an end all routine flaring by 2030.

The sole opportunity it discusses in depth, is making the UK oilfield services sector a leader in the decommissioning of offshore facilities, positively spinning the expectation the UK will “become the largest decommissioning market globally over the next decade”. Greenfield development is not on the cards, and just two days prior to the paper’s launch Johnson laid out plans to end state export financing for new crude oil developments. Nonetheless, the paper claims to recognise that any North Sea Transition deal will be a ‘quid pro quo’ between industry and Government.

Previous Conservative governments have already cut oil and gas taxes, including effectively eliminating the petroleum revenue tax and slashing the supplementary charge (SR) in 2015 and 2016, but there is little room to go. Cutting the SR would be ineffective at stimulating investment in the current environment. The white paper indicates that only non-fiscal support will be on offer, and that this will only be for those transitioning heavily away from their previous area of business. Whether the Government can extract such a hefty quo for such a potentially meagre quid, remains to be seen, however.

Dollars and sense: stage set for surge of sovereign lawsuits
The difficulty of pursuing foreign governments in domestic courts has long been a major hindrance to developing hard currency capital markets for emerging markets. But the idea of sovereign immunity in such spats has been steadily eroded – while over the last eight years, ever-riskier countries have been able to borrow dollars, euros and pounds out of London and New York. Infamously recalcitrant Argentina even issued a 100-year dollar bond in 2017, only to default again earlier this year. Sovereign credit markets have nonetheless remained frothy, with investors scouring opportunities for any real yield as Western interest rates are expected to remain at or near zero.

Advances in the enforceability of funds owed by uncooperative government creditors are rare, but often quite meaningful. The intervention of the late Judge Thomas Griesa in a group of hedge funds attempts to secure payment from Argentina following a previous dispute kept Buenos Aires frozen out of Western markets for years.

Many bond investors argued that the ruling strengthened emerging country debt markets. However, for non-bond investors, the ability to recover funds from governments when financing agreements go awry is more limited. Such investment disputes are typically heard by arbitration panels rather than by New York State and UK judges, as is the case with most bond spats.

Yet a recent legal settlement involving Guatemala has likely shifted matters slightly in such investors’ favour. On 3 November Guatemala missed a payment on a US$700m bond. Although it transferred funds for the payment to its custodian, Bank of New York Mellon, the bank told bondholders it was barred from making payment due to a restraining notice issued by the New York State Supreme Court. The court issued the order in response to a request from Florida-based firm TECO Energy, which secured a US$35.5 million judgement in its favour from the World Bank’s arbitration institute.

Guatemala protested the court’s order but by 24 November agreed to pay TECO, although it has not exhausted all appeals, even with the spat in its eleventh year. Put simply, Guatemala wished to avoid any blot on its heretofore spotless bond payment record lest it affect its ability to tap capital markets in the future. The process TECO took was rather simple by the standards of sovereign litigation. It secured an order from a D.C. court upholding its arbitral victory, then registering that with New York State Supreme Court, resulting in the restraining notice.

While there are very few countries in default on their foreign bonds at present, Guatemala is one of many countries entangled in lengthy arbitration disputes. We expect the New York State Supreme Court will soon face a barrage of applications for restraining notices from investors hoping to mimic TECO’s success.

Power play: the man reshaping Treasury’s tools
US President-elect Joe Biden’s nomination of Adewale ‘Wally’ Adeyemo as Deputy Treasury Secretary signals the agency’s international role is only likely to grow more activist. Adeyemo has a low public profile, but is a stalwart of the Democratic elite. He most recently served as the first President of the Obama Foundation. Before that as Deputy Chief of Staff to Treasury Secretary, Jack Lew, before concurrently serving as Elizabeth Warren’s Chief of Staff at the Consumer Financial Protection Bureau and as Deputy National Security Advisor, holding the International Economics Brief. Towards the end of the Obama Administration, he also served as lead negotiator for the Trans-Pacific Partnership and as presidential representative to the G7 and G20.

Adeyemo is tasked with overseeing a review of sanctions policy and will oversee the elements of the US Treasury that relate to its role in international affairs. If confirmed by the Senate, Adeyemo will essentially be the Biden Administration’s point man for ‘geo-economic’ policies, or the use of economic policies to affect geopolitical goals.

Adeyemo’s experience and writings provide an indication of the course he is likely to take. In the negotiations for the TPP, it was Adeyemo who focused on the inclusion of currency manipulation rules, though this was largely abandoned even before US President, Donald Trump withdrew the US from the negotiations. He was a key figure in shaping sanctions both while serving under Lew at the Treasury and in liaising the effort to respond to Russia’s invasion of Ukraine in 2014 in his dealings with the G7 and G20.

Both in and out of the White House, he has also focused on China, and been an advocate of the argument that the biggest threat to Beijing’s rise is its still-maturing financial market. During his 2016 Senate confirmation hearing, he took a relatively soft line on China when asked about his view on the role of the Committee on Foreign Investment in the United States (CFIUS). But the Trump Administration has since thrown up far more barriers to Chinese investment, and it is unlikely the Biden Administration will reverse many of these, if any. Biden’s nominee for US Trade Representative, Katherine Tai, further supports the belief that the Biden Administration will continue to take a hard line on Chinese investment. Adeyemo will ultimately determine how the Treasury supports such policies.

Do not expect any major surprises from Adeyemo’s sanctions review. The new Administration is not going to reverse the Trump Administration’s acceleration of sanctions. It will instead adjust its focus, from unilaterally blacklisting individual firms to working with allies to target China’s relations with the global financial system. Policy will be slow to emerge, and measured, but Adeyemo’s focus will be on limiting China’s ability to become a lynchpin of the global financial system. Given Beijing’s expansive lending abroad in recent years, however, the effort will prove extremely challenging.

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Batteries for Britain, deal with Japan hints at data plan and the keys to US trade agenda

Policy Preview: Batteries for Britain
Batteries are the new diesel, or so the proponents of electric vehicles would have us believe. Governments across the world – from Australia to China to Germany – appear to have embraced this mantra as well. Britain has attempted such a strategy for over three years now, with then-Business Secretary Greg Clark launching the £246m Faraday Challenge and QUANGO Faraday Institution in 2017.The government seeks the development of a domestic battery industry as part of its promised Brexit dividend. Among the many areas of dispute in the ongoing EU-UK trade negotiations talks are ‘rule of origin’ requirements around the battery industry and electric cars. Rules of origin often depend on the value of components, and EU and UK negotiators have apparently acknowledged the reality that neither has sufficient battery-producing capacity at present for the lion’s share of the value of electronic vehicles to be the result of production from either bloc. But leaked documents indicate that the rules would tighten from 2027, when only some 35 per cent of the value could originate outside the EU or UK to qualify for tariff-free trade between the two.

While neither the EU or UK has sufficient capacity at present, both are already in a race to ramp up such production, deal or no deal. Elon Musk’s Tesla has pledged to build batteries at its planned ‘Gigafactory’ in Brandenburg, outside Berlin, while in in May AMTE Power and British Volt signed a memorandum of understanding to build a roughly equivalent battery-producing factory in the UK. Yet no significant progress has followed the MoU, and the government has also faced criticism for failing to join up its policies, for example with the seemingly counterproductive move of raising VAT on home batteries from 5 to 20 percent this October.

The government may, however, have ideas in mind to jump start the sector related to another more prominent area of the Brexit negotiations, namely state aid. Brussels is reportedly willing to make concessions here if media reports are to be believed, in return for Britain’s reported concession that it will include its terms for such support in the final agreement. There is precedent from Brussels for allowing state aid in the sector, with the European Commission having approved last December a joint research effort by Belgium, Finland, France, Germany, Italy, Poland and Sweden, authorising them to spend €3.2bln in supporting such efforts. In 2021, expect a similar package from Westminster.

Dollars and Sense: Deal with Japan hints at Data Plan
On 22 October, Trade Secretary Liz Truss inked Britain’s first post-Brexit trade deal, flying to Tokyo for the occasion. Truss dubbed the deal historic and a sign of the benefits that will finally begin to flow from the years-long process of exiting the European Union. The new Japan-United Kingdom trade deal has unsurprisingly become a lightning rod of debate amongst erstwhile Remainers and Brexiteers, with significant debate over the extent to which it is different from the recent EU-Japan Trade Agreement to which Britain would have been party had it not left the bloc. Critics have noted that Britain has already signed agreements with some smaller Eastern European nations to continue trading under the free trade terms they secured from Brussels in years past, and that the minor differences Truss secured from Tokyo in relation to the EU deal will benefit Japanese manufacturers far more than it will benefit UK exporters.

But there is one key element of Truss’ deal that is noteworthy, even if it is perhaps while perhaps a small victory for now. Unlike the EU-Japan deal, British firms operating in Japan will not face data localisation requirements. Such rules are certainly a technical matter but, suffice to say, data is already a key commodity in modern economies, and is only set to grow more significant. In layman’s terms, British firms will be able to sell services, and software-as-a-service subscriptions, without the need to invest in expensive local servers and related staffing and infrastructure in Japan. If this technical detail of the UK-Japan trade deal can be repeated in others, it could set Britain on a path to become a larger tech and startup powerhouse.

Such data localisation rules require other foreign firms to store data locally in Japan. Japan is not the only country to have instituted such requirements. Russia prominently introduced extremely stringent rules on data localisation in 2016, and the global protectionist wave – combined with the realisation of how valuable data has become – means more countries are likely to implement them in the coming years. Brazil has recently advanced legislation imposing such requirements. Yet while Truss’ talk of the deal promoting a ‘Singapore-on-Tyne’ in relation to the video game industry is primarily aimed at garnering positive headlines from friendly media and the concession may not be enough to significantly impact GDP projections, it sets a significant precedent for other talks. If Britain secures similar provisions in other future trade deals, it will secure a key advantage in the data industry and make it a more attractive hub for tech start-ups.

Power Play: The Keys to US Trade Agenda
Markets have welcomed the simultaneous election of Joe Biden as the next President the United States and Republicans’ apparent continued hold on the Senate, where they hold 50 seats. Divided government makes it highly unlikely Democrats will be able to reverse the Trump tax cuts, but the partisan split throws up other challenges. Among the most immediate of these is whether Congress will renew the Trade Promotion Authority (TPA) that allows president to negotiate trade deals and for Congress to review them in a straight yes-or-no vote, without amendments. The current authority expires 1 July 2021.

Also known as fast-track trade, the authority requires the President to present a new trade deal to Congress 30 days before it votes on the pact. For Britain, which has seen a bilateral trade deal with Washington as key to its post-Brexit economic regime, that leaves a realistic deadline of 1 June – just 132 days into the Biden Administration to negotiate such a pact without an extension of the TPA. Such a tight deadline is highly unlikely to be met. Although talks with the outgoing Trump Administration formally began this May, the Biden Administration will have different demands – and Biden has said he does not envisage seeking trade deals in his first year in office.

The TPA was last re-authorised in 2015, albeit narrowly in the House, where Democrats initially refused to co-sponsor relevant legislation. Ultimately the move had to be included as part of a bill addressing issues with pensions for federal law enforcement and firefighters – an issue neither party was keen to obstruct. It also preceded the rise of Donald Trump and his challenges to free trade orthodoxy.

Whether the TPA is renewed could come down to the fight for the final two Senate seats, both in Georgia, to be determined in a runoff election to be held on 5 January. Incumbent Republican Senator David Perdue supported the 2015 extension and has expressed some, muted, support for renewed trade deals during the latest campaign. However, the other Republican candidate, Kelly Loeffler, has taken a more Trumpian approach, though this was likely motivated by her need to see off a challenge from her right. Democratic opponents Jon Ossoff and Raphael Warnock, respectively, have little public track record on where they stand on the matter – highlighting just how absent discussion of trade has been in the US election thus far.

Victory for either Perdue or Loeffler would allow Mitch McConnell to retain the bully pulpit of the chamber’s chair. Trade is among the few areas on which he was occasionally willing to rebuke the Trump Administration and the previous TPA one of the few areas he was willing to work with the Obama administration. His stance on the TPA and trade negotiation with Britain will shape the direction of the Republican party on trade for at least the next four years.

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