6 min read

Not-so Special Relationships

Biden needs the EU and the UK may end up being a helpful wedge on China
Not-so Special Relationships

Sorry this comes a day late (and later in the day)! I’m aiming to do another on Monday and ‘reset’ the schedule after a tumultuous few weeks where COVID time has eaten into my sense of when I am regarding work.

Around the Horn

  1. By executive order, Biden has banned the issuance of new permits for oil & gas drilling on federal lands for one year. It’s nowhere near a ban on fracking, nor will it really have that big an impact on the industry given the poor state of demand recovery for 2021. What’s likelier is that his team waits to see how the market pans out and what they can pass or do via executive order, the EPA, and DoE to make progress reducing emissions ASAP. By late 2018, Federal lands only accounted for 23.7% of US crude production — three-quarters of that lies offshore and note that topline production figures rose by about 2 million before COVID hit after the 2018 numbers were taken so now it’s closer to 10%. Yeah, Biden’s doing nothing of significant harm to oil & gas (yet), and frankly that’s the right call. Plenty in Houston are whining about it, but the market is their problem, not Biden’s policies. They’ll lighten up when they see export markets start slapping adjustment costs onto imports with higher emissions levels and likely ask for federal help to reach net zero in the event. There are some losses from the order, but they’re small and a sustained oil market rally would change the political calculus next year anyway.
  2. Biden’s China policy will largely be a continuation of Trump’s, if done so with a different tack. UN Ambassador nominee Linda Thomas-Greenfield is expected to take a hard line with China in her role, Commerce Secretary nominee Linda Raimondo backs the full use of tariffs and export controls against Chinese firms, Biden himself has promised to deepen the United States’ security relationship with Japan to counter China and defends Japan’s claims to the Senkaku islands (which sounds to me like an offer of membership to the 5 Eyes is a very real possibility in the not-too-distant political future), and Kerry — setting aside his solar panels gaffe — forcefully laid out that the US was going to demand China do more on climate issues.  As predicted, there’s way more continuity with Trump than a break with his approach, save that Biden’s arguably going about doing it more effectively. We’ll see how Biden handles Europe, but even with the EU-China investment treaty, Europe’s likely over-playing its hand if it thinks meaningful strategic autonomy regarding China can be balanced against its other needs in the translatlantic relationship.
  3. US Secretary of State Tony Blinken has said that the US will return to the Iran deal after it has verified that Iran is back in compliance, a move that directly challenges Tehran’s claim that if the US acts to come into compliance, it will act accordingly. So far there’s little evidence of a meaningful shift in US policy regarding Iran. Biden authorized more B-52 flyovers to scare Iran in the last few days, a military decision that would have reached the White House before it went ahead given the stakes and the administration’s stated policy. Iran has already expressed its disappointment with the United States’ stance. There’s still room to reach a deal in theory, but this definitely isn’t the way you want to start it especially when the US unilaterally broke the initial agreement to begin with.
  4. Negotiations over stimulus in the US are frustratingly, if understandably, moving slow. The IMF calculates that the $1.9 trillion package Biden’s team wants would increase US economic output by 5% over 3 years, a figure you’d think would help nudge more votes along since growth creates higher revenues. Democrats are now moving into budget reconciliation mode to pass a bill, though it seems likely that moderates will introduce new measures trying to target additional cash relief, which will inevitably slow the pace at which any stimulus reaches people even once the bill passes. Here’s hoping the legislative schedule accelerates a bit given that Trump’s second impeachment trial is going to suck up lots of oxygen better spent on policy.

Back to reality

Now that the US is back in the Paris Agreement and appears to be ramping up to really jump into the geopolitical competition over the energy transition, Europe’s antsy. For two decades now, the basic underlying argument for EU leadership on any given major policy issue was that the size of its market and global presence in trade — Europe is far more dependent on trade for economic output and growth than the US or China — gave it a cudgel to be a ‘regulatory superpower.’

Biden upsets the role Trump allowed Europe to more firmly carve out for itself by bringing the US back into climate power politics with serious intent. The issue now is one of how powers opt to build climate change into their discursive approaches to policymaking. The EU is better placed to align with where the UK seems to be and where the US is headed: building climate concerns into trade and other aspects of the economic relationship. Eventually one might see financial pacts harmonizing standards for investment as well. China, interestingly, would like to build climate matters into its broader relations with the US too, but for self-serving reasons.

John Kerry has expressly stated that climate matters have to be a separate issue distinct from others for US-China ties, calling it a ‘critical stand-alone issue.’ But China’s Ministry of Foreign Affairs is communicating that it wants to embed said climate issues into overall ties in hopes of extracting more concessions from the US on issues like trade. The fact is that US and EU are more aligned than not on moving to introduce carbon adjustment mechanisms into trade agreements and frameworks, and while China could reasonably fend off the EU scheme on its own to some extent by raising the costs, it won’t be able to do so with its two biggest trade partners simultaneously. For now, though, the political conversation in Washington is limited by the domestic politics around Trump and stimulus plans. Until the trial ends and a new package heads out the door, the ‘big picture’ thinking falls entirely on the executive branch and requires close scrutiny of official statements, phone calls, visits, and so on to discern what the Biden administration’s real priorities are compared to what its stated priorities are abroad.

Trade, however, is going to remain a serious point of contention in transatlantic relations and globally. It’s been interesting to see the UK talk up the climate and China in trying to convince Biden’s team to push trade talks over the finish line. What’s become apparent is that the Five Eyes (and Japan) could become a trade platform and forum out of which a non-EU economic agenda for the UK emerges. Talks with Australia are set to continue in February, a UK-Japan trade deal largely replicates that of the EU-japan deal with more achieved on financial services access and data protection, the hope is to close a deal with New Zealand by Easter, the UK has a rollover agreement with Canada, and despite the lack of recent progress and uncertainty, it’s also quite possible that the arc of post-COVID recoveries and difficulty securing an EU deal will encourage Biden to change tack. By no means is it a rip-roaring success story, but it would be an interesting development and poke a hole in the EU’s generally lax view of geopolitical competition with China. British policy has generally taken a hard line (excluding the Tories voting down a bill that would have effectively linked trade with human rights concerns about genocide, a pressure point for trade with China). 5.4 million citizens in Hong Kong now have the legal right to apply to live in the UK as a result of the crackdown on the city. But then you get German chancellor Angela Merkel delivering the classically German geoeconomic line that political blocs are to be avoided in resolving disputes between powers. Biden’s foreign policy and its inclusion of climate change into most facets of policymaking requires European allies to function effectively so buckle up. The UK has left the EU, but even with an EU trade deal that leaves it highly exposed to EU regulatory regimes, it can still act as a wedge for the US depending on what Brussels does next. As for what this all could mean for Russia, I leave that till Monday.

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