The lightweight vs the heavyweight

A few simple truths on world trade

Getting to be a heavyweight boxing champion takes many years of training, a top coach and clear rules of engagement. Talent may well be the least of it.

The UK is sadly bereft of all of these as it bravely makes its way in a world where the boxing ring is riven with cracks and the ropes are frayed and broken. Trade giants of the likes of Peter Sutherland and Pascal Lamy built the global trade structure brick by brick, compromise by comprise, backed most notably and most crucially by the US.

But President Donald Trump’s disdain for traditional allies and alliances extends to the World Trade Organisation and its carefully wrought rules, which are in any case due for modernisation in a services and digital centred world. The application of unilateral tariffs on China, leading to an exchange of tit-for-tat, is not the worst of it. Rather, it is taking the fight outside the ring, as Mr Trump did by pressuring Canada to arrest the CFO of Huawei, the Chinese telecoms giant, or blackmailing Mexico with a progressive 5% tariff on exports if it did not do more to curb illegal immigrants from Central America.

Prime Minister Boris Johnson last week held out the exciting prospect of a trade deal with the US in 2020. Here are five home truths on global trade which he might wish to share with the nation.

• Number 1. Protectionism extends across both American political parties. It has been a recurrent theme in US politics since the founding of the country . The only time it has been superseded in the last few decades is when the sitting President was given Fast Track Authority by Congress, unshackling him from Congressional approval. Trump doesn’t hold it now, nor will he even if he wins a second term. Additionally, Democratic House of Representatives leader Nancy Pelosi has made it very clear that a bipartisan group in Congress will block any US/UK trade pact if Brexit imperils peace in Northern Ireland due to the removal of the Irish border backstop.

• Number 2. Countries closest to you are those you are most likely to trade with. Thus the UK’s largest trading partner is the EU – it may be growing slowly, compared to markets like China, but it is affluent, with trade and commercial trust well established. It also shares a world view which underpins domestic legislation in all EU countries on the environment, food safety and digital privacy. The US has what both the UK and the EU would call lower standards on these issues. Tales of US chlorinated chicken making its way into British supermarkets are not far off the mark.

• Number 3. The UK’s exports to China are not going to take off like a rocket when and if the UK leaves the EU. Former Prime Minister Theresa May may have spoken of “ambitious future trade arrangements” with China last year. From within the EU, Germany’s exports to China have been far superior to the UK’s at $110 billion compared to $22 billion. The simple truth is that they produce goods and services which the Chinese want more. Nor will the depreciation of sterling help. Despite a 29% fall in the pound’s value since 2000, the UK’s export market share of world trade has fallen, according to a recent Schroders report.

• Number 4. The EU signed a trade deal with South America’s Mercosur trade block earlier this year. It took two decades of on and off talks. This is not unusual for trade deals. And it may not see the light of day as approval is needed by the Parliaments of countries involved. President Trump’s tweet suggesting a trade deal between the US and the UK within a year was ludicrous.

• Number 5. Earlier this week Mr Johnson said he wanted trade liberalisation between the UK and the US in products including pillows, cauliflowers, wallpaper and railway carriages – odd that he failed to mention services, 80% of the economy versus 18% for manufacturing. He complained about “some kind of bureaucratic obstacle” stopping the sale of British-made shower trays and “some sort of food and drug administration restriction” stopping the sale of Melton Mowbray pies. These are exactly what trade negotiations are about. Regulatory agencies, like the Food & Drug Administration (FDA), are among the most powerful players at the table.

When it comes to the services sector, it is worth noting what happened at a friendlier time a few years ago when the EU and the US were negotiating a trade deal. The US Treasury adamantly rejected any market opening to the UK’s stellar financial and professional services sector. That won’t change in the more hostile and nationalistic “America First” that now prevails.

In a world of heavyweights, the UK (population 60 million) is a lightweight. As part of the EU (population 450 million), it is a heavyweight that could take on other heavyweights, like the US (population 327 million) and China (population 1.4 billion). On its own, I fear it will be KO’d.

Vintage heaven; vintage hell

The transformation of Fine Wines

As you raise a glass of Chêne Bleu Rosé on a sizzling hot summer’s day, spare a thought for the wine industry, which is facing a perfect storm.

Global warming, increasing regulatory pressures, and disinvestment, are set to dent if not destroy what had seemed a simple story of emerging markets growth and increasing quality which would lead global wine consumption to reach $207bn in 2022.  

But the overall global wine and spirits market has slipped by -1.4% in the last five years, according to industry body IWSR, and disruption of the status quo is set to accelerate.  In the US, 54 per cent of the population chose to abstain from alcohol, driven largely by 21-34 year olds, according to a 2018 Nielsen Survey.

Parallels with the tobacco industry are not an exaggeration. Imagine a photograph of a liver riven by cirrhosis on a plainly packaged bottle of wine, along with a warning that alcohol can abet breast cancer. Inside, the magnum of Château Kirwan lies, un-drunk and unloved.

Demand for wine in developed markets is under pressure from older generations who are drinking less and younger generations who prefer cocktails and don’t buy into the elitist, obfuscating language used by connoisseurs. Millennials and Generation Z are in any case also drinking less, as evidenced by the drop in turnover at university bars and the increased availability of non-alcoholic cocktails and beers. Hashtags such as #sobersaturday are trending. The ever-widening legalisation of cannabis is another factor in wine substitution.

Health is on the global agenda, with the World Health Organisation (WHO) using increasingly alarmist language about the effects of alcohol, and cash-strapped governments looking more closely at the costs of ill-health from excess use and, in parallel, the benefits of increasing so-called sin taxes. This is affecting investor behaviour too.  KLP, Norway’s largest pension fund with $80bn under management, announced in May that it would divest from any company that made more than 5% of its revenues from alcohol. French champagne and wine house LVMH and beer giant Heineken are among those affected. It is likely that this policy will spread as Scandinavians generally lead the way on Environmental, Social and Governance (ESG) investing.

Meanwhile, climate change is harming crops, disrupting supply chains and eroding corporate profits. This summer’s European heatwave is likely to be the norm, not an exception, while global cooperation on climate change lies moribund amidst the wreckage of the post-Second World War order. Disorderly trade patterns – be it between China and the US or Britain and the EU – add to the confusion. The door to the fastest growing wine market in the world slammed shut in the face of the US wine industry when President Donald Trump imposed tariffs on China.

Can the industry adapt? Over two sun-drenched days in Bordeaux, 70 winemakers, technologists and reviewers from around the world, came together for a convivial brainstorming on Fine Wine’s evolution. Organised by ARENI, a wine institute, many of its conclusions were just as relevant for the broader wine industry and, potentially, for other consumer companies.

Navigating a future where sustainability and inclusiveness are among the paramount values is crucial to its survival. That means clarity on everything from the wine-growing process to the treatment of the seasonal labour who pick the grapes, along with an openness to sharing information via blogs and tech solutions like the Global Wine Database (GWDB).  Even information that may seem ridiculous. “Your millennials want to know the name of the wine maker’s dog - it’s true!” exclaimed a 27-year old sommelier from New York.

Websites like Wine Folly use straightforward language and by so doing are creating new enthusiasts, as are wine bars with top wines by the glass via the clever Coravin system, which doesn’t damage the cork, and apps like Palate Club. Champagne houses like Moët & Chandon are enlarging their offering to a younger clientele by offering a cocktail-like experience. Ice Impérial, a sweeter champagne poured over ice, is the result. Wine makers are exploring lowering the alcohol content without compromising on taste and signing up to wider industry campaigns to advise consumers on drinking responsibly.

China is set to become the second largest wine market after the US and by 2022 its value will be over $19.5bn, reports IWSR. Prestigious winemakers are taking the opportunity to make local wines to feed the increasing appetite of the growing middle class. Château Lafite is launching its first Chinese wine, Long Dai 2017, later this year. In India, private equity group Visvires Capital expects wine tourism to be a source of revenue. The business plan for its four vineyards includes an estimated 300,000 visitors over the next three years for wine tastings, restaurant meals, hotels stay, and wine buying.

 Global warming is an opportunity, as well as a challenge. English wine evoked sniggers when it started; wines like Chapel Down from Kent are now classified as Fine Wine and sell at premium prices. Spain’s Bodega Torres has been buying land at higher altitudes. Nordic wine could be the next discovery. 

On the back of an uncertain future, the Fine Wine industry is acclimatizing to a new world. Let’s raise a glass of Château Talbot to toast its journey. 

Why Putin is heading off the world stage

The energy paradox

The events of the last few months have set in train Vladimir Putin’s disappearance from the world stage. The only uncertainty is how long it will take, whether it will be months or years. It will happen due to unintended consequences – a concept first analysed in 1936 by American sociologist Robert Merton – of his Crimean annexation.

US Defense Secretary Robert Gates, in the memoir about his years serving under Presidents Bush and Obama, notes that during the Cold War Soviet interests were taken into account to avoid military conflict. However, “when Russia was weak in the 1990s and beyond, we did not take Russian interests seriously. We did a poor job of seeing the world from their point of view, and of managing the relationship for the long term.” He confesses that he “dutifully” supported the effort to bring Georgia and Ukraine into NATO, even knowing that this would feed Russia’s “paranoia” about the West.

Russia’s feeling of geopolitical weakness, allied to an economy that has failed to diversify and a mistrustful leader, resulted in the Crimean invasion and current troublemaking in Ukraine. But the unintended consequences of its escapade are an increase in its irrelevance to the world and the beginning of the end for Putin.

Consider these factors. Europe depends on Russia for one third of its gas needs. From complaining half -heartedly about their dependence on Russian energy, the Germans have woken up to the reality. Nuclear power could well be back on their agenda, although in 2011 it was announced that it was to be phased out by 2022. Who can doubt that serious discussions are now taking place behind closed doors between ministers and energy companies?

Meanwhile, the vociferous voices against extracting shale gas from the soil in Europe have lost ground to more widespread fears about a resurgent Russia, and the US export of shale gas to Europe, a contentious issue for some Americans, now has strong government backing.

As for Putin, he has infuriated his main constituency, the oligarchs who long ago agreed to keep out of politics in exchange for permission to carve up Russian’s economy in a monopolistic and oligopolistic way. As the stockmarket falls, the currency plummets and targeted sanctions start to bite, they are not a happy bunch. IPOs are on hold, foreign customers are wary of dealing with any company that is substantially owned by Russians and domestic banks are having trouble with their wholesale funding.

Whatever Putin does on the Ukrainian front, whether or not he compromises with the West on other multilateral issues to soften sanctions, the Russian leader has fatally undermined his own rule.

Does this scenario sound too complicated and therefore implausible? As humans we generally lack the ability to figure out what the unintended consequences of actions might be, even knowing they will always occur. Nassim Nicholas Taleb, the philosopher cum trader best known for The Black Swan, talks about narrative fallacy, in other words our tendency to construct simple stories to explain the world. Narratives about the past are often wrong. Hindsight is a myth because we do not and cannot know what did not happen, which would have resulted in a different story.

At the altar of the story and the storyteller we unconsciously sacrifice the uncertainty of human existence, what Nobel prize-winner Daniel Kahneman calls the “illusion of understanding.”

When I worked as a reporter at Bloomberg News, we were forced to find reasons for stocks going up or down. We called up analysts and traders, found the most convincing explanations, and banged them out on the screen. Those stock reports read well. Similar ones are being churned out by the media and pundits today. They are examples of narrative fallacy. Beware believing them…although sometimes, only sometimes, they may have more than a smidgen of truth about them. As does the Putin story.

This column first appeared in The Dialogue Review