Even a partial deal with Iran will help the slow journey to trade normality

There were two important (well, big) meetings last week, the G7 summit in France and an EU member states summit in Brussels. Neither showed much consensus. The first revealed a lack of confidence (wisely, in my view) in a US proposal to manage critical minerals supply, emanating from a president who tried to annex Greenland for its rare earths. The other, as I predicted last week, showed an unambitious lowest common denominator outcome (I reckon this should be “highest common factor”, who’s with me?) among EU member states for taking on China.

In today’s newsletter I wonder what will happen if the sort-of deal (which is more of a stand-off) between the US and Iran starts to settle down into a medium-term equilibrium. I also look at the UK ahead of tomorrow’s 10th anniversary of the Brexit referendum, following today’s defenestration of Sir Keir Starmer as prime minister. Like his five predecessors, Starmer had no real plan on how to handle EU relations. Charted Waters, where we look at the data behind world trade, is on electric vehicle battery production.

An uneasy ceasefire may be just enough

War over, nothing to see. For the moment. Again. Obviously the US-Iran memorandum of understanding has the legal force of scribbling a Post-it note to yourself and sticking it on the fridge, assuming you can read your own handwriting the next day. Yet what’s relevant for trade purposes right now is not whether we’ve achieved a long-term foreign policy steady state. (Obviously not, but when do we ever?) It is whether commodity markets, the trading system and the world economy can return to any kind of normal for the medium term.

My utterly amateurish evidence-free guess is that, whatever the final outcome and the response of Israel and so on, we’re unlikely to go back to the full double blockade. Let’s just say we carry on with the security situation in the Gulf as it has been in the past few weeks. Flows of shipping both ways remain restricted, but enough oil gets out to keep the global crude price comfortably below $100 a barrel. (This morning, Brent crude was around $77 a barrel.) Fertiliser flows should start to pick up as well, though more slowly, in weeks rather than months. Container shipping could take quite a lot longer.

I doubt the movement of containers will really matter, as I’ve said from the beginning. There has been a big surge in global freight rates in the past few weeks, but that was because of the traditional peak season and operators trying to beat the incoming Trump tariffs. There aren’t many container ships in the Gulf in any case, and the transshipment functions of the port of Jebel Ali have moved elsewhere without major disruption.

Oil and fertiliser shipments are obviously a much bigger problem, especially as there will be a large air pocket between the deliveries of oil and fertiliser that left before the strait was closed and those that will arrive after it has partially reopened. It will take a long time to get back to normal, and localised effects, particularly in low-income energy importers, could be severe.

But on the optimistic side, oil prices have reacted less than a lot of the forecasts predicted. Even jet fuel prices (remember the talk of cancelling European summer holidays?) have dropped sharply.

You can argue that crude was contained because China tactically ran down its large oil inventories to manage the price. Or you may think the predictions of oil substantially above $100 a barrel for a prolonged period were wrong, as did economist Robin Brooks in his very interesting newsletter. But, in any case, the massive sustained $150-plus-a-barrel oil shock we might have expected hasn’t happened.

Regarding fertilisers, it seems from what evidence we have that the northern-hemisphere planting system went ahead OK and there weren’t generalised shortages. And, as far as we can infer, it doesn’t seem as if Australian wheat farmers are in crisis mode about a lack of fertiliser either. (It is worth noting that farmers don’t need all their fertiliser when they plant — they use it over the growing season.) The UN Food and Agriculture Organization predicts a very healthy world harvest and ample global food stocks.

As I’ve said before, agricultural futures markets — which act as hedging devices as much as actual forecasts — haven’t shown any significant probable impact to come through on food. Clearly low-income countries are going to get hit, as they often do during food shocks. But the impact of the war on oil and fertiliser has been weaker than a lot of people expected. An uneasy ceasefire may just be enough.

When the two tribes of Westminster and Brussels went to Brexit war

Brexit day seems to come around earlier each year. This year is the 10-year anniversary of the June 23, 2016 referendum — a decision that has poisoned British politics and the UK economy ever since.

Given the slow pace of current UK-EU talks — there’s a summit next month which will at best sign off some non-negligible but hardly earth-shattering agreements — there is not much new of substance. So in one sentence I’ll note a few things that the UK has taught the non-trade nerd world through giving its body to science in such a destructive experiment. Then I’ll go way off-piste and offer a cultural-political explanation about why the two sides found it hard to negotiate.

So what should everyone have learnt? In no particular order: regulations are as important as tariffs; following EU rules doesn’t mean you get treated as if you are an EU country; a single market in services needs freedom of movement; and, most comically, no, you really can’t invoke a provision (Article XXIV) in a World Trade Organization agreement to make Brussels extend your EU membership until further notice. 

On the cultural-political bit: I was living in Brussels in the years after Brexit and it took a long time for people to grasp that the bumbling ineptitude from the UK government wasn’t a cunning trap. They were baffled. Where were the hugely respected, urbane British civil servants they were used to inside the European Commission? Where was the technocratic excellence, the clarity, the judgment? Why were they having to deal with David Davis?

The Commission and EU member states were being exposed to pure Westminster politics, and it wasn’t a meeting of minds. UK policymaking is highly centralised, fast-paced, combative and partisan. It often places narrative before substance and is filtered through an excitable, insular and detail-averse media. Hence the endless parliamentary manoeuvrings coming up with cake-laden wheezes that would have been, or were, dead on arrival in Brussels. The EU is ponderously iterative, legalistic, technocratic and process-driven, and its media is largely fragmented by member state.

Perhaps the most painful contrast was the disaster in 2019 when Geoffrey Cox, former UK attorney-general, took his combative barristerial style to Brussels to discuss a “backstop” for the Irish border. He reportedly tried to patronise the German Commission negotiator Sabine Weyand, got the steely response he should have anticipated and achieved nothing at all.

We’d seen milder versions of this before. Before the referendum, former British prime minister David Cameron rashly promised voters he could quickly renegotiate the UK’s EU membership deal. He tried to bounce former German chancellor Angela Merkel into accepting changes and failed. As I said a few months after the referendum, he was an essay-crisis prime minister in a coursework culture. 

If Starmer’s successor wants to improve the UK-EU relationship, they need to think like a eurocrat. Forget crafting a narrative: this isn’t a bedtime story. Go in on the details and practicalities. It can be done. Former prime minister Theresa May got a significant concession over a UK-wide customs territory in 2018 before her idiot party killed it. You need to know exactly what you want, that you can get your parliament to support it and avoid giving off the smell of cake.

Charted waters

The Bloomberg NEF measure of overcapacity for electric battery manufacture shows Chinese production far exceeding domestic demand.

Trade links

• Speaking of Brexit, my FT colleague Tej Parikh argues that the UK rejoining the EU is no panacea for its deep-seated economic problems.

• A perennial story: China’s attempt to shift its growth model towards domestic demand is not going well.

• Relatedly, a note from the Rhodium Group argues that China’s attempts to control key industrial inputs make its economy less efficient and strain global supply chains.

• The Washington Post on how China controls more choke points than just rare earths.

• Iranian cargo ships holed up in south-east Asia have started to make their way back to the Gulf.

Trade Secrets is edited by Harvey Nriapia