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Hello and welcome to World Business Report from the BBC World Service.
I'm Roger Hearing and on this edition, as Europe pledges to spend much more on defence, how far is the continent able to afford it?
Also, we'll hear about the challenges for the trans -Pacific supply chains as US tariffs begin to bite.
But if you think about tariffs, those are calculated against the underlying cost of the product.
So as soon as you have a 20 % increase in tariffs from China, a $450 TV is suddenly costing $90 more.
Plus, if you fly through Afghan airspace, who do you pay and how?
But first, the president of the European Commission has said the continent is at a watershed as an emergency EU summit on defence gets underway in Brussels.
As the summit opened, Ursula von der Leyen stressed the importance of Europe protecting itself through a massive increase in defence spending and also of helping Ukraine achieve a fair and lasting peace.
This is a watershed moment for Europe.
And Ukraine, as part of our European family, it's also a watershed moment for Ukraine.
Europe faces a clear and present danger, and therefore Europe has to be able to protect itself, to defend itself, as we have to put Ukraine in a position to protect itself and to push for a lasting and just peace.
And the Ukrainian President Volodymyr Zelensky, who's also attending, thanked the European Union for its strong support.
We are very thankful that we are not alone and these are not just words, we feel it.
It's very important.
You made a strong signal to Ukrainian people, to Ukrainian warriors, to civilians, to all our families and it's great that we are not alone.
We feel it and we know it.
President Zelensky.
But of course, all this support for Ukraine and the rebuilding of Europeans' defence get costs.
And Europe has been exploring ways of paying, not least the incoming German government's plan to allow vastly more borrowing.
That has sent sovereign debt costs soaring.
So can Europe afford all this?
Jean -Claude Trichet is a French economist who was president of the European Central Bank between 2004 and 2011.
He joins me now. Jean -Claude Trichet, thank you for being with us.
Welcome to World Business Report.
What about that question, can Europe afford this kind of push to self -defence, to improve its defences?
First of all, thank you very much for inviting me.
I would say yes, Europe has certainly the means to do that if you're taking account of the fact that Europe is in a position of excess of savings in comparison with the U .S., which have a very, very important lack of savings.
So the money is there, potentially.
But the political will, of course, is absolutely necessary.
And we will see exactly how the various countries concerned are reacting to this very important proposal, which was made both, I would say, in Germany.
500 billion euros for infrastructure and defense, if I understand well, is something which is extremely important.
And of course, you have the proposal of the commission.
So again, bottom line, yes, it is possible, but it would need certainly a considerable amount of political will by most of them.
But also, it's going to depend on the willingness of international money markets to make that kind of money available at a reasonable cost.
And what we've seen, and maybe partly because your old institution, the ECB, which cut rates, interest rates by 25 basis points, also predicted a fairly dismal outlook for European economies.
Perhaps it's unsurprising that the cost of borrowing, sovereign borrowing, has gone up so much.
I think it is absolutely normal at the very moment where you are indicating that you will probably embark on much more borrowing.
Of course, you have an impact on the market rates, medium and long run market rates.
So I understand that pretty well.
The problem that I was responding to was, is it possible?
Do the European have the means in terms of savings and of excess of savings?
And as you know, they have a current account surplus, which is quite substantial.
So, again, if you compare the U .S.
and Europe, you have certainly a comparison which must take into account the fact that we are in a position of excess of savings.
That being said, of course, you're absolutely right.
The fact that in comparison with the previous state of the situation, you are improving, increasing substantially the borrowings, then you have necessarily an impact on market rates.
We will see how all this combines.
It's very complex. And of course, on top of that, you have the impact of the tariffs and of the trade war, which is extremely bad because it has a bad effect on inflation.
and that means also more market rates unfortunately because it goes with the anticipation of inflation and of course you have also an impact on growth which is also bad so it's bad by all dimension.
Well that was kind of what my other point I mean the tariff situation we don't know as yet when or what the tariffs will be that come from the US onto European goods but we do know that this is likely to happen.
Certainly, Donald Trump has suggested that.
I go back to my point.
OK, they can pay out of savings to some extent, but you do need a healthy European economy to back all this up.
And the signs are, both from the ECB and from this prospect of tariffs, that that isn't the case right now.
No, you're absolutely right.
The situation is not good, and it is absurd, by the way.
At a time where not only the European growth is not brilliant at all, when the US economy is slowing down quite substantially.
I was very impressed by the last PMI for February, which is not good in the US.
And the global economy is not in a satisfactory mode also.
So we are in a universe where it is all the more absurd, of course, to increase the inflationary pressures and the, I would say, slowing down of the real economy.
But all that being said, again, the question was, will the Europeans have the means and the capacity to do what they want?
It seems, I mean, again, we have to be very cautious in Poland.
We don't know yet what will be the position of all Europeans in front of the proposal of the commission.
What we know is that a decision has been taken in Germany, which is a very important decision, particularly to accept that some of the rules of the European should not be respected for this defence.
Well, that, if I may interrupt, is the point.
Some people said to me, well, it's typical European Union, if it's Germany or elsewhere.
You have rules. When it doesn't work, you change the rules.
And this happened, of course, famously before when the amount of debt was regulated in the euro system, and then they just changed the rules.
They're saying this is the same thing all over again.
Well, I would not be that, I would say, negative on what is envisaged.
You know, I have the reputation of being unorthodox, and I'm very, very to apply by the rules.
nevertheless, we are in a situation in terms of defense where the European has squeezed, totally squeezed and when I say European, I certainly mean also the UK, between the tanks of the Russian and the withdrawal at least the will of President Trump of withdrawing from the European defense so that is really the worst period that we are experiencing since World War II, I would say.
In my own life, I never saw such a situation.
It's desperate measures.
Trying to cope with such a situation seems to me normal.
That being said, it seems to me also that you have to remain in a reasonable and certainly a workable situation and to neglect the impact, as you said, to neglect the impact on interest rates, market interest rates, would be a mistake.
We will see exactly what happens.
We will see. Jean -Claude Trichet, thank you so much for being with us here on World Business Report.
You are with World Business Report from the BBC World Service.
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Now, the latest changes on US tariffs will even while we've been on air, we've had some reports that, in fact, the Trump administration, which had, of course, imposed those tariffs of 25 % on goods coming from Mexico and Canada, is now minded, potentially at least, to do them, to put them on hold.
Let me tell you what's happened.
U .S. Commerce Secretary Howard Lutnick has said the one -month reprieve on hefty tariffs on goods imported from Mexico and Canada had been granted to car products is likely to be extended to all products that comply with the US -Mexico -Canada agreement on trade.
We don't know how much detail there will be about that or indeed any about the timing but that's what has broken in the last hour or so.
So where does this take us?
Because Donald Trump's rapid -fire tariff policies have rattled risk markets and dented consumer and business confidence.
The China tariffs of course are causing concern given the size of those two economies pitted in a new trade War.
So how prepared have businesses been for all this?
In particular, those involved in the trans -Pacific shipping route that's been so important for China -U .S.
trade? Well, I asked Ethan Buckman from Freytos, a global freight exchange.
I think the core takeaway is that the smaller importers and exporters that we work with were just vastly underprepared when compared to the larger and multi -national importers as soon as those tariffs came down.
And they just did not have the resources to really prepare the supply chains in order to weather the storm.
And it's really interesting that not only were they not really that ready, some of them didn't seem that concerned, really, I mean, or at least not to the extent of making changes.
Yeah, I mean, when you take the long view and you look at the last five years, most large multinational companies have been absolutely destroyed by different supply chain challenges, right?
So if you're a large multinational importer over the past five years, you've gone through COVID, you've gone through these toilet paper shortages, the Swayze Canal being blocked by the evergreen ship.
You've gone through inclement weather.
And then, of course, you've gone through the Red Sea crisis, whereas typically smaller businesses tend to not be as dependent on these large sprawling supply chains.
They don't have as many dependencies.
so for the most part when there are these very very large issues they can somehow get by without seeing a massive hit on their bottom line but tariffs is a totally different beast well let's let's focus on the impact of that on one of the major routes which is which is west coast u .s to china that across the pacific because that really does seem to be in focus because of course the tariffs on china they're not even in doubt really the 10 percent and then 10 percent more What about the rates for that route?
How have they been affected by all this?
So this is a really interesting contrast to during COVID.
So just for context, prior to COVID, international imports container from China to the United States would typically cost about $2 ,000 to $3 ,000.
And at peak COVID, that climbed up to $20 ,000 for a container.
So it was just a brief period where it reached that level, but it really hit people in the bottom line.
Now, zoom forward to last year and due to the Red Sea crisis, ocean container rates rose to about $4 ,000 to $5 ,000 and have slowly began to decline.
But what we saw over the past couple of months is a front load in people shipping more in order to get their products into the United States prior to the tariffs taking place.
So you saw a little bit of a bump, but now we're seeing those rates start to decline.
and right now they're at rates that they only last saw in the very very beginning of the red sea crisis down to about two thousand five hundred dollars or so and this was a very very sudden recent drop and is that sustainable for the for the companies doing this because you imagine that bringing those rates down and given probably the diminution of trade across that route because of the tariffs it might become almost unsustainable yeah you know we tend to see this as being fairly cyclical, where rates rise and fall typically not to the $20 ,000 costs for a container.
But I think what ends up being much more important is the fact that unlike ocean freight costs, which can still, even if you're paying $20 ,000 a container, the cost of importing, let's say, a 42 -inch TV from China to the United States, the underlying cost of what would you pay in terms of ocean freight rates would be around $60 compared to a normal period, let's say now, where the freight costs for that TV would be $4 to $5.
But if you think about tariffs, those are calculated against the underlying cost of the product.
So as soon as you have a 20 % increase in tariffs from China, a $450 TV is suddenly costing $90 more, which is something that we've not seen even during peak, peak COVID.
So the result of that surely must be that less of it's going to happen.
It's just supply and demand, surely.
I do think that that's correct.
However, I had pulled people's attention back to what happened during the financial crisis in 2007, 2008, which is that we are so dependent globally on international trade that trade doesn't slow down.
Even during the financial crisis, trade only dropped by high single percentage digits.
So what's going to end up happening is we're going to keep on importing those goods and keep on exporting those goods.
But we're all going to pay a higher price.
And I think every single person is going to see this and feel it in their wallet.
Ethan Buckman from Freytos speaking to me there.
Well, let's now talk about the tariffs of the moment.
We have had that news breaking within the last hour or so, of course, about a possible suspension of the latest tariffs.
So where are we now?
What happens next? Let's talk to Wendy Cutler, Vice President of the Asia Society Policy Institute and after almost three decades as diplomat and negotiator in the office of the US Trade Representative.
She joins me now. Wendy, thanks for being with us.
I mean, you know the way these things work better than anyone.
What do you make of these back and forth in terms of tariffs?
I say this news that from Howard Lutnick, US Commerce Secretary, that the one -month reprieve on hefty tariffs on goods imported from Mexico and Canada has been granted, which have been granted to cars, is likely to be extended to all products.
What are we to make of this?
Well, first, I think it just shows how fluid this situation is.
It seems to me that these announcements are being made without really thinking through the consequences.
And because of, you know, it first started with autos, where the auto CEOs approached the White House to say, look, you're going to devastate our industry given how integrated we are with our North American partners if these tariffs are put into place.
And then not even 24 hours later, talk of extending this across the board.
so i think we we need to be ready for this roller coaster ride to continue with announcements being made but the actual implementation not a hundred percent guaranteed yeah it is extraordinary and and the relationships the trade relationships which have been very long running with canada and mexico there's a lot of damage being done to them let me just quote to you that that justin Trudeau, Canadian Prime Minister, has just said that Canada and the U .S.
are in a trade war for the foreseeable future, even despite these changes.
So is this something that is going to have very long term effect?
It will have long term effects, but I don't want to overreact either because 80 % of Canada's and Mexico's exports go to the U .S.
market. They have tried since Trump won to diversify partners, but it's easier said than done.
And so I think that while we're clearly not making friends right now, and there will be some long -term implications, I still remain on the confidence side that we will find a way to find accommodations with Canada and Mexico, improve the USMCA to make it work better for the United States and our partners, and have that really as the framework for trade in the North American area to continue.
And Wendy, what about China then?
Because that's one area that seems to be relatively consistent that Donald Trump has imposed and not lifted the new tariffs, 10 percent on top of a previous 10 percent.
And China obviously responding in many areas as well.
Does that constitute a trade war that is going to continue?
Well, it's interesting because China to date has been pretty measured in its retaliation.
If you think about it, we just put a combination of 20 % tariffs on China, but that's on top of the 25 % tariffs that were put into effect during Trump 1 .0.
So our tariffs with China on many products are close to 50 percent, which is pretty high.
China has been somewhat restrained.
And I think, number one, they're focused on their domestic economy.
We know that they have important meetings going on in Beijing now.
I think also, though, that they want to leave the door open for a possible phase two trade negotiation with the Trump White House.
And I think there are signs from Trump that he may be interested in trying to conclude a new big deal with China in this area.
We'll see if it comes through.
Wendy, thank you so much for being with me.
Wendy Cutler there, a former negotiator in the Office of the US Trade Representative.
So how has all this been playing on the markets?
Because we certainly saw in the first few days of this week, and indeed the previous week, a lot of ups and downs on Wall Street and elsewhere.
where Emma Wall of Hargrove's Lansdowne joins me now.
And, of course, Emma, we've also seen major moves in Europe, too.
I suppose first we should talk about the ECB, European Central Bank, made a rate cut as promised, but it did give a pretty gloomy forecast.
It did, and all of these things are interconnected because one of the reasons why the ECB gave a gloomy forecast, despite, as you say, cutting by 25 basis points or a quarter of a percent, as much anticipated, cutting to 2 .5, But that gloomy outlook was a lot to do with the expectation around inflation.
And some of the inflation concerns are, of course, around tariffs.
And although nothing's been announced yet for Europe, that expectation that Trump and the U .S.
will be putting tariffs on Europe.
Europe's in a position where actually hasn't got very much growth either, unlike other areas that the U .S.
is in tariff conversations, shall we say, with.
So the combination of increased expectation for inflation and that low growth outlook is hurting the bond market at the moment.
Well, I was going to talk about bonds because we have seen, obviously, I guess, in response partly to what Germany or Germany's future government wants to do in terms of borrowing.
The cost of state borrowing overall is really going through the roof, isn't it?
Yeah, absolutely. So, as you know, bonds work in this way where actually when bond prices fall, bond yields jump considerably.
And the market is very much expecting Germany to need to require more borrowing as a result of expectations that it will be spending more on defence following the suit of the UK last week, promising to spend more of GDP as a percentage on defence in ongoing conversations around Ukraine.
But as a result of that, it does mean that bond yields have popped and they haven't just popped in Germany.
they've gone up across the world.
I mean, we've here in the UK where I'm speaking from, the 10 -year guilt yield has gone up 20 basis points in just over 24 hours.
So we're definitely seeing bond yields spike across the world.
All right. Thanks very much for being with us.
Emma Wall there of Hargreaves Lansdowne having a look at the impact of all this on the markets.
Now, let's turn to something very different.
Afghanistan. Well, since the takeover of Afghanistan by the Taliban in 2021, the new government there has not received international recognition, and government bank accounts have been frozen.
There's little interaction with the outside world, so this doesn't have much impact except in one regard, the use of airspace.
Now, in the last year, more airlines have started flying over Afghanistan as conflict in the Middle East widened and also as aviation regulators soften their stance on using Afghan airspace.
But who to pay the overflight fees to.
Well, Reuters have been investigating how airlines are dealing with this.
With me now is Joanna Pluchinska, who's European Airlines and travel correspondent at Reuters.
Joanna, thanks for being with us here on World Business Report.
What is going on with these airlines?
What are they doing and what are they trying to do?
So essentially, airlines always have to pay overflight fees when they fly over a country, and they're charged at different rates.
Usually when you're flying over a European country, you would just naturally use traditional banking routes to pay the regulator or the local aviation authority.
But of course, when you can't use those traditional banking routes, as is the case with Afghanistan, then you have to find alternative means.
This isn't the first time that this situation has happened, but usually there is some guidance given by public bodies on how you can make these payments, which companies you can use.
And that has been the issue with Afghanistan, is that there really isn't much public clarity on what airlines can do.
So, they've had to solve their own problems and find their own companies to try to make these payments.
So, how have they done it?
What have they done?
So, there are these entities called trip support companies.
They are third -party financial intermediaries.
They're all around the world.
But in this particular case, airlines have been using them.
Many of them are based in the United Arab Emirates.
There are dozens of these companies based there.
And they are essentially sending money to these intermediaries.
And then these intermediaries are paying the Afghan government directly.
Right. So they're...
In theory, in theory.
Ah, right. Enlighten me then.
In theory, they're doing it so it may not actually happen.
So this has been what our reporting showed that in many of these cases, even these companies are not receiving invoices, or they're receiving them, you know, six months later.
and it's beginning to worry a lot of airlines that they're just going to get a huge bill a year from now when the Taliban finally gets around to filing these invoices and there's a lot of uncertainty over what exactly this might look like.
Now that's very interesting because you say the huge bill might be coming because some people say well to these airlines look the government of Afghanistan is not recognised internationally the bank accounts are frozen you don't have to pay the fees.
it's very difficult to know what sort of legal ramifications you can operate under in this case and no one really knows what the consequences of this are right OFAC which is the U .S.
sanctions body could in theory when we spoke to lawyers say you know pick an airline and say you haven't you've been breaching sanctions by by trying to pay Afghanistan so we're going to file a case against you that hasn't happened it's unlikely to happen but there's just a lot of uncertainty around the possible consequences.
Yeah. So which airlines are we talking about here?
Because I suppose people think, well, who's going to fly over Afghanistan anyway?
But is it some of the really big names?
So a number of very popular airlines are using Afghan airspace on an almost daily basis.
British Airways is using it, Lufthansa is using it, Singapore Airlines, Air India, a lot of these big names.
KLM is regularly using the airspace.
A number of international airlines are using this route because it's really the most effective way to avoid flying over Central Asia and paying substantially higher fuel bills.
And I guess they might be putting themselves at a bit of risk because if they're actually paying money that ends up in the coffers of the Taliban, I mean, that breaks all sorts of international rules.
The US, I guess, might not be very happy about that.
I think at this point, what some lawyers have told us is that the amounts of money are not substantial enough.
At the end of the day, it's a $700 overflight fee per flight.
This isn't necessarily millions of dollars from an individual airline, although it is millions of dollars that, in theory, the Taliban should be making every month.
So, yes, this is still a new situation and there's not much clarity about what governments might do with it.
It's a very interesting and very difficult question to resolve, I think, for many of these airlines.
But thank you so much for being with us.
Joanna Placzynska there, Europe and Airlines and travel correspondent at Reuters who uncovered that very interesting story.
That's it from World Business Report.
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