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Defence’s defence, Sinn Féin and aiding ailing airlines

Policy preview: defence’s defence
UK Defence Secretary Ben Wallace has made plenty of headlines in recent weeks amid the emotional withdrawal from Afghanistan. Foreign Secretary Dominic Raab has as well, albeit suffering from more critical coverage amid reports regarding his holiday during the frantic fall of Kabul in early August. However, it is business secretary Kwasi Kwarteng whose actions this month most clearly illuminate the government’s defence agenda.

On 18 August, Kwarteng issued an “intervention notice on the grounds of national security” regarding US private equity firm Advent International take over UK defence manufacturer Ultra Electronics. Just last year, Advent acquired another British defence firm, Cobham, with UK government approval granted in November 2019 under following reviews by former business secretaries Greg Clark and Andrea Leadsom,despite public opposition from Cobham’s founder.

Cobham is more than double the size of Ultra Electronics by revenue and differentiating between their contribution to national security is not so easy. Both provide crucial services such as Cobham’s aerial refuelling and Ultra’s positioning, location and communications technologies, used in many of the UK military’s most advanced components.

The government had telegraphed for weeks that it was likely to make such a move regarding Ultra. Blocking US private equity firms from investing in the UK, even in the defence sector, risks upsetting the UK’s reputation among an investor class that could be key to the UK’s post-Brexit prospects. The review Kwarteng’s notice ushers in will be reported in January, the same time as the UK’s new National Security and Investment Act comes into force.

The action has two motivations – first a desire to ensure that UK manufacturing and engineering of such high-value technology continues. There have been complaints regarding Cobham’s offshoring and Advent’s apparent prioritising of US development sites in the 18 months since its takeover. The second comes amid a push to ensure the UK’s defence sector, and defence strategy, is not wholly dependent on the US, something various Conservative MPs have harked on amid the Afghanistan withdrawal.

This is not a position limited to the Tory backbenches; even the -Blairite New Statesman has warned against the UK becoming dependent on US foreign policy decision making, while politicians such as Rory Stewart have sought to resurrect their careers by calling for a limited UK force to remain in Afghanistan, knowing they won’t be held to account for a policy that will never come to pass.

Boris Johnson and Biden’s lacklustre relationship, and the UK’s search for a new post-Brexit foreign policy mean that such rumblings will continue. However, upon a review of costs, it is likely to become quite clear to Johnson that it will be far too expensive to keep US investment out, let alone invest sufficiently to give the UK independent defence capabilities again.

Where there is smoke, there is not always fire.

“Tony Blair made decisions on what he thought was best for the people of Great Britain, and I made decisions on what I thought was best for Americans” Former president George W. Bush

Power play: a big dail
Sinn Féin won the most votes in Ireland’s February 2020 elections for the first time, with 25% of votes. As the coalition between Fine Gael and Fianna Fáil, traditionally the two main political competitors, faces low public approval and continued strong polling for Sinn Féin, what chance does the leftist radical Republican party have of entering a future government?

Sinn Féin candidates won comprehensively across the country in 2020, with many of the party’s incumbent members, Teachtai Dala (TDs), re-elected on the first count, a rarity in Ireland’s ranked-preference system of constituency proportional representation.

However, Sinn Féin won fewer seats than Fianna Fáil – 37 to 38 – as the party did not run multiple candidates in every constituency. The party has spent the last 16 months preparing for the potential for another election, and to ensure it does not leave ‘seats on the table’ once again – had they more candidates in the last election, it is estimated the party would have received 41 seats. 80 are needed to form a government.

Despite Fine Gael and Fianna Fáil’s opposition – they hold a combined 73 seats – as a result, Sinn Féin is very likely to become a party of government in the medium term.

In recent years the party has sought to broaden its appeal beyond radical Republicanism by embracing left-liberal progressivism in the mould of Greece’s SYRIZA or Spain’s Podemos. This has proved popular amongst Ireland’s younger voters, who form the backbone of Sinn Féin’s electoral success and are driving historic success in the polls, which it has been leading since before Christmas.

Based on the latest polls, Sinn Fein might win as many as 50 seats in the next general election. The Dáil has a sizeable proportion of around 20 independents, predominantly local and leftist candidates, and TDs belonging to smaller left parties such as the Labour Party or Social Democrats. Should Sinn Féin prove successful at the next election, a broad left coalition with Sinn Féin as the largest party could be its route to power.

Aside from strengthening calls for Irish reunification, with Sinn Féin also leading polls in Northern Ireland, a Sinn Féin victory in the Republic of Ireland would prove significant on a number of fronts.

Though its policies may be altered should the party form a coalition, Sinn Féin have pledged to deliver ‘the largest public housing program in the history of the state’ as well as to implement a 3-year rent freeze.

Though it seeks to maintain Ireland’s famously low 12.5% rate of corporation tax, multinational companies should note Sinn Féin’s intentions to tighten the tax environment by closing tax loopholes, as well as their demands on firms to be more transparent about their tax affairs.

Sinn Féin entering government would be a significant landmark in Irish politics, and is a real possibility in the medium term. A radical progressive program would include ramped up social spending on housing and a more sceptical approach to Ireland’s position as low-tax business environment.

“To go for a drink is one thing. To be driven to it is another.”

Michael Collins

Dollars and sense: aiding ailing airlines
It is no surprise that aviation has been among the sectors most battered by the pandemic, and which continues to face significant uncertainty about its prospects given the ongoing threat of further viral mutations. The UK government has come under considerable public pressure to do more to respond, with calls from airliners, airports, and the communities that house them for the government furlough scheme to be extended for the sector past the end of September.

So far, however, there has been little reaction to such pleas. Chancellor Rishi Sunak appears to have ruled out furlough extensions in response to a letter signed by 67 MPs from across Parliament calling for such action.

The future of the UK’s aviation sector is not merely a matter for the Treasury, however. Extending furlough would be expensive, but failure to support aviation amid the ongoing uncertainty risks Britain losing out to European competitors, and for London’s status as an international transit hub diminished. One individual unlikely to countenance such a loss is Business Secretary Kwasi Kwarteng, who represents the constituency of Spelthorne, a hub for employees of Heathrow Airport and related industries.

A number of leading lights in the aviation industry have appealed to Kwarteng, and the government more broadly, for support. Aside from extensions to the furlough scheme, their primary ask has been to seek a reduction in airline passenger duty (APD), the variable tax (depending on class of travel and distance) that passengers pay when booking a ticket.

Numerous APD increases were pushed through Parliament under the Conservative-Liberal Democrat coalition from 2010 to 2015, to help pay for government spending as mandated by the era’s dedication to austerity. Shockingly, APD for long-haul flights was again increased in the March 2021 budget. Yet with so many flights still grounded as travels has yet to recover to 2019 levels, receipts have fallen off a cliff. Properly communicated, a campaign for the temporary reduction or suspension of certain APD charges may prove the most effective way to guarantee government support for the sector.

Exemptions to APD already exist – passengers on long-haul flights departing Northern Ireland do not pay the fee. Regional and smaller airports can argue for such an exemption to ensure they survive the pandemic, and help with the government’s ‘levelling up’ agenda. Heathrow and other large airports similarly should position the potential for exemptions as one of the benefits of Brexit to the sector, not normally seen as a winner of the recast EU-UK relationship.

The same March 2021 budget that raised the long-haul APD merely froze it for short-haul flights but Prime Minister Boris Johnson opened the door to a cut for domestic flights only. A consultation is ongoing, but pressure for the government to act should come now – especially as it will become hesitant to do so as the COP26 climate change conference’s 1 November launch approaches.

“Heathrow expansion is supported by businesses, unions, trade bodies, airlines and airports across the country, as well as many local communities whose economic livelihood depends on the airport’s continuing success” Secretary of State for Business, Energy and Industrial Strategy Kwasi Kwarteng

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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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