Preferential trading agreements under the global trading system (known as the WTO) cover between one third and one half of world trade. EU countries do the greatest part of their trade under such preferential rules (including intra-EU) and have always been a big defender of open and free trade for all, and of the support system created around it.
However, there are two reasons for the EU to worry about a potential disruption to this global working system. The first threat is immediate and it comes from the US, while the second is much more structural and comes from China.
The unexpected election of Donald Trump has accelerated an existing US trend of questioning its role as the anchor of the global system. A trend that started with President Clinton’s “what’s in it for us” motto has accelerated with President Trump’s ‘America first’ rhetoric. And this is not just about withdrawing from an active leadership position. It is a notion, if not a belief, that the US can make better deals for itself if it acts alone – possibly outside the confines of multilateral frameworks like the WTO.
In the past two years, President Trump has held true to this notion. The US has challenged existing trade relationships in order to secure better terms for itself. It has imposed tariffs on Chinese products and it has threatened repeatedly to do the same to the EU. This confrontational approach to trade issues is certainly against the spirit of the WTO. But more than the spirit, the US administration is also attacking the workings of the WTO by challenging its dispute settlement system and delaying the appointment of judges that will risk making it non-functional.
The latest report by the US Department of Commerce recommends a 25% duty on cars built in Europe in addition to a current tariff of 2.5%. This recommendation awaits decision in the next 60 days or so, but both the current uncertainty and the decision itself would have sizeable effects on European exports and, hence, growth. For the moment this is the most important risk to the EU’s short-term growth.
But the global multilateral system is also challenged by China’s entry to the global stage. First, China has very different views about the role of the state in the market place. Implicit and explicit subsidies for domestic firms have created unfair competition for US and European firms at the global level. The signs of these are becoming visible both in China’s rapid innovation advancements and its extent of market penetration globally.
But additionally, China forces technology transfers for foreign firms that wish to enter the Chinese market. This has been a point of dispute from US and EU authorities alike, and has left many doubting whether China can actually be a member of the WTO – in the sense of abiding not only by the agreements but also the underlying principles on which market economies operate.
The size and speed of China’s growth are beginning to demonstrate that China is not going to be a rule-taker when it comes to global engagement; it will at some point want to impose some of its own rules, which at the moment are not in line with the ‘Western’ way of doing business. In the meantime, Chinese businesses are enjoying the benefits of scale that Chinese policies have enabled.
President Trump has decided the solution to some of these issues is through bilateral confrontation. Where does this leave the EU?
With regard to the US, the EU has maintained a clear strategy: it will continue to try to persuade the administration of how detrimental trade wars can be, but it will also retaliate with proportional measures to any effective action taken by the US. While the US is a long-standing ally, the antagonism it is currently showing puts into question its role as global leader. For its part, the EU is forced to re-think whether it can have economic autonomy without the US. Antagonism coming from the US in the form of possible trade tariffs remains, for the moment, the most immediate risk to the EU’s economy.
The emergence of China as a global player is forcing the EU to rethink how well it can compete in the world. What tools does it have in place and how should it use them to prevent what it considers to be unfair advantages arising from state intervention. The EU its starting to reassess its industrial policy, whether it has one and how it should use it to level the playing field at the global level. It remains to be seen whether China will manage to increase its global influence without being forced to follow at least the spirit of the global system. In the meantime, the EU needs to think hard about which policies to pursue in the current environment of trade antagonism and direct market interventionism.