Policy brief

International trade under attack: what strategy for Europe?

This Policy Contribution analyses the economic consequences of a full-scale trade war. The US position, focusing on bilateral trade imbalances presuma

Publishing date
28 August 2018

This policy contribution
was prepared for the
French Conseil d’Analyse
Économique.

The multilateral trading system is seriously threatened by the country which has been its main inspirer, the United States. The US position is focused on bilateral trade imbalances presumably resulting from unbalanced trade policies, but it is flawed. Not only does it make little sense given the existence of global value chains, but it also misses its target: what matters most are aggregate trade surpluses and deficits, which depend above all on the differential between domestic investment and savings, and little on trade policy.

This Policy Contribution first analyses the economic consequences of a full-scale trade war. Our estimates show that it would have a permanent effect of a similar magnitude on the GDP per capita of the three major global powers (the European Union, the United States and China) of around 3 percent to 4 percent of GDP, as big as the effect of the Great Recession of 2008-09. The impact would be much more damaging for small countries. By contrast, the EU is partly protected by the size of its internal market. In addition, the short-term effects would be even greater because of the negative supply and demand shock the global economy would be subjected to. For this reason, the EU must engage resolutely in a strategy of defence of trade multilateralism.

We recommend combining the adoption of firm and credible retaliatory measures in response to the current attacks with an offer of multilateral or plurilateral negotiations on legitimate issues: macroeconomic imbalances, institutional design of dispute settlement at the World Trade Organisation (WTO), reciprocity of commitments and updating of rules on subsidies, state-owned enterprises and intellectual property rights. However, considering how difficult plurilateral and multilateral negotiations with the US administration are, Europe needs a plan B. In the short term, this requires, for instance, coordinating a club of countries in order to identify and implement strategies to circumvent US blocking of the WTO at the Appellate Body level.

In addition, we recommend pursuing an ambitious policy of trade agreements. The expected economic gains are modest. But trade agreements can play an additional role of insurance policies in case of full-scale trade war and can be used as leverage on other non-trade issues. Therefore, these agreements should change and address two main concerns about globalisation: environmental protection with the issue of global warming and problems related to tax evasion and optimisation.

We therefore recommend making the signing of trade agreements conditional on the adoption of the OECD’s action plan to combat erosion of the tax base and the implementation of the Paris Climate Agreement. We put forward progressive monitoring and sanction measures to ensure effective implementation.

About the authors

  • André Sapir

    André Sapir, a Belgian citizen, is Senior Fellow at Bruegel. He is also University Professor at the Université libre de Bruxelles (ULB) and Research Fellow of the London-based Centre for Economic Policy Research.

    Between 1990 and 2004, he worked for the European Commission, first as Economic Advisor to the Director-General for Economic and Financial Affairs, and then as Principal Economic Advisor to President Prodi, also heading his Economic Advisory Group. In 2004, he published 'An Agenda for a Growing Europe', a report to the president of the Commission by a group of independent experts that is known as the Sapir report. After leaving the Commission, he first served as External Member of President Barroso’s Economic Advisory Group and then as Member of the General Board (and Chair of the Advisory Scientific Committee) of the European Systemic Risk Board based at the European Central Bank in Frankfurt.

    André has written extensively on European integration, international trade, and globalisation. He holds a PhD in economics from the Johns Hopkins University in Baltimore, where he worked under the supervision of Béla Balassa. He was elected Member of the Academia Europaea and of the Royal Academy of Belgium for Science and the Arts.

  • Philippe Martin

    Philippe Martin is Professor of Economics at Sciences Po in Paris. He currently serves as the head of the Department of Economics at Sciences Po and is a research fellow at the London-based CEPR (Centre for Economic Policy Research). He previously taught at the University of Paris 1 Pantheon-Sorbonne and the Paris School of Economics. From 2001 to 2002, he served as an economist at the Federal Reserve Bank of New York.

    Martin's research focuses on international trade and macroeconomics, in addition to economic geography. In 2002, he was awarded the Prix du meilleur jeune économiste de France, a prize awarded yearly to a French economist under forty years of age "who has combined recognized expertise with an active participation to the public debate," along with Thomas Piketty.

    He also works as a columnist for the French daily Libération.

  • Sébastien Jean

    Dr. Sébastien Jean is Director of CEPII.

    He is also a Senior Scientist with INRAE, the French national institute for research in agriculture, food and environment, a member of France’s Council of Economic Advisers (CAE) and National Productivity Council (CNP), a Policy Associate with GEP (University of Nottingham, UK), and a fellow of CESifo Research Network (Munich, Germany). He previously held positions at CEPII and at the OECD Economics Department and taught in various institutions. He graduated from Ecole Centrale de Paris and holds a PhD in economics from University of Paris-1.

    His research and policy works mainly deal with international trade, trade policies, and international economic policy.

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