Now that the US has imposed a first wave of tariffs, Stefan Legge and Piotr Lukaszuk ponder whether the EU has become the standard bearer of multilateralism and free trade or whether it will it ultimately follow America’s course of action.
Stefan Legge and Piotr Lukaszuk are researchers at the University of St Gallen, Switzerland. Both are regular contributors Global Trade Alert, an independent service, which provides intelligence on national policies that impact the world of commerce.
According to many commentators, the United States officially abandoned the role of emissary of free trade and multilateral cooperation in January 2017. The US administration has withdrawn from the Trans-Pacific Partnership and is reconsidering participation in other multilateral agreements.
Some pundits like Sunny Hundal quickly suggested that the European Union and Mrs Merkel ought to become the new leaders of the free world. Now that President Trump has imposed the first wave of tariffs, is the EU the bearer of multilateralism and free trade or will it ultimately follow the American lead? And what does its current trade policy mean for future relations with China?
To infer the EU’s position on international trade, we go beyond official statements and analyse in detail the Union’s decisions and incentives. Actions speak louder than words.
In trade policy, for sure, all political leaders prioritise national interests. The key question is whether they believe trade to be a zero-sum game with some countries benefiting at the expense of others or a positive-sum game with mutual gains for all participants.
The EU’s recent actions suggest that there is some belief in mutual benefits. Despite rising nationalist tendencies in many of its member states, the European Union has forged ahead and concluded free trade negotiations with Canada, Japan and Vietnam. It is also continuing or planning to negotiate with over a dozen other countries, including India, Mexico and Australia.
Notwithstanding this trend towards selective tariff reduction, what has flown under the radar is that the European Union recently raised its tariffs on China for imports worth $242 billion. The EU gradually removed China in 2014 and 2015 from the Generalised Scheme of Preferences, a system of low tariffs for poor countries.
Our analysis with Simon Evenett shows that this move did not significantly affect aggregate imports from China but raised tariff revenues for the European Union by an estimated €4 billion. In general, we show that customs revenue constitutes a sizeable share of the EU budget. This reduces the incentive for the Commission to engage in future talks about reducing tariffs on Chinese exports, in particular when facing revenue losses associated with Brexit.
Furthermore, the European Union, together with the United States, has been a vociferous opponent of granting China market economy status within the World Trade Organisation (WTO). If granted, it would be harder for other WTO members to impose anti-dumping duties on China, as it would no longer be possible to use third-country price comparisons for normal value calculations in anti-dumping proceedings. Brussels and Washington argue that China should not have received the status starting on 12 December 2016, as Beijing has not eliminated market-distortionary state practices – mainly subsidies – since joining the WTO in 2001.
Also, individual member states of the European Union continue to take unilateral steps against the free flow of investments. Like policies in Australia or the United States, EU governments have blocked Chinese takeovers on grounds of national security or national interests. Just this year, France vetoed the Chinese takeover of Toulouse airport, Germany, the takeover of the aerospace group Cotesa, and Brussels is working on a draft EU law confining Chinese acquisitions of European companies and technologies.
Apart from tariffs and M&A restrictions, there are numerous other measures to limit trade, including subsidies or local content requirements. According to the Global Trade Alert, a trade policy watchdog, the EU and its member states introduced 38 trade-distorting interventions in the first four months of 2016. For the same time period, that number has gone down to 12 in 2017 and 7 in 2018.
Nevertheless, these interventions indicate significant protectionism – until one compares them with the trend of the United States: during the same time frame, the US imposed 27 trade-distorting interventions in 2016 when Obama was in office. Since then, the figure almost doubled to 53 both in 2017 and 2018. The numbers from the Global Trade Alert indicate that the European Union continues to enforce unilateral trade-distortionary policies. However, these actions cannot be put in the same basket as the protectionist measures imposed by the United States.
Considering all these observations, what is the EU’s position on trade at a time when the multilateral order is called into question? Decisions in recent years highlight that the EU acts unilaterally to protect its own interests, but in a way that is very different from the current US administration.
Despite the 2008 pledge to abstain from protectionism, no G20 country has refrained from trade-distorting policies. To the extent that such actions are deemed harmful to other nations, new global trade rules ought to be developed. Instead of threatening and imposing new barriers to trade, new common rules must be determined – and the WTO still presents the best platform for negotiations.
European and Chinese living standards depend heavily on international trade. Leaders in both must defend and respect multilateral rules as the world trading system endures its most demanding stress test to date.