The last great defender of rules-based open commerce — the European Union — is about to fall.
It happens in slow motion and the impact will be painful. If the world’s largest trading bloc abandons the concept of free trade, the entire global economy will suffer.
But such an outcome looks increasingly likely, as the European Commission and its powerful trade department come under intense pressure to join China and the United States in a game of economic self-interest and protectionism.
The era of Europe first may be about to begin.
“Our competitors’ assertive new industrial policy requires a structural response,” Commission President Ursula von der Leyen said in a critical intervention on Sunday. “Europe will always do what is right for Europe.”
For decades, increased globalization was a given for Brussels, providing business opportunities and jobs. Growing calls from Paris and Washington for greater strategic autonomy or strict export restrictions have been rejected by the liberal European Commission that von der Leyen now heads.
This free-trade philosophy eventually hit a brick wall in the form of US subsidies for clean technologies, such as US-made electric cars. To understand what went wrong, it is essential to go back to the failed experiment of free trade with China.
The West tried to bring Beijing into the multilateral trading system — and it didn’t work. China has only doubled down on its state-driven economic model. Its rapid growth and dominance in key technology areas has prompted Washington and Brussels to rethink their business strategies in recent years.
“The EU has always supported free trade and that’s a good thing,” Kristjan Järvan, Estonia’s minister for entrepreneurship, said last month. “But now we see undemocratic powers trying to use it against us.”
While the West failed to convert China to free trade, the United States decided that “if you can’t beat them, join them,” said John Clancy, a former trade official of the EU turned consultant. “The EU, which has always tried to find a balance between the two sides, now finds it a difficult place.”
Under pressure from France, Brussels slowly began to build its arsenal of trade defense weapons to combat unfair practices by China and then-US President Donald Trump.
Now the EU is thinking of picking up its big guns and joining a protectionist battle involving state subsidies.
The main trigger this time is not Chinese economic aggression, but climate-friendly reforms emanating from Joe Biden’s White House. Its Inflation Reduction Act (IRA) clears the way for $369 billion in subsidies and tax breaks for US green businesses — but only if they are assembled and essential parts, such as car batteries, are made in the USA
The law was seen as a “slap in the face” and a “game changer” in Brussels, especially from a Democratic president. Angry European politicians have accused Washington of following in China’s footsteps.
The IRA led first to Paris, then to Berlin, to develop new subsidy measures which could include the obligation for European manufacturers to use local products or technologies so that they can benefit from subsidies from the state of the EU. It’s a concept that French President Emmanuel Macron has called “Buy European”.
Such Franco-German dynamics fuel pressure on the Commission, said David Henig, trade expert at the European Center for International Political Economy think tank. “The Commission is in a very difficult position on this,” as the political tide in Europe is changing, Henig said.
In his speech in Bruges on Sunday, von der Leyen said it was time for Brussels to reassess its rules on state subsidies to European industries. A trade war with the United States is not in the interest of either side in the midst of an actual war, she said. But a vigorous response to the threat the IRA poses to European manufacturing will be needed.
“There is a risk that the IRA could lead to unfair competition, shut down markets and fragment the same critical supply chains that have already been tested by COVID-19,” she said. “We’ve all heard the stories of producers considering moving future investments from Europe to the United States”
While working with Washington to try to address “some of the most concerning aspects” of the law, the EU will need to change its own rules to allow more state subsidies for clean technologies, von der Leyen said.
It won’t be easy. According to von der Leyen, additional EU funding could also be needed – and that will certainly spark a heated debate among its 27 member countries over where the money will come from.
But if the EU, one of the biggest and last big proponents of openness and free trade, throws in the towel and enters a global subsidy race, it would not just undermine the rules of trade world and further weaken the World Trade Organization. It would also send a key signal to other countries: forget the rules, take care of yourself.
“We call on our members: don’t turn inward, don’t isolate yourself,” WTO chief Ngozi Okonjo-Iweala warned during a press conference with German Chancellor Olaf Scholz last month. last.
It is not an isolated voice. The most liberal and free-trading countries in the EU are desperately trying to preserve their ideals. “A roundup of subsidies is a very dangerous game,” Czech Trade Minister Jozef Síkela told reporters last week, warning that the winner could be Beijing.
There are also clear fault lines within the European Commission itself. Trade Commissioner Valdis Dombrovskis called the subsidy race “expensive and inefficient”. EU competition chief Margrethe Vestager said last week that no one wanted a subsidy war. For the Commission’s ultra-liberal trade and competition departments, the whole idea is a nightmare.
The real fight within the EU has only just begun, two EU officials said. But the fault lies not with Brussels, but with Washington and Beijing. “The EU is not the one that closed the door to the global free trade system,” added one of the officials.
Last week, Biden held out hope that a compromise would be possible, promising to seek ways forward that don’t hurt America’s allies in Europe. Yet so far no concrete details have emerged and, privately, many on the European side remain skeptical.
“At some point you have to face reality,” said Holger Hestermeyer, a business expert at King’s College London. “Even if you defend the system, you cannot live under the illusion that it is the same world as before.”
Sarah Anne Aarup and Camille Gijs contributed reporting.
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