International trade: EU must start preparing for the worst and resist own Trumpian sirens

After European elections later this month, the challenge in Europe will be to keep our nations’ own Trumpian instincts at bay and position ourselves as a safe haven in a turbulent world, writes Iana Dreyer.

This is a bleak week for international trade. The EU is caught in between the United States and Iran as the US escalates its confrontation with the Middle Eastern country months after having pulled out of a 2015 deal on Tehran’s nuclear programme. The World Trade Organization as fulcrum of international rules-based trade is likely already nothing more than a hollow shell.

US president Trump sabotaged his own negotiations with China and ordered a fresh new round of blatantly WTO-illegal tariffs. European leaders now need to plan for the worst. After European elections later this month, the challenge in Europe will be to keep our nations’ own Trumpian instincts at bay and instead position ourselves as a safe haven in a turbulent world.

US deal, Appellate Body revived? Don’t count on it

EU technical negotiators are in Washington this week to make progress on a deal on conformity assessment to ease industrial goods trade and gauge whether planned tariff elimination negotiations can begin at all. Don’t hold your breath. Even if the agreement on elimination of tariffs which EU member states agreed to launch last April ever gets off the ground, it most likely won’t be concluded.

If the US negotiations with Canada and Mexico on the one hand and Japan on the other can offer any guidance, then it is this: EU demands that the US lift its Section 232 tariffs on steel and aluminium included in the member state mandate to the European Commission will be ignored. Instead the EU will be presented with a request to accept import quotas on autos. The EU also wants the US to lift its veto on appointments of new WTO Appellate Body members. But it won’t happen.

The EU will be targeted by a round of US tariffs sometime this year. It might well be that these will not be the much-dreaded auto tariffs Donald Trump is entitled to slap by late next week under the process foreseen by US national security legislation – Trump is holding those back as his team negotiates a trade agreement with Japan. But the current EU-US standoff on the settlement of the 15-year old WTO dispute on subsidies for Airbus and Boeing, or the yet-to-finalise renegotiation of a WTO tariff rate quota for non-hormone beef, are perfect ‘hooks’ for the US administration giving it an opportunity to slap tariffs on EU products.

This week’s China episode also shows that there is no trust to be had at all in the current US administration as a trade agreement negotiating partner. To conclude any international agreement, there needs to be a gradual building up of trust that any agreement will stick. What we get instead is confrontational and mercurial behaviour. The US are playing it strong but are too weak to turn a large country such as China around to their views by exerting putative trade leverage.

The fact that Congress in the US has not been able – or willing – to curb the US president on his international trade agenda by now means that there is some measure for support for his policies in Washington. This in turn does not bode well for the EU if leaders are still hoping this is just a bad moment that will pass once president Trump leaves office.

All this leaves the EU pretty much alone on the international trade stage. The EU won’t just become a friend and ally of China, India or other countries to compensate for the increasing political gulf with the US. But China, Russia, a variety of Middle Eastern countries will try to sap EU unity as they smell weakness.

EU ‘brutal’ or divided?

Not only is the EU alone, it is also at risk of being further divided. The fact that French president Macron ended up not endorsing two mandates for trade negotiations with the US and that the European Parliament was not able to come up with a joint view on the current transatlantic trade negotiation process is a sign of things to come. European elections later this month will result in an even more polarised EU.

Brexit is not helping. In utter disregard of mainstream US business views that Brexit is undesirable, the current US administration is embracing it. Why? It’s clear why: it is all about relative US power. Both the EU and the UK will be more easily told what to do by Washington, whereas an EU that is reasonably united in its views and diplomacy can actually resist US demands (eg for agriculture market openings) or even quietly induce policy change in Washington (e.g. LNG export licences).

Perhaps the greatest compliment to the EU was made by president Trump himself, when he tweeted last month: “Too bad that the European Union is being so tough on the United Kingdom and Brexit. The EU is likewise a brutal trading partner with the United States, which will change”. Is this a recognition that Europe’s putative ‘soft power’ is perhaps ‘harder’ than some think?

The biggest threat to the EU’s hard ‘soft’ economic power lies within, though. Given the ongoing world turbulence, EU leaders could, if they wanted to or had the vision and guts to do so, play it smart. They could position the continent as open for business, thanks to an open trade and investment regime and predictable rule of law. Security concerns with China, Russia, and the rest? Well, the solution lies in stepping up intelligence services and defence cooperation significantly – not shutting down on business or imports.

Stability and rule of law have been the hallmarks of the EU until recently. But these are being gradually eroded. Germany’s new embrace of economic nationalism and of old-fashioned French-style industrial policy that channels tax money to less innovative big business (as in the brand new Battery Alliance), as well as its recent its attacks on the Commission’s role as independent guardian of EU competition policy, is deeply worrying in this regard.

The elections in a couple of weeks will most likely usher in a new breed of MEPs who, for different reasons politically, could well tilt EU trade policy towards a more ‘protective’ if not outright protectionist stance.

The new parliament will deepen an already clear trend: green or social ‘idealism’ will de facto partner with old-fashioned farm and industrial interests to produce trade policies that will satisfy nobody and breed more diplomatic trouble. A precedent was sent with the episode leading up to the decision to phase out palm oil from South East Asia for EU biofuels and Brussels’ current threats to imports from Cambodia and Myanmar.

Finally, if the EU wants to position itself as a safe haven in a world of Trumps and Xis, it needs to be open and welcoming to migrants. But here most EU member states, including those without a formally populist government as in Italy, are already Trumpian. This trend will colour any immigration policy coming out of Brussels in future.