Stakeholders in international trade policy in Europe interested in an open economy need to face up to a few harsh truths.
The first truth is that there will be no pro-active, free-market, let alone an effective trade policy in the coming months, if not years. Trade policy will remain reactive, protective if not protectionist, and focused on ‘security’.
The second truth is that pro-trade lobbying now needs to focus on fundamental issues of rule of law and institutional reform in the European Union.
This week’s call by more than thirty business groups for the EU to fast-track its trade agreement agenda and appoint a proper trade commissioner is somewhat beside the point. This type of lobbying is from another era.
It’s not the fairly reasonable content or specific demands made that are in question. It would of course make sense, for example, and as requested, for the EU to conclude free trade agreement negotiations and to unlock new markets.
This applies not least the large and still highly protected South American one – Mercosur, which does not get a mention in president von der Leyen’s programme submitted to MEPs ahead of their confirmation vote.
There clearly is an imperative to diversify export and investment destinations as well as critical minerals sourcing.
Or course it would be useful to have a trade commissioner in place able to mobilise a relevant directorate-general towards achieving the EU’s trade policy goals and not leave negotiations and management to shiftier, technically less competent, presidential or executive vice-presidential cabinet members in the European Commission.
EU’s constitutional weakness exposed
But issuing such a piece now comes across as the most powerful business lobbies failing to see that something more fundamental is currently at stake here.
At fault here is not Vladimir Putin, Xi Jinping or the possible return of Donald Trump to the White House per se.
The fault lies in the EU’s constitutional inability to deal with the kind of security and sovereignty threats, kinetic and hybrid, we are seeing.
From inside, the EU faces the systematic undermining of the rule of law, including that related to the single market and the customs union – as seen with unilateral import bans from Ukraine last winter enacted by at least five member states.
These are dangerous precedents that have largely gone unpunished. To the contrary, the Central European countries were rewarded by the first von der Leyen commission with the EU enacting global trade restrictions on Ukraine.
The customs union and single market appear increasingly optional for increasingly populist member states. The undermining of the foundational EU rule-book, abetted by lax enforcement, leads to rising business costs, legal instability and no credible foundation on which to sign international trade agreements.
Henceforth there can be is no effective and credible free trade agenda without the above fundamentals being sorted.
Some might have noticed that the Council is currently presided by a country that the EU let slide into authoritarianism and destroy its rule of law, a country that has blackmailed the bloc on the existential issue of Ukraine’s security.
Viktor Orbán’s freewheeling diplomacy is embarrassing the EU by pretending to speak for it with the likes of Vladimir Putin, Xi Xinping and Donald Trump.
The European Union, ridden by a series of crises for fifteen years now, has slid into intergovernmentalism. Intergovernmentalism breeds impunity for national governments violating the club’s rules as well as the text and spirit of the EU’s treaties.
Let us not forget that the best the EU has been able come up with in this crisis is a string of member states and the commission not sending ministers or senior staff to regular ministerial meetings of the second order.
Nobody wants to punish Orbán seriously by for example suspending his country’s voting rights, or rescinding his presidency, for fear of setting a precedent that would be used against them one day.
Impunity means the gradual self-destruction of the Union.
Certainly, von der Leyen’s programmatic pledges this morning include restoring the rule of law, making use of Article 7 on this matter. The proof will be in the pudding, though, at the next inevitable crisis.
The trade policy community has been amoral enough to watch that happen passively on the issue of migration – this is now coming home to bite business and the free trade agenda too.
This morning’s von der Leyen programme doubles down on the EU’s far-right tinged agenda of focusing on kicking out rebuffed asylum seekers instead of building a much needed migrant-welcoming framework that is needed for our fledgling ageing economies – and the EU’s international reputation.
Businesses must also be ready to confront a situation where Donald Trump wins the race to the White House next November.
Tariff tit-for-tat measures
In early 2025, the EU will need to decide if it reinstates its punitive tariffs on the United States. The US will certainly continue to levy tariffs on EU steel and aluminium for purported national security reasons.
The EU and US will not have found an arrangement on carbon pricing in steel. These are two conditions needed for the Biden-era tariff truce on this issue to be prolonged.
Donald Trump already announced he would levy an all-round 10% tariff on all imports. Any tariffs the EU applies to the US above that amount could be met with ‘reciprocal’ tariffs. This would be combined with a 60% or even higher all-round tariff on imports from China.
This in turn means some Chinese products could be diverted to the rest of the world and also the EU, leading to more protectionist calls from the usual-suspect protectionist industries and further friction with China.
There is a new digital tax retaliation threat looming from Washington.
Thanks not least to the EU’s very own Hungary, the relevant first pillar of the 2021 OECD Global Tax agreement has not come into force. Individual tariff truces negotiated on the sidelines of the OECD tax deal between the US and individual European countries that have introduced digital services taxes have lapsed.
A second Trump administration will certainly not adhere to the OECD treaty. The Trump entourage has already signaled it will want to go after those taxes under the US’ Section 301 legislation.
EU businesses will certainly want the World Trade Organization’s heavily watered-down e-commerce agreement to finally be signed. This is a reasonable wish.
But the Biden administration may well not sign up to it all. A second Trump administration is likely to damage the WTO as an institution altogether – let’s just wait for the next budget discussion in Geneva.
More US blackmail on China
“The raw truth” is “that the United States, in certain critical technology areas that are viewed as central to future military capabilities, does have zero-sum objectives,” says a recent report by the Centre for a New American Security about the US’ new approach to economic security as the first Biden administration ends.
Whether we have Biden (or a replacement) or Trump in the White House as of next year, this state of affairs will persist.
A second Democrat administration might still pursue efforts to cultivate allies. A new Trump administration will not.
“Entity List designations, which prohibited designated entities from receiving U.S.-origin technology or goods, rose from approximately 5 to 30 designations annually [in the early 2010s] to more than 150 in 2023,” the above-cited CNAS report reminds us.
We’ve already seen the Biden administration dropping directly arm-twisting individual EU member states into limiting exports of high-tech products to China in a way that is not in line with EU interests.
Throughout the EU-US Trade and Technology Council process in the Biden era, we have seen the US trying to push its Chinese agenda with the EU, with relatively limited success thus far, and at least a willingness to listen.
There will be no TTC under a Trump administration. But the China-related arm-twisting of individual member states will inevitably pick up gear.
EU capitals are ducking responsibility. Back in May EU member states basically refused to follow the commission’s export control policy proposals made in a White Paper from January.
These include expanding the EU export control lists beyond the remit of multilateral institutions and to coordinate export controls decisions better so as to avoid being blackmailed and undermine the EU single market.
If Trump is back in the White House, the EU’s sanctions regime affecting Russia, thus far coordinated with G7 and other allies, will inevitably be weakened. Some in the EU might welcome it.
But this will further threat the EU’s security. There is no flourishing business without security.
The business community might be well advised to weigh into the process to make sure the EU’s single market is preserved, its well-understood long term business interests are preserved, and the EU has a decent export control strategy. Instead of just urging the commission for “caution”. Geopolitics is upon us – business needs to recognise it and shape it intelligently.
As the second von der Leyen term begins, the EU will be weakened by lame-duck governments in the biggest member states – France and Germany – where the far-right has surged and indecision will reign for the foreseeable future.
This is no time for business lobbies to submit their Christmas wish-list. To do trade agreements you need calm, patience and sufficient political support at home. The EU no longer has any of that. The house is on fire.
Internationally-minded EU-based business needs to act fast and think along on the economic security issue instead of pushing back against the inevitable. Their aim should be to make EU institutions robust and make economic security what it is about: security but not cosy protectionism.
It’s time to switch to a much more combative mode to fight for the EU’s fundamentals.
