26 April 2021

Europe’s new ‘strategic’ approach to trade is nothing of the sort

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The EU’s trade policy under the slogan of “open strategic autonomy” reminds one of the famous quip about the Holy Roman Empire, which was neither ‘Holy’ nor ‘Roman’ nor much of an ‘empire’. Likewise, European Commission’s recent Trade Policy Review betrays a view of trade relations that is neither open nor particularly strategic. And if it does offer ‘autonomy’, it comes at the cost of further detaching Europe from the global economy.

The Commission is correct in seeking to revitalise both the World Trade Organization (WTO) and the transatlantic partnership. However, the strategy presented in the Review is thoroughly inadequate in enhancing the “the EU’s ability to make its own choices and shape the world around it through leadership and engagement, reflecting its strategic interests and values,” as the EC defines its “open strategic autonomy.”

In a new report, the director of the European Centre of International Political Economy in Brussels, Fredrik Erixon, explains that the Review fails to engage seriously with some of the most pressing challenges of the day.

For instance, the Trade Policy Review says nothing about growing shifts in energy production and supply – a huge issue for the new geopolitics of trade and competition. China’s Belt-and-Road initiative is absent: again, a pretty big matter in both geopolitics and trade. The economics of the Abraham accords, and how these accords have consequences for economic integration in the region and the outside world, aren’t recognised. And the broader global geopolitical shifts? We aren’t provided with much guidance about how the Commission thinks about Europe’s international trade policy as part of an integrated policy on geopolitical shifts in the Asian region. Does it aspire to have a role in the shaping of trade openness and rules, or broader economic alliances, in in the Asia-Pacific region?

In particular, by not seeking to reach out to dynamic Asian economies outside of China – say India, Indonesia, or Malaysia – in the pursuit of deep trade liberalisation, the EU is putting itself at a distinct disadvantage. Not only would deeper ties with fast-growing regions be good for the European economy, they would also serve as a lever in the EU’s negotiations with Beijing. The Chinese government is not about to have an epiphany and suddenly moderate its mercantilist practices, nor can it be sweet talked out of them. Joint pressure from economies that matter to China, however, might force concessions – something that a purportedly “strategic” approach to trade policy ought to recognise.

Worse yet, the EC’s rhetorical commitment to economic openness is becoming increasingly disconnected from the EU’s actual posture on economic policy. It is telling that there is currently no successor document to the Lisbon Strategy and the Europe 2020 which, for all their faults, grappled seriously with the need to improve the EU’s competitiveness and productivity growth. Instead, there seems to be a tacit acceptance of an increasingly defensive, protectionist, and dirigiste approach to regulation and industrial policy, especially in areas featuring new (and hitherto unregulated) technologies. As Wolfgang Münchau notes in a recent article,

The EU’s business-unfriendly general data protection regulation inoculates it against artificial intelligence, which many Europeans regard as an American disease. Virus tracing apps, traffic-AI, face-recognition technology and military drones all depend on data sharing. With GDPR the EU gave itself a regime geared towards an analogue consumer in the pre-digital age.

There is real work to be done by the Commission to help create a genuine single market in services, foster capital markets integration, and help European start-ups reach large consumer audiences without struggling with myriad regulatory frameworks in different member states. But instead the EC is expending much of its energy on ham-fisted new regulations, from AI and data, through capital market regulation, to corporate governance and corporate taxation, which start from the assumption that new technologies and competition from overseas are primarily threats, not opportunities.

Extraordinarily, Erixon notes, the Trade Policy Review is also very casual about floating the idea of the Carbon Border Adjustment Mechanism (CBAM), a tool that the Commission aims to deploy to fight carbon leakage. Although existing WTO rules generally allow for the use of trade tools in the pursuit of environmental policy goals, the line between a legitimate deployment of such instruments and unjustified discrimination is very thin, and the EC falls short of making a coherent case why CBAM should fall in the former category. For one, the proposal is not neutral. Normally, border tax adjustment consists of a levy imposed on imports but reimbursed on exports; yet under the concept put forward by the Commission exporters are not going to see their carbon cost reimbursed if they export.

Secondly, a European CBAM would be connected to the EU’s emissions trading scheme, which allocates some carbon allowances to European companies for free. Jointly, the system would effectively subsidise EU-based companies, making it wide open to a legal challenge under WTO rules. This is a serious blunder particularly given the ample opportunities to work with the Biden administration, the UK, and other major economies around the world in creating a coordinated carbon tax framework that would be consistent with an open and non-discriminatory trading system.

In short, the Review is another reminder of the tensions over European integration. Yes, there are strong reasons to delegate trade policy to common European institutions. However, the ones that exist might be good at setting general rules and enforcing them but are distinctly ill-suited to thinking strategically and taking on calculated risks – and are therefore unlikely to generate an economic and trade policy fit for the 21st century.

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Dalibor Rohac is a research fellow at the American Enterprise Institute in Washington, DC.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.