A slow genetic mutation is taking place in Brussels. It began with the arrival of Donald Trump to the White House, continued with Covid and the war in Ukraine to culminate in recent months with a long series of legislative measures.
The EU was originally born as a model of multilateralism and trade openness. This has always been his vocation, his reason for being. But the taboo has been broken. Security and strategic autonomy are now the priority. And if a tool has to be implemented to ensure value chains and the supply of raw materials or protect a strategic sector, it is done. These are some of the topics that were debated a few days ago at a conference at Cidob, The European Union in the face of the fragmentation of international trade.
There are numerous initiatives that symbolize this change in position. For example, the investigation into China’s illegal subsidies to its electric vehicle sector to lower prices. Or the European chip law, the fundamental raw materials law. Development aid has become selective, with the Global Gateway initiative, which aims to define which countries are worthy of European trade and investment, according to criteria of affinity with European values.
The new legislation known as the anti coercive instrument (ACI) is perhaps the most extreme case. It establishes cooperation where possible, but confrontation when necessary. Its objective is to deter third countries that have the EU in their sights.
When it is not possible to reduce the escalation of tensions, as a last resort, the EU may adopt countermeasures, such as customs duties, import or export licenses, restrictions on trade in services or access to foreign direct investment or public procurement. We already saw what happened with Russia, which used energy as a weapon after the outbreak of the Ukrainian war.
In the Granada declaration, signed by the EU during the Spanish presidency of the Union, this new philosophy is put in black and white. “We will reduce external dependence on key areas where the EU needs to establish sufficient capacity, such as digital technologies, net zero emissions, essential medicines, raw materials and sustainable agriculture (…) It is important to strengthen and diversify our supply chains.” Proof of this is that the president of the European Commission, Ursula von der Leyen, raises with the American president, Joe Biden, the possibility of placing joint tariffs on steel and aluminum “for non-market economies,” according to the newspaper. Political. Jennifer Harris, who helped shape American industrial policy in the White House, exclaimed: “Welcome, Europe. I’m glad you’re here now.” Why is the EU changing its trade policy?
“If Europe really follows the United States and becomes more protectionist, it will do so for similar reasons: the fear that Chinese competition is undermining Europe’s industrial base and with it social and political stability,” wrote Gideon Rachman in the Financial Times. And, indeed, in six years, the EU’s trade deficit with China has multiplied by five, approaching €400 billion. Dependence on Beijing grows. Too much.
Patricia García-Durán, professor of International Economic Organization at the UB, considers that, unlike the American ones, the European measures are defensive and not aggressive. “It is the awareness that the world has now changed,” she explains. We are going towards a more assertive and resilient trade policy, yes. At the same time, the EU tries to play an active role. It has signed free trade agreements with New Zealand and Chile, although the Mercosur agreement remains blocked.
But it is a genetic mutation that is here to stay, with regulations that will become part of the community regulatory body. “Only an agreement within the WTO could rediscuss this fragmentation,” predicts García-Durán. But this multilateral organization is very weakened right now. Thus, each block defends its own interests.
Luis Pinheiro de Matos, economist at CaixaBank Research, confirms that the data indicate that the globalization process is evolving and that the EU is not immune to this movement. “Since 2021, a 10% decrease in European imports from China has been observed, while trade relations between Europe, the United States, Vietnam and Korea increase. A diversion of trade flows is taking place,” he notes.
Many wonder if this move, which today is called de-risking (avoiding establishing commercial agreements due to the risk they could entail in terms of security) is a good idea. Because the costs of economic fragmentation in Western countries vary between 1 and 8% of GDP, according to a study by CaixaBank Research.
Could it be that Europe loses? “From wind power to steel, from batteries to electric vehicles, the clean technology industry has to be manufactured in Europe,” said Von der Leyen. But is it something viable? “The idea of ??imposing reindustrialization in itself is good, but we currently have few examples of this happening in Europe in a significant way, in sectors such as chips or batteries. China has become the center of value chains, and it is very difficult to reverse that,” says Pinheiro de Matos. Likewise, we must assume that friendshoring, bringing production closer to closer and, above all, friendly countries, will have a cost for Europeans.
Karel Lanoo, from the Center for European Policies Studies (CEPS), declared to the Euroactiv portal: “To avoid protectionism we are embarking on a very costly route. We have to continue being the house of commerce, otherwise we Europeans are not what we are. We will be worse even with the proclaimed strategic autonomy.” Martin Bresson, from the Invest Europe association, recognizes that the new community policy of looking closely at investments from abroad (known as investment screening) is dangerous. “We need money flows from abroad to carry out the transitions we need, digital or energy. And if they are to be fair, they will not be cheap,” he stated.
Victor Burgete, senior researcher at Cidob and author of a study on the subject, considers that this new competition framework is “a scenario contrary to the interests of the EU. “Industrial policy does not resolve the loss of European competitiveness due to the increase in energy costs, nor the lack of economies of scale due to the lack of integration of the single market and capital.”
In his opinion, the EU would be worse off since, being an open economy, it would face higher prices as a result of a worse allocation of capital and less competition and innovation. “The best way to compete is not to seek economic fragmentation, but to deepen European integration. Because a policy is only as strong as the budget that supports it,” concludes Burgete.
