A slow genetic mutation is taking place in Brussels. It started with the arrival in the White House of Donald Trump, continued with the covid and the war in Ukraine to culminate the last months with a long series of legislative measures.
The EU was originally born as a model of multilateralism and commercial 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 needs to be launched to ensure value chains and the supply of raw materials or to protect a strategic sector, it is launched. These are some of the issues that were debated a few days ago at a conference at Cidob, The European Union facing the fragmentation of international trade.
There are numerous initiatives symbolizing this change in position. For example, the investigation into China’s illegal subsidies to its electric vehicle sector to lower prices. Or the European law of Chips, the law of fundamental raw materials. Development aid has become selective, with the Global Gateway initiative that aims to define which countries are deserving of European trade and investment, according to criteria of affinity with European values.
The new legislation known as the instrument against coercive actions (anti-coertion instrument, ACI) is perhaps the most extreme case. Establish cooperation as much as possible, but confrontation when necessary. It aims to deter third countries that have the EU in their sights.
When it is not possible to lower 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 have already seen what happened to Russia, which used energy as a weapon, after the outbreak of the war in Ukraine.
The declaration of Granada, signed by the EU during the Spanish presidency of the Union, puts black on white in this new philosophy. “We will reduce external dependence in key areas in which the EU needs to establish sufficient capacity, such as digital technologies, zero net emissions, essential medicines, raw materials and sustainable agriculture (…). It is important to strengthen and diversify our supply chains”. An example of this is that the president of the European Commission, Ursula von der Leyen, raises with the president of the United States, Joe Biden, the possibility of putting joint tariffs on steel and aluminum “in non-market economies ”, as reported by the newspaper Politico. Jennifer Harris, who helped design US 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 return for similar reasons: the fear that Chinese competition is undermining Europe’s industrial base and thus social and political stability,” wrote Gideon Rachman in the Financial Times.
And, indeed, within six years, the EU’s trade deficit with China has multiplied by five, approaching 400,000 million euros. Dependence on Beijing is growing. Too. Patricia García-Durán, professor of International Economic Organization at the UB, believes that, unlike the North American ones, the European measures are defensive and not aggressive.
“It’s the awareness that the world has now changed”, he explains. We are moving towards a more assertive and resilient commercial policy, yes. At the same time, the EU tries to play an active role. It has signed free trade agreements with New Zealand or 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 once again discuss this fragmentation”, predicts García-Durán. But this multilateral body is very weak 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 no stranger to this movement. “From 2021, there will be a 10% drop in European imports from China, while trade relations between Europe, the United States, Vietnam and Korea are increasing. A deviation from commercial flows is taking place”, he notes.
Many people wonder if this turn, which today is called de-risking (avoid establishing commercial agreements because of 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 CaixaBank Research study.
Shouldn’t Europe be losing? “From wind power to steel, from batteries to electric vehicles, the clean technology industry must be made in Europe,” said Von der Leyen. But is this feasible? “The idea of ??imposing reindustrialisation is good in itself, 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 complicated to reverse this”, Pinheiro de Matos points out. Likewise, it must be assumed that friendshoring, bringing production closer to countries that are closer and, above all, friends, will have a cost for Europeans.
Karel Lanoo, from the Center for European Policies Studies (CEPS), declared on the Euroactiv portal: “In order to avoid protectionism, we are embarking on a very expensive route. We must remain the house of commerce, we Europeans are not what we Europeans are in any other way. We will be worse even with the proclaimed strategic autonomy”. Martin Bresson, from the Invest Europe association, recognizes that the new EU policy of scrutinizing investments from abroad (known as investment screening) is dangerous. “We need flows of money from the outside to carry out the transitions we need to carry out, digital or energy. And if you want them to be fair, they won’t be cheap,” he said.
Víctor Burguete, 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 solve 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 capitals”.
In his view, the EU would come out badly damaged: because it is 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 Burguete.
