Discussing Trade with Barbara Moens & Stanley Pignal
EU-US Trade, IRA, China, Mercosur
Hi! Today, as part of our partnership with the amazing podcast Uncommon Decency — which we highly recommend you to subscribe to — we’re giving a written life to another fascinating episode.
In this conversation with François Valentin, The Economist’s Charlemagne columnist, Stanley Pignal, and POLITICO’s Barbara Moens, discuss the evolving trade relationships between the EU, the US and China.
The EU has historically been a strong advocate for free trade policies. This stance is now increasingly challenged due to the current geopolitical context. In November 2022 — when Uncommon Decency recorded this podcast episode — French President Emmanuel Macron had just made a statement calling for the EU to match the green subsidies being offered by the US government as part of the Inflation Reduction Act. He had expressed concerns that the tax breaks and subsidies in the US would put European companies at a disadvantage and believed there should be a joint effort to accelerate the green transition in both the EU and US.
One might wonder if the EU was truly committed to free trade in the first place, and whether this recent development may lead to a trade war between the EU and US.
The EU has historically been perceived as a protectionist bloc by outsiders, as it is said to raise barriers to trade with other nations. However, it is considered a free trading bloc internally. Which of these two reputations do you think is closer to reality?
Barbara: I would argue that both views have some merit. Over the years, the EU has been a strong advocate for globalization and free trade, as demonstrated by its support for the WTO. However, many third countries see the EU as a protectionist bloc, particularly in the agriculture sector. Currently, I've observed a shift in the EU's rhetoric towards a more protectionist direction due to the geopolitical context.
Stanley: When comparing the EU to the US under Donald Trump and Joe Biden, I would say that the EU is pro free trade by global standards but protectionist by EU standards. The EU has traditionally been open to trade and has tried to protect the multilateral trading system, but it has become a challenging political and economic task.
The EU single market is seen as a symbol of free trade due to the free movement of goods and people. However, globally, especially in the US, the EU is perceived as a protectionist bloc due to its agriculture subsidies and recent carbon border adjustment tax. Is the EU actually a voice for free trade on a global scale?
Barbara: We can have a look at the regulations that the EU has either in place or underway, including the carbon border mechanism, ban on forced labor, supply chain due diligence, and deforestation regulation. The EU is unilaterally imposing these values and rules on third countries it trades with for the betterment of the climate and social labor standards. However, many third countries see these regulations as making trade with the EU more difficult and potentially hurting their economies and businesses.
Stanley: The EU is composed of many countries with varying views on trade. Some are open to it and see it as necessary for their economy, while others are more skeptical.
Barbara: The European Commission, which serves as a central bureaucracy, is generally supportive of trade. Historically, trade has been a significant aspect of the EU's influence as a European power, leading to a liberal approach towards free trade by the Commission. The EU's trade department is under pressure due to difficulties in concluding or ratifying trade deals, leading to a shift in the European Commission's belief in the benefits of trade. This is influenced by challenges in trade negotiations such as MERCOSUR or TTIP, China's behavior in the WTO, and Russia's invasion of Ukraine.
I have noticed a change in how EU officials approach trade with America. Can you help me understand the response to the inflation Reduction Act in Brussels? Do EU officials have a valid argument about trade imbalance with America due to subsidies?
Barbara: The European view is that the inflation Reduction Act undermines the global multilateral trading system and transatlantic relations, as the US didn't consider the impact on its ally before passing the legislation. The EU's frustration is also due to its late reaction to the legislation, as well as the complex domestic political situation in Washington. Despite this, the US might argue that the EU asked for them to take action on climate, so why are they complaining now ? There needs to be a resolution to iron this out.
Stanley: On the other hand does Europe have a valid point in regards to the IRA being a problem? Absolutely. Even if the subsidies were open to Europeans, it would cause disruption. But the fact that it is heavily influenced by protectionism is a major concern for the already vulnerable European industry. As a European policymaker, I would argue that the high energy prices in Europe are a result of us bearing the burden of the sanctions, imposed by the EU on Russia but heavily supported by the US, among others.
However, just because there is a valid point doesn't mean that the solution is to start a trade or subsidy war. Even though everyone may agree on the problem, there isn't a clear agreement on the solution. You can see the familiar divide among the EU nations with some, like Emmanuel Macron, pushing for European subsidies without a clear understanding of who will pay for them, while others like the Dutch, Germans, Irish, etc. believe in remaining a free-trading bloc and upholding their responsibility in keeping the trading fair.
Is the EU's European Battery Alliance and semiconductor subsidy act a response to the US's EV subsidy and to the concern that the US has undermined the EU's efforts to strengthen its industrial base with a larger subsidy? Do EU officials start realizing that the US just got a bigger gun?
Barbara: The EU is having a heated debate over subsidies and industrial policy. France has long pushed for stronger support, but many countries say they lack the funds and structure to make it happen. Tax breaks can be done at the national level, but other changes require action at the EU level, making it a more complex issue than in Washington. We agree with the argument that the EU's complaints about US protectionism lack credibility because the EU has implemented similar policies.
Stanley: Policies such as CBAM, restrictions on foreign companies bidding for public procurement contracts, curtailing foreign companies from receiving state aid, and the IRA are all seen as forms of protectionism, or at least close to it. This makes it hard for people like Macron to criticize the US, as these policies align with what he would have wanted to do, but the question of who will pay for it remains complex.
What's up with the MERCOSUR negotiations? What are the issues and what's next?
Barbara: Let’s take a step back. The EU is trying to diversify from Russia and China after the war in Ukraine. They've already made deals with New Zealand and Chile and are working on one with Mexico. The big goal is Mercosur, but it's sensitive because of deforestation and agriculture. The EU hopes to negotiate a new addendum with Latin American countries of Mercosur about deforestation, but it's unclear if that's achievable.
Stanley: We can be curious about the size of these trade deals the EU is making. Are they expansive enough to need approval from national and regional parliaments like what happened with the Canada deal? I hope the new deals being negotiated are less ambitious to avoid that kind of complexity. The EU indeed changed the way it negotiates trade deals to avoid complications with national and regional parliaments. By doing so, the provisional trade aspects of a deal can start, then be shown to be working, and hopefully get ratified. This approach has faced criticism as some see it as a power grab by the Commission, detrimental to member states.
Do you think the European Commission will play a role in securing energy supplies through deals with other LNG suppliers, in response to the US marking up prices and accusations from Europe?
Stanley: The EU would like to play a role in securing energy supplies through deals with other suppliers, but energy remains a national competence. There's a debate over a gas price cap and some countries don't want to give too much power to the EU. The bigger issue is with Norway, who's making good money from expensive pipeline gas. There's frustration towards Norway for taking advantage of the difficulties in Europe.
Do Europeans prefer protectionist or free trade policies?
Barbara: The public opinion on trade varies by country. For example, in Sweden, trade is not even a topic of discussion and the stance remains the same regardless of the change in government. However, in France, public debates on trade are different. Finding a common ground in public and political debates is a challenge for the EU, especially when it comes to the response towards the US on the subsidies issue.
Stanley: There's a shift happening, but it starts from a strong pro-free trade position” continued Stanley. Most Europeans (77%) have a positive view of free trade and only 16% have a negative view. Even in France, the least pro-free trade country, people are still three to one in favor. COVID and the Ukraine situation have changed things, making more people favor protectionism. Europe has worried about sourcing things like paracetamol during COVID and there's a growing idea of strategic autonomy. This means thinking about doing trade with friends instead of with people who aren't as friendly.
Barbara: We should emphasize that France has a big influence on trade policy, especially during its EU presidency. At that time, all free trade deals were on hold and the focus was on trade defense. France even created a chief trade enforcement officer, which was previously unthinkable, and whose role is fulfilled by an official of french nationality. Their influence has increased with the response to the American inflation Reduction Act because of unclear responses from Germany.
Stanley: And let's not forget about Brexit, which completely changed the political landscape for free trade vs protectionism. There was an attempt by Northern European countries to form a free trade alliance, but now even the traditionally pro-free trade Netherlands are leaning more towards France's stance. They're talking about "open strategic autonomy" which is similar to France's idea of strategic autonomy, which would have been unheard of a few years ago. This has made it easier for Macron with Britain out of the EU.
The single market was a big deal for Britain and they pushed for it. The single market currently does well for goods, but not for services like insurance, banking, and mobile phones. With services becoming a bigger part of the European economy, things like the digital single market and financial single market are becoming important, but there hasn't been much progress in this area. If Britain was still part of the EU, there would have been a push for a deeper single market.
What impact has China's economic expansion and state-driven model had on the EU's internal policies and external trade policy, especially with the stalled investment treaty with China and Lithuania?
Barbara: When it comes to trade, it's all about China. The West tried to get China into the multilateral system, but that didn't work out. Even with the US, all trade talks end up being about China. The US wants to be tougher, while the EU wants a more diplomatic approach. Within the EU, there's a lot of differences in how to handle China. But when it comes down to it, every trade discussion is about figuring out how to deal with China.
Stanley: Basically, people's views on China have changed. In the past, China wasn't seen as playing by the global trade rules, but that was okay because it was a poor country. But now that it's grown and is a larger part of the global economy, people are more worried about it. The US is trying to get Europe to join them in isolating China, which isn't easy for Europe since not everyone agrees on how to approach China. There are different opinions and constituencies in Europe, which makes it even more complicated.
If the EU expands to include countries like North Macedonia that have been waiting to join, will it move towards more protectionism or openness in trade?
Stanley: We don't know if smaller countries like the Balkans would be open to foreign trade. They have a lot of Russian and Chinese influence because Europe hasn't taken them on yet. They probably still want to have a relationship with China and be seen as a way for Chinese companies to enter the EU.
Barbara: Western European countries are worried about imbalancing the power dynamics within the EU, including in trade, but it is considered dangerous to talk about it. The UK was previously supportive of EU enlargement, potentially due to the idea that a bigger club means less control. The absence of the UK has an impact on the current debate on the issue.
This episode was adapted by Gabriel Papeians de Morchoven and Augustin Bourleaud.