The EU must think twice before triggering a global trade war

Frankly Speaking

Picture of Giles Merritt
Giles Merritt

Founder of Friends of Europe

Giles Merritt warns against the protectionist downside of European governments’ economic rescue bids, and urges the EU to seize the vacant WTO leadership in a bid to save free trade. 

The consensus amongst media commentators around the world is that unless we all resist protectionism we’ll be throwing away the key to post-corona recovery. They warn that new tariffs and other trade barriers would trample any green shoots of growth and renewed prosperity.

How, in practical terms, can resurgent protectionism be vanquished? It’s easy enough to sing the praises of free trade, but in a global economic depression it can be political suicide for governments already running scared to allow outside competitors to cost local jobs.

Where do we Europeans stand? We like to see ourselves as the champions of open borders and free markets, yet we are already letting some hungry foxes into the hen coop. The foxes in question are the leading EU governments and the major corporations and industries they are ‘saving’, and the henhouse is the global trading system.

Propping up industrial cripples may also have disastrous consequences

Germany and France have been pouring taxpayers’ cash into beleaguered big businesses where something like a million hi-tech, high-value jobs are feared for. It’s unlikely that after having spent so much, Paris and Berlin won’t do everything they can to protect their investments. To defend 400,000 auto industry jobs, France is ‘injecting’ €8bn into the PSA grouping of Peugeot, Renault and Citroen, and lending €5bn more to Renault. To support another 100,000 French aerospace jobs it is spending €15bn more.

Berlin, a longtime opponent of state aids, is forking out €9bn to rescue Lufthansa alone, and is to subsidise electric cars. In Italy, Chrysler-Fiat is seeking a €6bn handout. These are just a few on the lengthening list of bail-outs made possible by the EU Commission’s temporary lifting of the ban on unfair distortions of the anti-trust rules. Brussels’ competition watchdogs have also allowed a slew of state aids to go to advanced sectors like car batteries, hydrogen technologies and microelectronics.

In all these industries, the next step is liable to be competing demands for protection from Europeans’ international rivals. If the looming global depression is as long and as deep as economists fear, protectionist pressures in Europe and elsewhere will be hard to resist.

Many of the recovery packages that EU governments are introducing are badly needed. Furlough payments to discourage mass sackings by paralysed companies are proving vital, and hand-outs to sectors like hospitality and transport may do much to eventually get life back to normal. But propping up industrial cripples may also have disastrous consequences.

The EU has a chance to take back the WTO and revive its fortunes

The betting is that within months, countervailing tariffs and import restrictions will be going up around the world, and that would be to everyone’s disadvantage. Immediate action is needed to head off disaster, and the instrument for that action is the UN’s Geneva-based World Trade Organisation (WTO). The WTO’s members must devise an international code of conduct that reconciles short-term state-funded bail-outs with binding commitments to liberal free-trading rules.

As luck would have it, the WTO is in an awful mess. The protectionist Trump Administration in the US has drawn its teeth by sabotaging the WTO’s mechanism for settling disputes, and the organisation’s Brazilian chief Roberto Azevedo is quitting prematurely in protest. The way is therefore open for a European successor to take over in September with the full weight of the EU behind a WTO-led drive to stave off a global trade war.

But Brussels isn’t stepping up to the plate. The EU’s trade commissioner Phil Hogan has signalled his desire to take over from Azevedo, but he has yet to win the backing of all 27 member states. A number of European governments are playing politics over Hogan’s nomination, and with each week of delay the Irish member of the Von der Leyen commission is losing momentum.

Hogan won widespread respect for his adroit handling of the agriculture portfolio in the Juncker commission. Known to many as ‘Big Phil’ because he stands almost six and a half feet tall (2 metres-plus), his reputation is of a gritty negotiator with an eye for detail. The EU has a chance to take back the WTO and revive its fortunes – Azevedo’s predecessor was Pascal Lamy – and should on no account fritter this away. Maintaining the international trading system could well be at stake

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