Europe’s high stakes bluff on trade
Dr Joe Zammit-Lucia and Robert McDougall believe Europe cannot weather a major transatlantic trade war, which would run the risk of fatally wounding the European project.
Escalating global trade tensions are presented as a fable of heroes and villains. Trump's America is cast as the villain undermining the rules-based international trading system. The EU casts itself as the hero defending the international order. Trouble is that, as with all fables, the reality is more complicated.
President Trump's steel and aluminium tariffs represent an attack on the international trading system. The "national security" justification offered for the tariffs is dubious on its merits at best. But worse, it breaks with a longstanding tradition of restraint designed to avoid a domino effect where everyone marches through these loopholes thereby destroying the whole trust-based system.
In response, the EU and others have instituted, or threatened to institute, immediate retaliatory measures.
Since the global trade rules prohibit unilateral retaliatory measures, that makes them no better than the original tariffs. Where Trump might even win a legal challenge of his tariffs, the retaliation will surely not. Imposing them therefore constitutes as great a threat to the integrity of the rule-based system as the original tariffs. With no evidence that the US will respond with restraint to an escalation, undermining the rules-based system is a steep price to pay for a reaction that seems to be based more on hurt pride and internal politics.
Instead, the correct response is the one we have seen from Norway. It has joined five other WTO members in requesting consultations in the WTO. As stated by Norway's Minister for Foreign Affairs: "The WTO and its dispute settlement system is the established forum for handling disagreements about trade policy". That is what it means to abide by a rules-based system.
This is turning out to be more of a fable of multiple villains than one of villains and heroes.
But the selective call for respect of international rules goes further. How can Europe suddenly decide that it is all in favour of upholding rules and agreements when most EU countries have, for decades, disdained their obligation to spend 2% of GDP on defence commitments? How can Germany pretend to be the champion of a rules-based order when for years its current account surplus has been well in excess of that allowed by the EU's own rules? How has the European Commission suddenly mustered such an explosion of outrage and indignation at the US tariffs when it chose to stand idly by for years as both Germany and The Netherlands have broken the rules on trade surpluses within the EU to the detriment of other Member States?
The objective of a rules-based system is to meld national interest and the collective interest. Without it, it's a Hobbesian world of all against all – to everyone's detriment.
But, for Europe, the more important question is this: if Europe chooses to escalate (illegally) its trade spat with America, where will it all end?
Europe finds itself in a perilous moment. Divisions are there for all to see. It is losing one of its most important and globally influential Member States. In spite of protestations to the contrary, that matters. Eurosceptic parties are gaining ground in Member State governments and seem ever-more determined to stand up to the Brussels consensus. China's Belt and Road initiative and the promise of investment at a time of shrinking EU budgets act as a siren song to some – particularly in Eastern Europe. Europe remains unable to guarantee its own defence and security. A revanchist Russia and an increasingly unstable Middle East lie on its doorstep. Further acrimonious divisions await as more refugees make their way to a Europe that cannot agree on how they should be handled.
The global geopolitical situation has also changed. We are moving from a long period of stability guaranteed by a hegemonic United States to a multipolar world where the US, China and the EU are the largest blocs. In such a world, competition between blocs is much more likely than the multilateral cooperation that we have become used to. And, if such competition were to escalate, Europe is easily the weakest of the three major players. A relative weakness that could turn into utter disability if America were to withdraw its security umbrella.
Given these realities, the last thing that Europe can afford is a severe transatlantic rift that may well fatally wound the European project. Rather than illegal retaliation that escalates what is still an early conflict, Europe would be better served by recognizing its own sins as well as those of others, and co-ordinating wider discussions on how to make an outdated international trading system fit for a 21st century world. Absent such an initiative, Europe may find itself squeezed between China and the US if a full-fledged trade war breaks out.
Joe Zammit-Lucia is a co-Founder and Trustee of Radix, the think tank for the radical centre (www.radix.org.uk) and co-author with David Boyle of 'Backlash: Saving Globalisation From Itself'
Robert McDougall is an international trade lawyer and Senior Fellow at Radix.
