Apr 09, 2018 03:08 PM

Opinion: EU Must Avoid Trump’s Trade Trap

The last meeting of the EU’s heads of state or government, the European Council of March 22-23, was dominated by worries about the future of global trade. Since the announcement of U.S. President Donald Trump to impose tariffs on steel and aluminum imports and the granting of a temporary exemption to the European Union, South Korea and number of other countries, the old trade order based on a strong multilateral system is already undermined de facto if not de jure.

Nothing in Trump’s recent announcements should come as a surprise. In fact, Trump not only got elected on an electoral platform that was anti-globalization, anti-China and anti-Germany. He also had repeatedly questioned the value of a multilateral system. Contrary to perception, Trump’s views on trade follow a long-standing philosophy. In fact, his values reach back at least to a 1990 interview in the Playboy, where he argued that the U.S. should impose tariffs on Mercedes Benz. Trump’s words and actions are consistent with a vision.

One of the first actions in office was his declaration to take the U.S. out of the Paris agreement in preventing climate change. This unilateral action was met by a determined response of the EU and China and led to the isolation of the U.S. in the G20 declaration in Hamburg, Germany, last year.

But the success of German diplomacy in preserving the international climate agreement may be more difficult to replicate in the trade arena. Isolating the U.S. trade actions and preserving the multilateral system against the United States may, in fact, turn out to be impossible. The first cracks in the system have started to become visible.

After the departure of Gary Cohn, the remainder of Trump’s team now even more firmly consists of individuals who reject multilateralism. His closest trade advisor, Peter Navarro, and his commerce secretary, Wilbur Ross, argue that all deals that lead to a trade deficit for the U.S. should be renegotiated. Meanwhile, Robert Lighthizer, who is the current United States Trade Representative, has also shown his contempt for the World Trade Organization (WTO) and is a skillful expert on exploiting legal grey zones of the WTO. By purposely justifying the steel and aluminum tariffs as necessary for U.S. security, the United States has made it difficult to win a case against it at the WTO, which in principle allows imposing tariffs on security grounds.

But the challenge of the United States to the global trading system well exceeds steel and aluminum tariffs. The real question is whether the United States can or has already forced the European Union to pick its side and become an ally opposing China. On the day when Trump announced that the EU would be temporarily exempted from the steel and aluminum tariffs, he also decided to impose tariffs on $60 billion worth of Chinese imports, in response to alleged intellectual property theft and a steep and persistent trade surplus by China.

So how should the EU respond? So far, the European Council has declared that it continues to support the multilateral trading system and that it wants the EU to close more free trade agreements — after the successful completion of an agreement with Japan and with Canada, where the deal on the former was certainly accelerated by Trump’s election. The European Council has also rightly called the U.S. tariffs an inappropriate answer to the real problem of steel overcapacity, on which the EU has already offered to collaborate with the U.S. The European Council has also declared that it is ready to respond to the U.S. measures with appropriate countermeasures that are in line with the WTO. Finally, it has declared that it values the strategic partnership, including on security matters, with the United States.

The EU’s response so far has, in my opinion, been smart and measured. Yet, it also shows that it will be difficult for the EU to run a middle course in between the U.S., its main market and second largest supplier, and China, its main supplier and second largest market. One dimension is security. It will be difficult to seriously undermine the trans-Atlantic relation without significant concerns for the security guarantee of Europe.

A second crack in the architecture is that the EU has taken note of the temporary exemptions that the U.S. has granted and would like them to be permanent. As such, that formal declaration has already put a wedge between those countries that have been granted exemptions and those that have received even more tariffs. In particular, the EU has been treated differently from China at its own request and that will not have gone unnoticed in Beijing. South Korea has also received exemptions and Japan is considering how far it can go in saying no to Trump. The united front that could be upheld on the climate agreement was not preserved on steel, and Trump skillfully managed to divide the world with these small scale measures.

Third, political pressure in the EU will likely increase as China and others affected by the U.S. tariffs will try to redirect their supplies to the EU, increasing competitive pressures on European firms. Will the EU be able to keep its borders open or will lobby pressures become so great that the EU will itself feel compelled to raise tariffs? This risk may not materialize anytime soon, also thanks to the good business cycle and the increasing demand for steel, but the pressure will certainly increase the longer the tariffs last.

Overall, the EU is right to insist on preserving the global multilateral trading system and bringing both the U.S. and China back to the table in Geneva. Trump’s strategy has already brought cracks to the global trade architecture. It will be important that China and the EU start talking seriously to cooperate on preserving multilateral trade. But the EU cannot and should not fall in the trap of picking sides between China and the U.S.

At the same time, it is also fair to acknowledge that some of Trump’s concerns are valid. Europe needs to reduce is excessive reliance on foreign demand and focus on stimulating domestic sources of growth. China also clearly has a duty of opening its markets in a reciprocal way and abstaining from aggressive and uncompetitive practices in EU and U.S. markets. If a global trade war is to be prevented, the EU and China need to adapt their economic models and jointly collaborate to preserve the multilateral system.

Guntram Wolff is the director of Bruegel, a European think tank specializing in economics. His research focuses on the European economy and governance, on fiscal and monetary policy and global finance.

To read more about China-U.S. trade tensions, click here

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