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Comment: After the G7, keep calm and carry on

After the disastrous Group of Seven summit in Canada, the EU will need to find ways to keep calm, focus on saving the WTO’s dispute settlement system and address some of the root causes of its disputes with the US not least Germany’s current account surplus, argues Iana Dreyer.

 

The Group of Seven summit in Charlevoix, Canada, ended in humiliation for the six political and trading partners of the United States. President Donald Trump visibly relished throwing out a final communique he had originally signed off on, and then accusing his counterparts of dishonesty. The world now knows what Trump is about: entertaining uncertainty and applying the tariffs he always wanted to have.

 

German, French, British, Italian – and Canadian, Mexican and Japanese  carmakers need to brace themselves for new World Trade Organization-illegal tariffs on autos in the coming months. Unless someone in the US stops Trump, though it doesn’t look like Congress or the Senate has the teeth to do so.

 

Nothing the EU has done to try to avert the Section 232 tariffs on steel and aluminium in the last months has worked: cajoling Trump (French President Emmanuel Macron’s initial steps), calling for a deal at any price (German car industry, at times German government), or anger and pushback (current EU policy).

 

The EU has engaged in two further types of diplomatic gymnastics that have failed. The first was to tell Trump “we follow you on China trade”, leading to the filing of a new complaint against China’s intellectual property practices at the WTO in a coordinated manner with the US and making joint statements with US trade chief Robert Lighhizer and Japanese trade minister Hiroshige Seko. While there’s nothing wrong with filing a new case against Beijing (why did the EU not do this earlier?), hoping this would sway Trump was at best delusional.

 

The second is trying to convince the US administration to unblock the nomination of Appellate Body members and to stop choking off the dispute settlement mechanism in Geneva. Until a few days ago, EU officials were still saying they had hopes the White House would change its mind. One cannot run a policy on hope alone. It is abundantly clear now: the US president opposes the WTO and the ‘rules-based trading system’, and he will kill it off if it suits him.

 

So what’s to be done next? For whatever yours truly’s two cents are worth, here is my take:

 

Keep up the good work on EU unity

 

Many commentators in the EU lamented German wobbliness and eagerness to cut a deal with Trump. Others were shocked by Italian reluctance to do anything to counter Trump.

 

What most commentators don’t get: division in the EU is the norm. What is more interesting is the fact that despite the big gaps in approaches to the Trump administration professed by member states, in the end they all came up with a consistent joint position. German government statements this morning were even clearer than usual: EU unity first.

 

In the world we have lived in until recently, the EU’s approach towards the US administration would have made sense. This approach has been to wield both the carrot and the stick, by offering talks and responding with retaliation threats. Alas, we are no longer in the world we knew before November 2016. In such a world, the last thing Berlin would want is to face Trump alone with his wrath against German exports and Berlin’s defence under-spending. Germany will happily hide behind the EU.

 

The risk of a crack in the EU’s united front is not Berlin. It’s Rome. With the new populist government there now largely formed and made up of one political party that appears to love Trump, Rome is the weak link to watch. Interestingly, the challenge to EU unity is not Brexit – Whitehall has been hiding behind the EU on this one.

 

EU unity and consistency contrast with US disunity and inconsistency: different agendas pursued by the White House, the US trade representative’s office and the US International Trade Commission during the talks with the EU leading up to the duties on 1 June. And there is the very unpredictability of Trump himself.

 

The EU’s carefully crafted and still fragile unity and consistency might have made matters worse in the short term. Trump has faced resistance. He was told that his much-vaunted ‘art of the deal’ involves understanding that ‘negotiation’ or ‘doing a deal’ is a two-way street. That very resistance might have triggered his decision to apply the Section 232 tariffs.

 

Yet caving in doesn’t help, either. Japan’s silence on the Section 232 matter, or Korea’s eagerness to comply with US requests on autos and a quota, haven’t helped them or spared them any tariffs or quotas. Nor has Seoul saved its free trade agreement with the US, now that car duties loom.

 

So, Europeans, Canadians and Mexicans might as well at least not cave in.

 

Keep the WTO’s dispute settlement system alive

 

The real focus now for the EU and its friends should be to keep the Appellate Body afloat. Trump has introduced crude power politics into trade policy. He constantly lashes out at Europe. So there should be enough of hoping the US will come back to the table. It’s time take the necessary steps to keep the international trade judicial system going without the US no matter the method chosen – whether it means letting Appellate Body members stay on until there is a replacement or setting up parallel appellate systems: whatever works best.

 

Of course, this should be done while keeping engaged and continuing to talk. In the end, it’s in the US national interest to keep the dispute system functioning. The US is, alongside the EU, its most frequent user, and Washington wins most of the cases it files.

 

In this regard, it might be useful for the EU to be a bit more clever in dealing with China. The EU is trying to engage Beijing on “WTO reforms” that primarily involve asking China to change the way it does trade. That’s fine and makes economic sense.

 

Yet Beijing will ask for concessions in return, namely for changes in the EU’s new dumping legislation: its new methodology and trade-defence instrument reforms. The EU will have to accept that if it wants China to move, it will also have to give. After all, the Chinese also know something about the ‘art of the deal’, to use a Trumpian expression.

 

This is going to be difficult. The EU clearly has a point in criticising Chinese state-owned enterprises and subsidies. But the bloc’s current diplomacy in the WTO is too focused on ganging up on China with the US rather than trying to balance out the two interests: make China change and make the US change its mind about the dispute settlement body.

 

Whether the complaints lodged by the EU, China, Canada, Mexico and India against the US’s Section 232 tariffs will lead anywhere is a moot question. It’s worth trying and will pile extra political pressure on the US, but they might just alienate Trump even more.

 

Germany must do its homework

 

A major problem with the EU’s crisis with Trump is that the US has a point. Germany runs an excessive trade surplus. The EU has been telling Trump it’s better to work on ‘root causes’ of his trade anger: Chinese overcapacities. But that is just one part of the story. Another ‘root cause’ of the crisis is also made in the EU especially in Germany, whose current account surplus of 8% is unsustainable and damaging for its eurozone neighbours, too.

 

Many EU governments – particularly Germany – don’t invest sufficiently in defence. Germany is too close to Russian President Vladimir Putin’s Gazprom  refer to Nord Stream 2. The Poles have been nurturing hopes that prospective talks with Washington could help change German gas policy.

 

The European Commission should push Germany more on Nord Stream: there is little evidence the project will bring cost-effective gas or greater energy security. But more LNG imports from across the world – including the US – would. The commission should also pressure Germany more via a ‘macroeconomic imbalances procedure’ to get it to reduce its current account surplus. Berlin can no longer blame France for not doing its job on reforms and fiscal rectitude: time for Germany feel the pressure, too.

 

The spat with the US over autos comes at a time when one cannot but sense that the 20th century auto era is ending, anyway: saturated markets in rich countries, a future that lies in the electrical and the digital. Western millenials don’t care about cars. Germany’s export-driven economy, which relies particularly on car exports, faces severe headwinds. China will become less a driving force for German exports, while the German economy is starved of investments in infrastructure, high tech, digital and, more generally, a 21st-century services economy. Germany’s future economic stimulus will have to be domestic. While the issue is obvious to economists across the world, and increasingly in some economist and business circles in Germany, the German public and many political leaders are complacent.

 

Chancellor Angela Merkel has already said the standoff with the US will force Europeans to depend less on America for their security. She also recently conceded there were political issues with Nord Stream 2. The problem with Merkel is that it’s rare she actually delivers significantly. Her style of politics tends to be to dither and then do too little too late.

 

Let’s hope the current tremors in the global order – from Russian political destabilisation tactics to the upheaval in the White House – will accelerate a rethink. But with two ‘conservative’ status quo-focused parties in power – both the CDU/CSU and the SPD – and the only serious opposition in the Bundestag being the far right, there are grounds not to be too optimistic.

 

Go slow on retaliation and safeguards

 

All in all, the wisest approach taken towards Trump so far is Japan’s: stay silent, don’t cause ripples, don’t retaliate, don’t rush to protect your industry from imports – but also simply don’t give in under pressure. Clearly Europeans like melodrama. Yet a lesson in Japanese zen would clearly be in order here.

 

It’s pretty obvious the cranberry, Harley Davidson and peanut butter tariffs under preparation in the EU in response to the metals duties are not likely to sway Trump. There’s no point in drawing up new ones.

 

Finally, the EU is finding that its coming safeguards on foreign steel and aluminium in response to a possible overflow of imports is ruffling feathers with friends and neighbours and disrupting supply chains (eg here and here) – without impressing the US. What the EU needs is to reach out and work with these friends.

 

Perhaps a better route would be to find a way to temporarily subsidise jobs in the EU’s aluminium and steel sectors  something akin to Germany’s 2009 job-retention programme  rather than introducing new protectionist measures.

 

Opinion pieces published on Borderlex are those of their authors only.

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