The United States’ rising protectionism and turn away from multilateralism require the European Union to “mature”. The bloc must make efforts to save the WTO and the multilateral trading system, argue scholars from the economics think tank Bruegel.
A new think piece published in Brussels argues the EU must respond to the trade policies of president Donald Trump with a four-pronged strategy centered around preserving the multilateral trading system.
The authors of a the policy brief entitled ‘Europe in a new world order‘ say the EU must now step in to defend the World Trade Organization as its traditional pillar, the US, retreats from it. The EU should also seek to deepen trade ties with China whilst insisting on competition friendly rules, reform its internal trade imbalances, and consider carefully crafted bilateral responses to damaging US trade and tax policies if necessary.
The most important threat to trade openness initiated by the Trump administration are plans to introduce a 20 percent destination-based cash-flow tax’ – DBCFT – also known as the ‘border adjustment’ tax. The system penalises imports and subsidises exports.
“The legislation that the Trump administration will eventually pass would set tariffs obviously incompatible with [non discriminatory] most favoured nation schedules of concessions. If the discussion on the destination-based cashflow tax concretises, the US tax system will openly infringe WTO rules”, Guntram Wolff further explained in an interview with Borderlex. “If … the most powerful country openly defies WTO principles, [this] will raise deep doubts in the global system”, Wolff reckons.
“The European Union has a clear solution, which is to go to the WTO and do so early, ideally with partner countries” Bruegel’s director said. But although it is the world’s largest trading bloc, the EU remains a relatively weak global player. This is partly for internal reasons, notably the state of the economy, a weak defence and security policy, the report explains. This is also partly for external reasons, as the world power balance is changing in favour of China and other emerging markets.
“Brussels could forge an alliance with Beijing”, said Guntram Wolff, “but enlisting China as a strong partner also means insisting on the rules and on certain principles that are absolutely central to the multilateral system. These include the role of competition policy, the place of state aid and the question of reciprocity in investments”, Wolff explained. “The Chinese economic model makes trade on equal terms very tricky”.
The grounds for such an alliance with Beijing should unmistakably be upholding the WTO. “The perception of a new alliance made of current account surplus countries against deficit countries could very quickly emerge”, warned Wolff, “with China and the European Union standing against the United States and perhaps also the United Kingdom. This would be a great mistake.”
Brussels could team up with other partners. It should join Mexico in challenging potential tariffs on Mexican imports the United States has threatened to impose. “The EU has the right to do so because its interests are directly affected by US border taxes increase”, observed Wolff. “EU foreign direct investments in Mexico are about €180 bn. Soaring tariffs will directly impact the value of European assets that are destined to exports”, so Wolff.
Should the US press ahead with its ‘border adjustment tax’, the EU “should carefully consider … in collaboration with other WTO members … the possibility to adopt reciprocal measures on corporate taxation that would only be directed against the US”. Another possibility would be to resort to anti-subsidy measures against the US, the authors suggest.
“Brussels will have to walk a very thin line between safeguarding its interests and avoiding a very costly escalation for both sides”, so Wolff.
The EU should further pursue its interests through bilateral trade deals, the think tankers recommend. Concluding ongoing negotiations towards a bilateral investment treaty with China is a priority. Yet these deals “should be designed as stepping stones rather than obstacles to the multilateral system, including in investment matters, where the ultimate goal could be an expansion of the WTO into a ‘WITO’” – to include investment, reads the paper.
Europe heal thyself
The Bruegel policy brief argues the EU needs to reform internally to become more credible externally.
“The challenges posed by President Trump are a call for the EU to fully play its role with the unwavering support of its member states. This implies for Brussels to be ready to internally challenge member states that do not play by the rules”, said Wolff.
The paper highlights three areas where reform is most needed. The EU should address distributional concerns domestically in order to deliver inclusive growth and better social protection, the think tankers say. EU trade and investment policy should be revamped through increased transparency, legitimacy and a reformed European Parliament. And finally, the EU and its member states should seek to correct internal imbalances, in particular Germany’s excessive current account surplus.
“This is a call for the European Union to mature”, concluded Wolff.
Europe in a new world order was co-authored by Maria Demertzis, André Sapir, and Guntram Wolff.
The material for this article was put together by Hermine Donceel.