Economy

The EU’s Trade Policy Is Headed Towards a Mexican Standoff

In fact, we may just be approaching a three-way trade World War

China is the European Union’s second-largest trade partner, behind only the United States. At the same time, the EU is China’s largest trading partner. As of 2018, China was the USA’s largest goods trading partner, although for goods and services listed in 2017 the largest overall trading partner was the EU. And yet, despite the EU, US and China being each other’s largest trade partners, it appears as though we’re heading towards a lose-lose standoff between the three.

Upsetting the balance

Heating tensions have been around for a long time, but we can pinpoint the 2018 G7 summit as the catalyst which triggered the worst of the conflict. The US’s aggressive, almost neo-mercantilist, trade policy headed by the Trump administration has placed the land of the free at odds not only with China but also with the EU and a number of African nations such as Rwanda.

What started as a US-China trade war has now evolved into a US-EU dispute as well. The US wanted the EU to support the US in their trade war against China, by limiting Huawei networks and joining in the USA’s sanctioning and admonishments of the actions of the CCP. On the other side of the Atlantic, though, China and the EU saw an opportunity to unite against Trump’s aggressive trade policies and began setting up negotiations to form a unified front against the US in trade issues.

However, Europe soon found that even a common enemy wasn’t enough for China to adopt fair trading practices. Currently, the European Commission’s web page on trade policy has a civil, yet telling paragraph: “The EU is committed to open trading relations with China. However, the EU wants to ensure that China trades fairly, respects intellectual property rights and meets its obligations as a member of the World Trade Organization (WTO).”

The text very politely implies that the EU doesn’t think that China trades fairly. Indeed there are deep problems with trading in China, everything from the legislation allowing China to exercise control over private companies to mandating that foreign companies have a designated national connection in China before they are allowed to do any business in China.

The EU has until recently allowed Chinese companies to operate relatively freely in the EU, just like other international companies. With no improvement of fair trading conditions in sight, now even the EU has had enough and has begun targetting Chinese companies much like China has targeted European ones, and it is China’s turn to complain. Reciprocity wasn’t supposed to be on the menu.

Foreign Direct investment Restrictivess in 2016: EU vs China (Graphic by Merics at https://merics.org/en/report/eu-china-fdi-working-towards-more-reciprocity-investment-relations)
Foreign Direct investment Restrictivess in 2016: EU vs China (Graphic by Merics at https://merics.org/en/report/eu-china-fdi-working-towards-more-reciprocity-investment-relations)

Will US-EU Trade Relations Keep Deteriorating?

The fallout between the EU and China could (and should) have opened up a pathway for Western powers to mend their broken relationship and form a renewed Trans-Atlantic front. Instead, earlier this year the EU-US trade dispute flared up with new tariffs.

At the end of 2019, the Trump administration announced that it would be placing higher tariffs on a multitude of European goods, especially alcohol and foodstuff – hitting a myriad of products with a 100% tariff. This came as a reaction to the EU’s illegal support of Airbus as well as France’s planned 3% digital tax. Later, in January 2020, France agreed to freeze the plan, as nearly 140 OECD countries negotiated new international tax plans to better account for digital giants like Facebook, Google and Amazon. However, as the COVID-19 drug and vaccine manufacturing disputes arose, France announced it would once again go ahead with the tax plan, which prompted the US to hit the EU with another barrage of tariffs.

Now, while the EU has also responded with a number of retaliatory tariffs on the US, it is possible that European leaders will yield to the US to protect their relationship with the EU’s largest export market. There is a long-lasting bias for favouring exports and demonising imports – stemming from the mercantilist age. This mode of thinking has lasted in the minds of policymakers.

Economics and trade are not so one dimensional though. They cannot be summarized as “exports good, imports bad”. This sort of autarkic way of thinking has caused many nations – from Fascist Italy to the Soviet Union – an endless amount of trouble in their time. Many modern businesses are built around international trade – many of them require imports to function and impediments to imports may cause them to fail, thus negatively affecting the national output of the importing nation. Showing that wealth can be generated from imports.

Looking Ahead

The US and China managed to arrive at a deal settling their trade differences at the end of 2019, which made many hopeful that this would be the end of the year-long conflict. Unfortunately, as the COVID troubles heated up, the trade war heated with it. The US has mounted attacks on China from within the international community, berating them for their early cover-up of COVID and eventually leading to the US exiting the WHO.

At the same time, China has been attempting to bring Hong Kong under control, which has prompted a fresh line of criticism towards the CCP. With the alleged genocide of the Uyghurs, the CCP has seen its fair share of criticism this year. However in a twist of fate, while these wars of words have gone on, both countries have been forced to exempt many of the tariffs they placed on each other out of necessity, as they’ve found that the current situation has increased the need for imports.

The danger in the trade wars between the US and China (and EU and China) is that decoupling economies in this day and age is horribly difficult, and possibly recession inducing. The same warning has been levelled about an EU-US trade war.

The COVID-19 crisis may have put a stop on any major changes in the trade war situation, but it is very possible that after the worst is past the US and China will once again slip into a trade war. While the EU-US war rages on and an EU-China trade war looms over the horizon, pitting each other’s largest trade partners in a cycle of trade battling risks closing Europe into a true Mexican standoff.

Tags

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top button
Close
Close