IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
Europe recently faces, on one side, the potential isolationism of the USA (and the UK) and, on the other, aggressive competition from China. This provides an opportunity to the EU to confirm its support to free trade and to influence the conduct of trading partners.
A protectionist wind from the other side of the Atlantic and dumping practices from the East
With the unexpected victory of Donald Trump in the US Presidential vote on the 8th of November the scenario of global trade policy enters a new phase. Indeed, the return to protectionism and the fierce opposition to regional free trade agreements have represented two of the pillars of the campaign of the 45th American President. In addition, the already uncertain future of the Transatlantic Trade and Investment Partnership (Ttip) between US and EU appears even more uncertain, especially in the light of Brexit and given the clouds gathering around CETA.
The graph below shows how important trade partners the USA and China are for Europe. China, in addition, is projected to keep the core of its industrial structure alive by supplying the global markets with subsidized exports, a phenomenon that might intensify once China acquires the Market Economy Status (MES) within the WTO, as a consequence of which the previous anti-dumping agreements become void.
The return of protectionism in Europe?
So far, the EU has proved to be a strong supporter of free trade and globalization. Indeed, the EU accounts for 15% of world imports (second only to the United States), yet the EU’s trade duties affect a mere 0.21% of its imports.
The recent challenges that the steel sector has experienced, especially because of Chinese export subsidies, have however induced a recent change in the approach of the Commission.
The Communication “Steel: Preserving sustainable jobs and growth in Europe” published in March 2016 highlights an urgency to defend the steel sector against unfair trading practices.
More recently, President Jean-Claude Juncker added in occasion of the European Council of October:
“Our current rules are proving insufficient, to combat the harm from unfair foreign competition… It’s now high time … to … equip the Commission with instruments fit to deal with the current realities of the international trading environment."
“The new method takes into account specific distortions due to state intervention in a country or a sector", -– “When a state has such control [on its economy] that the prices and cost of exported goods do not reflect market realities, we will be able to intervene."
This would be the time to take a stance
The recent attempts to act against Chinese export subsidies are worrying signals of the weakening of European support for free trade.
Nonetheless, protectionism in Europe and in the US cannot be the solution. It would reduce the freedom of choice (and the budget) of consumers. Trade wars are expensive and it is unlikely that the EU and the US are equipped to battle with China. Similarly, promising to protect (or to revive in the US) sectors that have completely lost global competitiveness, subsidizing producers and imposing significant duties to imports cannot be an efficient and effective (both in the short and long run) solution. Sure, inefficient sectors may survive for a while thanks to State support and some jobs may even be protected or created; eventually, however, the economic losses due to the inefficiencies will take their toll.
Operating in a competitive environment does not need protectionism or champions elected by allegedly omniscient bureaucrats. Rather, it requires unfettered entrepreneurship.
Europe should establish itself as the main defender and believer of free trade. Surprisingly (and maybe rather ironically), Europe should provide a support to free trade, consistent with the arguments recently put forward by the Chinese Prime Minister Xi Jinping.