More moderate protectionism than the US’s ‘may help free trade’

Even moderate US policymakers accept that there is a rational underpinning to the US’s turbulent trade policy, the central pillar of which has been the blanket adoption of tariffs on economic friends and foes alike.

Figures in the US administration have argued that higher tariffs are necessary to protect the US economy from the threat of an increasingly economically dominant China. As Chinese businesses have grown more technologically advanced, policymakers have identified a change in the economic power balance between China and the west.

These types of concerns are not new. The Biden administration made a similar diagnosis - only the proposed actions were different. Biden chose to use subsidy incentives on a massive scale to kick-start high tech manufacturing in the US. His Inflation Reduction Act and Infrastructure Investment and Jobs Act pumped huge amounts of public money into the economy to support the kind of manufacturing activity that might have otherwise gone to China.

Trump has chosen tariff hikes rather than subsidies but the policy itself as well as the rapid manner of its implementation risk causing serious harm to the current global trading system. Indeed, the impact has already been felt.

This is in large part because the US policy of tariff hikes has not just focused on the defence of specific domestic industries alone or the defence of perceived national security threats from the economic policies of a particular country. Instead, the US administration has asserted the need to raise tariffs across the board, so as to remedy so called ‘trade deficits’ with most other countries.

Even if the principle that such trade deficits might exist is accepted, most economists and US trade partners have been quick to point out that the way in which such deficits were calculated was too binary, ignoring, for example, the valid reasons that have led to trade imbalances with other nations, or the fact that the calculation of trade deficits disregarded trade in services where the US has a clear advantage over other nations as a net exporter.

So while we might recognise that some governments have identified what they see as a problem to which higher tariffs might be an appropriate answer, we must also recognise that the US’s actual approach has been a blunt instrument and is as likely to harm its allies as its economic rivals.  

Other western governments might have concerns about the fairness and unpredictability of the US tariff policy. But they also believe that western economies have become over-reliant on China in a way that might put at risk their own economic development and continued prosperity.

The essential tools of the future economy – computer chips; solar panels; batteries; rare earth minerals; steel; concrete – are either controlled or made in huge numbers by China. At the same time, China has been investing in Europe and further beyond. China’s expansion of its economic sphere of influence has been perceived increasingly with apprehension in many western capitals, which are concerned about various aspects of China’s trade policies, including the level of state subsidies granted to Chinese companies that compete in international markets as well as concerns over fair access to China’s own internal market.

The EU has been grappling with its industrial policy in relation to China the better part of 15 years, seemingly going through phases of ignoring it, courting it or seeing it as an economic threat.

For a while the UK, cultivating a close relationship with China in the 2010s, was able to win the day over more protectionist instincts of others in the EU so that for a long time the EU kept its own internal market open to Chinese companies despite concerns over subsidies and reciprocal access. But the world has moved on and so have perceptions in the EU, not least as a result of the UK’s exit from the EU. Brussels is now implementing laws that enable the EU to take action to protect its economic interest against what EU member states perceive as unfair practices by non-EU countries, including the US and China. 

The introduction of the Foreign Subsidies Regulation in July 2023, which enables the European Commission to take remedial measures to address concerns over the distortion of competition in the internal market as a result of foreign subsidies, is a case in point. Equally, the introduction of the International Procurement Instrument a year earlier allows the European Commission to restrict third country access to its public procurements where there are concerns that EU businesses do not have fair access to the public procurement markets of those third countries. Chinese companies and Chinese policies have been the subject of investigation under both legislative instruments.

Ultimately, while the EU has recognised that concerns over China’s trade policy need to be addressed, it is unlikely that it will allow itself to be co-opted into the US’s seemingly broadbrush approach of imposing indiscriminate tariff hikes or requiring the removal of Chinese companies from supply chains.   

There are two main reasons for this. First, the EU is wedded to a rules-based global trade system, given that the EU itself is a construct that can only function on the basis of a rules-based legal order. And even if there are those in the EU that might accept a more aggressive approach against China, such positions do not currently command the necessary majority either at the European Parliament or amongst member states.

For now, the EU has the heft and seemingly the will to resist the type of radical trade policies coming from the US. But whether that will remain the case in the longer term is not entirely without doubt. Recent election results across the EU indicate that the post second world war centrist consensus is breaking down and more radical ideas are becoming mainstream.

Many people might see the Trump reset of trading relationships as a quirk born of a singular personality. In due course we shall find out whether this is right or whether the electoral trajectory that led to Trump winning the presidency will spread further into Europe, leaving even further geopolitical fragmentation and economic upheaval in its wake.