Europe’s Trade Strategy for the Age of Geoeconomic Globalization

Christian Bluth, Senior Expert, Bertelsmann Stiftung. The Bertelsmann Stiftung is a Knowledge Partner in the Global Trade Series. This article is an overview of the main themes from the book “Europe’s Trade Strategy for the Age of Geoeconomic Globalisation”. 

Original Source: Europe's Trade Strategy for the Age of Geoeconomic Globalisation (ged-project.de)

Since the EU published its most recent trade strategy five years ago, the world has changed dramatically and with it the objectives which trade policy needs to address. The most important of these changes is likely the increasingly geoeconomic nature of globalization.

Trade is used more and more as a tool for power projection rather than the generation of prosperity. Big powers use trade and investment to generate networks of dependencies rather than building institutions to underpin rules-based free trade.

While this is the central challenge for the foreseeable future, trade strategy has a multitude of other challenges and objectives to address, from climate change to the growing frequency of epidemics, from populist protectionism to big power competition.

Non-Political Megatrends

Central non-political megatrends are the fundamental changes in the world’s climate and demography, technology developments, and the increased risk of future epidemics.

Climate change is a challenge for trade policy in several ways, especially since big trading nations increasingly use aggressive carbon pricing to meet their emission targets. This risks profoundly changing the costs of production and consequentially the localization of production around the globe.

To prevent leakage, i.e., production moving to low carbon price locations, the EU is contemplating introducing a Carbon Border Adjustment Tax (CBAT), which other trading powers may see as an illegitimate protectionist distortion of trade. I argue that a CBAT is a second-best solution.

The EU should use a political window of opportunity to create a plurilateral agreement with other large industrial nations on coordinating carbon pricing efforts, which would also serve CBAT’s environmental objectives without creating similar distortions. The EU should also seek FTAs with countries that have low-cost clean energy to bolster the global competitiveness of energy-intensive EU industries.

Climate change also threatens the world’s food supply. While populations are rising, soil surfaces suitable for agricultural production are decreasing, and extreme weather events make yields more volatile. Trade can play an important role in addressing local food shortages. This implies that the rules governing agricultural trade should be adjusted to meet the demands of rising global temperatures.

The size and wealth of populations are an important determinant of a market’s attractiveness. Global demographic dynamics, therefore, have important implications for trade policy. While the EU will remain a wealthy region, its relative share of the global population is declining.

It is also unlikely to be a region of the world with the most dynamic growth. This will translate into a gradual depreciation of the EU’s bargaining power in trade policy, relative to other more populous and economically emerging world regions.

Generally, the world will be aging, which alters global investment and consumption patterns, a structural change that trade policy can accommodate. Africa’s population is expected to rise dramatically, increasing the need to create economic opportunities for a young population.

The EU is falling behind the US and China in cutting-edge patents. Source: Breitinger et al. 2020

Technology is becoming an increasingly important factor in determining competitiveness but also geoeconomic vulnerability or strength. Europe’s capacity to innovate is lagging behind that of the US and China.

The EU must increase its innovative capabilities if it is to remain globally competitive. It is also well known that the EU is underperforming when it comes to exploiting the digital revolution’s opportunities.

The EU must make it easier for domestic digital business models to grow and scale-up, improving its global competitiveness in this area. While defending important values, such as privacy and data protection, the EU should not succumb to digital protectionism since the availability of digital solutions also matters for Europe’s more traditional industries.

In areas where digital solutions or platforms leave it geoeconomically vulnerable, the EU should consider developing its own capabilities or diversifying the services deployed on its territory.

Finally, as the COVID-19 pandemic has shown, epidemics can have severe economic repercussions. As the frequency of epidemics is rising, this is increasingly a concern for trade policy. It is vital that critical medical supply chains continue to be operational and that — from a global perspective — production clusters in one location are avoided. Efforts to monitor supply and demand developments together with increased public stockholding can prevent further recourse to export bans as in Spring 2020.

Political Megatrends

As crucial as these non-political megatrends are, the political megatrends constitute a more urgent threat to which EU trade policy needs to respond. This is particularly true for the accelerating big power competition between the US and China, but also because of the tendency of “weaponizing interdependencies” the continued prevalence of protectionism and populism, and the weakening of multilateral institutions.

Along with many other countries, both the EU and the US share several concerns about the trade implications of China’s competition distorting policies. Both find it difficult to obtain a serious policy reaction from China — the US trade war has not yielded much by way of substantial results, the EU’s negotiations with China are slow to make progress.

It is time for both trade policy powers to join forces and construct a multilateral initiative to address the distortions of the level playing field — in China, but also within other trading nations. The EU and the US should also use their influence to shore up the multilateral trading system and increase regulatory cooperation to maximize their normative influence.

A core feature of “geoeconomic globalization” is the “weaponization of dependencies.” Trade powers seek to create asymmetric interdependencies that give them political leverage over a trading partner.

The EU should therefore be careful about the dependencies it is entering into with other trading powers. The response should, however, not be reshoring of production and the pursuit of autonomy. Rather, the EU should closely monitor its supply network, diversify production chains, and avoid dependency on a single actor (company, country, or region).

In addition, the EU should create strong defense instruments that can be deployed if a trading partner is weaponizing the EU’s dependency on it. Such instruments should be defensive in nature, aimed at acting as a deterrent, and the EU should make it clear that it does not intend to use such instruments aggressively, as Europe benefits from global trade integration and an over-assertive strategy may cause trading partners to reduce their dependencies on the EU in turn.

If the deterrent is to become credible, the EU should also seek more streamlined decision-making mechanisms in foreign and security policy.

Rising populism is a serious challenge for EU trade policy. Political developments in trading partners and potentially in the EU and its member states might make trade policy less reliable and more difficult owing to increased politicization. I argue that dealing with protectionist tendencies is best done with domestic policy tools, notably by improving the welfare state and its efficiency; providing insurance against trade-induced shocks. At the same time, it is important to maintain a societal consensus to embrace open trade, which also requires that rules and values are incorporated in trade agreements and enforced.

For the EU as a strong trading power, the weakening of multilateral institutions, particularly the WTO, is another growing challenge. There is a risk that multilateral policymaking will fall victim to big power competition and geoeconomic globalization.

For the EU, it is vital to defend liberal globalization embodied in rules-based trade governance. Therefore, the EU should be careful to avoid any undermining of global economic trade governance, invest political capital in the system, and play a constructive role, together with other nations supportive of liberal global trade, in modernizing the WTO by making it more flexible and effective.