Will Europe Step Up to Its Global Trade Responsibilities?

December 18, 2018

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For more than 75 years, the United States has sacrificed to create a defense shield for Europe, first against Soviet threats and more recently against the malign influence of Russia. Most European leaders have expressed gratitude for U.S. leadership and would never have suggested that Europe should take advantage of America’s largess. But that is not what’s happening today in the economic arena. The United States is once again sacrificing its own interests by challenging China’s trade-distorting brand of mercantilism, but instead of supporting the effort, some European elites see an opening to capitalize by striking deals with China while America strains to clear the way.

There should be no confusion that China’s duplicitous economic and trade practices—including intellectual property theft, forced technology transfers, closed markets, and massive industrial subsidies—violate the free-trading and market-opening norms that both the United States and Europe have long embraced. Former U.S. Treasury Secretary Hank Paulson reinforced this point at the recent summit in Singapore on globalization. Paulson, who spent much of his career supporting China’s integration into the global trading system, is the last person who can be accused of being a China hawk. But his comments reflect the harsh reality of China’s trade and economic policy: “Seventeen years after China entered the WTO, China still has not opened its economy to foreign competition in so many areas. It retains joint venture requirements and ownership limits. And it uses technical standards, subsidies, licensing procedures, and regulation as non-tariff barriers to trade and investment. Nearly 20 years after entering the WTO, this is simply unacceptable.” Indeed.

There should also be no confusion about the fact that the United States is doing the heavy lifting in pushing China to reform and play by the rules. U.S. tariffs will hurt the U.S. economy by raising intermediate input costs for U.S. manufacturers and Chinese retaliatory tariffs will hurt U.S. exports. If the United States is successful in pressuring China to roll back its mercantilist practices, then America surely will benefit, but so too will Europe and the entire global trading system.

It is in that context that it is so disappointing that some are calling on Europe to take advantage of this moment to benefit European companies. Case in point is a recent op-ed by Daniel Gros, director of the Center for European Policy Studies. Gros sums up his argument for Europe to take advantage of U.S. sacrifice: “economic theory suggests that there is truth in the old adage: ‘When two quarrel, the third rejoices.’” He goes on to write, “With the US imposing higher tariffs on Chinese goods, European producers will enjoy a competitive advantage over Chinese producers in the US market. Likewise, in the Chinese market, both European and Asian producers will have a competitive advantage over US producers.” And rather than hope for a speedy resolution in which China rolls back its egregious practices, he goes so far as to state, “the rest of the world may well have reason to wish both sides a long and fruitful conflict.”

To be sure, not all, or perhaps not even most European leaders advocate such a short-sighted and selfish approach, but too many do. Gabriel Felbermayr, director of the ifo Center for International Economics, a Munich-based think-tank, maintains that Europe could emerge as the big winner from a US-China trade war.

While talk of how Europe can profit from sitting behind America in this fight is unseemly, and short-sighted, the notion that Europe can simply sit this one out is not much better. For too long, Europe has been able to let America fight the good fight to open global markets, knowing that U.S. pressure would often prevail. But this time is different: Unless Europe engages with the United States, China will likely be able to continue its mercantilist practices. This is because, as the second largest economy in the world, China exerts “monopsony” power for foreign companies, including European ones, that feel they have no choice but to be in China, no matter how unfair Chinese practices are. Moreover, because China has no rule of law, it has perfected the art of designing unfair mercantilist policies and practices that can’t be challenged at the WTO, such as forcing foreign companies to relinquish their technologies, but not writing these rules down in official law or regulation. Finally, China is not constrained by normal factors limiting state action. Case in point is how it is able to keep domestic consumption down in order to lavish massive and unprecedented subsidies on its domestic champions, making the EU’s launch aid for Airbus look like chump change.

Even if Europe sits out this conflict, thinking it can jump in and be China’s beneficiary, rewarded with FDI and market access, it would be short-sighted in the extreme. If China succeeds in using its arsenal of unfair trade practices to dominate virtually all advanced industries, it will hurt U.S. companies and U.S. competitiveness, to be sure. But if European leaders believe for a moment that their companies will emerge as the new leaders, they are sorely mistaken. Once China takes market share from U.S. companies, Europe will be next. This is why a draft document from the Federation of German Industries argued that China is not likely to open its markets or roll back its innovation mercantilist policies.

To be sure, with his steel tariffs and threats of additional tariffs on autos, President Trump has not made it easy for European leaders to support U.S. efforts to fight for global free trade. But that doesn’t mean it is in Europe’s interest to cut its own deal with China and sit back while the United States does the heavy lifting. If Europe wants to set its own course in the new global order, then the most important first step is to join with America to fight for free trade and an open Chinese market.