Given global uncertainty and increasing protectionism, it is up to the European Union to take the lead in defending the liberal world trade system and, with it, the set of shared values that aims to ensure high labour, environmental and social standards internationally. A strategy that is designed to promote free trade worldwide should primarily strengthen and reform the role of the WTO as the backbone of a multilateral trade order, secondly promote the benefits of free trade throughout the world and thirdly deepen free trade with the USA and other countries and regions.
At the beginning of 2018, the USA, hitherto a champion of the liberal world trade order, caused great concern by raising tariffs on steel and aluminium. In the months that followed, a spiral of reciprocal protectionist measures developed. Fears of an escalation of the conflict up to a trade war were repeatedly raised, which would have a severe impact on international value chains and thus on the global economy. Almost two years later, the conflict between the USA and China has somewhat calmed down. In January, after months of wrangling, both powers reached a partial agreement. Despite this temporary success, the current state of free trade is worse than it has been for a long time. Around the globe, scepticism about globalisation and trade has increased noticeably in past years. Recent figures from the International Monetary Fund and the World Bank confirm a trend of increasing tariff and non-tariff trade barriers. Trade restrictions among the G20 countries have grown steadily in the last years, currently affecting more than 50% of exports, compared with 20% in 2009. This explains to a large extent why investments are declining, and international trade as a share of global GDP has fallen to 58% since then, after rising from 39% to 61% in the period 1990-2008.
While the USA is adopting a protectionist stance and threatening to escalate trade conflicts, it has itself instigated, the former Opening of China is increasingly being replaced by aggressive state capitalism. Through increasing support and establishment of state-owned enterprises (99 of China’s 100 largest listed companies are majority-owned by the state), the government intends to stimulate the international competitiveness of its economy and at the same time create an uneven playing field at home.
The WTO should remain the foundation of world trade
Efforts to fight protectionist measures should start from the WTO system of multilateral rules; this applies all the more today as we see bilateral agreements undermining the WTO’s multilateral nature. The WTO is estimated to have generated a total annual increase in prosperity of USD 855 Billion for its members around the globe, which corresponds to an average gain in GDP of 4.5% per member country. However, without the enforcement of rules, a rule-based system cannot exist for long. The erosion of the WTO’s dispute settlement mechanism is shaking the binding nature of rules in world trade. It must be defended and urgently adapted so that individual countries can no longer block it. Also, far-reaching reforms are needed: The WTO regularly fails because of the divergent interests of its 164 members. For example, the Doha Round agreed in 2001 – a package of measures for multilateral trade liberalisation – has not yet been concluded. The biggest flaw in the WTO’s rules and regulations is that it is not designed to bring together the fundamentally different and, in many respects, incompatible economies of the West and the East. While China favours its state-controlled economy through subsidies, the rules of the WTO do not allow for an adequate and effective response from its trading partners. In addition to updating the WTO with respect to the exchange of environmental goods, climate protection, cross-border data flows as well as e-commerce, the EU should take precautions and advocate for setting up a core-WTO. A kind of club system of democratic market economies could intensify economic integration and provide sufficient leverage in dealing with incompatible economies in a world of systemic competition.
The EU must publicly counter misleading protectionist arguments and support the political forces that advocate an economically sound position
The European Union should unremittingly communicate the benefits of international trade and counter mercantilist and populist rhetoric. Politicians such as Donald Trump like to argue falsely that free trade is a zero-sum game, thereby ignoring that trade is instead the source of our global prosperity. As a result of the enormous intensification of global economic integration since the 1980s, wealth has increased in almost all countries worldwide. At the same time, not only has the number of people living in poverty fallen globally, but inequality between countries has also decreased. Without the international division of labour, many of today’s achievements would be unthinkable. The global spread of technological progress has not only benefitted the West but has enabled people in developing countries to gain increasing access to innovation in, e.g., medicine, agriculture or education. Trump likes to base his rhetoric about the winners and losers of trade on the massive trade deficit of the United States, which, in his opinion, reflects the country’s losses due to globalisation. What Trump fails to recognise, however, is that the link between net exports and GDP that he refers to does not per se reflect a causal relation. Of course, higher exports would increase US GDP – but the opposite would be the case if additional tariffs led to a decline in imports of goods and consequently increased costs for firms and consumers.
After George W. Bush imposed tariffs on steel imports in 2002, some 200,000 workers lost their jobs – more than the entire steel industry employed. According to a 2018 study by the Peterson Institute of Economics, a 25% import tariff on cars and potential retaliation would put about 624,000 jobs in the US at risk. Granted, although international trade leads to the economic cake growing, there can still be losers whose piece of the cake is smaller than it would be without free trade. When an economy opens up to other countries, competition leads to lower prices and drives innovation and growth. An inevitable consequence, however, is that companies disappear from the market because they are no longer competitive. It is the government’s responsibility to compensate the losers, but also to increase the mobility of workers to achieve better results for all. And it has all the resources to do so because, indeed, the cake does grow! In the US, where the social network is very permeable, efforts to compensate the losers were inadequate in the past, that is why there is so much resistance in parts of the population against opening up trade today.
The European Union itself could make even greater use of the advantages of liberalising world trade. This applies to its relations with the USA as well as with other regions, such as India, Australia, New Zealand, Mexico, the ASEAN states and the African states. Trump is not wrong in his criticism of the European Union’s sometimes high tariffs, for example, on cars. In the broadest sense, this also includes efforts by individual member states to introduce a special tax on the revenue of digital companies, which can be interpreted by the USA as a protectionist measure. However, despite trade policy frictions, the USA is and remains Europe’s most important export partner. Transatlantic economic relations remain of particular importance not least because shared values unite us.