The European Union faces serious protectionist challenges
Juergen B. Donges
On 6 November 2018, the Rafael del Pino Foundation organised the Keynote Lecture "The European Union in the face of serious protectionist challenges", delivered by Juergen B. Donges, Professor Emeritus at the University of Cologne (Germany).
Juergen B. Donges is Emeritus Professor of Economics and Director of the Institute for Economic Policy and the Otto Wolff Institute for Economic Studies, both located in Cologne.
Professor Donges was Vice-President of the Kiel Institute for World Economics and Chairman of the Commission for the Deregulation of the Economy, set up by the German Federal Government. From 1995 to 1997 he was a member of the German Federal Government Commission on Public Sector Reform and subsequently Chairman of the German Council of Economic Experts.
Juergen B. Donges is scientific advisor to several institutions and trustee of several scientific and cultural foundations, including the Fundación ICO, Madrid, corresponding academician for Germany of the Real Academia de Ciencias Económicas y Financieras, Barcelona. - Member of the Academy of Sciences of the Land of North Rhine-Westphalia, Düsseldorf and advisor to the Rafael del Pino Foundation.
On 6 November 2018, the Rafael del Pino Foundation hosted a lecture by Juergen B. Donges, Professor Emeritus at the University of Cologne, entitled "The European Union in the face of serious protectionist challenges". Donges, Professor Emeritus at the University of Cologne, entitled "The European Union facing serious protectionist challenges". According to Donges, this is a very serious issue that comes at a time when European economic activity is losing steam. This year we still have reasonable growth, but all the international organisations have lowered their forecasts and we have a series of additional risks that are not gauged by these reports: various negative shocks such as Brexit, the drift in Italy with a populist and Eurosceptic government, a government in Spain that we do not know whether it is governing or what its economic policy is, and a Germany with Mrs Merkel practically on the ropes, who may disappear as chancellor sooner than it seems. The latter means for Europe the lack of German leadership to carry out European integration together with French leadership, which means that the integration process will stagnate, which is not a good thing either. All this we already have and these are downside risks for economic growth and employment in all EU countries for the coming year. Added to this is now protectionism. If the protectionist threat comes from the United States, it comes from a country with which the European Union has, for decades, built up very close economic ties, both in terms of foreign trade, investment and mobility of skilled people, and all of this on a reciprocal basis. If these links are challenged, this will have negative repercussions for our economies. Donald Trump has moved from rhetoric to action and has started with punitive tariffs, against China, against Japan, against the EU, etc. Now he is threatening additional tariffs explicitly targeting the German car industry, despite the fact that the German car industry has large factories in the US and is one of the largest employers there. The first thing the European Commission has done is to report these cases to the World Trade Organisation and to consider retaliatory tariffs. The problem it has encountered is that it does not know how to act because we are not major importers of American products, since what we really import is what the big internet platforms offer us, and all this does not lend itself to a conventional tariff policy. So, so far Trump is relaxed. Another issue is whether the European Commission's ideas of introducing a digital tax will prosper, because the US administration could interpret this as a tariff against large American companies and would do the same against similar European companies, which also exist, so a trade war would be on the cards. The idea of a digital tax does not seem a very rational policy, because it is not a question of increasing taxation on a sector of the future and hindering the emergence of new business models, but quite the opposite. If these measures were to succeed, we would be responding badly to the changes of the moment and we would be technologically dependent on the United States and China. It is therefore in everyone's interest to reduce tension and avoid a trade war, because with a trade war we all lose, not only because of the fall in turnover, but also because global value chains are broken. And there may be an additional aggravating factor in the form of a crisis in the financial markets. If the Chinese think of taking revenge on Trump by stopping buying US sovereign bonds, or even selling the bonds they hold on a large scale, we would have a financial crisis on our hands. The ECB would no longer have any room for manoeuvre, because it already has very low interest rates. In other words, we would be in the worst of all worlds. It would therefore be rational for both sides to cool down the conflict and anchor open market expectations in the markets. For this to happen we need serious, credible partners with a sense of responsibility. But here we have a problem, because the interlocutors we have are Trump and the European Commission. Trump simply despises the basic principles of international trade, that is multilateralism and non-discrimination. He is simply a neo-mercantilist and for a neo-mercantilist the good thing is export, because it generates foreign exchange and creates jobs, and the bad thing is import, which has to be paid for with foreign exchange and destroys jobs, in his view. However, what really benefits a society is just the opposite, because imports generate more competition, a better allocation of resources, more possibilities for consumption. For its part, the European Commission is not as free-trade oriented as it would have us believe. The EU has long imposed significantly higher tariffs on imports from the US than the US imposes on imports from the EU. It also imposes anti-dumping tariffs on China, although studies show that there are no such tariffs. In many cases, the European Commission confuses unfair competition with simple competitive advantage, because they are more cost-efficient or labour is cheaper. Finally, there is the whole scheme of the Common Agricultural Policy, which is absolute protectionism. What the CAP hurts most is the African countries, which is where the immigrants come from. American farmers also don't have free access to the European market for the same reason. Still, it is worth negotiating because the effects in terms of more economic growth and less inflation are very palpable. This is also being seen by large American companies, which have launched a campaign in favour of free trade, because they know the linkages and global value chains and are terrified of the damage a country does to itself when it opts for protectionism. This could be an incentive for the EU to develop a strategy to restore global trade. The first would be to revive the TTIP, which was so opposed in some countries. The second way would be to establish a free trade regime with developing countries, which is the most efficient way to promote their development, rather than development aid, which does not work. The third way is to make more trade agreements with various emerging economies such as those the EU already has with China, Mercosur, India and others. Another problem of protectionism, which is little talked about and much more significant, is what we call locational competition, or competition 3.0. When we talk about competition, we always think of markets and products. Locational competition, on the other hand, does not take place between companies, but between states, which want to attract investment, technology and employment. And here we have entered into a very significant competition race, through the tax system, economic infrastructures, the educational model, market regulations, health care, legal security and public safety. The more attractive a government makes these aspects compared to other countries, the more investments will come, the more jobs will come. This new model is different because it is a competition between political and economic models: the Western, market-economy model versus China, which is totalitarian and state-capitalist. We have had a similar conflict in the past, between the democratic West and the communist, totalitarian Soviet Union, which the former won. But now it is not clear that the outcome will be repeated. China is ruled by a communist party, but it knows how to mould its ideology to the needs of a functioning economy. The Chinese government's strategy is simply to go on an innovation offensive in key fields such as robotics, artificial intelligence, biomedicine, etc. and become a leader. The problem starts with the fact that, to achieve this, the Chinese government uses its tools. It massively subsidises these activities, intervenes in companies, does not facilitate majority capital positions of foreign companies, promotes investments in Europe and the United States in these fields with the aim of acquiring know-how, intellectual property scams and industrial espionage, and makes an effort to attract brains to their country. We do not know if the Chinese will be able to get what they want because there are structural problems in their economy such as low productivity, a weak financial sector or an excess of uncompetitive companies. This is already having an effect because foreign companies are returning to their home countries. For this new local competition to work for the good of all, the same rules have to apply to all, and we do not have that, because China does not respect it. This is a reason to agree with Trump, who wants to curb China's technological development. The EU wants to do the same, but we forget that we behave just like the Chinese because we do not allow foreign companies access to sectors that we consider strategic or of national interest. If what Trump is really after is to win the war of local competition for the US, it could have a positive effect on foreign trade, because the Chinese government needs open markets in the global economy to create sustainable levels of employment. This could be an incentive to find avenues of understanding. Now is the time for the World Trade Organisation, not only on tariff issues, but above all to tighten the regulatory framework for international direct investment. This would involve limiting subsidies to companies, prohibiting forced technology transfers, not discriminating against foreign direct investment, and protecting trade and industrial secrets, including intellectual property and technological know-how. Doing this is complicated because the WTO has 164 members and decisions are made on the principle of consensus. In other words, each country has practically a veto. The only way out of this situation is for the EU to try to reach a consensus on these rules with the US and China, and if that works out well, it will be more attractive to other countries.
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The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.