At a Time of Trade Wars, the EU Must Defend Free Trade

After another change of the US administration’s decision, it became clear that for the next month and a half Europe will be spared from the new “retaliatory tariffs”, with which the US is trying to solve its problems with trade deficit, expensive currency and missing industrial jobs. The EU should not spend this reprieve unwisely, but use it to formulate a clear negotiating position. There are several possible courses of action, but the only profitable one is to return to the basic principles of free trade.

The alternatives for European policy over the next month and a half are broadly three. The first – which has worryingly crept into the rhetoric of many European politicians over the last ten days – is to set a course for the introduction of retaliatory tariffs in response to those imposed by the United States, which puts the EU in a situation of real trade war with its until recently most important geopolitical partner. This is the approach that China has taken; the difference, however, is that while in one case it is only a question of deepening the confrontation on both sides of the Pacific, if the EU were to take such a course it would reverse decades of close cooperation. A trade war with the US is the worst possible scenario. Even if we leave aside the consequences for other areas where the EU and the US are closely linked (the military, say), it will only lead to sharp impoverishment, business failures and set economies back years, if not decades.

The second option is for the EU to do nothing – neither to change its customs policy nor to negotiate. This approach relies on the US administration’s apparent lack of persistence. Everything said on the issue of tariffs seems to be penultimate; the date of their introduction and their parameters change from day to day. In such an environment, it seems possible that, even if they are introduced, their effect will be short-lived and that they will be removed once US consumers and companies feel their real burden. In such a scenario, the EU would be back to square one in a year or two, but would miss a very good opportunity to position itself as the leading advocate of free trade at the global level at a time when other global players are devolutioniozing towards 19th century protectionism and trade policies.

The third option is for Europe to position itself as an advocate of free trade principles not only in its relations with the US, but also with the rest of the world. This would represent a kind of return to basics – in its original conception, the EU was precisely a trading community that aimed to eliminate barriers between hitherto warring European countries. The most radical option would be for the EU to adopt – following the example of Estonia in the 1990s – a unilateral free trade policy and eliminate all import tariffs, unconcerned with the restrictions and regimes introduced by its trading partners.

This approach, unfortunately, does not seem too realistic. What can – and should – happen is for the EU to step up its efforts to conclude bilateral free trade agreements with all external trading partners that are willing to do so. These types of agreements not only most often succeed in reducing tariffs to zero, but also in agreeing to overcome non-tariff restrictions, recognizing standards and eliminating barriers. There have been several successful examples of such agreements in recent years, and the dynamics of trade and prices speak clearly for their usefulness. The big brakes until recently have been the interminably slow speed of negotiation, the vetoes of individual member states and the hundreds of protectionist exceptions that directly violate the spirit of free trade. To overcome these, we need first and foremost to reach a consensus that this is the best policy for European business and citizens, and then to empower EU bodies to conclude such agreements on their own[1] without the need for national governments’ consent.

Maximizing free trade means easy access not only for external producers to the European market, but also for EU goods to millions of new consumers. The absence of tariffs brings lower prices for both final goods for European consumers and intermediate goods and raw materials for businesses.Where there is trade there is also a strengthening of investment flows, and openness to many trading partners provides resilience to supply chain disruptions such as we saw in the pandemic and the Russian war.

Not that a free trade policy would not be painful – on the contrary. At a time when the European budget is facing increasing pressure, abandoning tariffs means gradually shrinking one of the EU’s few sources of own revenue. Equally necessary is the rationalization and abandonment of many non-tariff barriers; standards and requirements for imports will have to be reduced to those that actually protect the health and lives of Europeans, at the expense of those that protect the interests of domestic producers or pursue political objectives.

The current crisis represents an opportunity for the EU to build an image as a permanent and principled trading partner. The last few months have been a time of unilateral action and attempts at coercion from a position of strength. However, this does not mean that the international economic order based on rules and treaties with those who share fundamental political values is lost or unwelcome – decades of economic boom and rising global prosperity clearly demonstrate that there is no better way of regulating international relations. At a time when the US and China are gradually turning their backs on free trade, the EU can – and must – remain a defender of its principles.

[1] More details in the recently published study by EPICENTER and IME “Europe in the Global Race: Liberating Trade”