Brussels prepares to dump its free trade ideals – POLITICO | Popgen Tech

The last great defender of rules-based open trade — the European Union — going to fall

It happens in slow motion and the impact will be painful. If the world’s largest trading bloc abandons the concept of free trade, the entire world economy will be hurt.

But such an outcome looks increasingly likely as the European Commission and its powerful trade department come under intense pressure to join China and the United States in a game of economic self-interest and protectionism.

The era of Europe First may be about to begin.

“The new assertive industrial policy of our competitors requires a structural response,” Commission President Ursula von der Leyen declared in a critical intervention on Sunday. “Europe will always do what is right for Europe.”

For decades, more globalization was a no-brainer for Brussels, providing business opportunities and jobs. Growing calls from Paris and Washington for more strategic autonomy, or strict export restrictions, have been rejected by the liberal European Commission that von der Leyen now leads.

This free trade ethos eventually hit a brick wall in the form of US subsidies for clean technology, such as American-made electric cars. To understand what went wrong, it is essential to go back to the failed experiment in free trade with China.

The West has tried to draw Beijing into the multilateral trading system — and it didn’t work. China just doubled down on its state-driven economic model. Its rapid growth and dominance in key technological fields have pushed both Washington and Brussels to rethink their trade strategies in recent years.

“The EU has always supported free trade and that’s a good thing,” Kristjan Järvan, Estonia’s minister for entrepreneurship, said last month. “But now we see that non-democratic forces are trying to use it against us.”

As the West failed to try to convert China to free trade, the US decided that “if you can’t beat them, join them,” said John Clancy, a former EU trade official turned consultant. “The EU, which has always attempted a balancing act between the two sides, now finds it a difficult place to be.”

Under pressure from France, Brussels slowly began to build up its arsenal of trade defense weapons to fight back against unfair practices from both China and then US President Donald Trump.

Now the EU is thinking of pulling out its big guns and engaging in a protectionist fight involving state subsidies.

The main trigger this time is not Chinese economic aggression, but climate-friendly reforms emanating from Joe Biden’s White House. His Inflation Reduction Act (IRA) paves the way for $369 billion in subsidies and tax breaks for US green businesses — but only if they are assembled and key parts, such as car batteries, are made in the USA

The law was seen as a “slap in the face” and a “game changer” in Brussels, especially from a Democratic president. Furious EU politicians accused Washington of following in China’s footsteps.

The IRA led a push from first Paris and then Berlin, to develop new subsidy measures that could include requiring European manufacturers to use homegrown products or technologies to qualify for EU state subsidies. It is a concept that French President Emmanuel Macron called “Buy European”.

Such a Franco-German drive is heating up the pressure on the Commission, said David Henig, a trade expert at the European Center For International Political Economy think tank. “The Commission is in a very difficult place on this,” because the political tide in Europe is changing, Henig said.

Von der Leyen said in her speech in Bruges on Sunday that it is time for Brussels to reconsider its rules on state subsidies for European industries. A trade war with the US is in neither party’s interests in the midst of a real war, she said. But a strong response to the threat to European manufacturing posed by the IRA will be needed.

“There is a risk that the IRA could lead to unfair competition, foreclose markets and fragment the same critical supply chains that have already been tested by COVID-19,” she said. “We’ve all heard the stories of producers considering moving future investment from Europe to the US.”

While working with Washington to address “some of the most worrying aspects” of the law, the EU will have to change its own rules to allow more state subsidies for clean technology, von der Leyen said.

‘Dangerous Game’

It won’t be straightforward. According to von der Leyen, extra EU funding may also be needed – and this will certainly spark a fierce debate among its 27 member states about where the cash will come from.

But if the EU, one of the biggest, last great believers in open and free trade, does throw in the towel and enter a global subsidy race, it will not only undermine the global trade rulebook and further weaken the World Trade Organization. It will also send a key signal to other countries: forget about the rules, just look after yourself.

“We appeal to our members: don’t look inward, don’t isolate yourself,” warned WTO head Ngozi Okonjo-Iweala at a press conference with German Chancellor Olaf Scholz last month.

She is not a lone voice. The EU’s more liberal, free-trade countries are desperately trying to preserve their ideals. “A subsidy rally is a very dangerous game,” Czech Trade Minister Jozef Síkela told reporters last week, warning that the winner might be Beijing.

There are also clear fault lines within the European Commission itself. Trade Commissioner Valdis Dombrovskis called a subsidy race “expensive and ineffective”. Margrethe Vestager, the EU’s competition chief, said last week that nobody wants a subsidy war. For the Commission’s ultra-liberal trade and competition departments, the whole idea is a nightmare.

The real battle within the EU has only just begun, two EU officials said. But the blame lies not in Brussels, but in Washington and Beijing. “The EU is not the one that closed the door to the global free trade system,” added one of the officials.

Last week, Biden raised hopes that a compromise might be possible, vowing to seek ways forward that don’t hurt America’s allies in Europe. Yet so far no concrete details have emerged and privately many on the European side remain skeptical.

“At a certain point you have to face reality,” said Holger Hestermeyer, a trade expert at King’s College London. “Even if you defend the system, you cannot live in the illusion that it is the same world as before.”

Sarah Anne Aarup and Camille Gijs reported.