2 – EUROPE IN A NEW WORLD ORDER
The United States is the European Union’s most important trade and bilateral investment partner, which has, until now, supported a multilateral trade system and European integration and has provided a security guarantee to the countries of the EU. But like other advanced economies, the US’s relative weight in the global economy has declined. The new US administration seems intent on replacing multilateralism with bilateral deals. In trade, it aims to secure new trade deals in order to reduce bilateral trade deficits and to protect, in particular, the US manufacturing sector. In climate policy, the US commitment to the Paris Agreement is being questioned. In defence, the security umbrella appears less certain than previously. The overall promise behind this change of direction is to put ‘America first’ and deliver better results for US citizens.
From Europe’s perspective, the world in 2017 looks very different to how it looked just one year ago. But despite significant upsets resulting from elections and/or referendums, not all of the changes that are taking place are breaks.
HOW CAN THE EU DEFEND A MULTILATERAL SYSTEM?
Trump’s America first policy threatens to upset the global trading system and even put the WTO in danger. This will naturally precipitate reactions from other global players, and in particular the EU and China.
The EU has a strong economic and political interest in preventing the demise of the multilateral trading system. Openness, measured as exports relative to a country’s GDP, is far greater in the EU (43.8 percent) than China (22.1 percent) or the US (12.6 percent). The rules-based system allows all players, including the weaker ones, to trade with each other based on high and comparable standards that have to be followed by all.
Protectionism would reduce EU and global welfare, hurt global growth and could mean lower standards and unfair competition. In particular, in the EU with its strong trade relationships around the world, many jobs could be at stake.
However, though the EU is the largest trading bloc in the world, it cannot sustain a strong multilateral system on its own. The EU’s inability to replace the US as a global hegemon is partly for internal reasons (the state of the economy, a weak defence and security policy) and partly for external reasons (the world balance has changed with the increasing economic relevance of China and other emerging countries).
At the same time, all three leading global trade players have expanded the number of regional trade agreements. The world therefore is evolving from a multilateral system centred around the US into a more multipolar system resting on the three strong trading poles of China, the EU and the US, each with several bilateral and regional trading arrangements. This has been criticised as
already undermining existing multilateral frameworks¹³.
This raises two questions: whether the poles of the system are collectively interested in supporting at least the core of the existing multilateral system, and whether the EU and China are willing and able to jointly support the multilateral system as the US steps back from its central role.
While the EU and China each clearly has an interest in supporting the multilateral trading system, it is an open question whether they can act in a coordinated manner as the EU and the US have done in the past. This is not a trivial question because the European and Chinese economic systems are much more different from each other than the European and American economic systems.
Nevertheless, in certain areas, such as support for the WTO, EU-China collaboration should be relatively straightforward. The EU should also seek other partners for collaboration in support of the WTO.
THE EU NEEDS TO STEP UP INTERNALLY TO BECOME MORE CREDIBLE EX TERNALLY
For the EU to assume a bigger role in safeguarding multilateralism and in forming new, and deepening old, alliances, a number of reforms would be required. We see three main areas in which
reforms would increase the credibility of Europe’s claim to a bigger global role.
- First, addressing distributional concerns domestically is a prerequisite for entering new trade arrangements. Europe’s social model is a major factor in reducing inequality and is rightly thought
of as softening the impact of rapid change on citizens in an age of globalisation and technological change.
But many EU countries still need to reform their social systems to deliver inclusive growth and better social protection¹⁵. The EU’s role should primarily be to empower its members to achieve desired levels of redistribution by effectively combatting tax evasion and social fraud that relate to
the single market¹.
- Second, the governance of EU trade and investment policy has become cumbersome. The recent difficulties in signing CETA have increased partners’ doubts about the EU’s ability to deliver.
We consider it imperative that the EU institutions regain citizens’ trust so that they can negotiate trade agreements on citizens’ behalf. This requires more transparency in negotiations. It will
also be important to ensure greater EU legitimacy, including through a reformed European Parliament.
- Third, the EU as a large open economy cannot sustainably run large current account surpluses. The large surpluses, and in particular Germany’s surplus, are a result of imbalances in the euro area that need to be resolved irrespective of the global environment.
Strengthening domestic demand in Germany is pivotal. Structural reforms at the national level, for example by addressing the debt overhang and remaining banking problems in other countries, would further boost demand. Such actions in surplus and former deficit countries will help speed up the normalisation of European Central Bank policy and strengthen the euro, thereby also helping to address the large euroarea surplus.
WHAT BILATERAL ACTIONS SHOULD THE EU TAKE?
While future EU reforms can set new trends in motion in terms of the new global economic order, there remains the question of how to respond to a potentially antagonistic US administration.
At a higher level, Europe’s possible responses range from pure antagonism and retaliation, to staying the course and building alliances with other countries.
Then there are more specific questions: what is the worst-case scenario in terms of US trade and investment discrimination and over what time horizons should the EU prepare to react? What are the implications beyond the purely economic relations, in terms of defence and cultural values?
In our view, the underlying objective of the EU’s response to unilateral measures by the US should be to sustain the multilateral trading system. The aim should be to react strongly and decisively but based on principles. The aims would be to wait until future US administrations change course and abandon unilateral actions, and to prevent an unnecessary
escalation that would be damaging to all: the EU, the US and the rest of the world.
In the event that the US terminates the North American Free Trade Agreement and imposes tariffs on imports from Mexico that are above the US mostfavoured nation (MFN) tariffs, it would amount to a violation of the US’s WTO obligations.
The EU and other WTO members would be affected directly because they have foreign direct investments in Mexico to serve the US market (see Table 3). The EU and Mexico (with which the EU has an FTA) and other WTO members that would be similarly affected, should then file a WTO complaint against the US.
In case the US introduces a form of DBCFT that is clearly in violation of WTO rules, the EU should carefully consider, again in collaboration with other WTO members, stronger measures. There is for example the possibility to adopt reciprocal measures on corporate taxation that would only be directed against the US. An alternative would be to use anti-subsidy measures against US exports to the EU or even to third countries. The latter is entirely within the EU’s remit and one of the WTO legal instruments at the European Commission’s disposal.
EUROSCEPTICISM Nations Conflicts Crisis Army Person Economy Youtube
*Youtube — The Eurozone’s Coming Storm.Stratfor pinpoints the political and economic developments that could lead to the collapse of the currency area.
*Youtube — George Friedman: Eastern Europe Is Trapped Between Russia and the West. George Friedman writes the free weekly column “This Week in Geopolitics” (http://www.mauldineconomics.com/subsc…) for Mauldin Economics. Subscribe now and get an in-depth view of the forces that will drive events and investors in the next year, decade, or even a century from now.
The European Union’s eastern bloc finds the ongoing refugee crisis annoying but is far more worried about Russia. Geopolitics expert George Friedman says the formerly Soviet-dominated nations see Russia gaining strength but don’t know if NATO will defend them in a crisis.
*Youtube — Geopolitics, Identity and the National Interest with Tim Marshall .