January 19, 2020
Finance

If you want to protect Europe, prepare for trade war

French President Emmanuel Macron wants to build “a Europe that protects,” but that wont come without a fight. America and China are ready to resort to a full arsenal of trade weapons to stop the EU charting a more protectionist course.

Under pressure from Paris and Berlin, the new European Commission led by President Ursula von der Leyen is looking to craft an industrial strategy that will shore up the EUs commercial defenses and rear homegrown business champions. Thats a red rag to U.S. President Donald Trump and Chinese trade officials, who are likely to lash out at anything that smells like the construction of “Fortress Europe.”

On only the second day of her Commission, von der Leyen got a taste of what is to come.

U.S. Trade Representative Robert Lighthizer on December 2 threatened to impose tariffs of up to 100 percent on $2.4 billion worth of French products such as Dom Pérignon champagne and Roquefort cheese.

Perceived European protectionism lies at the heart of that case. The American anger focuses on a French digital tax that Washington condemns as a classic example of unfair discrimination, designed to hobble big U.S. competitors like Google and Amazon.

Many EU countries are also far less gung-ho than France when it comes to introducing protective measures for the EU economy.

In a further sign of U.S. willingness to take up arms over Europes cosseted champions, Washington also said it was ready to up the ante in a long-running fight over subsidies for aerospace giant Airbus, whose main office is in the southern French city of Toulouse. The Americans have said they are now willing to increase the level of tariffs over the Airbus case, as well as the range of EU goods targeted, after a new World Trade Organization ruling on Monday.

Faced with this early onslaught from the U.S., Europe has immediately said that it is ready to come to the table to negotiate. “Ive taken notice of the recent announcement by the U.S. regarding potential tariffs. Im very open to engage, to discuss and to find solutions,” von der Leyen said during a press conference.

Despite the U.S. threats, French Economy Minister Bruno Le Maire and his German counterpart Peter Altmaier on December 4 doubled down on the need to create a European industrial strategy and key strategic value chains in Europe. As part of the strategy, Le Maire insisted that the EU would need to implement a carbon border tax that would curtail imports from countries with laxer environmental standards. That is another measure that opens itself up to assault from the Americans and the Chinese.

“A border tariff will most likely provoke a strong reaction internationally,” said Henrik Horn, professor of international economics at Stockholm University and a fellow at the Bruegel think tank. “Just remember the aviation directive in 2008 when the EU wanted to impose a levy on flights which would lead to a form of extraterritorial taxation. The international reaction was so strong that the EU eventually gave up.”

The port of Hong Kong | Anthony Wallace/AFP via Getty Images

In the case of flights, the Chinese flexed their muscles as major buyers of aircraft to hit back against Europes attempts to include aviation within Europes emissions trading systems. The killer threat was always that China would buy Boeing rather than Airbus.

The EU is aware of this risk of the carbon tax. At a POLITICO event this week, Bernd Lange, chair of the European Parliaments trade committee, insisted that the measure should not be called a tax, but an adjustment mechanism to ensure its compatible with the rules of the World Trade Organization. “Therefore we have to be really proper. This is not a question of competition. This is a question of the protection of our climate.”

Lange suggested introducing a border adjustment mechanism under Article 23 of the GATT — a provision of the WTO rulebook that allows countries to negotiate new proposals, provided that the other WTO members agree. By using this institutional exception, the EU wants to bring a carbon tax into the WTO arena in a non-confrontational way — but that doesnt mean other trade blocs will swallow it easily.

Risks and doubts

Many EU countries, particularly in northern Europe, are also far less gung-ho than France when it comes to introducing protective measures for the EU economy.

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