Who’s afraid of non-market policies?

7 months ago 38

Readers of the latest statement of the ongoing EU-US Trade and Technology Council (TTC) may have been struck by a deep tension among the text’s assertions.

On the one hand, the document repeatedly condemns the “threat” posed by “third countries’” use of “non-market economic policies and practices”, a thinly veiled reference to Chinese state subsidies that critics say are causing a global glut of solar panels, electric vehicles, and many other manufactured products.

On the other hand, the text explicitly advocates countermeasures to such policies that, one could argue, can only be described as non-market driven, including export controls and investment screening. The document notes that such measures if applied appropriately in certain strategic sectors (e.g. tech), will “boost” the EU’s and the US’s economic security.

In other words, The EU and the US both believe that non-market policies pose a threat to their own security and offer a solution to those very same security problems based on comparable non-market measures.

Is this Orwellian doublethink? A simple contradiction? Complete hypocrisy?

Whatever it is, it seems that China is doing almost exactly the same thing.

Last week, China filed an official WTO complaint against the US, arguing that the Inflation Reduction Act — a multi-billion subsidy programme passed by the US Congress in August 2022 — unfairly discriminates against cars that use battery components made in China.

As Nobel Prize-winning economist Paul Krugman pointed out in the New York Times last week, such a move represents “an act of colossal chutzpah” by Beijing.

“China spends vast sums on subsidies for favoured companies, far more so than any other major economy,” Krugman wrote.

“And [Beijing] has often engaged in blatantly discriminatory policy — for example, for several years, until 2019, non-Chinese companies were essentially prevented from supplying electric vehicle batteries to Chinese car manufacturers.”

Are China, the US, and Europe all just as bad as each other? Do they all similarly denounce non-market policies when pursued by others whilst supporting such measures domestically?

Not according to Philipp Lausberg, an analyst at the European Policy Centre (EPC), who maintains that, of the world’s three largest trading blocs, the EU is by far the most committed to the principles of free trade as codified by World Trade Organisation (WTO) agreements.

“Europeans tend to see the WTO order as still as important and valid…because it’s in the EU’s interests to do so,” he told Euractiv.

By contrast, China is pursuing an openly “neo-mercantilist” agenda, while “the US just wants to have a trade club against China”, he said.

Lausberg’s analysis is arguably corroborated by the data.

In a recent analysis, The Economist noted that “Europe is the region of the world most open to trade and investment”, with its total trade in goods and services as a percentage of total GDP nearly two times higher than in the US.

The EU’s commitment to free trade seems further evidenced by the fact that the EU itself has directly complained to the US that some of the IRA’s provisions are “in breach of WTO rules” in a letter sent by the European Commission to the US Treasury in November 2022.

“If implemented in its current form, the Act risks causing not only economic damage to both the US and its closest trading partners, resulting in inefficiencies and market distortions,” the Commission said, “but could also trigger a harmful global subsidy race to the bottom on key technologies and inputs for the green transition,” it presciently warned.

In an equally farsighted remark, the letter also warned that the IRA risked “creating tensions that could lead to reciprocal or retaliatory measures”.

This seems exactly what’s happening: Belgian officials have repeatedly emphasised that developing a European “Industrial Deal” capable of rivalling the IRA is one of the top priorities of its six-month rotating presidency of the Council of the EU.

Of course, neither the EU nor the US were ever, at a practical level, fully committed to the principles of unfettered free trade (cf. both blocs’ highly protectionist agricultural policies).

However, the world seems to be entering a new era in which countries are also rhetorically moving further away from advocating such principles.

Arguably, the world’s present economic situation is reminiscent of an often-quoted observation by Italian Marxist political philosopher Antonio Gramsci, who noted the appearance of “morbid symptoms” when “the old is dying and the new cannot be born.”

One current morbid symptom is the TTC statement itself, which condemns policies that it openly advocates.

The free trade era, it seems, may be dead – or at the very least, not feeling well…And perhaps governments should stop pretending that isn’t the case.

Chart of the Week

China’s share of global GDP has risen significantly over the past several decades, while the EU’s and US’s respective shares have declined.

Indeed, as this graph shows, in terms of purchasing parity, China’s economy actually overtook the US’s several years ago. It is also set to surpass the EU’s in just a few years.

As European Central Bank president Christine Lagarde noted last year, the world is becoming multipolar — perhaps unstoppably so.

Economic Policy Roundup

EU officials scrambled to prove EU-US Trade and Technology Council will survive Trump. As pressure on high-level officials from both sides increased ahead of their meeting in Leuven, Belgium, on Thursday (4 April), European Commission officials tried to stem mounting concerns that looming leadership changes in the US following the presidential elections in November may threaten the TTC forum’s survival – noting on Wednesday that “the momentum will continue whatever happens in terms of political leadership”. The Commission was setting up “a structured internal process to prepare for all possible outcomes from the United States presidential elections,” the official added, to safeguard the transatlantic relationship “regardless of whoever is going to be next year in the White House or in the Berlaymont. Read here.

Industrial downturn frightens trade unions as much as corporates, BusinessEurope chief argued in an interview with Euractiv. As Europe‘s economy had grown much slower than the US counterpart, trade unions and business associations alike are concerned about Europe‘s future as an industrial location, according Markus Beyrer, Secretary General of Europe’s main corporate lobby. Beyerer said the European Trade Union Confederation (ETUC) “is increasingly coming on board with us” in emphasising the urgency of shoring up Europe’s industrial and business environment, he said, “simply because we are now also seeing losses of industrial or manufacturing jobs.” While Beyrer also bemoaned a “regulatory tsunami” coming from Brussels, ETUC‘s General Secretary Esther Lynch quickly pointed out on X that “ETUC calls for investment, not a deregulation agenda”. Read more.

The US and European market-based economies are struggling to survive against China’s “very effective” alternative economic model, a top US trade official warned. In a briefing in Brussels on Thursday (4 April) just hours before the start of the two-day EU-US Trade and Technology Council (TTC) got underway in nearby Leuven, US trade representative Katherine Tai said that Beijing’s “non-market” policies will inflict severe economic and political damage on the two blocs, unless they are tackled through appropriate “countermeasures”. “I think what we see in terms of the challenge that we have from China is… the ability for our firms to be able to survive in competition with a very effective economic system,” Tai said in response to a question from Euractiv. She described China as a system “that we’ve articulated as being not market-based, as being fundamentally nurtured differently, against which a market-based system like ours is going to have trouble competing against and surviving”. Read more.

Eurozone inflation overshot analysts’ expectations on Wednesday (3 April), with the headline rate falling back to the lowest level in three years and core inflation numbers dropping to their lowest in two years in March. The EU’s official statistics office Eurostat reported that headline inflation dropped from 2.6% in February to 2.4% in March: the lowest recorded rate since July 2021, except for the November 2023 figure, which also came in at 2.4%. Economists polled by Reuters last week had expected inflation to remain unchanged at 2.6%. Carsten Brzeski, chief eurozone economist at ING, suggested the data could be interpreted as “a very late victory for Team Transitory” — a reference to economists who view high eurozone inflation as a temporary, rather than permanent, phenomenon. “I think it’s nicely playing out for the ECB,” Brzeski told Euractiv. “It looks a little bit as if inflation is really fading away.” The news boosted hopes of rate cuts ahead of the European Central Bank’s (ECB) meeting next week. Read more.

EU countries provide billions of euros in aid to agri-food sector amid farmer protests. EU member states have spent billions of euros supporting agricultural and food industries over the past two years, following a temporary relaxation of the bloc’s state aid rules to help businesses cope with the impact of Russia’s war in Ukraine. Euractiv’s analysis of available EU data on state aid directly targeting the agri-food sector has revealed significant disparities among member states. Poland leads with almost €4 billion in public subsidies for agri-food, in particular, the grain sector, followed by Italy (€2.3 billion), France (€1 billion), and Romania (€770 million). Read more.