© REUTERS/Fabian Bimmer

In his State of the European Union address on September 13, EU Commission President Jean-Claude Juncker called strengthening European trade his top priority. Following his speech, the Commission presented a package of new trade measures called “A Balanced and Progressive Trade Policy to Harness Globalization.” The proposal lays forth a comprehensive negotiating agenda for the EU on a multilateral and bilateral level.

The EU depends on open markets and a rules-based international trading system. According to the World Trade Organization, the EU is the second largest exporter and importer of merchandize goods worldwide (excluding intra-EU trade), accounting for 15.4 percent of global merchandize exports and 14.8 percent of merchandize imports in 2016. Regarding commercial services, the EU is the number one exporter and importer, with approximately 25 and 21 percent respectively.

The EU is not only a global player in trade but also the world’s biggest investor. According to Eurostat, in 2015 the EU accounted for 48 percent of global foreign direct investment stocks (outward FDI) totaling €6.89 trillion. It was also a major recipient of FDI, drawing in upwards of €5.74 trillion that same year.

So Juncker’s emphasis on open markets makes a lot of sense – even more so considering that the open, rules-based trading system is under attack. Protectionism has been on the rise since the global financial crisis erupted in 2008. From October 2009 until May 2017, according to the WTO, the number of new trade-restrictive measures skyrocketed from 140 to 1,392.

Through May 2010, G20 countries had implemented 73 protectionist measures; by May 2017 that number had skyrocketed to 723. The G20 is struggling to find common ground on the future of the multilateral trading order, open markets, and the fight against protectionism. US President Donald Trump’s “America first” policy has left a void of uncertainty on the global stage. The EU could fill that void, but it will only succeed by doing the requisite homework. Only an internally strong and unified EU can be a strong actor globally.

In Search of New Partners

The EU’s efforts to pursue deep and competitive free trade agreements (FTA) with various partners are not new. The European Commission unveiled its “Global Europe: Competing in the World” strategy already in 2006. However, the EU’s most recent blueprint, a 2015 package called Trade for All, is a marked shift from its predecessors. The strategy was clearly inspired by the popular backlash against the perceived pitfalls of globalization; it aims to align the benefits of free trade with safeguards to protect norms and regulations as well as underlying values. Trade for All is intended to be a holistic free trade concept benefiting a whole range of actors, from producers to consumers, workers, citizens, and small- and medium-sized companies.

The EU sees free trade deals as a complement to the multilateral trading system and the WTO, not an alternative. FTAs can provide access to new markets but they also shape globalization by introducing new rules and regulations to meet current needs in trade. It would be a mistake, however, to think that FTAs are an easy route – the EU-India negotiations launched in 2007 are a case in point.

In the last four years, the Transatlantic Trade and Investment Partnership (TTIP) emerged as the EU’s top priority. Negotiations began with great enthusiasm in the summer of 2013. But by January 2017, when President Barack Obama’s second term drew to a close, the deal was still far from finished. In fact, TTIP had run aground well before President Trump moved into the White House. Negotiations stalled last year because the partners could not find common ground over a wide range of issues, including investment protection, government procurement, and trade in services. While TTIP has faced stark opposition in many EU member states and in Germany in particular, the Trump administration has not rejected the agreement outright. In late May 2017, a few days after his first visit to the EU, US Commerce Secretary Wilbur Ross said he was open to talks about TTIP. However, given President Trump’s “America first” agenda, the EU says it needs more time to assess the transatlantic agreement’s future.

While TTIP is still in a deep freeze, the EU has been busy negotiating other trade deals. Last month, the majority of the Comprehensive Economic and Trade Agreement (CETA) with Canada entered into force. The European Parliament ratified the treaty in February 2017, but the chapter on investment protection still needs to be approved by more than 40 national and regional parliaments. Nonetheless, even provisional application is a huge success for the EU, especially considering the major protests that erupted around TTIP and CETA.

Next Stops Asia and Latin America

Following the successful (partial) ratification of CETA, the EU is now looking further afield, aiming to improve market access and deepen economic ties with fast-growing Asia and Latin America. In its communication about a “balanced and progressive” trade policy, the European Commission has emphasized that it wants to pursue deeper economic ties with the Asia-Pacific region, and to expand the alliance of partners committed to progressive rules for global trade.

The EU is negotiating a free trade agreement with Japan, its second largest trading partner in Asia. Just prior to the G20 summit in Hamburg earlier this year, the EU and Japan reached an agreement in principle on the main elements of the EU-Japan Economic Partnership Agreement. They signed a symbolic framework that is supposed to pave the way for a more comprehensive accord at the end of this year. However, many difficult issues remain. Among them is the EU’s new permanent Investment Court system that is to resolve disputes between investors and member states. Japan opposes such a court.

The EU is also negotiating with India (launched in 2007) and several ASEAN countries like Malaysia (launched in 2010), Thailand (launched in 2013, stopped due to military takeover in 2014), Philippines (launched in 2015), and Indonesia (launched in 2016). The agreements with Singapore and Vietnam were signed in October 2014 and December 2016 respectively and are awaiting ratification in the EU.

The other potential growth region is Latin America. In May 2016, the EU and Mexico started negotiations to modernize their trade agreement that has been in place since 1997. In addition, negotiations between the EU and the four founding members of Mercosur (Argentina, Brazil, Paraguay, and Uruguay) relaunched in 2010 gained fresh momentum in May 2016 after four years of stagnation.

Moreover, in his speech, Juncker announced new negotiations with Australia and New Zealand, as well, to be concluded as an EU-only agreement by 2019. The EU is aiming to wrap up negotiations with Japan, Mexico, and Mercosur by the end of this year.

The Right Strategy

All of these efforts raise the question: Is this the right strategy? Large parts of the European public were highly skeptical of the negotiations on CETA and TTIP. A poll by the Pew Research Center from June 2017 revealed that a majority of Greeks (63 percent), French (56 percent), and Hungarians (55 percent) as well as about half of Poles, Spanish, and Italians wanted their national governments to negotiate trade deals instead of the EU. Only Germans (60 percent) wanted the EU to retain trade agreement authority. The survey highlights a deep distrust in the European Commission’s negotiating capacity and strategy.

Nonetheless, the answer is yes. The EU must try to fill the void and negotiate FTAs with strategic countries and regions. Trade and investment mean jobs and growth in the EU. Exports provide jobs for 31 million Europeans; in other words, one in seven jobs in the EU depends on exports – jobs that pay on average better than other sectors. Ensuring market access abroad is key to prosperity in Europe. Even so, the EU needs to carry out internal reforms and pursue both bilateral and multilateral initiatives:

Forging consensus among EU members: The European Commission represents 28 member countries in negotiating trade policy, and it is precisely that large, unified common market that makes the bloc attractive on the global stage. At the same time, the interests and sensitivities of each and every member country must be taken into account during negotiations, and this is not always easy. Still, the answer cannot be the lowest common denominator. In October 2017, French President Emmanuel Macron threw a wrench into the EU-Mercosur talks because of concerns over beef and ethanol market access to Europe. The EU’s trade policy is clearly at a crossroads: Either it risks being held hostage by competing interests or it can prosper and shape globalization in the absence of US leadership in trade. Germany and France in particular share a responsibility for forging consensus among all EU member countries. They should not fall for the concept of reciprocity, as has become a central part of Washington’s new trade strategy. It is a dangerous idea and should not be adopted by the EU as reciprocity underestimates the importance of imports for the competitiveness of a country.

Making trade work for all: Despite the overall benefits of trade flows, not everybody has reaped the promised rewards of globalization. A growing part of Western societies feel left behind. The EU needs to address that discontent, not by abandoning trade deals but by engaging the public. This should be done through more transparency about the goals and limitations of trade negotiations; engaging advisory councils that include all relevant stakeholders; and conducting thorough studies on the winners and losers of a trade deal, along with possible social measures to counteract imbalances. At the same time, EU member states need to ensure that the benefits of trade are widely shared.

Fighting for an effective WTO: Its economic and political weight lends the EU a special responsibility for the world trade order. The WTO is still the most important guardian of rules-based world trade, but the organization is facing severe challenges. Its rules need to be updated and its dispute settlement procedure protected against political influence. The upcoming ministerial conference (MC11) should be used to agree on roadmaps for discussing important issues such as digital trade and investment facilitation within the WTO. The EU can play the important role of facilitator in this regard.

FTAs as stepping stones, not stumbling blocks: FTAs are not without risk for the multilateral trading order. They may remove barriers to trade and investment among members, but they contradict a central WTO principle by granting partners certain benefits that are denied to others. Accordingly, they are permitted only as an intermediate step in the multilateral liberalization process and are subject to (albeit rather vague) rules. The EU therefore needs to take extra care that its FTAs are compatible with the WTO and ensure that any new rules do not exacerbate global regulatory chaos or discriminate against non-members.

Choose your partners wisely: President Trump has pulled the US out of the Transpacific Partnership agreement (TPP), but the other eleven countries in the Pacific Rim are pushing ahead with the agreement, including Japan, Mexico, Australia, and New Zealand. In addition, there has been an increasing number of bilateral deals in the Asia Pacific region (e.g. Australia-China). The EU needs to stay in the game to remain competitive, but its negotiation capacities are not endless (especially with Brexit weighing on Brussels). The EU should therefore clearly prioritize its negotiations with strategic partners such as Japan, Mexico, and Mercosur. TTIP should not be abandoned, but before reopening negotiations, the EU has to ensure that talks have a realistic chance of succeeding.

Update trade rules for the 21st century: The EU needs to modernize existing trade rules to reflect current realities. Trade has changed (e.g. global value chains) and new rules are crucial to adapting to these changes. European FTAs should therefore integrate new rules on issues like small- and medium-sized businesses, digital trade, energy, competition and state-owned enterprises as well as investment facilitation. This will be no easy task, in particular with partners like India. However, “old school” FTAs would not be worth the paper they are written on. Then again, investment protection and investor-state dispute settlement may be best negotiated in separate (investment) agreements – which was the norm before the EU’s Lisbon Treaty came into force – as they fall into the shared competence of the EU and its members. Thus the ratification of trade agreements would become much easier.

Fostering open markets and sustainable trade: The EU is right to promote its values and standards through trade agreements in order to shape globalization. This means maintaining high environmental, social, and labor standards. The Commission has recently drafted a paper on the effective implementation and enforcement of sustainable development in its FTAs; the hope is to engage with EU members, but also the wider public. At the same time, these accords cannot be a panacea for the world’s problems. They are first and foremost agreements on how to govern trade. Therefore, they should not substitute existing labor and environmental accords and organizations but work in harmony with them.

In short, the EU has right strategy, but it needs to do its homework.

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© REUTERS/Fabian Bimmer

For all of Donald Trump’s tough talk on security – after a meeting with German Chancellor Angela Merkel last week, he once again mentioned the “vast sums” Germany owes the US for its defense – it is trade where he threatens to upend the international order most dramatically. Trump represents a true break with the past; while previous presidents, Republican and Democrat, have at least paid lip service to the benefits of free trade, Trump is a true mercantilist. Trade is a zero-sum game: Exports are good, imports are bad. Production at home is good, production abroad is bad. Trade deficits are bad, surpluses good; the large surpluses of individual countries, however, are not a sign of competitiveness or supply and demand structures, but of unfair competition – of currency manipulation, subsidies, or dumping. Trade with Germany, for example, would only be “fair” if Germans bought as many American cars as US citizens bought German cars.

And Trump, who ran his campaign based on an “America first” rhetoric, has already begun carrying out his pledges to undo America’s trade ties. The new president wants to bring back well-paid manufacturing jobs to the United States and increase employment – never mind that structural factors, not trade, are responsible for most job losses. He also wants to eliminate the US trade deficit. On his first day in office, Trump formally withdrew from the TPP, and in his trade policy objectives for 2017 he stressed that he wants to strengthen US sovereignty over trade law, implying that the decisions of the WTO dispute settlement system would no longer be implemented.

Trump caters to those who feel left behind. Overall, the US economy is doing well: GDP grew slowly but steadily in 2015 and 2016, and unemployment has fallen to below 5 percent. However, not everyone has benefited to the same extent from the economic recovery since the crisis. Real wages have barely increased in the United States for years, and many middle-class citizens believe that their financial situation has not improved. Moreover, 47 percent of respondents in a 2016 Pew survey believed that overall, free trade agreements (FTA) had damaged the country; among Trump supporters, that figure was even as high as 68 percent. Many feel disconnected with the political elite. Voting for Trump was a vote against the establishment. The presidential elections revealed a deeply divided country. Trump ran his campaign on the basis of identity politics and he is running his presidency on it as well. His slogan “Making America great again” means different things to different people, but it certainly reassures a particular racial and cultural US identity.

It is unlikely that Trump’s plans will do anything to bring manufacturing jobs back to the US – and indeed if manufacturing does return, it will be new, digitalized manufacturing. But his policies could have dramatic consequences for the rest of the world.

Reigning in the President?

Will Trump be able to implement his plans? The US constitution gives Congress power over trade. However, Congress has delegated some of its competency to the president over time. The acts implementing various bilateral and multilateral trade agreements dictate that tariffs will be lowered or phased out through presidential proclamations. Trump could withdraw these and thus roll back previous tariff reductions. Other laws strengthen the president’s powers further: The Trade Expansion Act of 1962, for example, allows the president to introduce tariffs or quotas when imports threaten national security. Section 122 of the Trade Act of 1974 enables the president to implement tariffs of up to 15 percent and/or quotas for up to 150 days if the US has a significant balance of payments deficit with a trading partner. Section 301 allows him or her to introduce retaliatory measures, such as tariffs and quotas, if a trading partner denies the US rights under a free trade agreement or acts in an unreasonable or discriminatory way. Trump explicitly stated in his trade policy agenda for 2017 that he would strictly enforce all US trade laws.

Most experts agree that the president could also unilaterally withdraw from NAFTA. Whether or not the Trump administration needs congressional approval to renegotiate the trade pact with Mexico and Canada depends on what the new agreement would look like. If it required changes to federal statutes, congressional approval would likely be necessary.

And Congress itself is not immune to protectionism fever. Most feared by US trading partners is the border adjustment tax (BAT), an element of a tax reform blueprint introduced by the Republican members of the House Ways and Means Committee in June 2016. Under the proposal, a company’s cash flow would be taxed based on where the company’s goods and services are sold, regardless of where production, management, or income is located. In contrast to import-related costs, export-related costs would be deductible, thus encouraging exports and domestic production while discouraging imports. If implemented this would severely disrupt global and regional value chains. While Republican Speaker of the House Paul Ryan is promoting the proposal, leading Republicans in the Senate are skeptical.

Some of Trumps proposals also resonate well with House and Senate Democrats. Many of them cheered the idea of renegotiating NAFTA. Together with labor unions they have called for stronger labor and environmental standards and an exclusion of investor-state dispute settlement (ISDS), among other elements. Trump could also find allies among Democrats for his plans to go after (alleged) currency manipulators. Senate Minority Leader Chuck Schumer, for example, has repeatedly proposed classifying currency manipulation as an illegal subsidy to allow retaliatory measures.

In the business community, Trump’s trade policy proposals resonate well in industries that struggle to keep up with global competition, such as steel. They have been lobbying for stronger anti-dumping measures for years and seek more protection from foreign competition they claim is unfair. In early February, 25 US companies, including large exporters, launched the “American Made Coalition”, which supports the BAT proposal. General Electric, Boeing, Dow Chemical, Eli Lilly, Pfizer, and Oracle are among its most prominent members. However, Trump also faces stiff opposition. “Americans for Affordable Products”, to which many retailers belong, are lobbying against the BAT. Many companies in Silicon Valley depend heavily on international trade, such as Apple, which produces its iPhone mostly outside of the US. Aside from outsiders like Peter Thiel, Silicon Valley is deeply critical of Trump. So are business leaders in Texas, who have criticized Trump’s threats to end NAFTA or impose tariffs on Mexican imports. Members of Congress will listen to these voices as well.

Hard Times Ahead

What does this mean for Germany? In 2015, the US overtook France as the number one destination for German merchandise exports. Regarding merchandise imports, the US was Germany’s fourth most important trading partner in 2015. German and US companies are also important investors in each other’s markets – in fact, the US is the top destination for German foreign direct investment (FDI). In 2014, about 28 percent of German outward FDI stock was in the US. According to the Bundesbank, there were 4,725 German companies with direct and indirect investments in the US in 2014.

Some of Trump’s proposals, such as lower corporate taxes and investments in infrastructure, could benefit German companies with American subsidiaries. A precondition to participating in a possible infrastructure boom is, however, that government procurement will not be closed through “Buy American” clauses. If the White House slapped tariffs on products from Mexico, this would also hurt German companies. Many German automakers and their suppliers have subsidiaries in Mexico. They export not only cars to the US, but also intermediate goods. A BAT would also be a severe hit to the German export industry. Trump’s opportunities to go after Germany for currency manipulation are, however, limited. The US administration could not impose any trade policy measures against Germany alone, but would have to target the EU as a whole – and it would be hard to prove that the EU is manipulating the euro. But he might make this an issue in the G20, testing the resilience of a governance forum that is needed now more than ever.

Many of Trump’s proposals will also not be compatible with WTO rules. And here lies one of the greatest risks of Trump’s trade policy: Germany depends on open and rules-based trade, and the WTO is still the most important guardian of this, even if there has been little progress regarding further trade liberalization. If Trump adheres to his promises and starts to disregard the decisions of the WTO’s dispute panels, or even worse withdraws from the WTO altogether, this would throw the multilateral trading system in disarray.

Making Trade Great Again

The US is not the only country where anti-globalization sentiment is on the rise. In fact, many countries are resorting to protectionist measures. Since the financial and economic crisis of 2008, the number of protectionist measures has increased every year.

To counter Trump’s protectionist noises, the international community needs to send a strong signal supporting open markets – most importantly in the G20 that Germany is chairing this year. The signs are not promising. At their meeting in Baden-Baden, G20 finance ministers did not repeat their 2016 pledge to “resist all forms of protectionism” in the face of American opposition. Nonetheless, the G20 members need to take their previous commitments not to implement new protectionist barriers seriously, and roll back those which they introduced in the past years. They should also agree on strengthening the WTO’s monitoring capacities, giving it more leeway to classify protectionist measures and to calculate their effect on growth and employment. This will be no easy task, as there is considerable disagreement over what constitutes protectionism.

At home, G20 members need to better explain the benefits of trade. But they also have to address those who feel – and are – left behind and redouble their efforts to improve education and lifelong learning to help people seize new opportunities. Social protection systems to ensure a safety net for people who have lost employment, active labor market policies to support people getting back to work, and a strong social partnership can all help to make economic growth more inclusive. None of this needs to be disruptive to trade. The Trade Adjustment Assistance has never really worked in the US – but it could be a basis for an improved adjustment mechanism in the future.

The European Union also needs to speak out more forcefully for trade. The passage of the FTA with Canada – CETA – in the European Parliament is a good sign. But EU members have to put more effort into overcoming internal blockages to allow the EU to be an assertive actor in global trade. And EU members should speak with one voice vis-á-vis the Trump administration. This is even more important as Trump tries to divide the EU by exploring the possibility of bilateral trade deals with individual countries – which is not even possible under the EU’s common commercial policy.

What’s clear is this: if policy-makers do not address anti-globalization sentiment at home with concrete actions, trade as a basis for prosperity and development might become a thing of the past.

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