© REUTERS/Jesco Denzel

When US President Donald Trump comes to Europe this week, he is not going to be greeted by cheering crowds. Thousands of people are expected to turn up at anti-Trump demonstrations in Brussels this weekend, ahead of Trump’s attendance at a NATO summit on Wednesday and Thursday. Even larger protests are expected in the United Kingdom when Trump makes an official state visit following the summit.

This is not just protestors demonstrating against the actions of their government; they are doing so with the tacit approval of their leaders. Revulsion at Trump’s America extends from the top down in Western Europe. London Mayor Sadiq Khan this week authorized a giant balloon depicting the US president as a baby in a diaper to fly over Westminster during the visit. Trump has in the past brutally criticized Khan, accusing him, among other things, of being soft on terrorists.

But all eyes will be on the NATO summit, where Trump will meet Europe’s two most powerful leaders, French President Emmanuel Macron and German Chancellor Angela Merkel. Both of them seem to have lost patience with the US president. This week, Merkel told the German parliament that Europe will not back down in the face of Trump’s trade and military threats, disputing his claim that the US has a large trade deficit with Europe. She warned that the current trade conflict could escalate into “a real war” if cooler heads don’t prevail.

She also shot back against a letter Trump sent to her ahead of the summit demanding that Germany immediately increase its military spending to two percent of its GDP—the suggested level for NATO members. “We are the second biggest provider of troops, we are participating in several missions, and Germany will remain a reliable partner of NATO,” she told the parliament.

Macron, who had previously tried to make nice with Trump, seems to have abandoned that strategy following the disastrous G7 summit in Canada last month, where Trump berated the other leaders and left early. Macron’s team let it be known that during the summit Trump called NATO “as bad as NAFTA”—the US free trade agreement with Canada and Mexico that Trump says is unfair—and even offered Macron a financial reward if he took France out of the European Union.

Friends No More

Even populist and far-right leaders in Eastern Europe, who might be ideologically sympathetic to Trump’s world view, have grown exasperated with the US president’s Europe-bashing over the past months. They all signed on to EU counter-measures against Trump’s trade and aluminium tariffs without hesitation. And while leaders like Hungary’s Viktor Orbán haven’t openly condemned Trump, they haven’t defended him either. Indeed, it would seem Trump has no friends at the moment in the EU.

That exasperation grew last week when Trump told a rally in the US state of Wisconsin that the EU was “set up to take advantage of the United States, to attack our piggy bank.” The EU was, of course, actually set up in cooperation with the United States—at America’s urging.

EU leaders are talking in increasingly stark terms about the death of the transatlantic alliance. A senior EU official said Trump’s attacks on the EU, NATO, and free trade now look like “the pattern of an American doctrine in which there are no friends.”

Donald Tusk, the president of the European Council, said in a letter to national leaders last week that the EU must prepare for “worst-case scenarios” in its relations with the United States. Guy Verhofstadt, the leader of the Liberal group in the European Parliament, said on Monday that Trump is pushing a pro-Russia foreign policy that aims to cause the collapse of both the EU and NATO in order to benefit Moscow.

Trump is planning a bilateral summit with Russian President Vladimir Putin in Helsinki on July 21. There are expectations that he may offer to end US sanctions for Russia’s 2014 invasion and annexation of the Ukrainian territory of Crimea, and offer Russia a free hand to back Bashar al-Assad in Syria.

“Whether Trump realizes what he is doing is up for debate, but what is clear is that he is now acting in a way that threatens the stability and economic partnership between western liberal democracies,” said Seb Dance, a British Labour member of the European Parliament.

NATO No More

It is this context that has so many worried about the outcome of Wednesday’s summit—including Trump’s own generals. Reports have circulated that the US Mission to NATO is trying to manage Trump’s visit in a way that will give him as little opportunity to speak as possible. There was even speculation that the US military leadership had tried to convince the US president not to attend the summit.

Trump is expected to berate the European leaders for not spending enough on their military, as he did during last year’s summit. But the fear is that he will go much further this time. A lot has changed since last year. Europe and America are now in a trade war, and it seems unlikely that this will not come up at the summit, even though it is not related to military matters. Trump has implied that Europe owes America favorable trading terms as payment for the US military protection that NATO provides.

In the corridors of power in Brussels, Europeans are coming to accept that they are not considered friends of Trump’s America. But what if they become enemies? It depends which Donald Trump shows up in Brussels on Wednesday. An erratic Trump could threaten to pull the US out of NATO, which would leave Europe without the ability to militarily defend itself. It is a volatile moment, and much will depend on whether the American generals can steer the president away from microphones.

But Trump can only be steered for so long. What is clear now is that the enduring institutions of the Pax Americana, set up by the US after World War II, are unraveling. Perhaps the most astonishing sign of this came this week, when reports emerged that the Trump administration wanted to partially pull the US out of the World Trade Organization.

“It is clear to me following President Trump’s unilateral withdrawal from TTIP, TPP, JCPOA, Paris Climate Change Agreement, and blockage of the US nomination to the appeal body of WTO that this is part of a wider exceptionalist policy,” said Charles Tannock, a British Conservative member of the European Parliament.

“I don’t think President Trump holds sacrosanct any of the traditional pillars of the UK special partnership such as close alliance within NATO or even the UN primacy for security,” he added. “Trump wants a club of strongmen all operating on a bilateral basis again. It’s as if World War II has taught the West nothing. President Putin will be overjoyed by all this.”

Trump will be able to deliver that message to Putin personally a week after the NATO summit. By the end of July, the world may be looking at a very changed geopolitical and economic landscape. Wednesday’s NATO summit could, therefore, prove to be the most consequential in the alliance’s history.

The post Boiling Point appeared first on Berlin Policy Journal - Blog.

© REUTERS/Fabian Bimmer

The German export-oriented economic model is under attack this year: Germany is caught between tough American protectionism and aggressive Chinese industrial policy. The US government is threatening to impose painful sanctions on key German export goods, such as automobiles, while China’s industrial policy is focused on acquiring important industrial technologies, and eventually replacing existing foreign technology leaders in the automotive, engineering, and chemical industries.

Because of the sizes of their markets, the United States and China unquestionably have the tools to hurt Germany’s export-oriented economy. The new German government under Angela Merkel will have to counter the effects of the US-Chinese squeeze.

First, German dependence on exports to the United States and China must be reduced. The focus should be on strengthening growth forces – and not just in Germany, but Europe as well. All euro area countries except France, Finland, Cyprus, and Belgium have current account surpluses, , and Germany’s surplus amounts to almost 8 percent of its GDP. The euro area as a whole has a surplus of around 3 percent of GDP. These external surpluses are no longer sustainable in a world in which the US president is threatening to launch a trade war and the World Trade Organization can no longer regulate open markets in key economies.

Germany’s capital investment is lagging behind. Even without this acute pressure, it would be in Germany’s interests to set domestic growth forces free. German business investment has been weakening for years. German gross investment in the industrial sector has been lower even than in France or Italy since the start of the millennium. A timely and feasible step would be to massively improve the rules for depreciating assets on capital, software, and research investments in the German tax code. This is all the more necessary now as US corporate tax reform will allow companies to immediately depreciate 100 percent of their expense for equipment and building upgrades.

Beyond reforming the tax code and lowering other regulatory barriers, Germany will have to accelerate the development of public infrastructure. Improvements are urgently needed for the country’s roads and public transport infrastructure, as well as its data infrastructure and broadband network. Schools and universities could use more funding as well. The increased availability of both private and public capital will also help raise wage levels in Germany. After all, capital complements most labor activity. This set of measures would promote domestic growth and reduce dependence on exports; the resulting growth in Germany would also help its EU partner countries by increasing demand for their products.

Promoting Infant Industries

Second, German innovation policy must also make a real leap forward, especially in the digital economy, so as not to leave the future of technological change entirely to others. American and Chinese IT corporations are in the process of dividing up world markets, setting technological standards that will be associated with huge licensing revenues in the future. They are also making significant advances towards the technology of the (near) future: artificial intelligence.

At the moment, neither Germany nor Europe has a lot to offer in terms of a digital economy. The EU’s Digital Single Market is not progressing. As early as 2019, Europeans will become painfully aware of the shortcomings in their networks’ innovation policies when the Chinese company Huawei begins to install 5G mobile technologies in Europe, a prerequisite for networked industrial production and autonomous driving.

Europe needs a much more ambitious and active digital innovation policy, one that includes the targeted promotion of European “infant industries,” for example through the development of larger venture capital markets. Research shows that scaling companies is more difficult in Europe than in the US due to lower access to venture capital in all industries. With regards to critical infrastructures, there should be no taboo on the targeted support of currently weak European 5G developers, such as Nokia or Ericsson. If European semiconductor and mobile network companies disappeared from the markets, after all, dependencies on US and Chinese technology providers would not only create security risks, but would permanently reduce European innovation capacities.

European governments will therefore need to fundamentally rethink their innovation policies, and in particular their digital policies, in order to counter the rush of American and Chinese companies and innovations. The German coalition agreement does hint at the importance of research, but it gives the impression that rather marginal changes are being considered, when a qualitative change is needed. Company- and market-driven “innovation from below” will be necessary but insufficient; digital transformation requires new, state-financed infrastructures, targeted support measures, and educational offers as well as continuously adapted market rules provided by governments and parliaments. Public innovation policy must simply become more ambitious and think in terms of bigger goals and dimensions. Substantially strengthening research and development spending in the European and German budgets is only a first necessary step in this direction.

Screening Foreign Investments

Third, Germany should campaign for a robust foreign trade policy in Europe. On the one hand, this is about adequately examining security interests in foreign investments and acquisitions and flanking them with a pan-European coordination office. On the other hand, it is also about protecting strategic technologies from being taken over through market manipulation practices. For this task, the competencies of the EU Directorate-General for Competition should be strengthened. It is completely unacceptable that foreign top dogs operating with state funding from closed domestic markets should be able to drive European companies out of the European market.

Germany must stand up for open markets and fair trade practices more decisively than before through the EU’s Directorate-General for Trade, without weakening the European institutions through unilateral action. European Trade Commissioner Cecilia Malmström is doing a very good job, not only in her negotiations with the United States and China, but also in establishing new strategic trade relations with, for example, the Latin American Mercosur, along with a free trade agreement with Japan. Europe should build further partnerships and, at the same time, sharpen its trade policy instruments to defend itself in the case of conflict and represent European interests more effectively than before.

Germany can no longer avoid an economic policy correction in the face of the dual pressure coming from the United States and China. The new German government has to act now if it wants to defend domestic industries from unfair competition while releasing Europe’s own growth forces.

The post Squeezed Model appeared first on Berlin Policy Journal - Blog.

© REUTERS/Hoang Dinh Nam/Pool

It was some 100 years ago that a Japanese doctor, Hakaru Hashimoto, first described a troubling malady afflicting patients. The symptoms included listlessness, fatigue, and bouts of depression. Hashimoto had discovered a widespread autoimmune disorder affecting the thyroid gland. The eponymous condition cannot be cured, only aided by medication. Those suffering from Hashimoto have to adjust to living with diminished energy.

It can be argued that the doctor’s native country is suffering from the very same malaise. For a generation now, the Japanese have been yearning to return to the boom years of the 1970s and 80s, when the world and many Japanese believed their country could achieve the same grandeur China is ascribed today—the ability to conquer the world. The Japanese economy has witnessed a series of ups and downs but has not regained its swagger. Meanwhile the Japanese themselves and indeed the world still seem to see the Japan of today through the lens of the country’s boom days.

It would serve Europe well to look kindly upon Japan in its struggles. Europe and Germany in particular are suffering from many of the same symptoms, and Japan’s efforts to turn things around may provide an important blueprint. In Europe, most eyes are fixed upon China and India today, but among Asian economies, Japan is still the closest to ours.

The components of Japan’s woes are well known by now: stagnant economic growth, an over-dependency on exports, and soaring (public) debt on the one hand; a shrinking society and a growing chasm between rich and poor on the other; politically, a democracy facing real challenges to its governance and caught in a tricky position among neighbors in the region.

No Sick Man of Asia

And yet Japan is no sick man of Asia. Its challenges are not merely the result of failures, but also of important successes. Japan may not be a part of the current boom in Asia, but that is precisely because it was Japan that originally mastered it. And despite its woes, the country fares well in leading international benchmarks.

Japan ranked sixth in the Bloomberg Innovation Index in 2018, for example, while Germany came in fourth and the US in eleventh place. On the Human Development Index, Japan ranked 17th worldwide in 2016 (here, too, Germany landed fourth and France far further down at 21). While social inequality is a growing problem in Japan, it remains rather moderate by global standards. The country is ranked 22nd on the Gini coefficient of inequality register of OECD countries, between Italy and Australia. Germany, meanwhile, is ranked 13th. The United States is near the bottom (34), just ahead of Turkey and behind Russia.

Japan, it would appear, is suffering from first-world problems. Still, the extent to which these problems weigh on the country, and its economy, is unusual. Japan’s GDP in real terms has mostly stagnated over the last 20 years while the country’s public debt soared to 240 percent of GDP in 2017 (it is around 65 percent in Germany).
Meanwhile, Japan’s population is shrinking at record speed. If the current demographic trend continues, the country will plummet from 127 million people today to 87 million by the year 2060. In comparison, Germany will see a steady decline from 82 million to 68 in the same time period.

The fact that these trends affect Japan more than other wealthy countries is also reflected in the well-being of its citizens. In the UN’s annual World Happiness Report, Japan recently placed a lowly 51, alongside Russia, Belize, and Algeria; Germany ranks 16th. The studies show that many Japanese feel their country is not heading in the right direction. There is a lack of clear perspectives and opportunities.

Conflicting Interests

Part of the problem is that Japan finds itself in an uncomfortable position. Trade with China is currently the biggest opportunity for economic growth; at the same time, the rise of China is Tokyo’s biggest foreign policy challenge.

For years, the foreign policy debate in Japan has centered around both the commitment to the United States and integration in the region. At one end of the scale are the moderate pragmatists who advocate regional integration. They demand a more independent foreign policy, especially with an eye to China: They fear that cozying up too close to America will hurt Japanese interests. China is Japan’s biggest trading partner—in fact, the value of bilateral trade exceeds that between Japan and the US by more than half. And that gap is widening.

At the opposite end of the scale are the traditionalists, led by Prime Minister Shinzo Abe; they see a strong alliance with America as the highest priority. They believe Japan must work toward curbing China’s rise to prevent its powerful neighbor from becoming overly dominant—and that will only be possible with the help of Washington.

It would be as if Germany’s biggest trading partner were a booming, surging Russia—a Russia that is on the verge of dominating Europe economically and dethroning America as the most powerful in the world; a Russia where defense spending grows by double digits every year and which, at the same time, starts to make territorial claims on Germany and other European states. It is an imagined parallel, of course, but it helps to understand why Japan is lukewarm toward its budding partnership with China.

When Barack Obama was still US president, Abe knew he was on the safe side. Obama’s “pivot to Asia” was very much founded upon a strong alliance with Japan. Donald Trump has complicated the relationship, however; Abe was the first leader invited to golf with the new US president, but that show of friendship has brought Japan very little benefit so far.

Tools of Trade

The turmoil in the US has left Tokyo with no other choice than to take its fate into its own hands. The Trans-Pacific Partnership (TPP) provided the first example. Negotiated under the Obama administration, the TPP was to become the largest free trade area in the world, bringing together ten other Pacific Rim nations with the US and Japan. China was not invited to the club, which Beijing rightly saw as an attempt to rein in its influence in East and Southeast Asia.

After Trump’s withdrawal from the TPP, Abe’s government pursued a fresh deal with the remaining ten interested parties. The agreement, now known as TPP-11, is due to be signed in March. It is a striking success for Japan, not only because Tokyo led the negotiations. Its goal of creating a serious counterweight to China may not be achievable without the US, but the TPP-11 is an important signal that Japan supports global free trade and is capable of forging its own alliances.

Tokyo’s free trade agreement with the EU, called JEFTA, which enters into force next year, also shows that Japan is an important global player. Together, the participating countries in JEFTA account for around 30 percent of global GDP. Shinzo Abe described the agreement as “the birth of the largest economic zone in the world.” And JEFTA should bring significant benefit to Japan: According to a study by Germany’s Bertelsmann Foundation, it will generate growth of up to 1.6 percent of Japan’s GDP. Germany stands to benefit most of all the EU countries, with growth expected to reach 0.7 percent of GDP. It is not a game changer for any of the participating countries, but it certainly brings significant improvement and sends a signal of strength.

Abe’s Populism

Nevertheless, Japan’s possibilities are more limited than its economic power would suggest at first glance. This holds especially true in its own region. East Asia lacks the solid institutional basis that is taken for granted here in Europe. There is nothing in East Asia that comes close to the EU or NATO.

In all fairness, East Asia does present a unique set of circumstances. The size and proportions of East Asian nations are vastly different. China will never engage in European-style alliances in the region but rather pursue its own agenda; Japan is still so dominant that its neighbors fear integration would lead to domination.

Not to mention that today, more than 70 years after the Second World War, Tokyo still has not clearly distanced itself from its war-time atrocities—and that, too, worries neighbors. Nearly every post-war government in Japan has taken a revisionist stance on the country’s history, especially Shinzo Abe. Donald Trump’s former chief advisor Steve Bannon gave him the dubious praise of being a “Trump before Trump.” In reality, Abe is a far cry from the US president. But his aim to revise Japan’s pacifist constitution, restore pride in the country’s military traditions, and discredit “mainstream media” resemble the right-wing’s platform in the US.

In fact, Abe’s populist overtones have possibly prevented any party from gaining ground to the right of his Liberal Democrats. The populist sentiment he has stoked has served Abe well in cementing power at home. But abroad, he has harmed Japan’s image and deepened his country’s malaise.

Economic Strengths

Still, Japan’s technology and economy could emerge as possible bright spots for the future. Though economic growth has been weak, the country is well-positioned in key industries and has good opportunity to extend its advantage going forward.

For example, Japan regularly spends around 3.5 percent of GDP on research and development (R&D) . This is an extraordinarily high proportion, surpassed only by Israel and South Korea (in Germany, R&D expenditure has reached around 2.8 percent in recent years). Even in absolute terms, R&D spending in Japan—at around $180 billion—is among the best in the world, surpassed only by the US and China. German R&D spending, meanwhile, is around $110 billion a year.

Japan excels in robotics—it is currently the world’s number one manufacturer of industrial robots, meeting around 52 percent of global demand. This is nothing short of spectacular. While there is one major industrial robotics player in Germany (Kuka, which is now a Chinese-owned company), Japan’s Fanuc, Yaskawa, and Kawasaki Heavy are all competing.

Germany may have Siemens, but Japan has Hitachi, NEC, and Toshiba. A similar picture can be found in the chip industry and Japan’s electronics companies, which are growing and investing again after years of crisis.

Japan also has extremely ambitious goals in terms of energy and transport, including the evolution of hydrogen as an energy source. It is promoting this technology far more than any other country, and Shinzo Abe regularly speaks of a “hydrogen society” when talking about the future of Japan energy technology.
The focus on promoting new technology in the public and private sector has placed Japan on a unique path, turning the country into one of the leading drivers of innovation worldwide.

Robots for Guests

That spirit of innovation is too often overshadowed in debates and analysis of Japan. Outsiders struggle to shed the image of a directionless, listless Japan—a bit like Germany in the late years of former Chancellor Helmut Kohl’s leadership. Many are hoping the Olympic Games in 2020, due to be held in Tokyo, will jolt Japan back to life.

Even the best sports extravaganza in the world cannot change Japan’s situation dramatically, but it can certainly have a positive influence on its image. The games could provide a platform for the country to display its prowess in technology. That is why Tokyo has said it will prepare a small army of robots for the Olympics, to impress and woo foreign guests as soon as they arrive at the airport.

There is, for example, Cinnamon the humanoid who can talk to people and give directions; robotic stuffed animals translate into four languages at the airport while other robots help carry travelers’ luggage. Japan’s hydrogen technology, too, will be on display.

It may be entertaining and even useful. It could also serve as reminder to the rest of the world, that Japan is not on a detour. It is busy registering the results of its own success, and Europe would be well advised to pay closer attention.

The post An Uncomfortable Position appeared first on Berlin Policy Journal - Blog.

© 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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REUTERS/Fabrizio Bensch

How does this affect Europe? In the EU, we often forget that our most important trading partner, the United States, is a Pacific country as well as a Transatlantic one, with strong ties to Asia. US President Barack Obama’s so called “pivot to Asia” was complemented by a strong Asian trade strategy. With the Trans-Pacific Partnership (TPP), the US and eleven countries in the Pacific Rim are currently negotiating a comprehensive, mega-regional trade agreement encompassing about 40 percent of global GDP and 26 percent of global trade. Obama wants to conclude said deal in 2015.

Contrasted with America’s ambitious Asian trade agenda, the EU’s trade strategy towards Asia is miniscule. The EU currently is negotiating with Japan. But it has failed to reach a regional deal with the ten ASEAN countries. A bilateral deal with Singapore was finished in 2014, but still needs to be ratified along with an agreement with Vietnam (concluded in August 2015); bilateral deals with Thailand and Malaysia are currently in progress, while talks with India have stalled. Any present agreements are small in comparison to TPP or the Regional Comprehensive Economic Partnership (RCEP), which, unlike TPP, includes China (and not the US) and is scheduled to be completed by the end of 2015; the RCEP will account for 49 percent of the world’s population and 30 percent of world GDP, and make up 29 per cent of world trade.

Rather than strengthening its trade ties to Asia, Europe has focused its efforts on the Atlantic. The Transatlantic Trade and Investment Partnership (TTIP) with the US is the largest and most important trade agreement currently in the works for the EU. Together, the EU and US represent the largest economic market, covering around 45 percent of global GDP and 44 percent of global trade in goods and services.

Trade and growth dynamics in Asia far exceed the Transatlantic and European economic outlook. Nevertheless, TTIP could serve as a stepping stone for a strategic European trade policy, one that preserves European influence in global trade; without it, Europe is at risk of falling behind and being eclipsed by growing economies elsewhere.
Setting Standards

TTIP is of course important for generating growth. But more importantly, it could help determine where future global standards are set – in the EU and US, or in Asia. The EU needs the US as a partner to create new regulations and promote high global standards. If both regions are able to agree on common standards, they have a first-mover advantage that other countries and regions will have to follow, as was the case when the EU and US agreed on common standards in e-mobility.

To that end, TTIP negotiations cover many new areas beyond WTO rules, including rules in the area of sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT), as well as new areas such as sustainable development, competition, trade facilitation, energy, raw materials, and small and medium enterprises (SME).

In an article titled “A Comeback Strategy for Europe”, former Swedish PM and foreign minister Carl Bildt and former EU High Representative Javier Solana summed this up: “If the TTIP stalls or collapses, while the TPP moves forward and succeeds, the global balance will tip strongly in Asia’s favor – and Europe will have few options, if any, for regaining its economic and geopolitical influence”. The EU and US are still the world’s dominant trading partners. Without this strategic agreement, the EU will jeopardize its competitive position in the world.

Why TTIP is Lagging

If the strategic advantages of TTIP seem to be so clear, particularly for the EU – why are the negotiations taking so long as TPP progresses so quickly?

First of all, TPP is a high priority for President Obama. He wants TPP as a legacy of his presidency. Asia is seen as a “fresh” and growing region, especially in comparison to “Old Europe”, with her slow growth and aging population. TTIP is still important for the US, but it is definitely not the highest priority in Washington right now. And even though the July 2015 TPP meeting in Hawaii ended without an agreement (due to differences in automobile regulations, dairy market access, and patent and regulatory data protections for biological drugs), progress was made. A second meeting of the TPP partners to conclude a final deal is planned for this fall.

TTIP was supposed to be finalized by the end of 2015 too, but progress has been slow – which is due more in part to TTIP’s complexities rather than a lack of ambition. The US and the EU already have deep, long-standing economic, trade, and investment relationships, thus the negotiation issues at the heart of TTIP are far more delicate than other agreements for younger relationships. Both parties underestimated this. TTIP mainly covers non-tariff trade barriers which also impact health, consumer, and food safety standards as well as environmental and labor concerns. All of these are politically sensitive issues, many remain unresolved, and big political decisions still must be made regarding investor-state dispute settlement (ISDS), genetically modified organisms (GMOs), and public procurement on all state levels, just to name a few.

In July 2015, the EU and the US concluded the tenth negotiating round in Brussels. These were the first deliberations since important legislation had been passed by both sides: in June, the US Congress passed the Trade Promotion Authority (TPA), and in July, the European Parliament adopted a TTIP resolution and signed a series of recommendations. The endorsement by the European Parliament and the US Congress was an important step forward, as both parliaments will have to ratify the final treaty, a point EU chief trade negotiator Ignacio Garcia Bercero stressed, when he said that negotiators were working “with strong political wind in our sails.” During the negociations, both sides were able to accelerate their talks on services market access, a major issue in TTIP where both the EU and US stand to gain quite a bit. Chief US trade delegate Dan Mullaney emphasized that this was “a welcome step forward.” Despite these positive developments, it remains unclear whether TTIP will be concluded before President Obama leaves office in 2017. At the G7 summit in June in Elmau, G7 leaders called on both TTIP parties to “immediately accelerate” their work and to deliver an outline of a possible agreement at the end of 2015.

German Hostility

Despite Germany’s strong export focus, a large part of the German public sees TTIP as a threat to its values and way of life and has become increasingly hostile to the project. Concerns center on the overall transparency of the negotiations, as well as fears of lower food safety and environmental standards. Many also fear that the investor-state dispute settlement (ISDS) process will serve as a way for US corporations to circumvent democratic procedures and the “right to regulate”, allowing them to lower standards through a backdoor. The anti-TTIP movement, which consists of a large group of NGOs and trade unions at its core, has called for a nationwide “Stop TTIP/CETA” demonstration in October.

To counter the growing tide of public distrust, it is not enough for German business leaders to repeatedly point out the technical advantages of increased market access, mutual recognition, and common regulatory processes. Instead, Chancellor Merkel must make a specific economic and also (geo)political case for TTIP and push for genuine progress in the negotiations. To alleviate the fears of the opposition, it is important to have transparency with as many TTIP position papers and documents as possible. Furthermore, the European Commission and the German government should make a convincing and detailed case, outlining where concessions and liberalizations are possible and what is non-negotiable.

Present trade agreements (e.g. the EU-US veterinary equivalency agreement from 1999 or the FTA with South Korea or Canada) could serve as good examples. Regarding ISDS, there is a broad consensus on the EU side that the existing provisions need to be reformed. The proposal made by German Vice Chancellor Sigmar Gabriel to reform the present system of ISDS and eventually establish an international investment court is a step in the right direction.

Germany is the largest national economy in Europe and is one of the world’s leading exporters. Because of its size and economic performance, it has a strong influence on the TTIP negotiations and the final agreement. TTIP needs support from the German population, which has become complacent with its status quo economic performance and competitiveness.

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