More dark clouds over trade

If you thought that the international trade system  had been endangered by severe blows in the recent period — thus creating additional impediments and risks as countries are fighting to contain the Covid recession and set a fledgling recovery in motion — then brace for the impact of additional shocks and sources of friction that will at best create new strains in the system and at worst ignite new trade wars.

Instead of all countries putting their act together to intensify international collaboration in order to fight the global recession more efficiently, we have been witnessing an exacerbation and an amplification of existing trade tensions, and the emergence of new ones— further threatening the dislocation of the multilateral trade system. 

Eager to claim global leadership in the fight against climate change and to appease, at the same time, green groups and businesses complaining that European carbon restrictions are putting them at a disadvantage vis à vis their international competitors, the European Commission seems dead set in imposing a carbon border tax on imports from countries that don’t observe the same environment standards. 

“I know that it is not an easy part, but it is something that we have to take on,” declared Ursula von der Leyen, the EU Commission president, when she announced her flagship European Green Deal initiative to the European Parliament. The Commission is now studying the feasibility and modalities for imposing such a tax. Expect all hell to break loose if it moves ahead as this will trigger retaliatory measures from the US, China, Asean countries, India and maybe even Japan, which are not on the path to adopting the same kind of standards and constraints. 

The Trump administration has just withdrawn from the global digital tax talks held with European countries that aimed at taxing the profits made by the big e-commerce and social media companies in the countries where these companies sell their goods and make a profit but would not necessarily have a physical presence. Washington has warned that it will retaliate against European countries if they move forward with their plans to impose new taxes on the likes of Amazon, Facebook and Google — which is exactly what France, the UK and other countries officially plan to do. There is no underestimating the risk of a trade war that this will trigger — with all ensuing business uncertainties — at a time when national economies are at their weakest worldwide.

In the present situation, there is no prospect whatsoever of any breakthrough for the EU-US trade agreement that the former EU president Jean-Claude Juncker and President Donald Trump committed to achieve during their meeting in July 2018 to remove  tariffs on industrial goods and help eliminate non-tariff barriers. In fact, US Trade Representative Robert Lighthizer even raised the level of tension in his testimony to the Congress on June 17, threatening the EU of trade sanctions if Brussels continued to restrict the imports of American agricultural products over alleged safety concerns. One can have no doubt that, as he fights to shore up his chances for reelection, Mr Trump might not hesitate to resort to retaliatory tariffs against European countries to try force them to import more of US agricultural products in order to secure the much-needed votes of the American farmers. And this will set the stage for a new US-EU escalation of tit for tat measures. 

At the same time, the EU, as well as countries such as the UK, Canada, Australia and Japan are toughening their policies towards Chinese investments and acquisitions in technology sectors they consider of national strategic importance. The EU is also finalising regulations aimed primarily — even though China is not expressly mentioned — at preventing Chinese state-owned enterprises from using government subsidies to outbid competitors in acquiring European companies. European countries are becoming increasingly insistent that China — now labelled as a “systemic rival” — give their companies the same freedom to invest in Chinese companies that Chinese investors have in Europe. It remains to be seen if Beijing will take a more conciliatory stance towards this European demand, as it focuses on its confrontation with Washington, or if it will also harden its position. The interesting fact is that the two parties have found it convenient to use the issue of Covid-19 to postpone the summit that was scheduled in Leipzig next September between President Xi Jinping and all the leaders of the EU members. 

In this context, the nomination of a new director general for the World Trade Organization to succeed Roberto Azevêdo, who will step down from his post on August 31, promises to lead to tough diplomatic battles as the issue of reforming the WTO to adjust the organisation to the new realities of the world economy has now become crucial. There is no intention from the part of Washington to accept that China, as a member of WTO and the second largest economy in the world, will not get closer to a market system similar to the US or European one. Mr Lighthizer has branded the WTO “a mess” that has “failed America” and wants a new director general who “understands the fundamental problem that an extremely large state-run economy (China) cannot be disciplined into the current WTO rules.” Of course, don’t expect Beijing to accept a candidate who would just do Washington’s bidding. 

The real question and the key challenge is whether the WTO can be reformed and regain its effectiveness in ensuring the functioning of the international trade system in a situation where two key players of the global system — one based on a market economy system and the other on a “socialist market economy system with Chinese characteristics” — have now an equal “critical mass”. Tackling this enormous but crucial challenge would require conceptual and diplomatic skills, and the will to accept pragmatic compromises. Even if these skills and will were to exist in Brussels and Beijing, don’t look for them in the Trump administration. We will have to wait for a change at the White House to see if we can expect a better future for international trade.  

The writer  is president of Smadja & Smadja, a strategic advisory firm;  @ClaudeSmadja