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Can the EU thrive in an era of power-based trade?

Peter Rashish / Jan 2019

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The European Union is not only a major stakeholder of the economic arm of the liberal international order. It is also one of its key building blocks. While the United States and Japan are also important actors that have historically supported an open, rules-based international economic system, it is not their political form—their existence as unitary nation-states—but rather their policies that have made a difference in the flourishing of liberalism at the heart of the global economy.

Not so the European Union. While the World Trade Organization, the World Bank, and the International Monetary Fund get more attention for their role in maintaining economic order and prosperity along Western lines, the EU’s institutional character—its pragmatic sharing of sovereignty, its promotion of economic cooperation, and its operation according to common rules—has made it the most important regional wingman for the three Bretton Woods institutions. Because of this structural role it plays in the global economic order, the importance of the EU will always be greater than the sum of its member states’ (liberal) economic policies.

The creation of the WTO nearly 25 years ago, with its binding dispute settlement and its mandate to expand the ambit of rules-based trade, happened in parallel with the EU’s own experience creating common and enforceable frameworks to smooth the functioning of its internal market of 28 countries and 500 million people. The two institutions reinforced each other’s world view, even if the political imperative for European unity following the destruction of the Second World War, and the like-mindedness of the EU’s 28 member states has meant that cooperation at the European level was always going to exceed what the diverse, 160 plus members of the WTO could reasonably expect to achieve.

So far, so good for the EU. But what if the multilateralism embodied by the WTO—the idea that even for the giants of this world there is more prosperity to gain through cooperation than confrontation—is giving way to something else, something more sinister? Where will the EU be if the world is shifting from a rules-based trading system to a more power-based one?

While such an outcome is not inevitable, it is not hard to see that the risks are real. That the WTO has not been the venue for any trade deepening of significance since its founding in 1995 is not by itself a reason for alarm. In the absence of progress at the multilateral level scores of bilateral and regional trade accords have been signed, including many that have considerably liberalized trade and raised the standards for that trade. These include the Comprehensive Economic and Trade Agreement between the EU and Canada, the EU-Japan Comprehensive Economic Partnership Agreement, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“TPP-11”).

But paired with the WTO’s shortcomings as a negotiating forum are two more recent sources of apprehensiveness about its future: the challenges to its dispute settlement function (mainly from the United States), and concerns that the organization is not suited to manage the rise of Chinese state capitalism (expressed not just by the U.S. but by the EU and Japan as well). The two issues are related as the lack of transparency in the Chinese economy makes it difficult for the WTO’s dispute settlement arm to capture the full extent to which the country is either complying with or violating WTO rules.

The WTO is likely to survive its current uncertainties, but the next few years will be bumpy ones. Although the current U.S. Administration may be an outlier in its resort to unilateral national measures like tariffs and quotas to pursue its trade-policy goals, the unease about the U.S. global economic position that underlies these actions will only intensify as an increasingly self-confident China pursues its vision of state-directed prosperity on the world stage. Even a future U.S. administration that is more appreciative of the value of the rules-based economic order for the country’s interests could find it hard to resist the selective use of power-based approaches to trade.

Where would a more anarchical global economy, where the rule of law increasingly needs to compete with the law of the jungle, leave the European Union? In such a world, the distinction between economic policies and security policies will blur, since a challenge coming from the trade realm will more acutely engage a country’s national interests if the mediating forces of negotiation and dispute settlement are not as readily available.

In contrast to unitary states like the U.S. or Japan, which may not relish such a world but could grudgingly become resigned to it, the EU is not set up to integrate trade policy with national security policy. Despite the existence of the EU High Representative for Foreign Affairs and Security Policy, these domains remain the purview of the 28 member states. And while a true superpower in the trade field because of the competences the member states have entrusted to it, the EU cannot draw on as many policy tools or act with the same swiftness as the executive of traditional nation-states.

So could the EU thrive in an era of power-based trade? The answer is yes, but it would first require a change in political culture in Brussels. In parallel with ever more important efforts to maintain the rule of law component of the international economic system—the WTO and high-standard bilateral and plurilateral free-trade agreements—the EU would have to become much more accustomed than it is currently at preemptive leverage creation so that it can also be effective in its law of the jungle aspects.

That does not mean imposing arbitrary and shortsighted tariffs and other punitive measures on trading partners. But it does mean thinking and acting in a more strategic way than it does today—not only to advance European interests, but also to ensure that European values (which are also broader Western ones) continue to thrive in the global economy of tomorrow.

 

Peter Rashish

Peter Rashish

January 2019

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