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Europe should lead the way with multilateralism

Summary:
Despite the unique partnership with the USA, Europe needs to reflect on its place in an unstable world. Especially if the US Administration moves towards protectionism, the EU will need to build and deepen relationships with other partners. This opinion piece was also published in Il Sole 24 Ore, La Tribune, Nikkei Asian Review and Nikkei Veritas. The United States and Europe are more than allies. They share a long-standing and multi-faceted partnership. And the future of US-Europe relations is of fundamental importance for the global economy. However, this close connection has been under strain since the new US administration took office. For the European Union, this is a good opportunity to re-consider its geo-economic orientation. Let’s not forget that the United States is the EU’s most important bilateral trade and investment partner. The EU exports more than US$ 600bn in goods and services to the USA, which exports more than US$ 550bn to the EU. Bilateral investments are also huge, amounting to more than US$ 2 trillion. Numerous European companies are active in the USA, not only selling but also producing there. The same is true for many US businesses in Europe. But differences are emerging. Until the arrival of the current administration, the US supported a multilateral trade system and European integration. It also provided a security guarantee for Europe.

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Despite the unique partnership with the USA, Europe needs to reflect on its place in an unstable world. Especially if the US Administration moves towards protectionism, the EU will need to build and deepen relationships with other partners.

This opinion piece was also published in Il Sole 24 Ore, La Tribune, Nikkei Asian Review and Nikkei Veritas.

Europe should lead the way with multilateralism

Europe should lead the way with multilateralism

Europe should lead the way with multilateralism

Europe should lead the way with multilateralism

The United States and Europe are more than allies. They share a long-standing and multi-faceted partnership. And the future of US-Europe relations is of fundamental importance for the global economy. However, this close connection has been under strain since the new US administration took office. For the European Union, this is a good opportunity to re-consider its geo-economic orientation.

Let’s not forget that the United States is the EU’s most important bilateral trade and investment partner. The EU exports more than US$ 600bn in goods and services to the USA, which exports more than US$ 550bn to the EU. Bilateral investments are also huge, amounting to more than US$ 2 trillion. Numerous European companies are active in the USA, not only selling but also producing there. The same is true for many US businesses in Europe.

But differences are emerging. Until the arrival of the current administration, the US supported a multilateral trade system and European integration. It also provided a security guarantee for Europe. Now the new US administration seems intent on replacing multilateralism with a bilateral approach, hoping to reduce trade deficits and to protect, in particular, the US manufacturing sector. On climate policy, the USA’s commitment to the Paris Agreement is being questioned. On defence, the NATO umbrella appears less certain than before. And Mr Trump has openly questioned the value of EU integration.

The USA’s new stance, although still undefined in many ways, has provoked uncertainty and nervousness in Europe’s corridors of power. So how can the EU best respond to the situation?

Trade is good for Europe. The EU is a relatively open economy. Trade intensity, measured as exports relative to GDP, is far greater in the EU (44%) than China (22%) or the US (13%).  The EU, like many other open economies, has benefited greatly from the multilateral system. Now Europe should stand ready to defend multilateralism, as I recently argued with my colleagues Maria Demertzis and André Sapir. The rules-based system, centred on the World Trade Organisation, lets all players trade with each other under high and comparable standards. Protectionism would reduce growth in the EU and around the world, and could mean lower standards and unfair competition.

Europe needs to prepare its strategic response in case the US openly defies the multilateral order and slides into protectionism. First, the EU should collaborate with partners around the world in defence of the WTO and other multilateral agreements such as the Paris climate pact. For example, if President Trump follows through on his tweets and imposes tariffs on Mexican imports, the EU could team up with Japan and others to defend Mexican rights and protect foreign investments in the country.

Second, the EU should accelerate work on deeper economic relations with China and other global partners. One obvious objective is to complete on-going negotiations on a bilateral investment treaty with China. But that does not mean that the EU should sacrifice its principles. It should insist on public rather than private dispute settlement as well as reciprocity in investment terms. Only after an EU-China investment treaty has been agreed should the two partners start negotiations on a bilateral trade agreement. The aim of the EU-China deal should be to improve market access and set high standards for the environment, corporate governance, consumer safety and workers’ rights. Any deal that would lower standards in the EU is not in Europe’s interest and should be rejected.

But it is equally important to advance with other countries, such as Japan, Singapore and the Mercosur bloc. And all these bilateral deals should be designed in such a way that it is eventually possible to integrate them into a more multilateral framework.

Third, the EU’s own trade governance needs to be reformed and internal imbalances addressed, to increase the EU’s external credibility. Strengthening Europe’s social model would ward off protectionist temptations.

And finally, the EU should prepare tools that could be deployed bilaterally against the USA. These include WTO-compatible anti-subsidy measures and possibly tax changes. On the whole, the EU should stand firm on its interests and principles, but avoid an unnecessary escalation. Much is at stake for Europe and the world – but with the right strategy, the EU could come out strengthened.

Guntram B. Wolff
Guntram Wolff has been the Director of Bruegel since June 2013. His research focuses on the European economy and governance, on fiscal and monetary policy and global finance.

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