Dalibor Rohac

The EU and America are sliding into protectionism

(Photo: Getty)

Emmanuel Macron’s state visit to Washington this week and the upcoming meeting of the US-EU Trade and Technology Council on Monday are important tests of whether the western world can avoid a return of destructive beggar-thy-neighbour policies which already once destroyed the global trading system in the 1930s. 

The most recent point of contention centres on the American Inflation Reduction Act’s provisions aimed at supporting US manufacturers of electric vehicles, to the exclusion of European ones. While at a joint press conference with his French counterpart, the US President Biden vowed to fix the ‘glitch’ in his signature piece of legislation. But doing so remains a tall order, particularly with a Republican-controlled House of Representatives. 

Unless the remedy is swift and effective, both the German and French governments can be expected to continue pushing the EU to respond in kind, putting in place a similar subsidy programme tailored exclusively for European manufacturers. 

The new economic policy monoculture that Berlin and Paris are trying to instil in the is bad news. Market-friendly European governments – think the Netherlands, Ireland, the Baltic states, and the Nordics – have good reason to dismayed. So does the UK, faced with an increasingly protectionist continental neighbour and an indifferent partner on the other side of the Atlantic. 

Electric vehicles are an emerging industry with lots of loose technological ends that need tying. There is no guarantee that European legacy brands – say BMW or Porsche – will retain their leading positions, and that is OK. Trying to entrench incumbent manufacturers with subsidies all but guarantees that Europe as a whole will lose its technological edge against more nimble actors exposed to market competition. 

This is not to say that there is no role for government action and government spending, especially if you are concerned about the risks of China’s leap to the technological frontier, including through forced technology transfers facilitated by Chinese investment in the European automotive industry. Yet any sensible government action would seek to leverage the West’s strengths instead of aping China’s top-down, heavy-handed approach. Europe and the United States became wealthy through a process of creative destruction, not thanks to government subsidies for national champions or by creating artificial trade barriers between allied economies. 

But, the emerging Franco-German consensus on electric vehicles appears symptomatic of a broader problem. These countries are petrified by the idea that destruction is as important to markets as creation – and completely unafraid of big-government and protectionist policies both at the national and the European level. A case in point: Germany’s response to Europe’s energy crisis has consisted of a €200 billion state aid scheme benefiting heavy consumers of energy, violating the spirit – if not the letter  – of the EU’s single market and alienating member states for which similar acts of domestic largesse remain unaffordable. 

The EU as a whole, meanwhile, seems to have given up on structural reforms once envisaged by the Lisbon Strategy and Europe 2020. Today the bloc’s competitiveness policies seem like relics from a completely different era. Instead of efforts to complete the single market, Europeans are treated to the likes of the Commission’s ‘Important Projects of Common European Interest’ fund, worth €10 billion, as if the lack of public funding for businesses was keeping Europe’s economy from growing at anything but moribund rates. 

As a reaction to China’s Belt and Road Initiative, meanwhile, the EU is rolling out its Global Gateway initiative, with €300 billion in funding for 2021-2027. Its aims include ‘boosting smart, clean and secure links in digital, energy and transport and strengthen health, education and research systems across the world’ – in, other words, funding everything and anything, anywhere. 

The lack of explicit geopolitical priorities makes it impossible to judge whether the initiative will end up being a success or failure. More seriously, it betrays a stunning lack of imagination on the part of EU institutions and governments in their response to protectionism. 

After all, if Ukraine’s success at defending its territory against a more sizeable Russian force should teach Europeans anything, it is the importance of asymmetry. For the United States, the UK, and the EU, one of our main selling points has been our ability to craft voluntary, open, and rules-based partnerships – not our capacity to extract political concessions in exchange for loans for what will almost invariably be white elephants in poorly governed countries. 

Once the taboos of nationalist, parochially minded industrial policy are broken, there are few limiting principles – other than running out of cash. The strictures of the European single market do not seem enough to stop the German government from bailing out its industry. And the imperative of cultivating a healthy transatlantic relationship is unlikely to prevent the EU from embracing protectionism – particularly if Washington is keen to do the same. That makes it all the more important for more responsible voices to ring the alarm bells before it is too late.