Thoughts on EU Trade Policy after Ukraine

With the rapidity of events in the last month full analysis of the long-term implications of Russia’s invasion of Ukraine for global politics or economics feels premature, especially given the associated shock. It is important however to start, with a baseline of what was already looking like a time of change. There is also a need to push back on the fashionable declaration that globalisation is dead, as this simplification obscures how new realities will affect broad debates around individual EU policies being discussed now, not least between openness and autonomy.

A third economic age since 1945

Russia’s invasion of Ukraine adds to the sense of a turning point in the global economy. This looks broadly like a third stage since the end of world war in 1945, after the establishment of global institutions, corporatism and recovery, and then an increasingly technology-enabled economic opening constrained by growing regulatory differences.

The relationship between what could be described as the ‘old west’ and China may well be central, but there are many other potential themes emerging, including sustainability, state-directed supply chain management, and balancing economic complexity with political simplism. Based on the past, it may be some time before we can fully evaluate how the new will look, and timescales of transformation will differ between economies.

For certain it seems the backlash against globalisation is deeply-rooted. It could be argued that the speed of covid vaccine development was a great triumph of international cooperation, but instead the main lesson taken by governments has been the need for resilience and interference in supply chains, even if there is no reasonable evidence this would have delivered better results. Such are the signs of change, as were noted in the 1970s as free market ideas started to strongly influence debate. Now it is the free market ideal in retreat, the importance of values shown in the power of the consumer to force business decisions over Russia.

EU trade policy had already begun to reflect this backlash, in the US, UK, and China we can also see elements of change. Where once the priority was the negotiation of closer trading partnerships, now it is nativist economics under different guises such as autonomy, Brexit or bringing jobs home, combined particularly in the EU with extra-territorial regulation particularly focused on environmentalism. Existing global institutions and rules have at the same time been downgraded in importance, as yet without a clear sense of their replacement if any.

Yet, despite the backlash, globalisation is not dead. The technology that was its primary driver, the ability for a services company in another part of the world to sell you their app or game, or specific component manufacturers to grow global client bases, has not gone away. The EU’s trade policy agenda will have global impact. It needs review in the light particularly of a new potentially divided world, in which friendships take on a new importance.

Reconsidering Openness and Autonomy in EU Trade Policy

Many in the EU will suggest that its response to the backlash against globalisation, proposed mechanisms like the anti-coercion and international procurement instruments, also start to provide the tools that will be needed to thrive in the now obviously more divided post-Russian-invasion world. The counter argument is that the need to demonstrate values that define our side of a new divide to existing and potentially new allies, a modern liberalism perhaps, will require the defensiveness behind these initiatives to be reconsidered, with market access needing be at the very least available to others on a fair basis. We thus need to debate in the light of events a new balance of openness and autonomy.

The EU starts from a far higher point of openness and global integration compared to the other great trade powers. To that extent, regulatory measures with external effect, such as Carbon Border Adjustment, anti-coercion, deforestation, sustainability, and foreign subsidies are sometimes seen as simply rebalancing.

While showing Europe as the continent with by far the greatest concern for sustainability, such a list however also contains a contradiction. The climate emergency requires international cooperation to tackle, just as sanctions against Russia have required. The need to find balance between partnership and independent measures was already there, if now perhaps enhanced. It is also difficult to encourage deep and wide global alliances while simultaneously wanting to write the rules to your benefit.

There is a reasonable concern that the EU regulatory agenda has protectionist undertones, a convenient way to block market entry to do so while seeming to be on the side of the good. This won’t help build alliances. We need international cooperation on the values and regulatory agendas. The not apparently WTO compliant steel and aluminium deal between the US and EU, on top of US undermining of that global institution are not helpful. Even more after Russia’s actions we do not want to abandon global multilateral institutions which provide a basic foundation.

There are ongoing initiatives among like-minded, such as the US-EU Trade and Technology council and joint positions with Japan on Chinese subsidies which could be seen as a useful start of deeper partnerships. However, these also contain contradictions, as the EU and US increasingly seek to use exactly the same sort of public spending that has been an issue in China.

The events of the last month will inevitably cause further consideration about that relationship with China. Its rise was already a factor in the backlash, even if technology and domestic distribution may have been more important. European business now talks of governmental pressure the likes of which has not been seen before to move production away from China, if not fully reshore.

But focusing entirely on China risks skewing the trade policy agenda too much, away from alliances in general and towards autonomous actions. One of the most notable factors about the various Indo-Pacific strategies pushed by the EU, UK, and US in recent years was how little they seemed to involve actual two-way engagement with the region. That has to change. We need partners.

The EU’s role in defining globalisation

Thinking of the EU’s role in a new stage of global political economy also means reconsidering the existing position. The US has the dollar, military spending that has previously allowed it to be the world’s police officer, a dominant cultural influence, and the leading technology companies, while China has a vast population, high-tech manufacturing at great scale, and a global infrastructure programme. In this broad telling the EU fits in as home to the largest group of wealthy countries and consumers, an attractive destination for the global middle class, and possibly by extension therefore being the world’s leading regulator.

We tend to play down how much that position has been advantageous in also positioning EU companies and consumers to gain from global competition, and therefore the risks from potentially closing markets. It is the EU that as much as China has benefitted whether for vast consumer choice or establishing brands globally. This also provides a strong position to influence the future.

The need to enhance an attractive offer in contrast to autocracies apparently bearing gifts must mean some form of economic openness, a basis for other countries to join. New international partnerships should really go further than the rather tired Free Trade Agreements model towards wider political consensus underpinned by wide ranging cooperation. The Trade and Technology Council thus becomes a model to be broadened with a lot more countries, an open concerted plurilateralism perhaps as New Zealand have long suggested. Old arguments such as those over whose food standards are better or worse should be quietly left, there will always be such differences of opinion, but they shouldn’t be more important than shared commitments.

Increased awareness of global realities, for example the complexities of supply chain decisions and the regulatory state, is also essential in developing better policy responses. We might almost argue that the modern open economy is all about the interplay of government, consumers, businesses and other players. Companies will balance various factors in making their decisions, in a kind of modern corporatism that probably needs more work in definition.

Government action to deliver good jobs and a decent standard of living is already difficult in that complex environment, and will be further challenged by the emerging inflation that is to a degree a function of closed markets. Expanding defence and renewable sectors should have some effect in increasing domestic manufacturing. The Green Deal, the move away from oil and gas in particular given much of its source, now takes on greater urgency.

Clearly there are increased concerns of the global economic impact if China follows Russia’s lead in aggression. Both the western bloc and China are thinking about how decoupling could logistically proceed, while also wanting to remain global. This is in turn leading to the new subsidy race, but for the time being the economies are likely to remain intertwined while gradually building the potential for quick change if required.

The anticipation of a more formalised global divided shouldn’t though be a reason to abandon global rules. There needs to be a way in which markets are open to those playing by broadly-defined rules, and in particular for smaller countries to not be adversely affected by such global power politics. This points to the ongoing importance of the WTO, which needs to be reminded to the US in particular.

Conclusion

Ultimately the economics always points to openness in trade, while the politics has increasingly leaned to protection, in particular in response to the idea China ‘won’ globalisation. The Ukraine crisis strengthens the counter-argument for openness to build broad alliances, of security, democracy, and sustainability. The EU has to trade, that shouldn’t be seen as dependence but influence. We still need the open part of open strategic autonomy, and to be careful that the autonomy part does not lose potential friends.