As the US and EU make their first noises about a new bilateral partnership, Finbarr Bermingham reports on the myth of free trade and how we’re further away from it than we have been for decades.
As the US and EU make the first noises about a new bilateral trading partnership, Finbarr Bermingham reports on the myth of free trade and how we’re further away from it than we have been for decades.
Kofi Annan once famously compared taking a stance against globalisation with “arguing against the laws of gravity”. The manner in which the financial crisis ripped like wildfire through one country then the next makes it hard to disagree with the Ghanaian diplomat. The world and its economies are now more connected than they’ve ever been before, but five years on from 2008, globalisation has evolved in a different manner than many expected.
The concept was for years anchored to the notion of free trade – in part borne out by the success of the European Union and North American Free Trade Agreement (NAFTA), which next year celebrates its 20th anniversary. But as we’ve witnessed the scattering of China’s state-sponsored capitalism across Africa and Latin America and the rise of nationalistic, protectionist rhetoric in the west, it’s clear that the two concepts are far from inseparable.
Rows over and accusations of protectionism have always been commonplace, but the frequency and vitriol of the past 12 months’ exchanges has been alarming. “Back in 2008 when I worked at the World Trade Organisation (WTO) we didn’t have so much of a surge in protectionism,” Aline Doussin, a French lawyer at DLA Piper tells GTR. This year, says Doussin, it looks like it’s all kicking off.
Last October, a US congressional report which recommended the removal of two Chinese telecoms providers from the US on the grounds that they presented a “potential security threat” was accused of laying bare “a Cold War mentality as well as protectionism among politicians at Capitol Hill” by Chinese state media. In May, Indian IT firms accused the US government of adopting protectionist measures when a new immigration bill sought to limit the number of skilled, foreign workers they could bring to the US.
But neither flashpoint has raised as many eyebrows as the ongoing solar panels and wine trade war engulfing the EU and China. In June, the EU imposed anti-dumping levies on Chinese solar panels, saying that they were priced below the market rate, undercutting European manufacturers in the process. China is the world’s biggest producer of solar panels. In 2011, it exported €21bn’s worth to the EU, hitting European manufacturers, most notably in Germany. Unsurprisingly, China reacted furiously and imposed a levy on the import of wine from the EU. France accounts for half of all China’s wine imports from Europe and labelled China’s actions “inappropriate and reprehensible”.
The impasse highlights the fickle nature of “free trade” in the post-2008 environment. “Inevitably when you see economic slowdown you start to see rising protectionism,” says Rain Newton-Smith, head of emerging markets at Oxford Economics. “Certain industries are more impacted by protectionism than others. But when people say it is China’s fault, they’re looking for a scapegoat. In some ways you could flip it around and ask if the current issues have come to light because certain countries in the eurozone are more concerned about some of their industries than they would be if the economic situation was different.”
China’s state-owned companies have, for a long time, had access to cheap capital and been given the means with which to produce low-cost, high-quality goods for export. Some industries receive subsidies but, as Newton-Smith tells GTR, “they’re not a patch on the [EU’s] Common Agricultural Policy (CAP). China can come in for undue criticism – it’s certainly not the only country that subsidises”.
Is free trade dead?
Despite the bickering, there are still efforts ongoing to forge free trade agreements (FTAs), each with varying degrees of freedom. In April, China inked its first FTA with a European nation when it signed on with Iceland. While the agreement may see Iceland sell more fish to its goliathan partner, sceptics suggested China was cozying up with a view to gaining more access to the spoils of the Arctic. Much more notably, the EU and the US announced at the G-8 summit in June that they were to sit down and thrash out terms of a transatlantic FTA that would have the potential to be the world’s biggest.
Import tariffs between the pair, however, are already low – prompting numerous economists to tell GTR that the projected agreement may be more difficult to ink than people think. “The bigger bilateral deals become more difficult to do because the easy things have already been agreed,” says Andrew Kenningham, senior international economist at Capital Economics. “The early agreements are always on tariffs. You can quite easily trade-off one country’s tariff against another. But once they start getting into the non-tariff barriers it’s harder and the tariffs between the US and the EU are already very low.”
In order to derive maximum value from the FTA, the pair would have to address their non-tariff barriers, which will be tricky. The EU is a much more heterogeneous union than the US. “The main difficulty will be to try to represent and address 28 interests against just one US interest which is highly organised and with a huge culture of lobbying, which is a bit less the case in the EU,” says Doussin of DLA Piper.
For instance, convincing 28 states to chisel away at the aforementioned CAP – EU subsidies to “ensure a fair standard of living for farmers” – may prove impossible. Stumbling blocks on the American side may stem from a law that disqualifies non-Americans from buying US airlines, and the huge barriers for overseas firms hoping to enter the insurance market.
Before the two parties had even sat down for discussions, you could hear the squeal of the slamming of brakes. France demanded that its film industry, of which it is fiercely protective, be exempt. After the leaks detailing the US government’s surveillance operations at home and abroad, ministers across Europe demanded explanations, saying that if confirmed, the espionage could be damaging to any FTA discussions.
With EU elections coming next year too, it’s likely that the nationalistic rhetoric will be stepped up a notch. “The protectionist debate will resurface ahead of the European parliament elections,” says Doussin. “We’re pretty sure by looking at the unemployment rate, austerity measures and people across the board being fairly unhappy that there’ll be a surge of populist parties being represented at the European parliament.”
Striking a balance
There are no 100% FTAs in existence. The EU and NAFTA are probably as close as you’ll get, but both France and Canada have protectionist policies safeguarding their cultural sectors, while Mexico is currently embroiled in a spat over the export of tomatoes to the US. When the EU and South Korea negotiated an agreement in 2011, its wording was interesting: “The agreement eliminates tariffs for industrial and agricultural goods in a progressive, step-by-step approach. Only a limited number of agricultural products are excluded from tariff elimination.”
Even in the best of times, FTAs are always more likely to be piecemeal, rather than wholesale. The EU Korean alliance is realistic and balanced, with plenty of points of compromise and trade-offs. When the US and EU announced that they would enter discussions over an FTA, it was greeted with widespread scepticism. The trade relationship is already mature and to take it further would require the pair to be willing and largely at the same stages of economic recovery. As it stands, the US is recovering nicely while the EU continues to flounder. It’s likely that in order to reach an agreement, the EU would have to compromise most, since the US holds a stronger set of cards.
“It’s always a compromise,” says Doussin. “Trade is always a reflection of the world: if everything’s going well, people always want to trade, because that’s where the money comes from. It’s easy to reach agreements and remove barriers when the money’s already coming in. When the house is in a much more difficult financial state, then it’s tougher: everybody’s trying to protect its industry and jobs.” Leaders on both sides, then, may be better advised to get their own shops in order, before persisting with discussions which are unlikely to go anywhere useful, anytime soon.