Free Trade in Retreat in Europe due to Environmental and Labour Standards

The EU free trade baton, carried by the UK until Brexit, has been relayed to the Stockholm Six of like-minded liberal countries pushing back against French and Italian pressure for Europe to get tougher on trade defence, and relax on subsidies.

Germany was invited to join the informal group but has demonstrated a slightly worrying lack of excitement as it gravitates away from its liberal instincts towards the more interventionist approach preferred by France, Italy, and several others.

The strengthening of the Paris-Berlin axis in the wake of the economic slump, and the willingness of Chancellor Angela Merkel to leverage her country’s financial might to help troubled member states weather the Corona pandemic has shifted the EU’s trade priorities. Previously unfashionable ideas and concepts have gained currency: industrial policy is back, as are protectionism and state support for corporates deemed of strategic importance. In France, economists are no longer reluctant to call for a “Buy European Act”, and point to the US, where domestic suppliers have long enjoyed a significant edge thanks to discriminatory legislation such as the Buy American Act of 1933 which, though watered down since, remains in force.

Paying the Price

In a note distributed earlier this year, the Conceil d’Analyse Économique (Council of Economic Analysis) argued that environmental concerns justify raising duties on, for example, EU car imports. However, the note admits that tariffs will probably not encourage the reshoring of automotive production. The council’s economists also warn that consumers may end up paying a hefty price for their insistence on stricter carbon emission and labour standards. According to the council, the best opportunity comes from a post-corona reappraisal of supply line cost and resilience, leading carmakers to lessen their dependence on distant suppliers.

Currently working on a trade policy review, the European Commission adopted the concept of open strategic autonomy to channel and contain the pressure exercised by governments responding to changing domestic attitudes and heightened concerns about climate change, national security, social inequality, and — of course — post-Covid recovery. However, the commission has so far failed to delineate the novel concept which is, essentially, a rhetorical vehicle.

The policy review, the first since 2015, is a cautious attempt to move away from blind adherence to free trade. Pundits have been quick to point out that the principle, as such, has never truly existed. Even the Comprehensive and Economic Trade Agreement (CETA) between the EU and Canada — almost universally hailed as a touchstone — runs for 2,255 pages. The hastily negotiated EU-UK trade deal — curiously enough the first in history to introduce obstacles instead of removing them — needed 1,246 pages to cover its meagre objectives.

Free trade as a shifting ideal is no longer progressing towards liberalisation. Systemic disparities are, in part, driving that trend. China’s state-sponsored capitalism — a rather unique form of dirigisme — has managed to muddy the waters and reignited the call for a return of industrial policy where states or, in the case of the EU, a supranational entity set out clear objectives and provide the legal and fiscal framework to ensure their implementation. The creation of European champions to nibble at the hegemony of US big tech is a priority for a growing number of European leaders who should, perhaps, know better than to expect miracles — or ground-breaking innovations — from corporates feeding at the state’s trough.

Minor Champions

Europe’s few homegrown minor champions — Booking.com, Skype, Spotify, and SAP — did not grow out of policy initiatives. Some of the more promising and successful ones were quickly snapped up by US companies. Skype, created in Estonia, was acquired by Microsoft in 2011 for $8.5bn. Booking.com, originally Dutch, went to Priceline for $133m in 2005 and is now worth an estimated $75bn. Only Germany´s SAP and Sweden’s Spotify have managed to reach the trailing end of the major tech league under their own power. Wirecard, the great hope of the European fintech sector, went bust when its creative book-keeping practices were uncovered by The Financial Times.

After the UK left the EU, Sweden seems to have taken the lead in protecting the autonomy of consumers in the face of slowly rising protectionism. The Stockholm Six are, however, not the fierce and buccaneering free traders they appear to be. Germany is but a pro forma member of the group while the Netherlands, duly invited to partake, appears to be having second thoughts as well.

Last year, the Dutch and French trade ministries jointly published a “non-paper” — EU jargon for a thought exercise — calling for tougher enforcement of environmental and labour standards. It also proposes the introduction of a Carbon Border Adjustment Mechanism — a rather clumsy euphemism for an added tariff burden and one unlikely to fool anyone. The mechanism would hit hardest those countries that fail to contain their carbon footprint.

The note bluntly suggested the deployment of trade policy as an instrument to provide additional leverage to the imposition of strict standards. Usually at loggerheads over trade, Paris and The Hague have staged a remarkable rapprochement after Dutch Prime Minister Mark Rutte came under heavy criticism at home for his eagerness to secure parliamentary approval of the EU-Canada trade deal, which only narrowly passed the Lower House and may yet be blocked by the Senate.

The EU-Mercosur trade deal that the commission successfully negotiated in 2019 is also facing opposition. Environmental groups are particularly incensed at the alarming increase in Brazil’s rate of deforestation and the country’s alleged mistreatment of its native inhabitants.

Even Stockholm Six initiator Sweden is not so sure that free trade is the end-all, cure-all it was once held to be. Here too, growing environmental concerns and distorted competition from low wage and low regulation countries have spurred a national debate on the merits and demerits of open borders. The ambitious climate goals of the EU and its individual member states seem to clash with frictionless trade.

So far, the European Commission has not managed to incorporate its lofty standards in any major trade deal. Its trade policy review still dwells at the wishful thinking stage. There are many practicalities to consider before the 2016 Paris Agreement on Climate Change can be elevated to a set of legally binding obligations in any future trade deal. Though 190 of the 197 parties to the deal have ratified the agreement, its incorporation as an added dimension to free trade deals runs into trouble over the extraterritorial imposition of EU law. Not all signatories of the Paris Agreement display the same level of dedication to its full implementation.

Although the reasoning on free trade has changed from economic benefits to environmental concerns, the current debate is not that new: free traders and protectionists have always clashed, albeit with a certain civility. Both the tone and intensity of the debate on trade have changed. The pandemic and its economic fallout have reopened public discussion on questions that, until about a year ago, appeared settled.

The fact is that free trade is in retreat; reshoring has become a buzz word, and industrial policy is experiencing a second coming of sorts — no longer the preserve of nostalgic economists dwelling on the fringe, but a possible centrepiece in the post-corona rebuilding of shattered and indebted economies.