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Subject: Is the EU’s trade policy fit for the 21st century?
M BRIEFING o
SW/ER/ Chance discussion by Centre for European Reform (DVC)
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Date: 31 March
Origin: DG TRADE
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Place: Brussels
SCENE SETTER
You are one of three panellists discussing whether ‘the EU’s trade policy is fit for the 21st
century’. This is the fourth of a series of lunches that are jointly organised by the Centre for
European Reform (CER) and Clifford Chance, albeit the first ‘virtual’ one due to the latest
development around the Corona pandemic. The CER has published a few recent pieces that may
come up in the discussion, a short summary of which you will find in the background.
The audience will consist of about 50-60 people – mainly business representatives, officials,
diplomats, analysts and a few senior journalists. Each speaker gets about 7 minutes of
introductory remarks, after which
,
, will moderate the
questions and answers. This will be either via instant messaging or with the moderator turning on
questioners’ microphones, depending on numbers. Other participants are
You received a number of guiding questions for which you will find suggested response
elements in the background section of this briefing. In light of recent events, we would however,
suggest to use the introductory round for a few general remarks on the crisis and then draw on
the questions as you see fit (if you were to use the steering questions, it might appear a bit
disconnected from reality).
CHECKLIST OF KEY MESSAGES
Intro
These are extraordinary times. First, let me say I hope you are all safe. This event was
announced quite some time ago, so I have had ample opportunity to reflect on its title. But I
believe that none of the cliffhangers I had considered for the introduction – from ideas of
Yuval Harari’s ‘21 lessons for the 21st century’ to snippets from historian Tony Judt’s
famous book ‘Thinking the 20th century’ – are appropriate following recent events. In light of
this new reality, my replies to the question posed by today’s panel discussion can certainly
not be the same they would have been 3 weeks ago….
[Alternatively: The pop culture fans among you may remember a contagion-style horror
movie called ’28 days later’ released in 2002. Its plot is simple: a man wakes up after a
month-long coma only to find society upended by a ramping virus. The fact that this popped
up in my mind as a potential introduction this morning is surreal enough in itself, I believe…
well, none of us was in a month long coma, but still it is difficult to keep up with the speed of
developments. And my replies to the question posed by today’s panel discussion can
certainly not be the same they would have been 3 weeks ago….]
Covid-19 Crisis
We are facing a global crisis –the biggest of our generation. COVID-19 is affecting all the
sectors of the EU economy. Demand has dropped, supply chains are disrupted, investments
are put on hold, and the banking sector sees a surge in non-performing loans. All Member
States are affected. The duration of the crisis is not yet known.
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Subject: Is the EU’s trade policy fit for the 21st century?
M BRIEFING o
SW/ER/Clifford Chance discussion by Centre for European Reform (DVC)
o
Date: 31 March
Origin: DG TRADE
o
Place: Brussels
This is new territory. You will have seen that many commentators are even talking about a
new historical divide. There is the world B.C. — Before Corona — and the world A.C. —
After Corona. I believe we have not even begun to fully grasp what the A.C. world will look
like.
While we’re still in the midst of it all, I see a few themes emerging in public discussion:
o
Calls for decoupling-deglobalisation: This is not new (US-China rivalry, 5G debate…)
but louder calls now. It starts with critical medical equipment (e.g. export controls
schemes) but same logic would apply to agricultural products or, more generally, to any
goods we consider of some importance.
o
Role of the state in the economy: State-led reactions against the economic crisis.
Massive subsidies will become the norm and states taking control of private companies
(e.g; nationalisation of Alitalia).
o
Risks for international organisations and multilateralism: here again, the crisis
is
simply reinforcing a pre-existing trend. International actors have found it difficult to
respond and national states are perceived as the only legitimate actors. WHO is
perceived as not doing a good job and/or as too influenced by China.
What is
most worrying in all of this is the trend to look inward – as if closing down,
severing ties with others, refusing to cooperate was the panacea to our problems. This looks
to me too much like hysteric and short-term thinking, driven by politics more that economics
or rationale thought.
The Covid-19 crisis clearly has exposed the risks associated with global value chains and of a
globalised and interconnected world. But the response to these problems surely cannot be to
aim for autarky. North Korea is hardly the example we should be getting inspiration from.
On the contrary, we need to focus our thinking on how to
strengthen international
cooperation and to build the trust and mechanisms needed to get out of the crisis together,
rebuild and strengthen our economies and ensure that we avoid similar pitfalls in the future
It was encouraging to see that the G20 leader statement included clear commitments to
international cooperation in tackling this pandemic. (Note: there will be G20 Trade ministers
exchange on Monday and it may need updating)
Situation is complex and there is no black and white. I believe important to
distinguish
between different phases now:
crisis mode, later recovery and long-term strategic
foresight.
Trade policy’s contribution to fighting the crisis
Delicate balance to be struck and we will have to find a role and position ourselves. Trade
policy will play a key role.
1) Preserving free flow of goods: Keeping supply chains open is as important to address
the immediate health threat as for the recovery of the global economy. Exceptionally, the
Commission has introduced a time bound export authorisation scheme on a range of
products (PPE, medicine) to support Member States’ efforts to mitigate the impact of the
crisis. However, emergency measures can and must only be temporary. Supply chains in
today’s world are highly integrated meaning that in the end, restrictions to do not make
any sense.
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Subject: Is the EU’s trade policy fit for the 21st century?
M BRIEFING o
SW/ER/Clifford Chance discussion by Centre for European Reform (DVC)
o
Date: 31 March
Origin: DG TRADE
o
Place: Brussels
o For example, big ventilator producers are located across the USA, EU and Asia, and
depend on globally interconnected supply chains, where a disruption in one part of the
chain will cause ripple effects.
o COVID testing kits have many different components (laboratory reagent,
immunological pads, testing instruments), which EU countries import from many
different places (e.g. China, Korea, US, Switzerland). 5 MS import in more than EUR 1
Bn – another 10 import in value over EUR 100Mn. If those sources dry up in response
to closing our borders in other areas, we all lose out.
No country can secure supply on its own. This calls for more international cooperation
and coordination, and a conscious effort to avoid protectionist policies, which would
entail significant economic costs and increase the risks of economic and societal fallouts.
2) Bringing economy back on track: As several IMF economists have said, the virus
has created a ‘wicked cocktail’ for world growth1. As seen in the financial crisis 2009,
trade will be an important driver for recovery. Ensuring open, rules-based trade, that
provides a stable and predictable framework for business, will be extremely important.
o We have seen the economic costs of uncertainty and rising protectionism/barriers
already before the Corona-virus crisis. We need to ensure that such costs do not
exacerbate the economic crisis; but rather ensure that open trade will help EU business
to recover.
3) Longer-term thinking: Ensuring strategic autonomy in a globalised world: The crisis
has underlined the need for the EU’s strategic autonomy and the build-up of resilient
value chains through diversification and rules-based, open trade. Both need to go hand in
hand.
Is our trade policy fit for the 21st century?
The fundamental directions of our trade policy remain in place.
In order to get out of the crisis and lay the ground for economic recovery, trade policy will
continue to focus on what it does best:
creating jobs and growth. This will continue to
entail:
o Building
stability - supporting the multilateral trading system and the predictability it
provides.
o Developing our trade
relationships with our partners (US and China being a clear
focus), but also continuing to diversify our trade relations.
o Ensuring
fairness in trade (LPF and enforcement).
o Contributing to addressing
global challenges, including issues linked to climate change
and sustainability, which will not become less urgent due to the Covid-19 crisis.
1
https://www.ft.com/content/be732afe-6526-11ea-a6cd-df28cc3c6a68 And Harvard professor Kenneth Rogoff
added ‘A global recession seems baked in a cake at this point with odds over 90 per cent’.
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Subject: Is the EU’s trade policy fit for the 21st century?
M BRIEFING o
SW/ER/Clifford Chance discussion by Centre for European Reform (DVC)
o
Date: 31 March
Origin: DG TRADE
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Place: Brussels
The COVID-19 crisis will of course mean that certain adaptations will be pursued (e.g. strict
monitoring to ensure that some 3rd countries do not exploit the economic crisis through unfair
practices). But the fundamentals remain.
Conclusion
We do not know when the Covid-19 pandemic will end; we do not know how it will end;
and, at present, we can only speculate about its long-term political and economic impact.
EU will have to adjust to this new reality, reflect on what it all means and how to best
navigate through it. How can we use our priorities?
Amid the many unknowns I believe one thing is clear though: the virus knows no borders:
both the pandemic and the ensuing economic crisis are global problems. They can be
addressed effectively only through global cooperation.
DEFENSIVES
How should the EU respond to China’s aim to shape globalisation for its own ends? Is there
much that it can do using existing multilateral tools to curb distortionary practices?
The EU is committed to engaging with China to uphold the rules-based international order.
However, we cannot ignore that China's engagement in favour of multilateralism is
sometimes selective and based on a different understanding of the rules-based international
order.
It is therefore essential that China – which often repeats its desire to shape global governance
in order to give emerging economies greater participation and decision-making power -
accepts new rules reflecting the responsibility and accountability that come with its increased
role. Selectively upholding some norms at the expense of others weakens the sustainability of
the rules-based international order.
As to addressing distortionary practices, the EU’s preferred option is to address this through
the negotiation of multilateral rules. However, when this is not possible, we have to
strengthen our own toolbox to be able to respond to such distortionary practices.
On a different note: Role of China during crisis: attempt to turn health crisis into geopolitical
opportunity. China has started reframing its role from that of the country that accelerated the
virus’s spread through cover-ups, to that of the magnanimous global power offering
leadership at a time of panic and peril in much of the rest of the world (offering support and
sending much-needed equipment such as ventilators to various countries, including in EU
neighbourhood e.g. Serbia, Morocco).
What do you make of France, Germany, Italy and Poland’s proposals to weaken merger
control in order to facilitate the growth of European champions? (ECR views here – see also
background). Note: while we generally agree with the arguments, we thought some important perspectives
were missing (see last para).
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Subject: Is the EU’s trade policy fit for the 21st century?
M BRIEFING o
SW/ER/Clifford Chance discussion by Centre for European Reform (DVC)
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Date: 31 March
Origin: DG TRADE
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Place: Brussels
The author examines the recent French, German, Italian and Polish joint request that EU
competition rules should be reviewed, in particular to “introduce more justified and
reasonable flexibility” to its decisions about mergers between European companies, to “take
better account of third countries’ state intervention”. In his view, developing European
champions is not the right approach to deal with Chinese competition.
First, China’s rapid economic rise says little about the degree of competition that EU
manufacturers are actually facing. There is a growing consensus that China distorts
competition globally through its various policies that shelter domestic companies from
competition as well as providing cheap capital to Chinese companies in strategic sectors in
order for them to move up the value chain. These strategies are well-known developing
country strategies.
A more detailed analysis shows that, overall, China has actually been making slow progress
in moving up the value chain. While both China’s electronics and industrial machinery sector
grew rapidly between 2005-2015, China has yet to build a large exporting base in aircraft,
trains, chemicals, pharmaceuticals and cars, which make up 45 percent of the EU’s exports.
In addition, the share of high-technology goods (aside from electronics) in its total exports
only grew by about 1 percentage point in that decade.
Furthermore, the author argues that China has found it easier to penetrate high-technology
markets outside the EU and that its exporters have performed better in sectors in which the
EU is weaker: electronics, electrical equipment and textiles. They have struggled to dislodge
their European competitors in the areas Europe is strong, such as cars, planes, rail and
pharmaceuticals. In addition, the speed of Chinese entry into higher-technology EU markets
was no faster than into lower-technology ones
Second, creating European champions in high-technology sectors would probably distort
competition within Europe. European companies with more domestic market power would
raise prices and lower innovation. Building European champions also carries with it
considerable risks for European consumers.
Trade policies are preferable to relaxing domestic competition policy in addressing trade
distortions. However, it will be very difficult for the EU to change China’s behaviour. In the
face of this, there are four areas that the EU should explore as the basis of a strategy:
o First, raise investment in R&D.
o Second, offer alternatives to closer ties with China, including by providing more EU
capital for strategic infrastructure, such as ports and railways, to seek to outbid
Chinese investment, while maintaining strong oversight to prevent corruption.
o Third, use new investment screening rules effectively.
o Fourth, if the EU is serious about tackling Chinese subsidies and safeguarding the
WTO, it could propose that China opens its domestic market and reduces subsidised
lending and discriminatory regulation in return for the US and EU curbing subsidies
to farmers and aircraft manufacturers (though the author acknowledges that politics of
such a deal would be very difficult).
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Subject: Is the EU’s trade policy fit for the 21st century?
M BRIEFING o
SW/ER/Clifford Chance discussion by Centre for European Reform (DVC)
o
Date: 31 March
Origin: DG TRADE
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Place: Brussels
Our assessment: The article raises some interesting perspectives in relation to the best way of
addressing Chinese trade distortions and unfair competition. However, there are certain
elements that are lacking from the analysis, which would have been useful to gain a more
comprehensive picture. First of all, nothing is mentioned in relation to the competition EU
companies face on third country markets. Furthermore, as regards the composition of
Chinese exports, the author has exposed himself to a risk in focusing largely on the period
2005-2015. There have certainly been significant developments in the last four years, and
had 2009-2019 been used, a different picture may have emerged. Finally, the analysis
completely ignores China’s extensive efforts to move up the value chain – for example, the
Made in China 2025 strategy was only introduced in 2015, something this analysis does not
take into account at all.
Does it matter that Europe’s tech sector is behind that of the US and (in some areas) China,
and is there anything that the EU should do to try to catch up? Or should it seek to regulate to
ensure that US companies serve European interests?
Issue of competiveness of European tech goes well beyond trade policy (mostly industrial
policy and internal market related)
But EU trade policy does contribute to ensuring the competitiveness of European companies
via:
o Opening markets
o Fight against non tariff barriers (data localisation requirements, obligations to give source
codes…)
o Preserving a level playing field (notably via actions against subsidies that have an
harmful effect in the single market…)
BACKGROUND
Recent ECR publications:
John Springford: Should the EU develop ‘European Champions’ to fend off Chinese
competition? (5 March 2020) https://www.cer.eu/insights/should-eu-develop-european-
champions-fend-chinese-competition
This is the article referred to in one of your questions
Main arguments:
o China is distorting world trade through its aggressive industrial policy. But
fostering ‘European champions’ in order to compete is premature – and risky
(notably for European consumers)
o China is some way from becoming a significant player in European markets for
high-technology goods. And any industrial strategy that simply transfers power
from Chinese companies to European ones is unlikely, ultimately, to raise the
EU’s competitiveness, as incentives to innovate will be weaker if the EU relaxes
its merger regime.
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Subject: Is the EU’s trade policy fit for the 21st century?
M BRIEFING o
SW/ER/Clifford Chance discussion by Centre for European Reform (DVC)
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Date: 31 March
Origin: DG TRADE
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Place: Brussels
o The EU would do better to tackle distorting Chinese policies using trade and
investment defences, however slow and frustrating that may be – while directing
aid to early-stage ventures that may turn into the world-beating products in the
future.
Christian Odendahl and John Springfield (10 March 2020) https://www.cer.eu/insights/bold-
policies-needed-counter-coronavirus-recession
Main arguments:
o Even before COVID-19 reached Europe, its economy was struggling.
o Now that the outbreak has become an epidemic, a recession in the first half of
2020 is all but certain. This makes early and aggressive action to stimulate the
economy – and to manage expectations about future stimulus – imperative.
o Stimulus policies should ideally be co-ordinated across Europe, the US and Asia,
to signal to firms and markets that the world is determined to minimise the fallout
of the epidemic.
o Since the virus is so contagious, the rate of infection is likely to peak within three
to four months, before falling back, which means that governments have more
certainty than usual about the future path of an economy.
o If they fail to act, they risk a wave of bankruptcies and rising unemployment.
They must be bold.
Agata Gostynska-Jakubowska and Luigi Scazzieri: The EU needs to step up its response to
the Covid-19 outbreak (23 March 2020) https://www.cer.eu/insights/eu-needs-step-its-
response-covid-19-outbreak
Main arguments:
o The EU has taken important steps to counter the coronavirus outbreak after
initially responding slowly and in a haphazard manner. But the EU needs to do
more if it wants to avoid boosting eurosceptic sentiment.
o The way in which the Union responds to the coronavirus will shape the
eurozone’s future, and exert a profound influence on how citizens perceive the
Union.
o If the EU fails to rise to the challenge, it will be weakened and lose legitimacy in
the eyes of EU citizens.
o Conversely, if the EU acts robustly and resolutely, co-ordinating member states’
actions and adding value to their efforts to counter the outbreak, it has a chance to
emerge from the crisis stronger, and with its image greatly enhanced.
Contact person:
26/03/2020
Art. 4.1 (b)
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