Europe’s Chance
OpinionOpinion by ZEW President Achim Wambach
The United States and China are pursuing national strategies. The EU should provide an alternative, argues ZEW President Achim Wambach in a guest article for the Frankfurter Allgemeine Zeitung.
With the slogan “America First”, Donald Trump set the stage for diplomatic friction with partner countries and other nations. Admittedly, previous presidents also kept American interests in view, but Trump has focused increasingly on short-term, supposed successes while neglecting long-term consequences.
His erratic foreign policy is a daily reminder of this: NATO partners can no longer be certain of US support in the event of a crisis. Ukraine, too, is reminded daily of the limits of American assistance. Both developments strengthen Russia and undermine the long-term interests of Western nations, including those of the United States itself.
Another example is Trump’s tariff policy. From an economic perspective, countries with market power can indeed achieve short-term gains through tariffs. The Americans’ unilaterally optimal tariffs against Europe are therefore not zero but positive, and the same applies in reverse. Yet it remains true that both sides benefit more if they agree not to impose any tariffs. Cooperation beats self-interest. The tariff deal currently under discussion – 15 per cent on imports into the United States and zero per cent on imports into Europe – illustrates what are the consequences of pursuing one-sided policies: Studies estimate that economic output in the EU will fall by 0.1 percentage points, while that of the United States could decline by as much as 0.5 percentage points overall. However, the political agreement does not create reliability: The joint declaration is not legally binding and Trump could raise tariffs again at any time. Meanwhile, the pressure on the EU continues unabated. Trump has now turned his attention to countries imposing digital taxes on the revenues of Google, Meta and other big tech companies. He is even considering sanctions against EU officials responsible for implementing the Digital Services Act.
Uncertainty dampens investment
Especially the uncertainty generated by this kind of policy acts as a brake on investment. It is hardly surprising, therefore, that German firms are deferring 30 per cent of their investments in the United States and planning to cancel 15 per cent altogether. Studies also show that rising economic policy uncertainty leads to significant declines in investment. The Economic Policy Uncertainty Index, which is based on evaluations of economic policy reporting in daily newspapers, corroborates this effect. A recent analysis by the European Commission for the euro area shows that a sudden rise in uncertainty caused by an external shock can reduce investment growth by up to 1.2 percentage points within a year.
It is no coincidence that the ordoliberal economist Walter Eucken, the father of the Social Market Economy, named the “constancy of economic policy” as one of the seven constitutive principles of good economic policy. This principle is increasingly being lost.
China, too, is acting ever more short-sightedly: Beijing has imposed a customs block on Lithuanian exports because the country plans to open a Taiwanese representative office. Australia, after pushing for an international investigation into the origins of the Covid19-pandemic, saw its trade with China collapse, with lasting damage to trust in the stability of economic relations. The result is that companies take into account the risk of arbitrary short-term trade barriers imposed by China when deciding on investments.
Alternatives for Europe
Germany and Europe must adapt to these new geopolitical realities: long-term cooperation where possible, damage mitigation instead of cooperation where necessary. A look at the trade statistics shows: The USA and China each account for around nine per cent of German foreign trade. So it is worth thinking about the other 82 per cent. With 53 per cent going to the EU, there is a lot of untapped potential. According to a recent study by the International Monetary Fund, the regulatory barriers within the EU correspond to a tariff rate of up to 44 per cent for goods and 110 per cent for services.
The EU Commission refers to these barriers as the “terrible ten” – the ten most harmful obstacles to the single market that companies experience on a daily basis. Anyone who has ever tried to send skilled workers to other EU countries or take part in EU-wide tenders knows all too well what these barriers are like. The expansion of the single market, which requires cooperation and a give and take between European countries, brings enormous opportunities for the prosperity of the countries involved.
In turn, the majority of EU exports do not go to China or the USA, but to other regions of the world. Here is potential too. Trump's arbitrary tariffs have highlighted how advantageous rules-based trade can be. Europe's supposed weakness – the diversity of voices from the different countries and the relative powerlessness of the Commission President compared to the presidents of China and the USA – is in fact a strength that Europe can use in international cooperation with countries and regions that are willing to cooperate.
South American countries or India need to worry much less about short-term political interventions in their trade relations with Europe than in their trade relationships with China and, of late, the USA. The EU should capitalise on this strength, for example by concluding trade agreements with India, Australia, Indonesia or Singapore and by ratifying the EU-Mercosur agreement.
Europe must be more aware of what its own interests are in order to hold its own against the USA and China. There is little point in continuing to play cooperatively if the other players switch to selfish mode. Europe's economic area is attractive, and it is of sufficient size to influence global trade. Unilaterally insisting on compliance with the rules while others are already using their economic power is not a strategy, but misplaced restraint.
Election challenge lies ahead for Trump
In the present situation, companies are taking a wait-and-see approach. The current tariff package is probably not the last word in the trade dispute. No credible economist in the USA supports Trump's tariff policy. And the US President takes his environment into account: The abrupt rise in interest rates on the financial markets following his announcement of the high tariffs on the so-called “Liberation Day” in April forced him to suspend the tariffs again the next day. Companies that have a direct line to the White House, Apple for instance, were able to obtain temporary tariff exemptions for smartphones, computers and chips. But the consumers, who suffer most from the tariffs, will not be able to make their voices heard until the 2026 mid-term elections to Congress. Trump and his team are aware of this and they will try to avoid a year of sluggish growth and possibly rising inflation.
In relations with China, much more is at stake than just customs issues. Competition with a state-controlled economic area requires specific rules and structures. The EU’s new Foreign Subsidies Regulation, which targets foreign financial contributions to companies operating in Europe, was an important step in this regard. Companies receiving subsidies from China must disclose their financial aid, for example if they want to buy European companies or participate in public tenders. The EU can then deny them access to the European market.
However, in the long term, Europe's most important goal must be strategic independence and this should also guide the EU's negotiations and further steps. Strengthening the single market and expanding the group of trading partners would be important elements of such a strategy. Allowing imports from China to increase further, as is currently being observed, does not contribute to achieving this goal.
This guest article was first published in the Frankfurter Allgemeine Zeitung.
