A Trumpian Turn in EU Trade Politics and the Silence of Germany
Kiel Institute for the World Economy
Gabriel Felbermayr became President of the Kiel Institute for the World Economy in March 2019. He concurrently holds a chair in Economics and Economic Policy at Kiel University. He has been a consultant with McKinsey & Co., an Assistant Professor at the University of Tübingen, and held a chair in International Economics at the University of Hohenheim (Stuttgart). From 2010 to 2019, he led the ifo Center for International Economics at the University of Munich, where he also served as a full professor in International Economics. He is a member of the Scientific Advisory Board of the German Federal Ministry of Economics and Energy, and Associate Editor of the European Economic Review and the Journal of the European Economic Association. His research and advisory activities focus on questions of economic global governance, European economic integration, and German economic policy. He has studied at the University of Linz, the University of Tuebingen, and received his Ph.D. from the European University Institute in Florence.
On December 5, 2017, the European institutions—Commission, Council, and Parliament—reached political agreement on reforming the EU’s trade defense instruments. This “modernization” of anti-dumping legislation is, in fact, an attempt to provide the EU with stronger tools to tackle the allegedly “unfair” practices of its trade partners. On its website, the Commission advertises that the deal will enable the EU to impose higher duties on dumped products.
During the more than three-year-long legislative process, Germany’s voice did not resound in the debate. The relative silence of the continent’s largest exporter is surprising, as the new rules are against its broader national interest. That Germany did not speak up is even more surprising given its very critical reaction to announcements by the U.S. president to “aggressively” use trade defense measures to protect the U.S.’ national interests. Does Germany’s position signal a new and worrying stance toward free trade?
According to WTO rules, an exporting firm dumps a certain product if it charges an export price that lies below the “normal” or “fair” value (whatever that is). If this behavior hurts the business interests of a firm in the importing country and causality can be established, a duty calculated as the difference between the “normal” price and the export price can be applied. The EU is a frequent user of such anti-dumping duties, in particular in the area of steel and chemicals.
Examined in more detail, anti-dumping duties are badly disguised forms of protectionism. Difficult questions abound: What is the “normal” or “fair” value of a product? Are low costs indicative of high productivity or hidden subsidies? Is it not part of the normal business course to set different prices on markets according to local market conditions? And how can one be sure that the instrument is not hijacked by certain corporations at the expense of consumers who ultimately always have to foot the bill?
The European reform is strongly related to China—another parallel line to Donald Trump. Fifteen years after China’s entry into the WTO, its accession protocol foresees that all members have to treat the country as a market economy. Clearly, today the Chinese economy is still heavily controlled by the government, perhaps more so than in 2001. But this is not the argument here: market economy status makes an important difference in anti-dumping procedures. Its denial allows referring to so-called analogue countries, such as Brazil or India, to determine the “normal” value of a good. As those countries tend to have higher costs than China, the procedure results in higher anti-dumping duties, as when Chinese domestic prices are used.
The reform makes the EU’s toolbox more similar to the U.S.’ It partly does away with the so-called “lesser duty rule,” which substantially constrains duties and enforces stronger regard to the overall welfare of EU citizens. It generalizes the analogue country method to countries hitherto classified as market economies. And it allows social, environmental, and labor regulations to creep into the definition of “normal value.” In short, it gives the EU instruments that are by no means less arbitrary than what Chad Bown from the Peterson Institute calls the stealth protectionist strategy of the U.S. president.
China claims that the new approach is not compatible with WTO law. Therefore, it has launched a legal dispute against the EU. The U.S., in turn, supports the EU at the WTO. At the same time (and not without irony), the EU finds these measures highly problematic when applied to itself by the U.S. The recent WTO ministerial meeting in Buenos Aires has shown that, these days, the transatlantic partners are not able to cooperate toward removing even minor barriers to trade. Yet, they get along quite well when the aim is to upgrade protection against Chinese imports.
Recent evidence presented by the German Council of Economic Experts shows that Germany has benefitted from increased exposure to China. This is also the case for the Netherlands, Austria, and Scandinavia, but not for most Southern European countries, including France, where most of the industries have been hit by surging Chinese imports. In contrast to these countries, prima facie, Germany has no interest at all to raise barriers against China. However, only Scandinavian countries have opposed the new legislation.
There are three possible interpretations for the German government’s restraint, all of which have merit: One is that Germany is slowly but steadily shifting away from its traditional emphasis on open markets toward a more protectionist attitude. After all, it was German public opinion that has brought down the transatlantic trade pact TTIP. According to a second interpretation, in the past, Germany was overly naive regarding the dangers of a newly assertive China. Now, led by a more realistic Trumpian assessment, it now understands the virtues of a “robust” defense against unfair imports. The third and maybe most optimistic interpretation posits that Germany has kept a low profile given the majorities in the EU institutions, repressed its ordo-liberal instincts, and has avoided a political defeat by doing so.