Max Bardong
Edited by Ansh Barot
Trade is vital for the EU economy, not only between its member states but also with other countries. In 2023, the ratio of the value of internationally traded goods and services relative to the EU’s GDP amounted to 22.4% (1). International demand for European products is particularly important for its economy, which is not characterised by as strong domestic demand as, for example, the US economy is.
Outside of the EU’s member states, China and the US are its most important trading partners, particularly with regard to importing EU products: Outside of the euro-zone, these two countries make up the largest share in imports of EU goods: In 2023, the US imported 15.1% while China imported 11.4% of total EU exports (2). The US and China therefore contribute considerably to the EU’s economic strength. However, this also means that the EU is largely exposed to changing trade patterns that might affect the volume of its trade with the US and China. This highlights the EU’s vulnerability to the currently growing geopolitical tensions between these two countries.
The risk of economic distress due to increasing trade barriers by China and the US is progressively materialising day by day. Since 2017, heightening US protectionism can be observed. The most prominent examples of that were the so-called universal “Trump tariffs” on aluminium (10%) and steel (25%). These tariffs were also imposed on the EU in 2018 (3) and only were partially lifted in late 2021 under the following Biden administration. Nonetheless, Biden also made significant use of protectionist measures, illustrated best by his "Build America, Buy American Act” (4) and his “Inflation Reduction Act” (5). Considering the broad support that protectionist instruments enjoy by both Democrats and Republicans, one can even talk of a (rare!) bipartisan agreement when referring to protectionism.
The re-election of Donald Trump in 2024 has strengthened USA’s protectionist impetus further. Trump prefers a more unilateral and transactional approach to trade negotiations, has started to block the appointments of the WTO’s appellate body judges, and has openly thought about leaving the WTO altogether during his first term. All of these ideas might materialise in his upcoming tenure. Trump also proposed a 60% tariff on all Chinese imports and a universal 10% tariff, including on EU goods, and announced on October 29, 2024, that Europe is “going to have to pay a big price“ (6) for not buying enough American goods. The EU has already announced retaliatory tariffs in case of additional US tariffs on EU goods (7).
Tariffs, however, increase the prices of imported goods and make domestic production more expensive. This leads to an increase in domestic inflation and a decrease in output, with spillover effects to other countries, resulting in higher unemployment and decreasing living standards. The Kiel Institute for the World Economy has estimated the effect of such tariffs to lead to a contraction of 4% in global GDP in the long run (8). Moreover, it has been estimated that if US trade policies lead to a further dismantling of the WTO, the EU’s real GDP will fall by more than 0.5% (8). This is a considerable amount, given that it stood at more than 17 trillion Euros (at current prices) in 2023 (9).
China's demand for European products cannot be expected to persist either. This is because China is increasingly attempting to increase self-reliance and dependence on imports, particularly in industry. In recent years, the People’s Republic has vastly expanded its production capacities, especially in the high-tech and automotive sectors (10), partially accommodated by vast subsidies. As a result, the demand for European products in these sectors, particularly for cars and Electric Vehicles (EVs) has decreased, which became evident in the recent difficulties of the German carmaker Volkswagen. In response, the European Commission implemented anti-subsidy tariffs on Chinese EVs in November 2024 (11). The Chinese and US-American trade policy changes in the last years have therefore highlighted that the EU’s two most important trading partners cannot be relied on anymore to sustain a fair level playing field on a global level.
This has two policy implications for EU policymakers. First, the EU needs to do everything in its power to uphold the WTO trade rules to defend the established world trade order, as suggested by the researchers of the Kiel Institute. Second, the EU needs to put more emphasis on intensifying its trade with other countries than the US and China to diversify its trade relationships and decrease risk.
The EU-Canada Comprehensive Economic and Trade Agreement (CETA) is a good example of what the EU must replicate further. It was provisionally implemented in 2017 and vastly reduces trade barriers on goods and services, securing European companies greater access to the Canadian market and vice versa. This encourages greater innovation, increases incentive to improve productivity, and reduces prices for consumers in the EU and Canada. The provisional implementation indeed had an effect, as trade between the EU and Canada rose by 9% in volume terms since then (12). The EU member states should increase their efforts to ratify CETA in their parliaments to make the agreement permanent.
Another FTA that would massively diversify the EU's trade is with the South American trade bloc Mercosur. A great deal of trade barriers are still in place, offering vast opportunities to increase bilateral trade and investment (13). The EU should concentrate on compromising and finalising agreements with all member states and the Mercosur bloc to implement this trade agreement as soon as possible. Greater dedication to finding common ground in this regard is both necessary and timely.
The EU is massively dependent on trading goods and services with other countries. However, it is particularly reliant on the US and Chinese markets. Considering intensifying geopolitical tensions between those two countries and growing protectionism by both, the EU has no other choice than to think about de-risking its trade relationships in the future. Ruling out a rather unrealistic surge in domestic demand, policymakers should focus on finding other foreign markets that might compensate for a fall in either US-EU or China-EU trade. Only by diversifying its trade partnerships can the EU safeguard its economic future in an increasingly uncertain global landscape.
References
1. European Commission (2024). World trade in goods and services - an overview. [online] Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=World_trade_in_goods_and_services_-_an_overview.
2. European Commission (2024). Extra-euro area trade in goods. [online] Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Extra-euro_area_trade_in_goods.
3. Lynch, D.J., Dawsey, J. and Paletta, D. (2018). Trump imposes steel and aluminum tariffs on the E.U., Canada and Mexico. Washington Post. [online] 31 May. Available at: https://www.washingtonpost.com/business/economy/trump-imposes-steel-and-aluminum-tariffs-on-the-european-union-canada-and-mexico/2018/05/31/891bb452-64d3-11e8-a69c-b944de66d9e7_story.html.
4. The White House. (n.d.). Build America, Buy America Act – Federal Financial Assistance | OMB. [online] Available at: https://www.whitehouse.gov/omb/management/made-in-america/build-america-buy-america-act-federal-financial-assistance/.
5. The White House (2022). Inflation Reduction Act Guidebook. [online] The White House. Available at: https://www.whitehouse.gov/cleanenergy/inflation-reduction-act-guidebook/.
6. Holland, S. and Beech, E. (2024). Europe will pay a ‘big price,’ Trump warns on tariffs. [online] Reuters. Available at: https://www.reuters.com/world/europe-will-pay-big-price-trump-warns-tariffs-2024-10-30/.
7. Blenkinsop, P. (2024). EU to cajole Trump on trade while readying tariff retaliation. Reuters. [online] 21 Nov. Available at: https://www.reuters.com/business/eu-cajole-trump-trade-while-readying-tariff-retaliation-2024-11-21/.
8. Felbermayr, Gabriel, Julian Hinz and Rolf J. Langhammer: "US Trade Policy After 2024: What Is at Stake for Europe?". Kiel Policy Brief Nr. 178, p.1. 2024. Kiel: Kiel Institute for the world economy.
10. de Soyres, F. and Moore, D. (2024). Assessing China’s efforts to increase self-reliance. [online] CEPR. Available at: https://cepr.org/voxeu/columns/assessing-chinas-efforts-increase-self-reliance.
11. The European Commission (2024). Commission Implementing Regulation (EU) 2024/2754 of 29 October 2024 imposing a definitive countervailing duty on imports of new battery electric vehicles designed for the transport of persons originating in the People’s Republic of China. [online] Official Journal of the European Union Available at: http://data.europa.eu/eli/reg_impl/2024/2754/oj [Accessed 20 Jan. 2025].
12. Vaudano, M. (2024). CETA : tout comprendre à l’accord commercial controversé entre l’UE et le Canada avant un vote crucial cet après-midi au Sénat. (2024). Le Monde.fr. [online] 18 Mar. Available at: https://www.lemonde.fr/les-decodeurs/article/2024/03/18/tout-comprendre-au-ceta-avant-le-vote-sur-sa-ratification-au-senat_6222662_4355770.html.
European Commission (2019). EU-Mercosur Trade Agreement. [online] policy.trade.ec.europa.eu. Available at: https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/mercosur/eu-mercosur-agreement_en.
Comments