Europe's two-front trade war
The trade war with the US came as something of a shock, though it should not have, given President Donald Trump's open hostility towards the EU and fundamental misunderstanding of trade dynamics. Trump complains about America's trade deficit with the EU, but that deficit extends only to goods; in services, the US runs a surplus with Europe. And Trump's tariffs amount to shooting the US economy in the foot while doing nothing to reduce current-account imbalances, which primarily reflect America's low savings rate.
This is not just a trade matter, but a political one. The Trump administration is seeking to intimidate – and extract concessions from – Europe, even at the risk of endangering US growth. Trump is probably convinced that the Europeans will cave in, allowing him to boast domestically about an easy 'victory'.
The trade war with China is both less surprising and more dangerous, representing an existential challenge for the European economy. Since its 2001 accession to the World Trade Organization (WTO), China has caught up with the advanced economies on productivity, but not in terms of wages and social standards. So, while China is at the frontier of innovation in many industries, its labour costs remain much lower than in the richest countries.
This combination of Silicon Valley-level technology, developing-economy labour costs, and the vast workforce of one of the world's most populous countries makes China a formidable adversary. Large parts of European industry are under threat. It's no longer just about steel and aluminium. The competition extends to cars, chemicals, pharmaceuticals, machinery and equipment, and many others.
Like US tariffs, China's actions are shaped significantly by political considerations. By accumulating industrial overcapacity – a key source of trade tensions with Europe – China's regime is seeking to project its power externally and maintain control of its own people. This explains why repeated calls for rebalancing towards domestic consumption, which would boost Chinese living standards, remain unanswered by China's leaders.
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The Greek historian Polybius attributed the fall of the Greek city-states to the Roman empire not to a lack of resources, but to outdated political systems, a lack of unity, and complacency. So, while China's rise fuels concern in the US about the 'Thucydides Trap' – whereby the incumbent hegemon's fear of a rising challenger leads to war – it also raises the spectre of the 'Polybius Trap' leading to Europe's decay.
If Europe wants to remain a global player, it must demonstrate that, like China and the US, it can endure short-term economic pain to protect its long-term strategic interests. Acquiescing to unjustified American demands might be good for next month's growth, but it would be disastrous in the longer term, not only because of the concessions themselves, but also because of the precedent they would set for a US administration bent on extracting more. All global players would doubt Europe's willingness to resist predatory behaviour.
Embracing China as an alternative to the US would be like leaping out of the frying pan into the fire, as it would create a new dependency that could easily be exploited. Either approach is a recipe for vassalisation.
The current period of great-power struggles, one hopes, will not last forever. In the meantime, however, Europe must find ways to strengthen its resilience. This requires finding new levers of growth, pursuing the 'savings and investment' union, dismantling the many remaining internal barriers to trade, and unleashing public investment through new joint borrowing.
To this end, the EU might consider convening an exceptional summit this autumn focused on establishing a 'growth-engine' strategy for the next two years, particularly if trade negotiations with the US fail. Such a plan should aim to accelerate the implementation of the recommendations included in former Italian prime minister and former European Central Bank president Mario Draghi's much-touted report on European competitiveness, including by mobilising the necessary funding.
Throughout this process, Europe must show humility. It must do more than simply acknowledge, as it did in commissioning the Draghi report, that it has fallen behind in many industrial sectors, and make use of the very tools that enabled China to pull ahead. In particular, the EU should introduce a 'European preference' in strategic markets and, even more important, include mandatory technology transfers for certain investments.
Finally, with the WTO framework appearing increasingly outdated, the EU should forge new trade agreements with economies that are not aligned with either the US or China, particularly in South Asia. Emphasising predictability and adherence to rules, these deals could start with targeted industrial cooperation, which is much quicker to implement.
The 19th-century historian Fustel de Coulanges observed that, as Rome advanced on Greece, 'All foreigners knew that the Greeks were for sale, either individually and in secret, or openly and by city.' If the EU is to avoid crumbling before the great powers that would besiege it, it must make clear that this is not true of today's Europeans. PROJECT SYNDICATE
The writer is a member of France's National Assembly for the Renaissance Party
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