Support for free trade has been eroding for a while in the European Union.
Support for free trade has been eroding for a while in the European Union.
F rench president Emmanuel Macron recently lashed out at the American “Inflation Reduction Act,” a piece of legislation that, among other matters, offers tax credits for electric cars. He considers this to be in violation of World Trade Organization (WTO) rules, calling the initiative not “friendly.”
Macron wants to respond to American protectionism with European protectionism. France and Germany are now considering a “Buy European Act” for electric vehicles.
But support for free trade has been eroding for a while in the European Union.
There is, for example, the brand-new EU agreement on a “Carbon Border Adjustment Mechanism,” or CBAM, an EU “climate import tariff,” which may well violate WTO rules as well as burden Europe’s already suffering manufacturing sector, given how it would drive up the cost of imports of raw resources.
And then there are a whole set of EU regulations presented as a framework to protect the environment but that, in reality, are all about protectionism. The most blatant is a proposed EU law on mandatory due diligence to stop deforestation in supply chains. This imposes a duty on enterprises to carry out investigations sufficient to ensure that goods in their supply chain have not been produced on deforested or degraded land anywhere in the world.
A Selective Bias
But this law would tackle deforestation rather selectively. It would mostly hit palm-oil producers based in countries such as Indonesia, Malaysia, and Papua New Guinea, despite the fact that palm-oil deforestation in these emerging economies has fallen to its lowest level since 2017. What’s more, it may just worsen deforestation, given that alternatives such as sunflower or rapeseed oil require more land, water, and fertilizers.
The New York Times, meanwhile, laments how “Europe is sacrificing its ancient forests for energy.”
The same European Parliament that is eager to go along with European Commission plans only when emerging economies will bear the brunt is meanwhile happy to throw in lots of taxpayer cash to fund EU-driven subsidies for biomass — wood burning as a source of energy — even considering this as renewable, and thus environmentally friendly: The idea that renewable energy is the technology of the future is a fundamental part of the EU’s climate orthodoxy. The dirty little secret here is that bioenergy represents almost 60 percent of the EU’s renewable energy sources, a percentage at odds with the popular image of renewables as solar, wind, and hydro.
Private Arbitration
Another area where EU institutions are turning against free trade is in the area of private arbitration courts. In 2018, the European Court of Justice ruled in the Achmea case that investor–state arbitration in an intra-EU context was illegal, effectively reining in the opportunity for internationally respected private arbitration panels, often based outside of Europe, to play a role in legal-dispute resolution in Europe.
The European Commission is furthermore also encouraging the Spanish government in its attempt to resist paying compensation awards that it has been sentenced to pay to investors in renewable-energy schemes. Spain was ordered to do so by private arbitration courts in a number of court cases, after it abruptly changed its financial-support scheme for investments in renewable energy in 2013. Many of these renewable-energy investors are non-European. It is unfortunate to see how the EU, which should be encouraging foreign investment in Europe, is really siding with national governments treating foreign companies unfairly.
In that regard, it should be mentioned that Spain in particular has a poor record of complying with arbitration awards. The country ranks second among the world’s most negligent governments in this regard, according to a new study, and it is also the country that loses the largest number of private arbitration cases. At the moment, the Spanish government still needs to pay a total of $700 million. Other European governments are, however, becoming more hostile to private arbitration, as this is one of the reasons why Poland, Spain, the Netherlands, and France have all announced that they would like to abandon the Energy Charter Treaty, a key treaty for energy investment, which puts great trust in private arbitration.
Decoupling
On the brighter side, there have been some attempts to reinvigorate the EU’s efforts to open up trade with countries outside the bloc. A few months ago, nine EU member states urged Brussels (which is responsible for the EU’s external trade relations) to speed up trade negotiations with New Zealand, Australia, India, and Indonesia, while accelerating the implementation of trade deals agreed to with Chile, Mexico, and the Mercosur trade bloc (which includes Argentina, Brazil, Uruguay, and Paraguay). In a joint letter, they lament the EU’s poor performance on opening up trade, contrasting it unfavorably with the success of the “Regional Comprehensive Economic Partnership,” a large free-trade agreement among various Asian-Pacific nations.
The EU’s negotiations with Chile, which are currently not going well, are seen as key, given how the country has great access to lithium. Lithium is a critical ingredient in the manufacture of the batteries and other high-tech components needed for electric vehicles. As a reminder, the EU has, in another example of how its dirigiste instincts have combined with the central-planning opportunities presented by the current approach to climate policy, banned the sale of new internal-combustion-engine vehicles from 2035, yet another great top-down EU policy experiment. The alternative is to become much more dependent on China, which is the dominant supplier of resources such as copper, nickel, cobalt, rare-earth materials, and lithium, all key to the EU’s green “transition.” Sweden, traditionally a force for free trade, will be chairing the EU presidency from January 2023 on, and it will attempt to get the implementation of the EU–Mercosur deal done.
The importance of China for European, and particularly German, manufacturing is one of the reasons why German chancellor Scholz decided to become the first Western leader to go visit the Chinese leadership in Beijing since the start of the Covid pandemic. He received a lot of criticism for the trip, with people arguing that Germany was simply replacing overreliance on Russia with overreliance on China
Germany has a history of closeness to China. At the end of 2020, when Germany held the EU presidency, the EU signed a “Comprehensive Agreement on Investment” with China, a small but still symbolically important investment framework. Only a few months after that, ratification of it was frozen, after China imposed sanctions on a number of MEPs, in a tit-for-tat move over EU sanctions fon Chinese officials involved in China’s treatment of the Uyghur minority.
In an op-ed ahead of his trip to China, Scholz addressed the debate over Germany’s relationship with China, writing: “We don’t want to decouple from China, but can’t be overreliant,” pledging that his government would “support” businesses “where risky dependencies have developed, . . . for example with new raw material partnerships,” which involves financial support for companies competing for critical raw materials. He summed up the West’s hesitation on how to deal with China by noting that “the EU has accurately described China as filling the threefold role of partner, competitor and rival.”
Following the energy crisis, the EU has been racking up a record trade deficit. For now, it has not yet abandoned the energy experiments — the reduced domestic production of fossil fuels — that are at the root of the current great fossil-fuels shortage. As mentioned earlier, protectionist instincts resurface, while legitimate concerns about excessive dependence on China add to the complexity. This debate is only starting.