Europe should lead the way with multilateralism
Open economies and stronger trade can continue to benefit the world economy
The U.S. and Europe are more than allies. They share a long-standing and multifaceted partnership. And the future of U.S.-Europe relations is of fundamental importance for the global economy. However, this close connection has been under strain since the new U.S. administration took office. For the European Union, this is a good opportunity to reconsider its geoeconomic orientation.
Let's not forget that the U.S. is the EU's most important bilateral trade and investment partner. The EU exports more than $600 billion in goods and services to the U.S., which exports more than $550 billion to the EU. Bilateral investments are also huge, amounting to more than $2 trillion. Numerous European companies are active in the U.S., not only selling but also producing there. The same is true for many U.S. businesses in Europe.
But differences are emerging. Until the arrival of the current administration, the U.S. supported a multilateral trade system and European integration. It also provided a security guarantee for Europe. But the new U.S. administration seems intent on replacing multilateralism with a bilateral approach, hoping to reduce trade deficits and to protect, in particular, the U.S. manufacturing sector. On climate policy, the U.S.'s commitment to the Paris Agreement is being questioned. On defense, the NATO umbrella appears less certain than before. And President Donald Trump has openly questioned the value of EU integration.
The U.S.'s new stance, although still undefined in many ways, has provoked uncertainty and nervousness in Europe's corridors of power. So how can the EU best respond to the situation?
Multilateral trade matters
Trade is good for Europe. The EU is a relatively open economy. Trade intensity, measured as exports relative to GDP, is far greater in the EU (44%) than China (22%) or the U.S. (13%). The EU, like many other open economies, has benefited greatly from the multilateral system. Now Europe should stand ready to defend multilateralism, as I recently argued with my colleagues Maria Demertzis and Andre Sapir. The rules-based system, centered on the World Trade Organization, lets all players trade with each other under high and comparable standards. Protectionism would reduce growth in the EU and around the world, and could mean lower standards and unfair competition.
Europe needs to prepare its strategic response in case the U.S. openly defies the multilateral order and slides into protectionism.
First, the EU should collaborate with partners around the world in defense of the WTO and other multilateral agreements such as the Paris climate pact. For example, if President Trump follows through on his tweets and imposes tariffs on Mexican imports, the EU could team up with Japan and others to defend Mexican rights and protect foreign investments in the country.
Second, the EU should accelerate work on deeper economic relations with China and other global partners. One obvious objective is to complete ongoing negotiations on a bilateral investment treaty with China. But that does not mean the EU should sacrifice its principles. It should insist on public rather than private dispute settlement as well as reciprocity in investment terms. Only after an EU-China investment treaty has been agreed upon should the two partners start negotiations on a bilateral trade agreement. The aim of the EU-China deal should be to improve market access and set high standards for the environment, corporate governance, consumer safety and workers' rights. Any deal that would lower standards in the EU is not in Europe's interest and should be rejected.
But it is equally important to advance with other countries, such as Japan, Singapore and the Mercosur bloc. And all these bilateral deals should be designed in such a way that it is eventually possible to integrate them into a more multilateral framework.
Third, the EU's own trade governance needs to be reformed and internal imbalances addressed, to increase the EU's external credibility. Strengthening Europe's social model would ward off protectionist temptations.
And finally, the EU should prepare tools that could be deployed bilaterally against the U.S. These include WTO-compatible anti-subsidy measures and possibly tax changes. On the whole, the EU should stand firm on its interests and principles, but avoid an unnecessary escalation. Much is at stake for Europe and the world -- but with the right strategy, the EU could come out strengthened.
Guntram Wolff is director of Bruegel, a think tank based in Brussels.