[Feature: The Future of Free Trade] EU Trade Policy in the Trump Era

2018/08/06

"The era in which we could fully rely on others is over."

German Chancellor Angela Merkel spoke these words one year ago, in May 2017. U.S. President Donald Trump has turned his back on international cooperation. The relationship of trust has collapsed, and the Atlantic alliance, which has been the foundation of the post-war world order, has been shaken.

For Europe, it is not simply a matter of revising trade policy. There is a growing movement to re-examine all policies, from energy and diplomacy to security. Who will protect "Western values" such as freedom, equality, and respect for human rights, and how? To what extent will Europe take on the role of a substitute for the United States? Such soul-searching has begun. It is a search for an international order without the United States.

A mistake often made when looking at Europe-U.S. relations from Japan is projecting Japan's position onto Europe. In other words, people think of Japan as a U.S. ally in Asia and Germany or France as U.S. allies in Europe as similar, overlapping "Japan-U.S." and "Europe-U.S." relations. However, Europe and Japan have different basic concepts for their policies toward the United States.

Although there have been debates over whether to cooperate with or maintain independence from the U.S., Japan's post-war politics has generally held that "it is not desirable to have a rift with Washington." While the U.S. is the one and only ally, there is a national consciousness of being exposed to threats—formerly from the Soviet Union and now from China. Without questioning the fixed idea that "we cannot conflict with the U.S., on whom we rely for security," the basic guideline has been to struggle to maintain good Japan-U.S. relations, even while being ridiculed as following the U.S. blindly.

That is precisely why, even after the election of Mr. Trump, who had repeatedly made remarks throwing cold water on free trade during his campaign, Japan could not abandon the hope that he "might turn to a realistic path," and it is only recently that a sense of crisis has intensified. Because security is a shackle, Japan is anxious about the Trump-style negotiation technique of linking security and trade.

On the other hand, the distance between Europe and Washington is different. Continental European countries, which profess to be welfare states and value safety nets, reject the dog-eat-dog Anglo-American style of capitalism. Even during the Cold War era, when they relied heavily on U.S. military power, they made an effort to maintain distance from the U.S. in diplomatic and security policies.

They have a conviction that their own economic and social policies are superior to those of the U.S. There is a sense of security in having deep and wide networks of personal connections, represented by figures such as former U.S. Secretary of State Henry Kissinger, who was born in Germany. There was also the existence of European integration to prevent isolation.

Furthermore, out of concern that over-reliance on the U.S. could lead to a loss of autonomy, they avoided definitive conflict even with their arch-enemy, the Soviet Union/Russia. In Germany (then West Germany), which developed "Ostpolitik" to seek rapprochement with the communist bloc in the 1960s and 70s, there is a philosophy of "not wanting security to be held hostage and the U.S. to take advantage in trade or energy policy." It was also during the Cold War that Germany began direct imports of gas from the Soviet Union to diversify its energy sources. Such a spirit of independence enabled a policy toward the U.S. on a different dimension from that of Japan.

Precisely because they were not two sides of the same coin, there was no atmosphere of believing in the "capable businessman" from the start of the Trump administration. The basis of European diplomacy is persistent dialogue. From time to time, they persuade the U.S. to return to international cooperation, but that is a political drama; in their hearts, they have long since given up on the Trump administration. Even when criticized at every international conference, they listen with an exasperated look and let it slide.

The shock for Europe is likely not the difference in policy temperature, but rather the fact that "Western values" such as respect for minorities and human rights can no longer be shared. Even if the Trump administration turned to "America First" in the economy, if it showed an attitude of protecting values, the relationship would surely not have become this complicated.

There is little foundation for President Trump, who repeatedly uses rhetoric involving racism and misogyny, to be accepted by the European leadership, which includes many liberals. Furthermore, there is no guarantee that the U.S. will normalize "post-Trump." Today, it is natural for European policy officials to engage in mental exercises to prepare for an "international order without the U.S." When analyzing European trade policy, it is necessary to know this European positioning.

Germany has been the target for a long time. What would he do if he became president? "I would tax Mercedes-Benz and Japanese products." Mr. Trump answered this way 28 years ago in a 1990 interview with the American men's magazine "Playboy."

Consistent in his original intentions and following through with his words. His claims remain unchanged today. He attacks Germany, which accumulates trade surpluses, as "bad, very bad," and grumbles that it is "unfair." Even as criticism of protectionism arose, he declared, "I will keep going until Mercedes disappears from Fifth Avenue (in Manhattan)."

President Trump's ancestors are from Germany. It is reported that his family drives German cars such as Mercedes, Maybach, and Audi. Why does Germany stand at the forefront of his attacks?

The background is the strength of the German economy. It holds "twin surpluses"—a huge current account surplus and a fiscal surplus—and the unemployment rate is extremely low. Thirty percent of the automobile exports that bring growth are destined for the U.S. From the perspective of the Trump administration, while imposing a trade deficit in the 60-billion-dollar range on the U.S., it looks like a beggar-thy-neighbor policy that enjoys its own growth.

However, according to Germany, the trade surplus is a fruit obtained through reform. According to the Cologne Institute for Economic Studies, German labor costs (manufacturing) are 30% higher than the Eurozone average and 70% higher than Japan's. To avoid being caught in price competition, German companies have polished their brand power and shifted to high-value-added segments, and they have the confidence that they have sublimated their products into things people want to buy even if they are expensive. While the anxiety and arrogance of remaining an export powerhouse gave rise to the Volkswagen (VW) emissions scandal, pride in "Made in Germany" remains unshaken.

The U.S. presses for the elimination of the trade surplus, and Germany dodges it sluggishly. Such U.S.-German disputes have been repeated since the 1970s. The long-standing conflict is heating up once again.

Germany, which possesses overwhelming power and makes various demands on the fiscal and economic policies of neighboring countries, is also disliked in Europe. The refugee crisis brought in by Chancellor Merkel threw European politics into turmoil. However, regarding trade friction, there is almost no movement within the region to jump on the Trump administration's criticism of Germany, and the European Commission, the EU's executive body, also thoroughly defends Germany.

When the U.S. invoked import restrictions on aluminum and steel, the EU filed a complaint with the World Trade Organization (WTO) and imposed retaliatory tariffs on products such as Harley-Davidson motorcycles. This is nothing other than a countermeasure targeting the local constituencies of U.S. Republican lawmakers. When an unconcerned President Trump hinted at imposing a 20% tariff on automobile imports, Europe did not back down an inch and is showing a readiness to take action again. For now, all member states support these EU moves.

The U.S. can no longer be trusted. Such a feeling has spread not only to Germany but across all of Europe, and the EU, which is usually a place of many voices, has become monolithic.

France, the key player, stands close to Germany. "We should not exclude the G6 confronting the United States." In June, ahead of the G7 summit in Canada, it was French President Macron who said the U.S. should be isolated. French Finance Minister Le Maire also warned in July, "If tariffs are imposed on automobiles, we will retaliate." The Macron administration, which flies the flag of European integration, values the relationship with Germany above all else. "You should just leave Europe." The Washington Post reported that Mr. Trump cracked this joke, but it goes without saying that Mr. Macron ignored it.

Central and Eastern Europe, which lean toward nationalism and defy the EU on refugee policy, also do not look kindly on a U.S. leaning toward protectionism. Today, Eastern Europe is the heart of manufacturing. According to estimates by the Vienna Institute for International Economic Studies (WIIW), the share of the automobile-related industry in exports to the U.S. is 10% in the automobile kingdom of Italy and 30% in Germany, but it reaches 60% in Slovakia. If the U.S. moves forward with import restrictions, the blow will be immeasurable.

The impact on the European economy of a trade war involving the world cannot be ignored. Not only will exports from Europe to the U.S. be delayed, but due to the friction between the U.S. and China, companies like BMW, which ship to China from U.S. production bases, will be forced to raise sales prices. If sales volume decreases, it will affect corporate performance. If the German economy downturns, Central and Eastern Europe and Northern Italy, which thrive on exports to Germany, will also feel the aftereffects. ECB President Draghi warns that "increasing protectionism" is the "main risk" to the economy.

There are rumors of a plan for the EU to lower the 10% tariff it imposes on imported cars from the U.S. to avoid a cycle of retaliation, but it is not yet clear whether this will come together.

However, it is not as if Europe has always been enthusiastic about free trade. Conservative parties are generally proponents, but many environmental and left-wing parties have argued that agriculture would be exposed to competition and that food safety could not be protected. When negotiating the Comprehensive Economic and Trade Agreement (CETA) with Canada in 2016, regional governments in Belgium resisted stubbornly. In Austria, 500,000 signatures were collected in opposition to the agreement.

But now, advocating "anti-globalism" would mean siding with the Trump camp. Since this is not desirable for the left-wing camp, the momentum for opposition movements has withered.

Europe has unexpectedly tilted toward "supporting free trade," but there is a concern. Italy, where the left-wing populist party "Five Star Movement" has become the ruling party, is trying to overturn CETA, which has been under provisional application since 2017. While this is a political performance aimed at rural votes, the sparks remain smoldering.

Although there are concerns like Italy, trade policy is still an area where it is easy for the region to align. While it is difficult to even find a point of compromise on fiscal or refugee policy, most countries in the region show understanding for the cause of "maintaining the free trade system."

However, it is difficult to find partners to join hands with. They cannot hope to change the mind of the U.S., and they are in the middle of Brexit negotiations with the UK. They cannot team up with Russia, against which they are invoking economic sanctions. While they are accelerating mutual investment with China, the reality is that they cannot lower their guard from the perspective of preventing technology leaks and protecting intellectual property. Europe is not as "pro-China" as Japan thinks. Since they have already finished negotiations with Canada among the G7, their gaze naturally turns to the remaining country, Japan.

The scope is broad. For the EU, Japan is the 6th largest trading partner, and 80% of the 74,000 companies involved in exports to Japan are small and medium-sized enterprises. Japanese companies that have expanded into Europe have created 550,000 jobs in the EU. If the two economic zones join hands, they account for 30% of the world's GDP. They can send a political message that they will be the guardians of the free trade system that the U.S. has begun to dismantle.

In response to this situation, it could be said that sentiment toward Japan has improved significantly. A clear example is Germany. In the Bundestag (lower house) on July 6, policy toward Japan was a rare topic of discussion, and Chancellor Merkel said, "Though the distance is far, Japan and Germany are close partners." She also strongly pushed for the Economic Partnership Agreement (EPA) signed by the EU and Japan in July.

Japan-Germany relations have not always been smooth sailing. It was West German Chancellor Adenauer who said at a cabinet meeting in 1962 that "we should be wary of the export offensive of Japanese companies against Europe." The conservative politician Erhard, who succeeded to the post of Chancellor, also once said, "Japan should not obsess over exports but should invite growth through the expansion of domestic demand." Both are known in Germany as champions of free trade and the market economy, but a shadow of protectionism flickered in their policies toward Japan.

Chancellor Merkel was also initially cold toward the Abe administration. She worried about Abenomics, which scatters money, saying she was "not without concern," and made demands regarding historical perceptions in disputes with China and South Korea. That has completely changed. Partly because Japan pushed forward with the Trans-Pacific Partnership (TPP) without the U.S., the evaluation of Japan as a "guardian of free trade" has become established in Europe. Unexpectedly, the Trump turmoil has become a tailwind for Japan-Europe relations, bringing opportunities to Japanese companies.

Europe's rift with the U.S. has widened to the point of "rediscovering" distant Japan. Friction is also conspicuous in Middle East policy and measures against global warming. However, while they may conflict, they are not trying to sever ties. Germany, the leader of the EU, will take on disputes on the policy front but has no intention of stirring up anti-U.S. sentiment. If anti-German sentiment were to rise in the U.S. in response, it would become an irreversible situation. To begin with, the leadership of German society feels a debt of gratitude to the U.S., which ousted the Nazis and brought democracy. Central and Eastern European countries still need U.S. military power to counter the threat of Russia. There is also the intention to keep the "U.S. card" to prevent the influence of Germany and France from becoming too prominent within the EU. With the UK no longer reliable due to Brexit, they have no choice but to pin their hopes on the U.S.

Nonetheless, the decline of U.S. power cannot be hidden. The perception that the U.S. area of interest is turning toward Asia and that Europe's responsibility in Africa and the Middle East will increase has existed since the Obama administration.

For Europe, the EU is a framework for dealing with China, Russia, and the U.S. on equal terms, and the Euro currency is an attempt with the hidden ambition of standing alongside the dollar as a key currency. In addition, in security policy, the concept of an "EU Army" is being discussed with a sense of reality. Its origin lies in the proposal by French Prime Minister Pleven in the 1950s, but the debate has recently been revived.

However, resolve has not hardened. While the nuclear-armed state of France has the capacity to join military operations in Africa and Syria, one country cannot substitute for the U.S. Germany, the beacon of hope, is divided in national opinion even over whether it should meet the NATO goal of "allocating 2% of GDP to defense spending." To begin with, Finland and Austria, which profess to be "neutral countries," are reluctant to join a military alliance.

There is no time left to continue taking an ambiguous attitude. Political instability in Africa and the Middle East creates a flow of refugees and immigrants toward Europe. How can they prevent a situation that stimulates exclusionism and endangers European integration? If they cannot rely on the U.S., a new European-style global strategy combining trade policy, military intervention, economic aid, and humanitarian support will be necessary.

Turning back to Japan, what is the situation? Japan is avoiding even the debate over whether it should reduce its dependence on the U.S. from a medium- to long-term perspective, and if it does, how it should face China and Russia. What the "Trump era" questions is one's positioning amidst the drastic changes in the world's post-war order. The future is in danger if thinking stops.