TRADE WARS: A RESET

The US-EU relations are swiftly turning into a new trade and economic confrontation. On November 9, the EU member states unanimously opposed the inflation bill initiated by President Joe Biden because they feel it threatens the EU local market.

Hopeless talks

On December 5, senior European and US officials led by Margrethe Vestager, Executive Vice President of the European Commission for A Europe Fit for the Digital Age, and Anthony Blinken, the US Secretary of State, met at the US-EU Trade and Technology Council held in Washington, DC. The council convenes twice a year to promote closer cooperation in areas ranging from financing joint telecommunications projects in emerging economies to collective efforts to counter cyberattacks. There are concerns that a looming transatlantic trade dispute over the US Inflation Reduction Act, which provides huge subsidies to Americans to buy domestic cars, can derail one of the main efforts in the post-Trump era to reset relations between Brussels and Washington.

In a joint statement adopted at the end of the meeting, the sides acknowledged the EU's concerns and expressed their commitment to resolve them constructively. At the same time, the document did not indicate specific measures to resolve the dispute. It was only decided to develop a "joint roadmap" for assessing and measuring reliable AI technologies and to set up a working group to reduce obstacles related to research barriers and quantum technologies.

Meanwhile, a number of EU countries are calling for more aggressive measures. Thus, France proposes the introduction of its own environmental subsidy programme for European companies as a response to the US move.

Under the EU law, industrial subsidies are subject to scrupulous review by the European Commission, which has the power to reject them if they are likely to harm the economic balance of the internal market. This prevents the largest member states from suppressing smaller competitors with large-scale state aid schemes.

This strict principle, which dates back to the origins of European integration, has come under scrutiny in recent years amid the intensifying global race between the US and China.

"The inflation act should make us think about how we can improve our state aid mechanisms and adapt them to the new global environment. We have to be very careful to avoid the emergence of negative trends in our single market. But we also have to respond to the growing global competition in clean technology," President of European Commission Ursula von der Leyen said.

According to experts, it is true that the EU has taken a cautious approach to subsidies for quite some time, while the US decided to use them for its own geopolitical purposes. 

The Inflation Reduction Act imposes restrictions on minerals from foreign companies of concern, which is an implicit reference to China.

Political economy of US-European relations

They believe it is a political issue, as, by and large, the goal is to avoid the subsidy race between the EU and the US. The winners are individual companies in the ‘right sectors’, which can then ask for big sums from the state budget.

Observers believe the confrontation, which risks turning into a real trade war, undermines efforts by Joe Biden and Ursula von der Leyen to overcome the effects of the US-European tensions of the Trump era and strengthen ties between the world's two largest trade and security partners.

The parties are expected to mitigate differences by announcing six projects to boost transatlantic cooperation. These include funding two telecommunications projects in Jamaica and Kenya, announcing rules for the so-called robust AI technology, and strengthening coordination to identify potential blockages in semiconductor supply chains.

It is also expected to announce the creation of common charging standards for electric vehicles, an agreement on mutual recognition of each other's vaccines and a pilot project allowing EU and US customs officials to use digital documentation tools as part of their work.

Nevertheless, the ongoing dispute over Washington's subsidies for electric cars, which will begin in January, remains a serious bone of contention even after a joint working group of senior officials was set up to address trade complaints. Some European politicians lobbying a significant share of the automotive industry in the overall industrial sector want Brussels to take a tough stance, including possibly retaliatory tariffs on US goods.

US officials reject accusations of the protectionist nature of the expected subsidies and make their own arguments. European policies, including efforts to create a cloud computing industry to compete with US companies such as Google and Amazon, are believed to represent an attempt to introduce unfair trade barriers.

The US-EU dispute comes at a time when the EU finds itself at a competitive disadvantage as Russia restricts energy supplies to European markets. Since fuel prices are much lower in the US, there are fears that European and international companies may change the course of operations. For example, the German chemical group BASF stated that it would have to ‘constantly’ decrease the number of employees in Europe following the opening of a new plant in China. The French president openly accused US energy producers of making ‘super profits’ by increasing sales to Europe.

The current situation reminds a similar one back in the 1950s, when the US tried to assemble a coalition of democracies for a new Cold War with the USSR. Today, similar actions must involve close coordination between the allied economies. Yet the trade disagreements between the US and the EU destabilise these plans.

Approaching new global recession

Meanwhile, the International Monetary Fund has revised forecasts for global economic development. The latest World Economic Outlook report says the world is gradually approaching recession and financial market instability. The outlook is expected to concern the countries that account for a third of the global production output.

The situation in China is also contributing to the deterioration of the global economic indicators, as many experts consider the Chinese economy in poor state. The main reason is reported to be the lockdown caused by the pandemic. Some industries, which used to employ millions of people, go for massive layoffs recently.

Over the past 30 years of economic liberalisation, China has played an increasingly instrumental role in global supply chains. Therefore, any blockage affecting the bulk supply of goods from China leads to serious international implications.

Inflationary shock in the Western economies explicitly demonstrated this after the surging demand for industrial commodities. This led to the introduction of supply chain constraints as plants were suffering from severe delays in deliveries from Asia, shortages of key components and exorbitant transport costs.

The war in Ukraine pushed inflation to the highest level in decades and a third of the global economy into recession, including the UK, several eurozone countries and possibly the US.

Major global companies hoped that inflation in advanced economies was near or even peaking, which could allow central banks to soften harsh interest rate fluctuations. However, China's deteriorating economic performance and the disappointing outlook for the global economy have dampened investor optimism.

According to the London-based consultancy firm Capital Economics, the global trading system, which has existed since around 1945, is now splitting up, which will lead to the development of two major trading blocs.

The pandemic and the war in Ukraine have led many countries to seek protectionism as their own industries suffer from the negative impact caused by instability in global markets.

As a result, two major trading blocs are predicted. The first and largest will be created by the US and its allies, while the other one will form around China.

These changes will reduce global productivity growth and increase inflation. The movement of skilled workers between two geographical areas is likely to decrease, leading to the slowdown of innovation and economic progress.

Geopolitical reasons will play a greater role in resource allocation decisions, leading to the regression of purely market-based tools.

For now, however, these are just trends that can slow down if the leaders of the world's leading economies find a more or less mutually acceptable model of cooperation to maintain the current system of relations, albeit in a modified form.