EU fails big test on geopolitics of trade

Receive free EU trade updates

We’ll send you a myFT Daily Digest email rounding up the latest EU trade news every morning.

Welcome to Trade Secrets. I got some pushback after last week’s column for describing Poland, Hungary and Slovakia as “rogue states” for trashing EU and WTO law over Ukrainian grain imports. Any smidgen of self-doubt I might have had evaporated when, after Ukraine started a WTO case over restrictions on its grain exports, Poland responded by threatening to stop supplying arms to Kyiv in the war against Russia. Today I look at what the issue says about the EU’s attempts to use trade as a geopolitical tool. Charted waters is about the EU’s trade deficit with China widening alarmingly.

Grain and suffering

Better-informed commentators than me (namely my FT colleagues opining on the subject here and here) have discussed how seriously we should take Poland’s threat to stop supplying Ukraine with arms. The conclusion seems to be that the Polish government might well calm down a bit, particularly after the national elections in mid-October. But some real damage has been done to EU unity.

I’d note that it also specifically shows the difficulty of trying to use trade as a geopolitical tool. (This is something I may have written about one or two hundred times before, and not just in an EU context either.) The EU has long been waving its arms about and talking vaguely about trade and regulation serving European interests abroad. To my mind it’s always been somewhat unconvincing. Giving up exports or accepting tougher import competition can be politically costly for individual member state governments, which may not be particularly impressed by the alleged trade-off in the EU’s collective strategic influence.

One obvious example is the group of countries including France, acting under pressure from a mixture of aggrieved beef farmers and principled environmentalists, holding up ratification of the deal with the South American Mercosur bloc despite the EU’s desire to build strategic links with Latin America. The FT has an interview today with Paraguay’s president saying the EU either agrees to sign the deal by December or it fails altogether. Another is Germany’s dependence on imported natural gas making Europe strategically dependent on President Vladimir Putin’s Russia in the years before the Ukraine invasion.

But it takes short-sighted self-interest to a whole new level for Poland et al to threaten to smash apart the mechanisms of the single market and the EU’s common trade policy because of the short-term impact of an emergency import measure to help a war-torn neighbour.

One view — expressed with eloquent force here by Iana Dreyer from the Borderlex trade newsletter — is that this is what happens with a weak European Commission that has let the member states, and particularly a clique of rightwing politicians, push it about for too long.

To be fair, you could also argue the commission was too confrontational in its short-run tactics. Maybe it would have been better to have delayed lifting the import restrictions on Ukrainian grain for a month until the Polish elections? For Ukraine’s part, maybe Kyiv could have waited for a bit before starting proceedings at the WTO?

Still, there’s no doubt that whatever the wisdom of the timings, the impact of this episode will surely be to warn the commission off trying to use trade policy strategically in the future. It’s not a great outcome for the EU to be deterred from employing one of its most practised tools to address its single overwhelming strategic concern.

Geopolitics going nowhere

Indeed, if it can’t even hold the line on temporary import preferences for Ukraine, the EU’s not really looking convincing on using its trade policy for strategic ends more generally. To take a step back, part of the problem is that outside very obvious issues such as securing its eastern flank against Putin, the EU isn’t really very clear on what its geopolitical interests actually are.

Traditionally they seemed to involve exporting its famous “European values”, particularly environmental standards, apparently in the belief that writing the rules necessarily means winning the game. Few of my conversations within the EU institutions over geopolitics and trade over the past few years have gone very far without the ritual invocation of the “Brussels Effect”.

But the Russian invasion of Ukraine and the rise in tensions between China and the US have given the debate over geopolitics a harder, more confrontational edge, encouraging the idea of a zero-sum world trading system focused on issues such as securing critical minerals.

The EU’s softer traditional goals are now often in quite serious conflict with its newer, harder ones. Brussels’ various environmental initiatives are threatening its standing in the eyes of the big emerging market countries it’s trying to cultivate. The forthcoming ban on products grown on recently deforested land is one of the major problems with the aforementioned Mercosur deal and talks with Indonesia and Malaysia. Its proposed carbon border adjustment mechanism has aroused passionate opposition from the big participants such as India and China.

Brussels is trying to hit a wider range of targets, quite apart from its traditional interest in opening up export markets, but with a limited set of instruments. It’s a recipe for confusion and disappointment.

Charted waters

Trade deficits aren’t driven by trade policy itself so much as by macroeconomic issues such as the economic cycle, relative savings and investment rates and currency valuations. Still, it’s certainly given EU trade commissioner Valdis Dombrovskis something to moan about on his trip to China this week that the bilateral trade deficit between the two economies has reached a record high.

Trade links

US trade representative Katherine Tai cast more doubt on a fix to the WTO’s problems by saying the US wouldn’t restore the currently paralysed Appellate Body in its previous form.

Reuters reports that on top of the coming wave of Chinese electric vehicles to the EU market, which may or may not face antisubsidy duties when they arrive, Vietnam is also tooling up to do the same.

Larry Summers, luminary of the Barack Obama and Bill Clinton administrations, speaking at the Peterson Institute think-tank, offered a blunt rebuttal to the kind of critiques of orthodox trade policy often heard in the Joe Biden camp.

FT colleague John Thornhill says there’s a “hot peace” between China and the US, with the two economies remaining more intertwined, particularly in their tech sectors, than the official rhetoric suggests.

The FT’s Britain After Brexit newsletter looks at the manoeuvring over the Labour opposition’s friendlier rhetoric about aligning with the EU, while EU commissioner Thierry Breton reiterated his opposition to continuing favourable rules of origin in the post-Brexit EU-UK trade deal to help British and German carmakers.

Trade Secrets is edited by Jonathan Moules