The EU’s traditional protectionism may have received a further boost from the coronavirus pandemic. While the EU will not shut off its market, its doors will certainly be less open.
As the coronavirus is hitting the world, the call for deglobalisation has grown louder. Politicians from the West are increasingly associating the fruits of globalisation with risks. Europe is no exception – the virus has accelerated existing trends in the EU’s trade policy. Brussels got some more political push to beef up the EU’s economic resilience and as a first case in point, the virus will very likely kill the ratification of the EU-Mercosur agreement. So what does this spell out for the major policies that are currently on the table?
EU Industrial Strategy on the fast track
France and Germany have already been aiming to make the EU’s economy more resilient through the EU’s new Industrial Strategy. The strategy included ideas such as “Europe also needs to make the most of localisation as an opportunity to bring more manufacturing back to the EU in some sectors”. The coronavirus provided a proof point on how vulnerable the EU’s supply chains are to external shocks. According to the United Nations Centre for Trade and Development, for the EU the impact of China’s export slowdown from the coronavirus is about 15.6 billion USD (14.4 billion EUR). This has prompted some EU Member States to call for reshoring production from third countries. French Finance Minister Bruno Le Maire argued, “we have to decrease our dependence on a couple of large powers, in particular China, for the supply of certain products” and “strengthen our sovereignty in strategic value chains” like cars, aerospace and medicines. German economic minister Peter Altmaier made a similar point, arguing that the EU needs to be less dependent on medical supply chains from China and India. This does not mean economic decoupling. EU Trade Commissioner Phil Hogan still thinks that the EU needs to do more free trade deals to help economic recovery post COVID-19. However, the EU’s new Industrial Strategy will get a huge push from large Member States.
Carbon border tax to incentivise local production
Some longstanding critics will also ride the anti-globalisation sentiment to settle their concerns. Green parties have long been advocating for shortening supply chains, as they argued that global-value chains allowed EU companies to outsource their pollution to countries with lower environmental standards. Their recent paper on post-COVID-19 economic recovery argued that “the distance between production and consumption should be as short as reasonably possible”. According to the green perspective, globalisation has been undermining the EU’s climate objectives, since a large part of economic activity occurs outside of the EU’s regulatory space. Such concerns already gave birth to ideas like the carbon border adjustment tax – pardon, “measure” – with the aim to make value chains greener. Incidentally (or not), such an extra duty on imports will by nature incentivise companies to reshore production from abroad. The pandemic will further boost these ideas, and green parties, already emboldened across Europe after the last European Parliament elections, will try to roll back globalisation – if that is possible.
RIP Mercosur?
The coronavirus is hurting an already struggling agricultural sector. According to the European Commission’s agricultural outlook, beef and dairy farmers will specifically face difficulties due to the lower demand from the restaurant and catering sectors. Beef farmers are also the most vocal sector against free trade. Last year, the EU concluded a trade agreement with the Latin-American Mercosur bloc, where livestock, including beef were especially sensitive sectors. The deal is currently being translated into all of the EU’s official languages before being put to the Council of the EU and the European Parliament for a vote. Even before the pandemic, Member States such as Ireland and Austria had floated their veto, due to agricultural sensitivities and Brazil’s lax environmental regulations. If one adds the negative economic impact of the virus to the existing protectionist sentiment of the agricultural sector, the result can be explosive. It is likely that COVID-19 will put the final nail into the coffin of the deal.
The coronavirus did not cause these sentiments. Farmers have traditionally been protectionist, and the EU’s more inward-looking industrial strategy has been in the making for months. The virus is just accelerating ongoing trends: the demise of the Mercosur agreement and the push to make the EU’s economy more resilient. Proponents of free trade need to make sure that amid the quick pace of events, the baby is not thrown out with the bathwater. Other countries might easily react by erecting their own market barriers in response. And according to a research by the European Commission, EU exports support 36 million jobs. After the Great Depression, more protectionism just created more geopolitical conflicts and a highly unstable international system. As the world is preparing for one of its worst economic shocks ever, this should not be repeated.