Is the European Union ready for neo-mercantilism? China certainly doesn’t think so. The European Commission framed its proposed Industrial Accelerator Act in terms of reciprocity, a key tenet in the “Rules-based International Order” championed by Brussels. The Act will restrict public funds to European firms in strategic sectors, including green tech, steel and automobiles. It also advances a Made in Europe programme by requiring foreign firms to partner with and transfer technical expertise to European companies. These proposed measures mirror those imposed by Beijing on Western companies, which the Commission clearly hoped would limit Chinese opposition.
But China doesn’t do reciprocity. With its customary passion for fair play, China denounced the EU proposal as “systemic discrimination” and threatened “countermeasures to safeguard the legitimate rights and interests of its enterprises.” Those rights apparently include flooding Europe with Chinese exports and beggaring European industry. China’s current trade surplus with the EU exceeds €360 billion, and Beijing intends to defend this imbalance as it struggles to overcome domestic economic stagnation. Its planned transition to a consumer-driven economy has run aground on the collapse of China’s real estate sector, which vaporised the retirement savings of millions of middle-class Chinese. They are no longer spending, they are stuck paying off loans for incomplete or never-built investment properties. Firing up the export machine is the best option available to President Xi, and he doesn’t intend to let any jumped-up Eurocrats endanger his economic plans.
Xi is confident he can play divide and rule among the EU’s 27 members. Germany is the most exposed to Beijing’s wrath. Volkswagen desperately needs to pull profits out of its declining share of the Chinese automobile market. The company has billions of invested capital in its 14 Chinese factories, and has slated additional billions in R&D investment there in the hope of reviving its sales. BASF is constructing a massive chemicals complex, lured by the promise of cheap energy. Both firms seek prompt economic returns from their investments, while President Xi views these investments as useful political hostages in his fight against Commission proposals. While Germany is (as always) inclined to seek a mutually beneficial arrangement with the political guardians of the Chinese market, those guardians clearly seek a zero-sum victory whereby German exports are supplanted by cheaper Chinese goods around the world.
France on the other hand regards China as an economic adversary and has no affection for the neo-liberal agenda that opened European markets to Chinese competition. The consumer bounty that derives from the miracle of comparative advantage holds little attraction to the diehard dirigistes who rule France. Nurturing European champions behind trade preferences suits the Élysée, which would cheerfully sacrifice Volkswagen’s overseas profits if it gave an advantage to Renault. Even if French preferences do not prevail completely, the Vestager era in EU trade policy is clearly over.
Between US tariffs and Xi’s industrial predation, there is a growing awareness in Brussels of a dawning neo-mercantilist era. The Industrial Accelerator Act reveals Commission preferences for Made in Europe subsidies, and it has softened its opposition to industrial mergers that would have previously run afoul of Single Market competition rules. Yet the EU’s responses remain tepid in the face of Chinese opposition. As Donald Trump well knows, a unitary executive holds a negotiating advantage over an organisation comprised of 27 quarrelsome members. Rapid fire criticisms levelled at the EU by Beijing prompt tortured compromise statements in response. The Industrial Accelerator Act is not yet law, and will emerge only after national leaders and the EU Parliament inflict numerous compromises. Spanish PM Pedro Sanchez would likely consider swapping NATO membership for a prime position in Beijing’s Belt and Road Initiative if it unlocked billions in investment, perhaps coupled with a lucrative consulting contract for his wife. Jockeying for China’s lucrative favours will be attractive to cash-strapped EU member states.
Even should the EU construct a unified policy, what might be the fate of the EU in a world dissolving into regional economic blocs? Certainly the vast export earnings that have allowed Germany to underwrite much of the European project since the days of the Wirtschaftswunder will diminish: The American and Chinese demand for German products is in secular decline, pummelled by trade barriers and competition. American industry shelters behind new tariff walls while China has invaded Europe’s domestic market with innovative products at prices below what welfare capitalism and its high labour costs can match. Europe no longer enjoys a technological advantage in its key export markets, and has not enjoyed a wage productivity edge for years. Ongoing stagnation in the EU’s internal market suggests declining prosperity absent reforms far exceeding those recommended by Mario Draghi.
Given the EU’s commitment to the regulatory state and stifling labour market practices, neo-mercantilism is likely to drive the bloc toward protectionism. Subsidies and trade barriers like the Carbon Border Adjustment Measure will wall off the Single Market from lower cost foreign firms. European champions will emerge as competition policy is relaxed, and will battle for global markets with Chinese and American firms. In exchange for employment guarantees, de facto industrial cartels will milk the European consumer for excess profits to subsidise exports. Fortress Europe will come to resemble state capitalism without the secret police. Also, sadly, without the radical innovations driving the next wave of industrial transformations. Creative young European geeks will continue their migration to Silicon Valley, preferring 80 hour work weeks and lucrative stock options to life in a museum of outmoded industrial practices.
But the EU will retain its finest achievement: The baroque regulatory apparatus that employs its favoured elites and stifles threats to its hegemony.
Industrial policy or collective defence: Europe picks one