The EU’s arsenal of defensive trade weaponry lacks an instrument ready to counter systematic, high-impact, and non-coercive trade law violations by the largest economies of the world in real time. This gap can be temporarily addressed through ad-hoc stand-alone legislation once the need arises. But the time is now for the institutions to consider adding a more robust instrument of general application to its armoury to equip the Union for the coming era of trade wars.
Financial Times’ chief trade pundit, Alan Beattie, got it right: “nobody knows anything” about the specifics of Trump’s prospective tariff policy – turning to dust a wealth of speculation over the deeper meaning of the President-elect’s Treasury, Commerce, and United States Trade Representative (USTR) nominations. The unpredictability of Trump’s impulses and disregard for economic rationale provide for ample justice to this observation. Yet, “nobody knows anything”, of course, implies that anything can happen.
Prepare for all eventualities
Trump’s plentiful statements on the tariff question fall into two broad categories of policy objectives: first, “universal” tariffs on imports from all countries aimed at reducing the US merchandise trade deficit and, secondly, tariffs to coerce governments of friends and foes alike to change policies that allegedly disadvantage the United States. Adding insult to injury, “coercive” tariffs may be imposed on top of unconditional universal tariffs. Latest investigations conducted by the Washington Post indicate just how live this worst-case scenario remains.
This grim outlook has led trade wisewoman Arancha González Laya to the conclusion that the EU must prepare for all eventualities. The bloc should do so by following a strategy of cooperative engagement, credible economic deterrence, and, as a last resort, fast and proportionate retaliation. Depending on the severity of the US tariff measure, EU retaliation could entail across-the-board tariffs on imports from the US.
The missing piece
Little attention, however, has been devoted to the fact that the existing EU arsenal of defensive trade weaponry renders the Union ill-prepared to respond to all conceivable scenarios. Specifically, the EU lacks a trade instrument that would allow it to credibly threaten with immediate retaliation in circumstances where a broad but non-coercive breach of World Trade Organization (WTO) obligations by the US or another major economy is so blatant and systematic in legal terms and so severe in its economic effect that it poses an existential threat to the Union’s economic security and the rules-based international trading system.
To be sure, a US tariff of 10% to 20% that unconditionally applies to all or a significant share of EU exports to the US – as announced by Trump during the election campaign – would fall into this category. A US trade measure of this scale and quality arguably requires a defensive trade response that restores the balance of negotiated concessions, inflicts proportionate economic and political harm, and hence effectively incentivises the repeal of the initial measure and WTO compliance. As González Laya and former European Commission senior trade negotiator Ignacio García Bercero have suggested, an emergency measure of this kind could take the shape of a negative list, i.e. a tariff on all imports from the US except where the EU has specific interests or dependencies. However, the EU does not have a defensive trade instrument at its disposal that would serve as a legal basis for such a response if the US tariff is not “coercive” in its nature.
Trump-proofing EU trade policy: past efforts
Let’s recapitulate: It is true, of course, that EU institutions have engaged in significant legislative efforts over the past years to address trade policy challenges, which arose during Trump’s first presidential term. The much referenced EU Anti-Coercion Instrument (ACI) is a prime example of the attempt to Trump- and China-proof the EU trade policy framework. But retaliation that is conditional on economic coercion by a third country government within the meaning of the ACI leaves the EU without the option to immediately respond to unconditional trade law violations: The ACI cannot be deployed if the aim of Trump’s tariffs is not punitive or their adoption made conditional on policy changes performed by the EU and its Member States. During the Trilogue negotiations leading up to the adoption of the ACI, the institutions did consider an instrument with a much broader scope of application but eventually and regrettably – in a leap of faith – opted for less versatile design features.
Another example is the reform of the EU Trade Enforcement Regulation. The so-called EU ‘trade bazooka’ now allows for the rebalancing of concessions if a third country government appeals a WTO panel report into the void. Taking retaliatory measures under the Trade Enforcement Regulation, however, awkwardly requires the conclusion of the first instance of a WTO dispute settlement proceeding. Such a built-in delay would severely undermine the deterrence function of EU retaliation and prevent the Union from responding to threats to its economic security in real time.
Fudging an EU response to Trump tariffs
In context of this regulatory lacuna, the Commission, the Council, and the European Parliament may be forced to pursue the ‘nuclear’ option and invoke Article 207 of the Treaty on the Functioning of the European Union (TFEU) to adopt unprecedented ad-hoc legislation for immediate and stand-alone retaliation against another WTO member. Such a move would be a quick fix for the gap that EU institutions left when they adapted the EU’s trade policy framework to contemporary threats over the past years. It is, however, hardly a functional nor sustainable solution to the challenges that will arise in the coming era of large-scale trade wars.
The EU has rightly taken pains to justify the reform of the Trade Enforcement Regulation and the adoption of the Anti-Coercion Instrument as necessary safeguards to enable a response to the sabotage of WTO dispute settlement and the weaponisation of economic inter-dependencies respectively. In times of ubiquitous geopolitical and geoeconomic uncertainty, the EU should not depart from this path of reason and thorough justification. That’s because invoking broadest constitutional powers on an ad-hoc basis for immediate retaliatory measures would signal a sea change in the EU’s attitude towards international trade regulation that the bloc may find difficult to reverse. Other trading partners will take note of such actions and may follow the EU lead – in the worst sense – and deploy ad-hoc and immediate retaliatory measures in trade disputes themselves. It is in this scenario that we can clearly see the rules-based trading system crumble for good.
Admittedly, such a move may be unavoidable in this one instance given the lack of readily available alternatives. It will be crucial, in that case, that the institutions clarify in the strongest possible language that they do not wish to establish a precedent, to prevent irritating otherwise unaffected trading partners.
Towards a new defensive trade instrument
In order to Trump-proof EU trade policy, however, the EU institutions should begin to devise a new defensive trade instrument whose application is explicitly – through objective criteria and clear thresholds – reserved for, limited to, and justified by the need to counter systematic yet unconditional violations of WTO legal commitments by the world’s largest economies, which pose an existential threat to the Union’s economic security and the rules based international trading system. Instead of resorting to boundless self-help, the EU should lead by example, develop a clear rationale and set clear limits to what may now become the necessary evil.
To read the expert comment as it was published by ODI, click here.