Trade tensions with the U.S. drive the EU into a more protectionist direction

U.S. President Joe Biden and French President Emmanuel Macron (Copyright: The White House, Public domain, via Wikimedia Commons)

Talk of a trade war has increased in Brussels, following the increased tensions between the European Union and the United States over the mass subsidies the U.S. Biden administration is planning to hand out to all kinds of supposedly environmentally friendly industries, most notably manufacturers of electric cars. The U.S. legislation which enables this carries the rather Orwellian name “Inflation Reduction Act”.

Despite a lot of discussion, Biden has still not made any commitment to amend the legislation. Unfortunately, the European Union is planning to respond with protectionism of its own, as EU Internal Market Commissioner Thierry Breton, is pushing for an EU “sovereignty fund”, whereby the EU would splash out its own subsidies, risking a full-on subsidy war with the United States that would gravely damage the already fledgling WTO-system.

Breton is French, so this is what one would expect. He also pulled out of the EU-US Trade and Technology Council (TTC) at the last minute. Still, Breton has also acted as a voice of reason within the European Commission, for example demanding to water down the EU’s innovation-hostile planned ban on combustion cars by 2035, warning that this may cause “gigantic disruption”.

Von der Leyen making it all worse

A greater danger to free enterprise within the EU Commission is perhaps the President of the European Commission, Ursula von der Leyen, herself. She has firmly supported the rather fanatical EU “climate” Commissioner Frans Timmermans with his plans for an expensive «European Green Deal» throughout, even following the massive shortage on fossil fuels the EU is currently struggling to cope with.

In response to U.S. protectionism, von der Leyen now wants the EU to change its state aid rules, in order to enable even more “green transition” spending. This amounts to an open attack on the core of the EU project: safeguarding fair competition within the single market.

We should not expect much opposition from the EU Commissioner responsible for competition policy, Margrethe Vestager, who has barely bothered to go after blatant violations of state aid rules, while however attempting to requalify tax rulings smaller European economies have agreed with multinationals as “illegal state aid”.

The Energy Charter Treaty (ECT) as a victim of increased EU protectionism

The whole thing is indicative of a wider trend of Brussels abandoning its support for the idea of free trade. An important event was in this respect also how following a major campaign by green leftwing activists, a number of EU countries are now planning to leave the Energy Charter Treaty (ECT), which establishes private arbitration as the solution in case of disputes.

Also Germany has now decided to do so. Franziska Katharina Brantner, a Parliamentary State Secretary in the Federal Ministry for Economic Affairs and Climate Action, and a member of the governing German greens has declared the Treaty to be “hostile to the climate”, adding that Germany’s exit “puts an end to non-transparent arbitration tribunals, which, in case of doubt, rule in favour of investments in coal.”

Apart from the fact that Germany’s problematic energy policies have now forced the country to increase its coal consumption, there’s the issue that the Energy Charter Treaty (ECT) is key to protect investment in the renewable energy sector, which greens so strongly support.

This is evident from the case of Spain, which lost a number of cases at private arbitration courts for having abruptly changed its financial support scheme in 2013 for renewable energy installations. This scheme had only been created in 2007. Clearly, for many greens, their hatred for the private sector trumps their support for renewables.

Spain continues to refuse to comply with the arbitration rulings and its leftwing government has also pledged to leave the ECT – not that this will in any way have an effect on its obligations to comply with past arbitration rulings. Since 2000, Spain has not paid a single Investor-state dispute settlement (ISDS) arbitration award and scores very poorly in a recent international comparison, which reveals the country as the second most delinquent country in the world when it comes to the refusal to pay these awards, as it currently still owes a whopping 700 million dollar to investors. It has been facing the highest number of renewable energy cases by far and has lost the highest number of private arbitration challenges.

Troubling throughout all of this is how the European Commission has been urging Spain not to comply with the arbitration rulings, even going as far as to claim that complying with such an arbitration ruling and paying out the compensation would amount to “illegal state aid”. The background here is the 2018 ruling by the EU’s top court, which held that between EU member states, investor-to-State arbitration was illegal.

EU attempts to regulate producers outside of the EU’s jurisdiction

While the American mass subsidy programme is mostly hurting investors keen to invest in the United States, newly proposed EU rules aim to not only affect those investing in the EU but also to regulate producers outside of the EU’s jurisdiction. One example of this is the proposed EU “Corporate Sustainability Due Diligence” directive, which would require certain companies to undertake due diligence across their value chains, whereby they are being held responsible for all kinds of things that go wrong, particularly in terms of sustainability and human rights.

Behind this smokescreen lays the EU’s desire to impose its own standards on trading partners. A similar regulation, which has now been agreed, is the EU regulation to introduce mandatory due diligence to stop deforestation in supply chains, requiring companies to check whether goods sold in the EU have not been produced on deforested or degraded land anywhere in the world, but in reality disproportionally hitting the palm oil sector in Malaysia and Indonesia, despite the fact that great progress has already achieved by producers over there.

According to the think tank Chain Reaction Research (CRR), palm oil deforestation in Indonesia, Malaysia and Papua New Guinea has fallen to its lowest level since 2017. Squeezing palm oil altogether out of the supply chain would in the first place also worsen deforestation, given that alternatives like sunflower or rapeseed oil require more land, water and fertilisers. That’s not to speak about the effect on EU consumers.

In contrast to the EU, the UK simply requires products to be in line with the local regulations, thereby effectively applying the principle of mutual recognition. This is much more practical and also more in line with the spirit of free trade, as trade should be about trusting the standards of trading partners. It is of course fair to deplore low labour or environmental standards elsewhere in the world, but typically, those have increased as a result of trade, not as a result of threats to end trade if foreign standards aren’t adopted.

What’s next?

Germany and France have reportedly agreed on the need for an expansion of so-called “Important Projects of Common European Interest”, which are EU programs that allow for the broader use of otherwise-regulated state aid, culminating in some kind of “Buy European Act”, referring to its protectionist American counterpart. At the moment, this initiative is blocked by the German liberal coalition partner FDP, but their obstruction has rarely ever delivered much, certainly when the EU Commission President herself has jumped on the state aid bandwagon.

After a meeting with Joe Biden, French President Emmanuel Macron, who has served as some kind of EU envoy to discuss the matter, has stated he and Biden had agreed to “fix” the dispute. We can only hope that’s the case, because the EU is firmly intent on making a bad situation much worse.