End of globalization? Europe is in danger of being crushed between the blocs

When Ngozi Okonjo-Iweala visits Berlin on Tuesday, she cannot complain about a lack of high-ranking interlocutors: Chancellor Olaf Scholz (SPD) receives the head of the World Trade Organization (WTO), and she also meets with Economics Minister and Vice Chancellor Robert Habeck (Greens). . This is no longer a matter of course, because hardly any other international organization has lost as much importance in recent months as the WTO.

Although the traffic light coalition has just discovered its interest in free trade, the once powerful WTO hardly plays a role in the deliberations. Instead, the federal government now wants to conclude more bilateral agreements with other countries in order to remove trade barriers. The WTO rules that were agreed upon to make world trade fair and prevent distortion of competition are no longer worth much.

"Of course, the WTO itself has suffered a great deal in recent years because economic policy disputes and trade policy disputes have increasingly been carried out bilaterally," says Habeck. "Above all, the relationship between the USA and China was fought out robustly."

That's still a friendly understatement, because it's no longer just about relations between the two economic superpowers. Germany and Europe are also becoming more and more drawn into the conflict – not only by China, but also by the Americans.

What the government of US President Joe Biden harmlessly calls the Inflation Reduction Act (IRA), i.e. a law to get the high inflation rates under control, is perceived in Europe as an attack on their own economy. French President Emmanuel Macron described the US law as "super aggressive", and Berlin is also extremely concerned about the plans.

"For me, at least, I can say that at least parts of the Inflation Reduction Act are not WTO-compatible based on our analysis," says Habeck. "I think that's largely shared by all countries that feel committed to a multilateral trade order." The Americans are well aware of that.

Nevertheless, the US government is sticking to the law, which is primarily a program to promote investments in climate protection and renewable energy with around 370 billion dollars. Green party leader Omid Nouripour praises this suggestion: “The Inflation Reduction Act is definitely a boost for climate protection in the USA. But we must not put obstacles in each other's way on the way to climate neutrality," he says at WELT AM SONNTAG. He would like "close coordination with our American friends on ecological standards and reliable supply chains".

Will the Americans get involved? In addition to the high subsidies for their own economy, the IRA provides a so-called Local Content Rule, which is intended to ensure that the products are also manufactured in the USA itself. This is just the latest step in a development that has been going on for years: globalization is being pushed back further and further. The USA, China and the EU are trying to shield their markets, to keep research, development and production in their countries or to bring them back.

“With the Inflation Reduction Act, we may be at a crossroads where we have to decide whether or not to go into an even closer partnership with the Americans, whether to do friend-shoring with them and still do some of our trading a lot focus more on them," says economist Holger Görg from the Kiel Institute for the World Economy (IfW). “But the big question is whether the Americans want that at all. They are our partners geopolitically, but they remain difficult for us on trade issues.”

Europe is in danger of being crushed between the blocs. On the one hand, there is a growing realization that China does not have to be a reliable supplier of primary products and a sales market for German goods (see box). On the other hand, the pressure is now also coming from the west, from partner USA. The debate has long ceased to be just about so-called decoupling, the decoupling of one of the two economic powers in order to be able to continue doing business with the other. In the end, the impression is that the Europeans could stand alone.

In banking circles it is said that the consequences of the IRA are already being felt: medium-sized companies are currently reviewing the investment decisions they have already made in Europe. Who knows whether the goods produced here can be sold competitively in the USA in the future?

In the coalition, it is undisputed that American trade policy is becoming a problem. At most, there are different opinions on the tone of voice that should be used towards the previous partners. While Habeck is already talking about "robust countermeasures" that one wants to prepare if the negotiations with the Americans do not lead to an agreement, the FDP coalition partner is more cautious. “The USA is our value partner, but at the same time there is an enormously protectionist economic policy. This is primarily aimed at China,” said Finance Minister Christian Lindner at WELT AM SONNTAG.

"That's why we have to represent our interests in Washington and point out the negative consequences for us." The German economy differs from the French one, many German companies are already producing in the USA. "Therefore, Germany cannot have any interest in a trade war, but must rely on economic diplomacy," warns Lindner.

One must take the Americans' Inflation Reduction Act as an opportunity to improve one's own competitiveness. "If you look at it clearly, you have to realize that constantly increasing EU demands on the economy in connection with energy prices are just as dangerous as the distortion of competition in the USA," says Lindner.

SPD leader Saskia Esken welcomes the climate protection efforts of the Americans with the IRA, but also warns of the consequences for trade policy: "Unfortunately, US legislation also has clear protectionist traits, which we view very critically," she says. This could lead to similar measures in other countries and regions. "Especially in the current situation of multiple global crises, for the resolution of which a variety of new alliances are emerging in many regions of the world, it would be fatal to pursue a policy of isolation," says Esken.

The economic policy spokeswoman for the CDU, Julia Klöckner, is calling for a new attempt at a free trade agreement with the USA. "I'm concerned that the competitive conditions between Europe and the US will be distorted and the spiral of protectionism will continue," she says. "It takes a political effort and new trade policy initiatives from which both sides benefit." Scholz must therefore travel to Washington with other EU heads of government. "In the end, there must be a trade agreement between the USA and the EU," says Klöckner. "Because a trade dispute with the US would be the last thing any side could need at this time."

However, following the failure of TTIP, a new attempt at a free trade agreement between the EU and the USA is considered unlikely. Habeck already had to do a lot of convincing in his party for the ratification of the agreement with Canada (Ceta) this week. Instead of a new agreement, the minister is relying on the established bodies such as the Trade and Technology Council with the USA, which is intended to ensure uniform norms and standards. Habeck does not want to give up hope that the WTO can be reformed and revitalized.

"I myself would always say that the WTO and a reform of the WTO should be high on the political agenda," says the Economics Minister. "Of course it's always better if we have a functioning global community, a multilateral structure with a common set of rules that as many states as possible feel committed to." The only one still looks at the referee, while everyone else no longer feels bound by the rules.

Experts consider a successful revival of the WTO to be difficult if not impossible. "We see that the World Trade Organization has no creative power when it comes to new developments in the global economy," says Friedolin Strack, Head of the International Markets Department at the Federation of German Industries (BDI). The WTO has an important role in maintaining the status quo on customs and anti-dumping issues. "Work usually runs smoothly here," says Strack. "Today it hardly plays a role in new questions of economic life." Economist Görg also diagnoses: "The WTO does not play a major role at the moment because the Americans are no longer interested in it."

So for now, the Europeans' only option is to seek negotiations with the US to push through a less damaging interpretation of the Inflation Reduction Act. Habeck showed the instruments this week, in case of doubt you have to counter with similar means. The EU could no longer only promote the development of new technologies, but also the domestic production of goods that are considered critical. "Even if the battery cells or solar panels are already state of the art, they should be eligible," says Habeck. He is thinking about a comparable rule that stipulates that a certain part of the products sold here must also be manufactured here: "We should consider whether we should also create a WTO-compatible mechanism for a local content rule in Europe."

In addition to chips and batteries, the Economics Minister also wants to achieve more European manufacturing capacities for energy supply products. “We need strategic sovereignty in critical areas here,” he says. Therefore, "production capacity here in Europe would have to be kept available because - who would dispute that after this year - energy is relevant to security".

In addition, the costs of CO₂ production can be taken into account, products that are manufactured under more climate-damaging conditions would then have to be subject to a kind of customs duty when they are imported into the EU. This could also “have an impact on the length of delivery routes, for example”. The calculation is clear: if companies that transport their goods to Europe and thus cause CO₂ have to pay more, then the incentive to manufacture within the EU increases.

Should the negotiations with the USA not be successful, Europe would probably react with similar means. A spiral of escalation would be set in motion, which would mean the end of globalization and thus also of the World Trade Organization. WTO boss Okonjo-Iweala warned in Berlin of the consequences. “If we break into two trading blocs, then that costs; it results in a five percent loss in global gross domestic product – that is massive, and for developing and emerging countries it would be in the double digits and the costs would be much higher.”

After the talk, Scholz emphasized that “deglobalization, decoupling and protectionism” were not a solution. "What we need is smart globalization in which we strengthen resilience, in which we reduce dependencies and in which we also make progress because we enable more countries in the world to participate in global exchange by diversifying trade relations."

The courtship of independent trading partners has long since begun. A few weeks ago, Scholz and Habeck traveled to Singapore to court the countries in Southeast Asia. States such as Indonesia, Vietnam and the Philippines should do more business with Germany in order to compensate for a loss or reduction in trade with China. They could not compensate for a loss for the time being.

Developments in China are even more dangerous than the new US laws. An attack on neighboring Taiwan is considered likely in the next few years, as the strategy paper from Habeck's ministry shows. That would be economically fatal for Germany, Taiwan is one of the most important chip manufacturers in the world.

But regardless of the Taiwan question, Europe is increasingly being forced to act by China. "The main pressure on our trade relations comes from China," agrees BDI expert Strack. "Something has changed noticeably in recent years." In the past, free market access to China was discussed. “That has now receded into the background. Today we have real system competition," says Strack.

In view of this development, Habeck is traveling to Africa at the weekend to conclude energy partnerships there and find trading partners. "From raw materials to export markets, we need stronger trade relations in order to gradually overcome the one-sided dependency on some markets, but also to make the states an attractive economic offer to be part of a prosperous community of values," he says. "This community of values ​​expressly includes the United States." He has to hope that the Americans see things the same way when it comes to trade issues.

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