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Jan 04, 2023

“Reports of Globalization’s Death Are Greatly Exaggerated”

What is the role of the EU in the system of world trade? Can it hold its own between the United States and China? Yes, as long as its internal market remains attractive, says Sabine Weyand, the European Commission’s Director-General for Trade.

Sabine Weyand
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Director-General Weyand, in recent decades, the European Union has benefited greatly from globalization and strong growth in world trade. But now we see the word “deglobalization” doing the rounds...

As Mark Twain might have said: Reports of globalization’s death are greatly exaggerated. For one thing, the data does not yet support the claim that deglobalization has taken place. What we can see is that we’ve plateaued in terms of trade in goods, but even this is not the case for all trading partners. And trade in services continues to grow very strongly. So we need a much more differentiated view.

My impression is that we are not experiencing deglobalization. Rather we are seeing an upheaval within globalization. This includes a certain tendency towards fragmentation. This is partly a question of different regulatory spaces, for example in digital commerce. In that context, we have different models. In the United States, regulation is heavily geared to the private sector, in China it is highly state-oriented and with heavily controlled, essentially by the Chinese Communist Party. In Europe, we have a model that begins with the rights of the individual. There is a great deal of discussion at the moment about which model will ultimately prevail. And if we don’t manage to come to agreement on international regulation, which is what we are trying to do in the World Trade Organization (WTO) framework, then of course that too can also contribute to fragmentation.

What is the EU’s current position within the global trading system?

What we aim to do is to help shape this upheaval within globalization, while upholding our own interests and values. In doing this, we are guided by three principles: openness, sustainability, assertiveness. So let’s bring our influence to bear. On trade policy more specifically, this means we are working hard to reform the WTO and to invest in it. The WTO is fundamental is for us. Or to put it another way: WTO rules are the guard rails of the global economic system. They’re damaged at the moment, we’re going to have to repair them and strengthen them. This is a big priority for us.

But we are also in the process of diversifying our bilateral trade relations. Along with our partners, we are using existing treaties to address new challenges. Take CETA for example, the EU-Canada trade agreement has been in provisional effect now for five years. We are now also increasingly using this treaty for raw material partnerships, for diversification in the energy sector, and to support digitization and the green transformation. We are also making new agreements—we have one with New Zealand now. We are also trying to make progress on our trade relations with Latin America, and we are on the right track there. The same goes for Australia: we are looking to conclude our negotiations with them in 2023.

And how about sustainability and assertiveness?

When it comes to sustainability, we have realigned our policy. On a multilateral level, we are pushing forward with discussions in Geneva on trade and the environment. In terms of bilateral agreements, we have restructured sustainability chapters by focusing more on implementation and cooperation with our partners. In newly-negotiated agreements, we have introduced new models for enforcing reciprocal environmental and social obligations. This also includes, as a last resort, the suspension of trade preferences. Commitments by both sides to comply with core labor standards or to see the Paris Climate Agreement effectively implemented are part of them. The agreement with New Zealand which I mentioned is the first example of this. We are using this approach in current negotiations and will continue to do so in future.

As for assertiveness, on this we have a toolbox of independent instruments, which reflects the fact that we can rely less on the force of law in international relations than we could a few years ago. Instead, we are now faced with the law of the strongest; that is why the EU has regrettably had to give itself instruments with which we can react to distortions of competition caused by the actions of other trading partners. In situations where we are not making progress bilaterally or multilaterally, we have to be able to take autonomous action to protect our own interests and values. In short, we hope that the triad of values—openness, sustainability, and assertiveness—will put us in a position to stand our ground in the new phase of globalization.

In the past, trade agreements have always come in for strong public criticism, for example the EU-Mercosur agreement, which has not yet come into force. The claim is made that the Mercosur agreement will promote greater environmental destruction in the Amazon region. How do you address that?

Our trade agreements form the basis for cooperation going beyond trade. All our agreements, including the Mercosur deal we have negotiated, contain legally binding and reciprocal commitments, including a commitment to effectively implement the Paris Climate Agreement. As I see it, criticism is often triggered more by the situation on the ground than by the agreement itself. The policies of President Jair Bolsonaro’s government, which has now been voted out of office, made a very substantial contribution to deforestation, and this was of great concern to the EU and international community as a whole. This is why the trade agreement has been on hold for the past few years: there was no chance of ratifying it under those circumstances.

But the absence of a deal is actually the worst of all possible worlds. Because if there is no contractual relationship, we have no way of tackling these issues together with our Mercosur partners. Now the change of government in Brazil means we have a chance to come to a new understanding on this. As far as the market access component is concerned, we don’t think it makes sense to re-open an agreement that took decades to negotiate. But on questions of sustainability, the agreement could be complemented with concrete, enforceable commitments.

To speak in more general terms, my impression is that the current political situation has led to a growing realization—among the governments of EU member states, in the European Parliament, and in national parliaments—that you need partners in this world. We need the kind of friends and partners with whom we have contractual relationships with, with whom we work together on global challenges. With regard to the Mercosur agreement, I see the change of government in Brazil as an opportunity. The first statements by the President-elect Ignacio Lula da Silva and those around him have been positive. Now we have to see if we can get the additional pledges that we need in terms of climate protection and the Amazon, as well as concrete improvements on the ground.

The EU seems to be mostly on its own when it comes to WTO reform and fixing the rules of the world trading system. The United States has tried to shut down the WTO, at least during the Trump administration, and China is circumventing many of its provisions. How do you deal with that?

Yes, that is indeed a challenge. After all, the United States was the main force behind the multilateral trading system after the Second World War. Washington’s turn against the WTO can be explained by its (quite justified) assessment that current WTO rules are not suited to making China’s integration acceptable to all parties. Expectations associated with China’s WTO accession have not been borne out.

Over the past decade, China has moved away from the reform trajectory it began in the early 2000s; we are seeing a much greater role for state-owned enterprises and the overall economic role of the Communist Party has been strengthened. When people talk about “decoupling,” it should be remembered that China was doing this long before the term even came into use in the United States.

As far as WTO rules are concerned, it isn’t that China circumvents them more than other countries, it is that the rules themselves are inadequate. The rules of the WTO were not designed to deal with China’s state capitalist model. They were designed for market-based economies, and that doesn't work for China. So we say to the United States: we agree with your analysis, but we draw different conclusions from the current situation. We have to reform the WTO system and we have to say to China: you have benefited tremendously from the multilateral economic system, but you have to design your system so it does not conflict with others. Among other things, it is a question of subsidies, technology transfer, and the role of state-owned companies, and more generally the state’s role in the economy. That’s a discussion that we want to have, which is why we are also moving forward with discussions on WTO reform.

Because the question is: What alternative do we have? The Trump administration tried to deal with the challenges presented by China on its own. The tariffs it levied produced little in the way of results, except in helping to reduce prosperity in the United States. We see that the Biden administration is now turning to other instruments, like export controls on high-tech products. We need to see how this contributes to organized coexistence between the Chinese model and the market economies. In our view, the ideal solution remains WTO reform. That will not be easy to achieve, but ultimately there is no alternative.

It is very clear that China is aiming for greater self-sufficiency, for example via the strategy of “dual circulation.” What’s your take on that?

Of course, we note this development with concern. China remains an important partner for the European Union, and we need China in the fight against climate change. And, of course, the Chinese have also been economic competitors for some time now, and more recently China has become a systemic rival. We are disturbed by authoritarian and autocratic tendencies in China. It is also clear that the European Union itself and its member states are now assessing relations with China against a backdrop of our experience with Russia. But I want to be very clear: China is not Russia. We do not equate the two countries. Clearly, we have to be careful that international trade does not lead to vulnerabilities brought about by one-sided dependencies, as with energy relations with Russia, which has been weaponized by Moscow. In cases like this, we as the EU need to position ourselves better, so that we’re less vulnerable.

In terms of relations with China, this means we have already looked into existing one-sided dependencies with China. We have looked at China as a supplier, especially of raw materials, but also at one-sided dependencies within the Chinese market, something that has affected certain companies. Now we are looking at how to get out of these one-sided dependencies, whether that is through diversification or through a reorganization of the internal market. But our analysis also suggests that this kind of dependency affects around 6 percent of trade. That means 94 percent is unproblematic. China remains a large economy which cannot be ignored.

China is showing clear protectionist tendencies, but so is the United States. Isn’t there a risk that the European Union may be crushed between the two big blocs, China and the United States? How can the EU hold its own in a bipolar world?

By staying attractive. And that depends to a large extent on how we shape the internal market, using regulation which follows market-based and democratic principles, principles based on values. That is very much a successful model. Guidelines that we establish can set international standards: this is known as the “Brussels Effect.” If you have to follow certain rules to have access to the EU internal market, and those rules also meet your own regulatory objectives, then it makes perfect sense that you adopt those rules for your domestic economy too, so you don’t have to comply with different rules. This is the kind of leading role we also want to have with the Green Deal and Green Transition. And that will also help us in terms of competitiveness, too. The strength of the EU depends on the strength of our internal market, and this has to be designed to be innovation-friendly, there has to be appropriate incentives for research and development and for investments in future-oriented industries. The EU has made great progress in this area in recent years too. So I don't see a danger of being crushed between the US and China. But as I said before, there are tendencies toward fragmentation, so we must continue to be vigilant.

French President Emmanuel Macron has suggested introducing “Buy European” clauses in response to provisions in US legislation this summer. Do you think that would be the right way to go?

It is true that the US policy, as manifested in the Inflation Reduction Act of August 2022, is causing us major problems. In our view, the discriminatory provisions contained in that legislation are not compatible with WTO rules, and the almost unlimited levels of public subsidies will also create problems for other parties. We have sought discussion with our American partners. A joint task force has been established between the White House and the cabinet of EU President Ursula von der Leyen. This is how we are seeking solutions to the discriminatory effects of the legislation and looking to make the challenges more manageable.

It has to be said that the Inflation Reduction Act also has positive aspects. It is the first package of comprehensive climate legislation passed by the United States, something that has been needed for a long time. But we are now left in the difficult position of supporting the aims but saying that the means are wrong. We want to come to an understanding about the means. We need acceptable forms of subsidy.

Incidentally, this is not only a question within the trans-Atlantic relationship. We are seeing that Japan, South Korea, and many other trading partners are intervening very heavily in the economy in order to combat climate change and ensure that digitization happens. Everywhere the state’s role in the economy is growing, including in the European Union. This is partly about the need for rapid reform and partly the result of the pandemic. And of course it is also a consequence of the Russian war in Ukraine, which led to the state taking on a much greater role.

To prevent this causing trade conflicts in the short term, we need agreement on what forms of subsidies are necessary and acceptable. I think we did a pretty good job with the Americans on the semiconductor issue. As part of the EU–US Trade and Technology Council (TTC), we have a working group which deals with these issues and works to prevent a subsidy race. I think we need a similar approach with the Inflation Reduction Act: more transparency and procedures that ensure we do no harm to each another.

In geopolitical terms, there is a lot to be said for even closer trans-Atlantic economic relations. However, attempts to negotiate the TTIP free trade agreement were a spectacular failure. There is no prospect at the moment of a trade deal of that kind being acceptable within the United States…

TTIP was an instrument developed in the 1990s for the challenges faced by the economy of that era. At the end of 2020, the EU Commission said it would make no sense to revive the treaty, since it would not meet today’s challenges. When I think of what’s at stake today, it is the Green Transition in the economy, digitization, and the questions of international regulation that we are working on. And there is increasing concern about issues at the intersection of trade, technology, and security. These include access to advanced technologies, export controls, and investment controls. These are issues that we address within the TTC framework, and I think that is the appropriate forum for them. By the way, the TTC also served us well in coordinating countermeasures and export controls after the Russian invasion of Ukraine.

From the EU’s point of view, it would be good thing for us to also develop an initiative in this context, seeking to make sustainable trade as barrier-free as possible. This could also be a trendsetting agreement in terms of international cooperation on the issue. In short: we need a different instrument than a classic free trade agreement. We have to achieve concrete results within the TTC and consolidate those achievements. So next year we are hoping to replace the remaining tariffs on steel imposed by the Trump administration with a Global Sustainable Steel Arrangement, initially between the EU and the United States. This would set agreed standards for “green” steel, in other words climate-neutral steel. This agreement could then serve as the basis for further barrier-free trans-Atlantic trade.

At the same time the center of the global economy is shifting to Asia…

We know that 90 percent of global economic growth is happening outside the EU. We have to latch on to future sources of growth, and this is where the Indo-Pacific plays a key role, both geopolitically and economically. We are fortunate in that we already have trade agreements with many countries in the region, including Vietnam, Japan, and South Korea. Negotiations with India and Indonesia have gained new impetus. There are signs that Thailand, Malaysia, and the Philippines are also interested in resuming negotiations. So this is not a one-way street: there is an increased interest on both sides. This is what we are working on for the future, but the European Union has already laid down an excellent foundation. For example, the EU has either concluded agreements or else started negotiations with every member of the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership), except Brunei.

Overall, it can be said that geopolitics is lending impetus to European trade policy. As I mentioned at the beginning of the interview, there is renewed interest in Mercosur, and a focus on Latin America as a whole. We have worked very well with Latin American countries in the face of Russia’s war of aggression.

Russia was previously an economic partner for Europe, but a decoupling has taken place since the war of aggression began on February 24. Are things going to stay that way?

In the case of Russia, I really would speak talk about “decoupling,” as opposed to what is happening in our trade relations with China or between the United States and China, where I think the term does not apply. If you look at trade flows with China, it’s not very wide-ranging and is very much limited to specific technologies. However, with regard to Russia, we have taken massive measures. Current sanctions are impacting one third of our imports and about half of our exports. This is not yet full decoupling. But the effects go far beyond that. Companies, for example, may be prompted to carry out a new risk assessment and withdraw from Russia. And decoupling from Russia seems permanent to me. At least for the moment I don’t see any prospect of ever going back to the status quo ante.

The interview was conducted by Martin Bialecki, Lukas Franke, Henning Hoff, and Joachim Staron.