Europe should not retaliate against US protectionism

MUNICH — US President Donald Trump is making good on his promises to put “American first” through trade protectionism. How should Europe respond?

Trump has temporarily exempted Europe from his newly imposed import duties on steel and aluminum. But his Sword of Damocles, high import tariffs, still hangs over Europe. Indeed, he has already pledged to impose tariffs on European cars, targeting, in particular, BMW and Mercedes, to help US car producers, even though this will also hurt American consumers. As always, consumers are politically less powerful than producers, as their per capita losses are smaller than the producers’ per capita gains, and they face more barriers to collective action.

The European Commission has been considering retaliatory tariffs on a variety of imports from the United States, ranging from Harley Davidson motorcycles to food products like orange juice and peanut butter, in the hope that affected American producers put pressure on the Trump administration. This obviously worked for the moment, but it is ultimately the wrong strategy.

The fact is that retaliatory tariffs are extremely dangerous, as they risk provoking a broader trade war. And, contrary to Trump’s ill-informed claims, trade wars are not good for anyone, as they undermine the division of labour. Nor are they “easy to win”. Quite the opposite: like conventional wars, trade wars are impossible to win.

Beyond this general risk of trade war, there are reasons why the European Commission, in particular, would find that retaliatory tariffs backfire. For starters, they could arouse suspicion that the commission is motivated at least partly by a desire to reap more customs revenues for itself, as a hedge against a Brexit-triggered financial crisis. Though such revenues would be taken into account in the upcoming budget negotiations with EU countries, questions about the Commission’s motives are the last thing it needs.

In any case, one should not throw stones when one lives in a glass house. And the EU’s house is fragile: it already taxes car imports from the US at 10 per cent, compared to the 2.5 per cent tariff the US has in place for car imports from the EU. While this asymmetry emerged because the US has received greater intellectual-property protections through the so-called TRIPS Agreement, the fact remains that tariffs undermine consumer interests, and are thus unjustifiable.

The EU also collects an import sales tax at the rate of value-added tax for systemic reasons. And it collects extremely high import duties for agricultural products. From the beginning, the European Economic Community was shaped by a bad compromise between Germany and France: French farmers could charge excessive prices, and Germany could sell its industrial goods to France.

The system of agricultural protectionism that this compromise produced survives to this day, exemplified in import duties of 69 per cent on beef and 26 per cent for pork. Because of these high import tariffs, European agricultural prices are, on average, around 20 per cent above world market levels. This burdens consumers across the EU, especially poorer people who have to spend a large share of their income on food.

Europe’s agricultural protectionism also harms developing countries, which are unable to sell their agricultural products, in many cases, the only goods they can export, in European markets. According to an older study by the Canadian economist John Whalley, the disadvantages of agricultural protectionism for developing countries outweigh the benefits of development aid.

American farmers also lose out, because they are denied access to the huge European market. So, in this respect, Trump is not wrong to criticise the EU’s protectionism. Europe is blocking access to a class of goods, one that is vital to people’s survival, that can be imported much more cheaply than it can be produced at home.

The EU must ensure that it is truly a bastion of free trade, even if America moves to act as a stronghold of protectionism. That means that it must not sacrifice its citizens’ interests to those of the French agricultural lobbies or to the Commission’s financing needs. And it certainly should not engage in transatlantic saber rattling.

Instead, the European Commission should pursue a de-escalation strategy, offering to reduce tariffs on US imports and to resume negotiations on the Transatlantic Trade and Investment Partnership. This would enable Trump to proclaim victory at home, while raising the European standard of living by freeing Europe’s consumers from the yoke of the EU’s agricultural protectionism.

Hans-Werner Sinn, professor of Economics at the University of Munich, was president of the Ifo Institute for Economic Research and serves on the German economy ministry’s advisory council. Copyright: Project Syndicate, 2018. www.project-syndicate.org