What Now?
Thoughts on Europe after the surrender, the high price of the latest Brexit benefit, the end of the Swiss model, and how Canada shaped the modern world
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In this newsletter:
Europe’s Surrender: Now what?
Brexit Benefits: Counting the cost
Swiss Model: Full of holes
Canada vs America: King of the North
1. After the Surrender
As the shock begins to subside following the EU’s surrender to Donald Trump last weekend, attention has shifted to how Europe should respond. True, the deal does not look quite as bad now after the US president announced a blizzard of new tariffs that left many other countries facing much higher tariffs than the 15 percent that now applies to most EU exports. In that respect, the EU could even be said to have become more competitive relative to exports from elesewhere.
What’s more, thanks to the mind-bending incoherence of Trump’s trade policies, EU exports could even have become more competitive relative to US manufacturing, as Shannon O’Neil at the Council for Foreign Relations notes:
The new trade deals charge cars coming from the European Union (EU), Japan, and South Korea with a 15 percent tariff, while Canada and Mexico—who use more U.S.-made auto parts and components—face a steeper tariffs of at least 25 percent (with discounts for U.S.-made content). This means headwinds for U.S. auto and auto parts makers, as it will favor cars made outside of North America than within it. And it will favor Japanese, Korean, and European brands such as Toyota, Hyundai, and Porsche over U.S. car makers GM and Ford whose supply chains rely more on Canada and Mexico.
Nonetheless, the one-sidedness of the EU-US trade deal, which most economists reckon will deliver a hit of around 0.5 percent of GDP over the next year, has delivered a psychological blow to the EU, coming so soon after the cringeworthy “Daddy” moment at the Nato summit in June. There is not much doubt how the EU should respond to America’s embrace of protectionism and Trump’s bullying: it needs to strengthen its own economy by deepening its trading links with rest of the world and removing barriers to trade within its own single market.
But there is rather more debate about whether the EU can deliver on this agenda. As Luis Garicano, professor of public policy at the London School of Economics, notes in this excellent post, some of the loudest voices bewailing the deal have been the biggest obstacles to European progress:
The French PM cried “soumission” on seeing the deal. But France (and the other member states) are responsible for the state of affairs. They continue to drag out, sabotage and fail to ratify Mercosur, blocking the best free trade alternative available. France (together with other member states) is responsible for slowing the single market of services and the capital market union at every turn in the name of national interest.
Similarly, in an op-ed in the FT, Marc de Vos, the co-CEO of the Brussels-based Itinera Institute, calls out Germany:
The single biggest European development of the year is the re-emergence of Germany as a military actor, with a five-year plan to spend more than €600bn on defence and security. But tellingly, the Merz government embraces a “Made for Germany” philosophy, forgoing the opportunity to put a new Germany at the heart of a coalition that could form the bedrock of a future European defence union.
Meanwhile, in an essay for Bloomberg this weekend, I looked at some of the ways in which the EU’s apparent capitulation to Trump, even if justified, has damaged confidence in Brussels in ways that could undermine support for free trade and deeper European integration within the bloc:
Already Europe’s right-wing populist parties are pointing to the deal as evidence that the EU is unable to defend national interests. French far-right leader Marine Le Pen slammed the agreement as a “political, economic and moral fiasco” that showed national sovereignty is being crushed “under the weight of Brussels bureaucracy.” Alice Weidel, the co-leader of Germany’s far-right AfD party, called the deal an “admission of failure for the EU,” while Hungarian Prime Minister Viktor Orban said that Trump had “eaten von der Leyen for breakfast.”
At the same time, there are growing calls within the EU for protection of industrial sectors that expect to be hit as Trump’s tariffs divert trade from elsewhere. The EU has already introduced tariffs on Chinese car imports. Now European steelmakers are demanding protection from a likely wave of cheap imports as a result of America’s 50% tariff on steel imports. While consumers will benefit from lower prices in the short term, any sense that the disruption to global trade is harming European businesses could make calls for protection harder to resist.
Meanwhile, the notion that the EU is a pushover weakens its hand in future negotiations too. An EU-China summit this month failed to make any headway in resolving trade-related disputes, in part because Beijing was unwilling to make concessions to an EU that lacks leverage. Only a few weeks ago, European Central Bank president Christine Lagarde was talking up the potential of a “global euro” moment. But the perception that the EU is unable to effectively defend its own interests undermines its pretensions as a geopolitical actor which is key to a global role for the European currency.
I explored these issues further in comments for this piece in Le Monde, columns for Byline Times and Kathimerini, as well as this podcast for Kathimerini.
For Europe’s sake, I hope I am too gloomy.
2. Brexit Benefits
One reason to worry that Trump’s trade policies might encourage further European fragmentation rather than drive integration stems from the different treatment meted out to the EU and Britain. Even Jonathan Reynolds, the UK trade secretary, was obliged to admit that the lower tariff on UK exports of 10 percent relative to the 15 percent tax on EU exports was a benefit of Brexit, much to the delight of Brexiteers. The fact that Brussels had initially scoffed at the UK-US trade deal and insisted that, with the greater negotiating heft that came with controlling access to the world’s largest single market, it would do better only added to the sweetness of the Brexiteer victory.
Of course, the idea that this small preferential treatment on tariffs can somehow make up for the considerable economic damage of Brexit is ridiculous, for all the reasons identified by Polly Toynbee in a column for The Guardian. And while it is true that the lower tariffs make the UK a more competitive place to locate a factor, as Simon Evenett notes, this needs to be set aside the inevitably greater damage to the UK economy from Trump’s trade wars. Deutsche Bank notes:
Domestically, our decomposition shows that the UK is not an island on its own. The [UK-US tad deal] accounts for only half of the total estimated GDP impact on our estimates. Reduced aggregate demand globally will have just as big of an impact on domestic demand. Put differently, what deals the US strikes with the UK’s biggest trading partners matters. And despite trade fragmentation, reduced global demand tends to impact the UK more significantly than it does for the EU – given that the UK is a smaller open economy.
The broader question is to what extent the mere fact of Brexit weakened the hand of both the UK and EU in negotiating with Trump. The US president and his administration have never hidden their intense dislike of the EU and their determination to undermine it, nor has he made any secret of his support for Brexit. Who knows whether an EU with Britain in it might have put up a stouter resistance to Trump’s demands. What I think we can say with some certainty is that in handing Britain a better deal, Trump has injected some tension into the cross-Channel relationship and turned Britain back into a something of a role model for European eurosceptics - no doubt exactly as he intended.
3. The Swiss Model
On the other hand, if being outside the EU was the key to successful negotiation with Trump, how does one explain Switzerland? No one has more reason to feel aggrieved as a result of the events of the last week than the Swiss. They have been hit with tariffs of 39 percent on their exports, which is even more than the 31 percent with which they were originally threatened on “Liberation Day” in April and not far off tariffs imposed on Brazil, Syria, Laos and Myanmar. No wonder one Swiss lawmaker told the FT that the government was in a “state of shock”.
What exactly the Swiss have done to merit such harsh treatment, other than to run a sizeable trade surplus with the US two thirds of whih is gold bullion and bars and so hardly counts, is unclear. Perhaps it will turn out to be more Trump pressure tactics ahead of a deal next week. In a surreal twist, Marco Rubio, the US secretary of state, posted a bright-sounding message the next day to the Swiss, commemorating the country’s 700th anniversary, noted the New York Times:
“The United States values its strong and steady relationship with Switzerland,” he wrote, without mentioning the new tariffs announced hours earlier. “We wish the Swiss people a successful and meaningful celebration and look forward to continued collaboration in the years ahead.”
The broader question is where this leaves the “Swiss model” which some will remember was for a long time the preferred outcome for many Brexiteers. This was the idea that it was possible to thrive outside the EU simply by relying on free trade agreements with the rest of the world to boost productivity. Some of us argued even then that this was deeply naive since it was already apparent in 2016 that the EU itself was no longer willing to tolerate the situation whereby the Swiss had effectively full single market access via 120 sectoral agreements.
Now, after a decade of negotiation, Switzerland recently concluded a new agreement which crosses almost every red line that Brexiteers set for Britain. As the FT reported:
If approved, the new framework binds Switzerland to mirror changes to EU legislation in areas including the regulation of goods, migration, electricity and transport — or face retaliatory measures. Bern would have little influence over how the rules develop, but it would be obliged to pay €375mn annually into the EU budget.
All this will be put to a referendum most likely in 2027. What the consequence of rejecting the new deal are not clear, but EU officials told the Financial Times that maintaining the status quo was not an option. Meanwhile:
Swiss officials say the erosion of the existing bilateral agreements could have serious long-term ramifications, for example in terms of Swiss export capacity, security and transport between Switzerland and EU countries.
Trump has just made that choice even more stark. Indeed, his decision to charge for market access leaves the Swiss model looking increasingly in tatters - even as Britain, lacking good options of its own, tries to inch towards it.
4. King of the North
The other country that is firmly in Trump’s crosshairs is Canada. It got slapped with a 39 percent tariff on its exports last week, though this headline number is slightly misleading since all exports of goods under the USMCA free trade deal are exempt. That reduces the average effective tariff rate to 6 percent. Nonetheless, the new tariffs, if sustained, will hit the Canadian economy hard. What’s more alarming is that they appear to have little to do with trade issues, so much as Trump’s personal political agenda towards Canada. The justification for the higher rate was fentanyl smuggling,
Anyway, this resurgence of US-Canada tensions, or more accurately Trump-Canada tensions, had me wanting to understand more about the history of the two countries, how they came to be separate and to develop such different political traditions. This superb five-part series of the Empire podcast really did the job. A fascinating story, compellingly told. I hadn’t appreciated the extent to which events in Canada nearly 300 years ago helped shape our modern world. If Trump listened to it, he might soon drop his nonsense about the 51st state.
I am constantly struck by the weird perspective some people have of the effect of #Brexit on the EU.
There is no doubt that the EU has been diminished by the exit of the UK.
There is no doubt that the UK also has been diminished by its exit from the EU. However, the #Brexiters seem to be unable to confront that reality.
For me, the conduct of the UK on the matter of EU membership has been disgraceful. Lies, more lies, treachery at every turn, the outcome for the majority has been appalling; we are so much poorer and less secure.
There has been a lot of nonsense talked about the lack of 'sovereignty'. Most of it was spurious drivel, barely worthy of response, but the people who wanted to protect the special privileges they enjoy were happy to go along with the dishonesty rather than to stay engaged and work to improve matters for the majority.
The UK, at the level of the wealth elites, is not a team player. The Scots voted to stay in the EU twice; first in 2014 and again in 2016.
Anyway, here we are, much poorer, less secure and - perhaps worst of all - less influential on the global stage.
On a personal note, I detest the people who drove the Leave campaigns and I hope they are made to pay for the many damages they have done to our country.
That's the post!
No tge assessment is realistic not gloomy and the carping from the usual suspects is predictable eg the ultra right hates the EC, France whichhas never quite bought into the single market and Hungary which is everyone else's stooge at large. The weakness in enforcing its rules against its members as opposed to third parties is evident. Hopefully VDL has bought a small breathing space pending more ruptures from Trump but imposing tariffs on US steel seems a likely prospect.