Europe arms itself against the global trade bullies

Hello from Brussels, which is braced for a Christmas in the shadow of the Omicron variant. Last week the government announced the latest restrictions. Restaurants and bars were spared limitations in hours (this is café culture Brussels, after all), and schools kept open for now, but with the ambitious instruction that all children aged six or above must wear face masks.

As for Omicron’s impact on the world economy and trade, we’re somewhat optimistic that the blow will be smaller than with previous variants, which themselves weren’t fatal to globalisation. Today’s main piece is on the EU tooling up to take on the trade bullies, and Charted waters is on shipping delays.

All for one, and one for all

We’ve been going on for a while about how the EU is arming itself with an array of unilateral (sorry, we keep doing this, “autonomous”) trade instruments. The aim: to clobber trading partners whose companies are being unfairly state-subsidised to export cheap goods, bid for procurement contracts or operate in the EU single market, or which use forced labour or destroy the environment in the process of trading with Europe.

A prototype of one of these weapons is being wheeled out of the European Commission workshop this week for examination by the European Parliament and the council of member states. The “anti-coercion instrument” (ACI) would aim to deter — and if necessary hit back with tools such as trade restrictions, divestment and blocks on government procurement — foreign governments from using unfair means to try to force policy change. The European Council on Foreign Relations has an excellent paper on the subject here.

There are several intriguing things about this. First, it rests on a creative interpretation of a general principle of public international law, that (roughly speaking) governments are not bound by treaties with foreign governments that are exerting undue coercion, including economic and financial pressure. It was much discussed during the Arab oil embargo of 1973, an attempt to get oil-importing countries to withdraw support for Israel.

If the targeted country then challenged the use of the ACI at the World Trade Organization, the EU would have to defend it using various provisions in WTO rules. The strategy is a bit suck-it-and-see — whack a trade restriction on a miscreant foreign government and see if you can convince a WTO dispute settlement panel that it’s justified. Full marks for entrepreneurial legal innovation, anyway.

The second interesting aspect is that the likely target has changed, and with it the instrument’s probable scope. The original motive was to hit back at the US under Donald Trump, whose administration was threatening tariffs on imports of European handbags and other consumer goods to try to force EU countries into dropping their digital services taxes.

The interim deal on digital services taxes means that rationale has gone, and a much likelier target is now China — which, let’s face it, has created a far richer and nastier array of coercive techniques than being beastly to French handbag makers. Just ask the Australians.

The debate now is how to set the rules of deployment: who decides to use the weapon (if it’s the commission on its own, that’s a lot of power to hand it) and under what circumstances. Fans of the idea say it should be flexible and speedy with limited room for discretion. Bernd Lange, chair of the European Parliament’s international trade committee, says: “We should make a whole bouquet of measures possible, so that our measures are not calculable from the outset.” He also wants “a certain element of automaticity to prevent the EU and its member states from being vulnerable to being divided”.

Sceptics (including Estonia, Sweden and Japan) are concerned it won’t actually limbo under the bar of WTO rules and will end up with the political management of trade. There is also, of course, the serious risk that the EU becomes a bully itself.

As it happens, we’ve got a test case of coercion going on now. Lithuania (population 2.8m, GDP $63bn) has taken on China (population 1.4bn, GDP $15tn), not least by establishing strong relations with Taiwan. Strategic autonomy, indeed. Until now China has made only modest efforts to punish Lithuania, but Vilnius complained on Friday that all its exports were being blocked at Chinese customs. It’s not clear whether the measured response (until recently) is because Beijing thinks Lithuania is too small to matter or whether it fears wider repercussions across Europe.

If the latter, would a formal anti-coercion tool help by formalising this threat on the Three Musketeers’ D’Artagnan principle of all member states for one and one for all? Interestingly, a report focusing on the Lithuania case by the Swedish National China Centre, a government funded think-tank — Sweden is the main other EU country subject to bullying by China this year — suggests perhaps not.

First, it argues, China’s aggressive diplomacy is unlikely to be deterred by a threat of punishment, and so a cycle of retaliation would start. Rather than a precision instrument operating under closely defined criteria, the ACI would become a blunt weapon which, wielded clumsily, could do serious damage to the wielder. Business lobbies in the EU whose members are regularly caught in trade war crossfire, such as the drinks association spiritsEUROPE (the strange capitalisation is theirs), have urged the commission to make each use of the tool subject to a transparent consultation to evaluate the full economic impact. Second, the ACI can’t be used against coercive acts that are not made public either by the aggressor or the target, as many probably are not.

Better than retaliation is “absorption”, the China Centre’s report says, helping coerced member states that find their trade with China blocked to develop other supply chains or giving them financial compensation through a solidarity fund.

To some extent the principle in both cases would be the same, an equivalent to Nato’s Article 5 on collective defence: an attack on one member state obliges a collective response. It’s exactly the kind of thing the EU was made for. However, it’s not just the method that’s in question but the political will. Although general disaffection with China has been growing, member states often still vary considerably in their attitude to dealing with Beijing. It’s not just the design of legal tools that matters: it’s also the readiness to use them.

Charted waters

Shipping goods across the world’s main trade arteries is not only super expensive right now, it’s also super slow. We’ve been hearing a lot of anecdotes about this, with much of the attention falling on the delays at ports such as Los Angeles and Long Beach. But what’s been lacking is a data set charting just how bad things have got over the course of the pandemic.

Step forward Flexport, which has come up with an Ocean Timeliness Indicator to track journey times from the Far East to the US West Coast and back. Pretty grim, we’re sure you’ll agree. Claire Jones

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