The European Council is discussing further tariffs in response to growing export pressure from China. This is the right approach, but it will only buy time for European industry. Restoring competitiveness in the long term will also require the EU to move beyond business as usual when it comes to integrating the single market.

After lengthy discussions, the EU is now preparing to take more decisive trade policy measures in response to growing export pressure from China. The German government, initially sceptical, is now joining France in pushing for higher tariffs and a new instrument to counter unfair competition from China. China’s concession to curb exports of subsidised hybrid vehicles is intended to keep the EU at the negotiating table, but does little to change the overall dynamics: China’s subsidy-driven exports are placing enormous pressure on European industry.

New tariffs will give European industry breathing space – but at a cost: Tariffs can ease price pressure from China in strategically important sectors such as chemicals, automotive manufacturing and mechanical engineering, helping to stem the market contraction of recent years. But this comes at a price: the cost of affected intermediate and finished goods will rise. China could also introduce far-reaching countermeasures, such as further restricting European companies’ access to rare earths.

Effective trade protection alone will not restore competitiveness. It can only restore the conditions for economic competition with China in the short to medium term, creating a window of opportunity for European industries to catch up. Whether they succeed will depend on business decisions, but also on the policy framework in which companies operate. Policymakers should create the conditions for stronger growth in Europe.

A large part of the answer lies in the European single market. With around 450 million consumers, the single market is Germany’s largest export market: more than half of German exports go to other European countries, and this share is growing, while exports to China have declined significantly. An integrated single market makes it easier for companies to achieve economies of scale and reduce costs.

Yet the single market’s potential remains far from fully realised. If we raise tariffs on Chinese imports, we must simultaneously dismantle internal trade barriers. National rules and requirements continue to impose substantial costs and hamper innovation. The German government is vociferous in its demands for less bureaucracy from Brussels, but overlooks a fundamental point: deeper integration is the most effective way to cut red tape. When one EU rule replaces 27 national laws, compliance costs for businesses fall. Those who want less bureaucracy cannot continue to cling to their own cherished national exceptions. This is evident in both relatively small matters, such as the still cumbersome recognition of professional qualifications obtained in other EU countries, and major integration projects: progress towards a banking union and an energy union remains painfully slow.

Yet many Member States are still not pursuing integration with sufficient ambition. Greater ambition is particularly needed in four areas. First, existing industries need more harmonised rules, for example through the elimination of differing product standards. Second, more should be done to help start-ups scale across Europe. The proposed harmonised European company form, ‘EU Inc.’, is an important step in this direction. Yet Member States are currently weakening key elements of the proposal, including provisions for simplified insolvency procedures for innovative companies. Third, Europe needs to make more strategic use of its own demand. The public sector is one of the largest customers in the single market. When public authorities purchase buses or battery storage systems, European manufacturers should have a better chance of securing those contracts. This is precisely what the Commission’s Industrial Accelerator Act proposes. Conservative groups in the European Parliament should abandon long-held assumptions and drop their opposition to the legislation. Fourth, the next Multiannual Financial Framework should be sufficiently funded to enable joint investment in innovation on a scale that individual Member States cannot achieve alone. The German government should lead by example and defend the modernised budget structure – even if this means a larger overall budget.

The stakes are high for the EU – but so are the potential gains. Taking action may entail considerable economic and political costs. Yet the costs of inaction – further erosion of Europe’s industrial base, a continued decline in its innovative capacity and growing dependencies – would be far greater. Europe has much to gain, but not by continuing with business as usual. Success will depend on Member States seizing the current window of opportunity and finally making serious progress on the most important integration projects.

About the authors

Etienne Höra is an EU trade policy expert at the Bertelsmann Stiftung.

Claudia-Dominique Geiser is a Senior Expert for EU economic policy at the Bertelsmann Stiftung.

This text first appeared in German at Europe.Table.

Related Posts: