EU’s evolving trade and industrial policies

The EU’s new approach to trade and industrial policy

Chad P. Bown explores the European Union’s evolving approach to economic security amidst global geopolitical and economic shifts. Below is a summary of the main findings:

• The EU-China Trade Dynamics
  – The paper highlights challenges in the EU’s trade relationship with China, focusing on electric vehicles (EVs) and critical minerals like graphite. China’s industrial policies, including subsidies and local content requirements, have given its EV industry a competitive edge, leading to increased exports to the EU.
  – In response to EU anti-subsidy investigations into Chinese EVs, China imposed export restrictions on graphite, a critical input for EV batteries, illustrating the risks of dependency on Chinese supply chains.
• Policy instruments for economic security
  The EU and other governments are deploying various tools to address economic security concerns:
  –Stockpiling: Building reserves of critical goods (e.g., energy or medical supplies) to buffer against supply disruptions.
  –Subsidies: Offering financial incentives to encourage domestic or allied production of critical goods (e.g., semiconductors).
  –Tariffs and Trade Defense Instruments: Imposing tariffs or anti-subsidy measures to counter unfair trade practices.
  –Export Controls: Restricting exports of sensitive technologies or materials.
  –Foreign Investment Regulations: Monitoring and regulating foreign investments in strategic industries.
• Challenges in Implementation
  – Policymakers face significant informational challenges in assessing dependencies and designing effective interventions. For example, while EU imports of graphite appear diversified, much of the global supply is indirectly reliant on Chinese mining.
  – There are trade-offs between efficiency and security. Policies like subsidies or tariffs may increase costs or provoke retaliation from trading partners.
• Broader Implications
  The U.S.-China trade war has indirectly increased EU-China trade in some sectors as Chinese exports deflected from the U.S. market.  

Trade policy, industrial policy, and the economic security of the European Union
Author: Chad P. Bown
From: Peterson Institute for International Economics

EU’s new era of economic protectionism?

Fredrik Sjöholm further develops Chad Bown’s argument above by specifying how specific economic policies reflect EU’s evolving perspective on globalization:

• Increased emphasis on supporting and protecting European industry from foreign countries’ trade practices.
• Introduction of the Carbon Border Adjustment Mechanism (CBAM) to address climate concerns in trade.
• A shift towards more state involvement and active industrial policy, particularly evident in Germany’s new approach.

Sjöholm highlights several implications and challenges arising from the EU’s new approach:

• Potential threats to the single market due to relaxation of state aid rules.
• Conflicts with EU policies regarding foreign countries, particularly concerning subsidies.
• Challenges in balancing economic interests with political concerns about maintaining a stable global trading system.

Navigating the New Normal: The European Union’s Changing Stance on Globalization in the Era of Trade Conflicts
Author: Fredrik Sjöholm
From: Lund University School of Economics and Management