EU policy makers need to think more long-term about their policy mix to achieve industrial competitiveness, greening and resilience. Knee-jerk reactions to what others are doing are not the way to go.
To a slightly unnerving degree, the European trade policy debate become dominated by the subsidies offered by the USA in the Inflation Reduction Act. There may be disagreement over the appropriate response to the US move, but there is broad consensus that the threat to EU industry calls for some action.
Snap reactions to policy decisions have been a common feature of politics for some years. Some proposed domestic regulations or foreign intervention are hyped up with varying levels of evidence as so severely impacting economic activity as to being a vital threat that must be resisted.
There are claims that free trade agreements will destroy EU farming, or, to give a more recent example, that digital regulation will destroy competitiveness. But after implementation, the claims are usually quickly forgotten as there is no such dramatic effect.
Regulations will have costs and benefits. These will however not always be those expected, for example it was the EU’s willingness to regulate that brought about the ‘Brussels Effect’, which involved other countries following.
Modern economies and systems of production are complex. Government interventions are frequent. Understanding their outcomes is therefore so difficult as to almost provide a reason to seeking simpler ways to proceed.
Subsidies such as those in the Inflation Reduction Act can change corporate decisions. That is why various rules are in place to discipline then. Tempting though it may be to just directly retaliate to another country’s actions, it should be resisted.
What is needed instead is a level-headed understanding of policy objectives and the entire policy mix that will help deliver these.
Baseline: companies trade, and make investment decisions for many reasons
Speak to those involved in major corporate investment decisions and they will typically tell a story of multiple considerations.
Stade aid is just one of these, though undoubtedly an important one. Energy prices, availability of good production sites and qualified staff, access to markets, and stable legal systems are currently frequently mentioned as grounds for making investments.
China has established its competitiveness in electric vehicles – this has involved subsidies. However, it has also involved many other factors including regulations and consumer incentives that mean Chines electric vehicle sales are likely to be more than double those of the US and EU combined in 2023.
China’s decision involved betting on a new technology while producers in other markets such as Europe focused on their advantage in building traditional cars for existing markets.
Governments in the US and EU are now seeking to catch up, but it is worth noting that in both markets the best-selling electric vehicles are produced by Tesla, rather than traditional car manufacturers. Tesla manufactures in all three major markets, perhaps suggesting that fears for the future of manufacturing may be exaggerated.
It is too easily forgotten in policy discussions is that it is companies that invest and trade, and make long-term decisions.
Government needs to meet multiple objectives
Even if their decisions are not simple, companies have the single over-riding objective of making profits. Governments do not have such a luxury: they need to meet multiple policy aims, which adds even more complexity to their choices.
Transformation to the low-carbon economy is at the forefront of EU thinking. However, maintaining manufacturing jobs, supporting existing manufacturers, securing supplies of key raw materials, and attracting new inward investors are also crucial policy objectives.
State aid has been part of the answer, trade deals too, as have regulatory measures with global impact such as most notably the Carbon Border Adjustment Mechanism. Given that this latter measure is also considered by some countries to be in likely breach of WTO rules, the EU’s objections to IRA could look a touch hypocritical.
Arguably, the scale of the carbon challenge means that existing trade rules have to be re-examined, and dialogue at the WTO of the sort suggested by the EU recently is a helpful suggestion.
Just as importantly, though, is that the EU continues to keep its own agenda under review.
Initiatives of other countries such as IRA should be just one factor in considering policy responses against other objectives.
Finding the right policy mix to influence company decisions will always be a challenge
No government actions are guaranteed to be successful. Worse still, constant change from politicians seeking quick results may actually prove counter-productive. Equally though, becoming stuck unable to act due to complexity is risky.
Each action will have winners and losers. Many measures, such as subsidies and regulations, will tend to benefit incumbents with the greatest lobbying power. Understanding the consequences of decisions will always be challenging.
Perhaps above all what is needed is an unglamorous message: to recognise that in the modern complex economy there are no easy answers. Equally unfashionably, that a stable long-term process delivering a balanced set of actions is still more likely to deliver the policy outcomes you seek than to chase reactions to what everyone else is doing.
A more appropriate policy mix is likely to include degrees of openness, regulation, and state aid, discussed intensely with politicians and stakeholders. Coming up with stable positions as a result is actually a strength of the EU that shouldn’t be easily discarded.
Experts see China’s economy as vulnerable. News reports have suggested that the US is struggling to find manufacturing labour.
Reviewing how the EU is performing given changed circumstances such as the Inflation Reduction Act is reasonable. This shouldn’t however come in the form of a panic to match the actions.
David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.
