2 – EUROPE IN A NEW WORLD ORDER
The United States is the European Union’s most important trade and bilateral investment partner, which has, until now, supported a multilateral trade system and European integration and has provided a security guarantee to the countries of the EU. But like other advanced economies, the US’s relative weight in the global economy has declined. The new US administration seems intent on replacing multilateralism with bilateral deals. In trade, it aims to secure new trade deals in order to reduce bilateral trade deficits and to protect, in particular, the US manufacturing sector. In climate policy, the US commitment to the Paris Agreement is being questioned. In defence, the security umbrella appears less certain than previously. The overall promise behind this change of direction is to put ‘America first’ and deliver better results for US citizens.
From Europe’s perspective, the world in 2017 looks very different to how it looked just one year ago. But despite significant upsets resulting from elections and/or referendums, not all of the changes that are taking place are breaks.
HOW CAN THE EU DEFEND A MULTILATERAL SYSTEM?
Trump’s America first policy threatens to upset the global trading system and even put the WTO in danger. This will naturally precipitate reactions from other global players, and in particular the EU and China.
The EU has a strong economic and political interest in preventing the demise of the multilateral trading system. Openness, measured as exports relative to a country’s GDP, is far greater in the EU (43.8 percent) than China (22.1 percent) or the US (12.6 percent). The rules-based system allows all players, including the weaker ones, to trade with each other based on high and comparable standards that have to be followed by all.
Protectionism would reduce EU and global welfare, hurt global growth and could mean lower standards and unfair competition. In particular, in the EU with its strong trade relationships around the world, many jobs could be at stake.
However, though the EU is the largest trading bloc in the world, it cannot sustain a strong multilateral system on its own. The EU’s inability to replace the US as a global hegemon is partly for internal reasons (the state of the economy, a weak defence and security policy) and partly for external reasons (the world balance has changed with the increasing economic relevance of China and other emerging countries).
At the same time, all three leading global trade players have expanded the number of regional trade agreements. The world therefore is evolving from a multilateral system centred around the US into a more multipolar system resting on the three strong trading poles of China, the EU and the US, each with several bilateral and regional trading arrangements. This has been criticised as
already undermining existing multilateral frameworks¹³.
This raises two questions: whether the poles of the system are collectively interested in supporting at least the core of the existing multilateral system, and whether the EU and China are willing and able to jointly support the multilateral system as the US steps back from its central role.
While the EU and China each clearly has an interest in supporting the multilateral trading system, it is an open question whether they can act in a coordinated manner as the EU and the US have done in the past. This is not a trivial question because the European and Chinese economic systems are much more different from each other than the European and American economic systems.
Nevertheless, in certain areas, such as support for the WTO, EU-China collaboration should be relatively straightforward. The EU should also seek other partners for collaboration in support of the WTO.
THE EU NEEDS TO STEP UP INTERNALLY TO BECOME MORE CREDIBLE EX TERNALLY
For the EU to assume a bigger role in safeguarding multilateralism and in forming new, and deepening old, alliances, a number of reforms would be required. We see three main areas in which
reforms would increase the credibility of Europe’s claim to