 a bigger global role.
- First, addressing distributional concerns domestically is a prerequisite for entering new trade arrangements. Europe’s social model is a major factor in reducing inequality and is rightly thought
of as softening the impact of rapid change on citizens in an age of globalisation and technological change.
But many EU countries still need to reform their social systems to deliver inclusive growth and better social protection¹⁵. The EU’s role should primarily be to empower its members to achieve desired levels of redistribution by effectively combatting tax evasion and social fraud that relate to
the single market¹.
- Second, the governance of EU trade and investment policy has become cumbersome. The recent difficulties in signing CETA have increased partners’ doubts about the EU’s ability to deliver.
We consider it imperative that the EU institutions regain citizens’ trust so that they can negotiate trade agreements on citizens’ behalf. This requires more transparency in negotiations. It will
also be important to ensure greater EU legitimacy, including through a reformed European Parliament.
- Third, the EU as a large open economy cannot sustainably run large current account surpluses. The large surpluses, and in particular Germany’s surplus, are a result of imbalances in the euro area that need to be resolved irrespective of the global environment.
Strengthening domestic demand in Germany is pivotal. Structural reforms at the national level, for example by addressing the debt overhang and remaining banking problems in other countries, would further boost demand. Such actions in surplus and former deficit countries will help speed up the normalisation of European Central Bank policy and strengthen the euro, thereby also helping to address the large euroarea surplus.
WHAT BILATERAL ACTIONS SHOULD THE EU TAKE?
While future EU reforms can set new trends in motion in terms of the new global economic order, there remains the question of how to respond to a potentially antagonistic US administration.
At a higher level, Europe’s possible responses range from pure antagonism and retaliation, to staying the course and building alliances with other countries.
Then there are more specific questions: what is the worst-case scenario in terms of US trade and investment discrimination and over what time horizons should the EU prepare to react? What are the implications beyond the purely economic relations, in terms of defence and cultural values?
In our view, the underlying objective of the EU’s response to unilateral measures by the US should be to sustain the multilateral trading system. The aim should be to react strongly and decisively but based on principles. The aims would be to wait until future US administrations change course and abandon unilateral actions, and to prevent an unnecessary
escalation that would be damaging to all: the EU, the US and the rest of the world.
In the event that the US terminates the North American Free Trade Agreement and imposes tariffs on imports from Mexico that are above the US mostfavoured nation (MFN) tariffs, it would amount to a violation of the US’s WTO obligations.
The EU and other WTO members would be affected directly because they have foreign direct investments in Mexico to serve the US market (see Table 3). The EU and Mexico (with which the EU has an FTA) and other WTO members that would be similarly affected, should then file a WTO complaint against the US.
In case the US introduces a form of DBCFT that is clearly in violation of WTO rules, the EU should carefully consider, again in collaboration with other WTO members, stronger measures. There is for example the possibility to adopt reciprocal measures on corporate taxation that would only be directed against the US. An alternative would be to use anti-subsidy measures against US exports to the EU or even to third countries. The latter is entirely within the EU’s remit and one of the WTO legal instruments at the European Commission’s disposal.
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