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Europe is learning that you can't separate trade and politics

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For all the jibes about it being a protectionist bloc, the EU has long been an important force for deeper international trade. The cross-border integration of its own members’ economies is the deepest in history. Internationally, it is the most open economic region. Trade, together with competition, is the bloc’s most successful policy area.

It has achieved this by giving negotiating power to an executive — the European Commission — as unencumbered by national vested interests as one can realistically get, and by isolating trade policy from non-commercial considerations. But that very success means the EU is all the more challenged by a world where this isolation is no longer possible.

Hardly a day goes by without illustrating how trade relations are entangled with conflicts over values ​​and geopolitics. The EU has recognized that a narrowly commercial trade agenda can undermine its priorities, and has also belatedly discovered the muscle that comes with a large and open market.

Forceful sanctions on Russia and the incorporation of climate and labor clauses in trade agreements show that Europe can, when it wants, use that power to shape the world around it. But what is still lacking is a consistent willingness and united strategy for how to do so.

Take the friction over the US Inflation Reduction Act. This piece of legislation involves a subsidy to buyers of electric vehicles, but only those made in North America. The EU has cried foul, which has led to the extraordinary step of two jurisdictions setting up a task force to scrutinize a piece of domestic legislation in one of them.

The EU risks protesting too much. While the US subsidy is discriminatory in form, it may not differ all that much in its economic effect from the EU’s own subsidies to battery producers.

Europe’s greater interest lies in reinforcing and locking in the belated US commitment to decarbonisation technologies that the IRA represents. Preparing the ground for its own introduction of carbon border tariffs, the EU should coax the US towards the same principle of linking market access to climate change policies. It could encourage Washington to move forward, and go beyond, its interest in “skinny” carbon adjustments for steel.

It’s against this backdrop that German chancellor Olaf Scholz went to China last week, business delegation in tow. The question the trip raises elsewhere in Europe is whether Germany has learned to distinguish its own narrow commercial interests from Europe’s broader strategic ones.

Vladimir Putin’s attack on Ukraine means the error of Germany’s dependence on Russian gas is now blatant. Its reliance on China is no less real, but less well understood. A decade ago, only Chinese demand for German goods made it possible to reconcile the three German desiderata of shrinking the eurozone periphery’s current account deficits, maintaining Germany’s surplus and recovering from the global financial crisis through export-led growth. One could fairly say that China saved Berlin from the contradictions of its own Europe policy.

No wonder, then, that Scholz does not support “decoupling” from China. At the same time, he recognizes strategic imperatives, promising to “dismantle one-sided dependencies”. This is a step forward, and would help the German chancellor catch up with his voters, half of whom already think the country should reduce economic co-operation with China, while two-thirds reject economic interests taking precedence over human rights.

Other European leaders, too, are more eager to think strategically. French president Emmanuel Macron reportedly wanted a later joint visit to Beijing by the two leaders. But Paris also often falls short of promoting a trade policy that advances the EU’s united strategic interest rather than its own national concerns.

The trade deal with the South American Mercosur bloc has languished largely because of French reservations. The election of Luiz Inácio Lula da Silva as Brazil’s president creates an opportunity to complete the agreement with strong and enforceable commitments on climate change. If Macron is serious about the EU being a player on the world stage, here is a chance for him to create the missing political commitment on all sides.

The EU can no longer trade in isolation from strategic imperatives. Neither should the end of strategic naivety be an excuse for withdrawal. Europe needs to transcend that old dichotomy and embrace the rather un-European approach of using trade policy to pursue political objectives.