TheMarketForIdeas

The much-awaited vaccine has recently been announced and reignited hope that the coronavirus pandemic that has kept the planet in a tight grip for about a year now is about to end. Though the vaccine itself is not beyond suspicion as some question the methodology used to validate it (normally, vaccines are vetted after being tested over several years), the world is gasping for a glimmer of hope against a threat it has struggled to understand and contain with mixed success. After an initial wave in the first and second quarters of 2020 that brought most of the planet to a halt with businesses closing down, unemployment rising and trade plummeting, the lockdown measures succeeded in putting a damper on the spread of the virus, leading to a relaxation of the lockdown measures during the third quarter so as to breathe new life into the ailing economy. Yet, this has caused the virus to emerge once more, thereby sparking a new wave starting around the middle of the third quarter of 2020 and continuing to this day. 

Threats from without and within 

Civil unrest has increased in intensity and aggressiveness, with riots erupting in several major European cities such as Paris and Berlin. Across the ocean, some hope came with Joe Biden’s victory against Donald Trump in the US presidential elections, as European leaders readily greeted the his victory and expressing their eagerness to work together, leaving indeed little room for doubt that they prefer Joe Biden’s promises for a renewal of the United States’ cooperation with its European allies as opposed to Donald Trump’s more unpredictable stance, divergent policies and, at times, downright adversarial attitude. And yet, for Europe, this last year has been an opportunity for some uncomfortable yet necessary self-reflection as the pandemic has revealed several weaknesses and fault lines in the EU as a whole as well as among its Member States. For starters, as previously discussed, the initial reactions of its Member States showed a conspicuous lack of a union-oriented mindset as well as a lack of confidence in the EU as a reliable medium for discussing and solving problems.

Another issue has been the stark differences between the Member States in terms of economic structure as well as political architecture. Some countries, such as Poland, have not suffered as strong an impact on their economy as did Italy and Spain. Research by A. Sapir has revealed that the countries with the tightest lockdown measures, greatest reliance on tourism and poorest quality of institutional governance have suffered the worst effect of the pandemic. This reveals to us a picture of EU Member States that are not only significantly divergent in economic structure from one another, but in which certain Member States present important red flags. Their economies present serious structural issues, such as a reliance on tourism to the point where it can lead to a crash in the economy. Why? Because the more a country depends on tourism (or any single economic activity, for that matter), the more disruptions in tourism can lead to high unemployment (when so many people are employed in this sector), can put many businesses that depend on tourism (e.g. housing, restaurants, entertainment etc.) out of commission and the more the government’s revenues from taxes decrease correspondingly, causing it to be unable to maintain its social security system and provide public services, forcing the government to borrow heftily and likely increase taxes to pay off loans (and therefore worsen people’s welfare), to say nothing of the risk of sovereign debt crises. Furthermore, poor government effectiveness is perhaps what makes the problem all the more challenging, in the sense that the countries that need the recovery funds the most also have the weakest administrative and political capacity to put them to optimal use.

A combination of economic insecurity, administrative shortcircuits, political bickering and the inherent unpredictability of the virus has sparked protests in several major European cities such as Paris and Berlin, and there has been rising Euroscepticism which, should it grow big enough, would eventually put a strong enough pressure on governments, to reassess EU membership in the context of national interests in a new light. Whereas the post-Cold War world transitioned from a unipolar world dominated by the US to a multipolar world with several poles of power, the past two decades have marked an intensification of the shift of the world’s economic centre of gravity from the Atlantic to the Pacific Ocean, and the rise of China as a global economic power, especially as it gained dominance in manufacturing and trade in good. China’s geoeconomic influence has risen accordingly, and can possibly reach a critical level if its aggressive endeavours in the South China Sea bear fruit and it gains control over what is arguably one of the most significant geostrategic hotspots in this day and age.

The United States began challenging China’s rise ever since the Obama Administration, when a “pivot to Asia” was first attempted. During Obama’s terms, this approach took the form of indirect military challenges, as the US sought to increase its naval presence in the Asia-Pacific region (recently redefined as the Indo-Pacific region), created new regional cooperation formulas that indirectly help contain China (such as the Quad between the US, India, Japan and Australia) and the drafting of the Trans-Pacific Partnership, a trade agreement that included several countries spanning East and South-Eastern Asia, Oceania, South and Central America but conspicuously excluding China. This was a thinly veiled riposte to China’s Belt and Road Initiative which seeks to create a trading and infrastructure network throughout Asia and Europe, with China as its point of origin.

Donald Trump, on the other hand, was far more overt in his stance against China. Not only did he hold the line in keeping a US military presence in the region, but he went as far as instigating a public trade war with China (as opposed to the legal battles within the World Trade Organization’s courts of the previous Administrations), imposing high unilateral tariffs on imports from China, who responded in kind. Curiously enough, Trump recanted the US signature from the Trans-Pacific Partnership, effectively halting it, which further pointed to his vision of departing from Obama’s initiatives and pursuing his own brand of foreign policy, as well as his stated beliefs of the TPP, as it was negotiated, as being detrimental to American workers. This US-China competition may run into a new bipolar order. 

The Sino-American pincer 

For the European Union, the significance of this Sino-American rivalry and of Donald Trump’s Presidency is twofold. For once, even though he has been voted out of office and replaced with a candidate that promises to rekindle the US-EU privileged relations, Donald Trump’s Presidency has sent a strong signal to the EU that it needs to rethink its place in the global geostrategic playfield, especially in terms of security. By choosing its President, America ultimately chooses its own path; as we argued on the occasion of Trump’s election in 2016, many Americans cast their ballots in his favour due in part to an underlying sentiment that US leadership had neglected American interests in its pursuit of greater involvement in foreign affairs (with, at times, disastrous results, such as the war in Iraq) while Trump had promised to turn the focus of his Administration inwards instead of outwards. Throughout his Presidency, Trump has made several negative comments towards the EU, for instance by praising Great Britain for exiting the union (a stark contrast to Obama’s vociferous campaign for the UK to remain in the EU). He also criticised European NATO allies for not doing their part for collective self-defense in NATO and freeriding on the US to maintain security, despite hopes that the US should “renew and even strengthen its commitment to European security”. Not only that, but in spite of requesting European allies to increase their defense budgets to the decades’ old agreed upon levels, Trump has urged NATO to become more active in the Middle East, in the context of flaring tensions in Iran over the US assassination of Revolutionary Guard commander Qasem Soleimani and the bombing of US and NATO targets in Iraq shortly thereafter.

Michael Crowley of the New York Times assessed that a second term for Trump would have raised the probability of the US withdrawing from the Alliance. Therefore, the EU needs to awaken to the realisation that it must work on its own security mechanism. On the one hand, the US accounts for 70% of NATO’s budget, and, if the Trump Presidency is any indication, any change in the White House Administration may imperil the solidity of the alliance and put into question the effectiveness of NATO. Scepticism about the Alliance and and complaints about freeriding allies have a long tradition in the US, but it was in Trump’s time that this also became part of the foreign policy rhetoric. At the same time, none can tell for certain that in the future the US will not seek to reform the EU’s role into that of a security client as opposed to a security partner. On the other hand, Russia spearheads its own equivalent to NATO, the Collective Security Treaty Organisation, and did not shy away from making its military presence known right in EU’s vicinity with its intervention in Crimea in 2014 and support for rebels in Ukraine’s Donbass region. More recently, Greece has clashed with Turkey, with Turkish and Greek warships coming to a standoff over Turkish vessels trying to drill for oil in disputed waters near Cyprus. The takeaway here is that, while most EU countries are also NATO members, an unpredictable US also means an unpredictable security network, and in such a situation, EU and NATO Member States would need to consider whether the alliances they are part of can actually satisfy their security needs, making them easier to pick apart in a divide and conquer strategy.

In another sense, the Sino-American rivalry means that the EU risks being trapped in the crossfire. The US under Trump has not hesitated to threaten on more than one occasion tariffs against the EU, the latter responding in kind. China, in turn, is no better for the EU as a trading partner. While the pandemic was in full swing, China issued a stern and salty reply to the EU’s analysis of Beijing’s efforts to suppress news of the virus originating and spreading within its territory, with the New York Times reporting pressures against the EU to tone down the language; not only that, but the European Council on Foreign Relations reported that China has even tried to blackmail the EU with a ban on exports of medical supplies to the EU unless the latter consented to political concessions. This all goes on to underscore just how precarious the EU’s situation really is in geoeconomic and geopolitical terms: its time-tested alliance with the US in matters of security and trade is not as sturdy as once thought and should not be taken for granted; its relations with its second largest economic partner – China – have revealed a gross vulnerability to the latter’s geopolitical manoeuvring, while its relations with its largest source of oil and gas imports and fifth largest trading partner – Russia – is marked by deep weariness and distrust, with the latter’s dependence on the EU for trade being, perhaps, the main factor that keeps its ambitions in check. 

When realism and liberalism collide... 

When we speak about free trade versus protectionism, this is a no-brainer for most economists. The superior benefits of free trade and its importance for economic prosperity, welfare and the maintenance of peace between trading partners are well-known amongst economists, while protectionism is known to stifle economic growth and hurt competitiveness in the long run. In light of this state of affairs, free trade would seem like the obvious, reasonable choice, and any sensible government should seek to reduce barriers as far as possible. But what happens when, in a world where some countries play fair while the others do not? What happens when some countries intervene in their own economies to reduce foreign competition and increase the power of their own companies on foreign markets, while other countries allow their companies to face competition freely while reducing governmental intervention to a minimum? What happens when a company that already benefits from strong incentives from its government enters markets where local companies do not have that artificial governmental support? It would help to say that protectionism and free trade relate to two different philosophies in international relations: protectionism pertains to realism, a school of thought which views the world as an anarchic competition for power between self-interested agents as a means of ensuring their own security, with greater power meaning greater security. By contrast, free trade reflects the values of the liberal school of thought where institutional cooperation, the rule of law and economic interdependency are the main drivers of peace.

It is also useful to recall the famous prisoner’s dilemma, where two suspects need to choose whether to remain silent (i.e. cooperation) or turn each other in to the authorities (i.e. competition) as a means of minimising punishment over a crime. In the classical example, both suspects have the most to gain by competing, for if either suspect chooses to cooperate by remaining silent while the other suspect opts to compete by turning their partner in, the suspect who chose cooperation will endure the greatest punishment while the one who chose competition will walk free. As a result, when one country that advocates free trade and liberal values interacts with another country that pursues a realist, protectionist strategy, the outcome is analogous to a duel between a fighter who respects the rules of the code duello and a fighter who is willing to do anything and everything to win. In other words, we have a power imbalance, in the sense that the companies buttressed by their governments can better survive the fluctuations of the market better than the ones who rely purely on their own efficiency and competitiveness, which turns the market into a weapon that can be used geopolitically. The European Council on Foreign Relations sheds light in its study on this inequality, arguing that both China and the United States have politicised several economic instruments, China through its investments, which it then leverages for political concessions, and the US by applying its own rules to international, normally politics-neutral institutions and services such as the internet, SWIFT, the International Monetary Fund or the World Trade Organisation. In the words of the authors of that study, “rather than being a barrier to conflict, interdependence will increasingly be weaponised”, just as in our analogy, the cutthroat fighter will use his opponent’s adherence to a strict code of duelling to his own advantage. 

Free trade with a realist(ic) price tag 

In recent times, EU leadership including President of the European Commission Ursula von der Leyen and President of the European Council Charles Michel have spoken of a need to protect key economic sectors from takeovers in the midst of the crisis and develop “strategic autonomy”, which he described as a means of not giving away access to the European Union’s large market for free. When the EU, traditionally seen as an advocate of liberal values, speaks of protecting its own industries (which had generally been the concern of the Member States), it is perhaps worth wondering whether this marks a departure from Europe’s hitherto stance and a switch towards protectionism. This initiative to attain strategic autonomy (an originally American concept) lacks for the moment a clear definition or implementation plan, but Charles Michel did speak about “levelling the playing field” in the sense of negating the advantages of foreign players from countries where regulations confer them an edge over their European counterparts. To the extent that the EU desires to maintain a free internal market, the initiative is meant to, as per Michel’s statement, enforce fairness in its trade with extra-EU partners. Can we thus speak of protectionism? No, not really, especially insofar as we do not have a clear outlook of the measures through which this autonomy is to be attained, but we can speak of a possible paradigmatic shift in the EU’s geostrategy, namely an adaptation of free trade to the power politics that take place in a world where geopolitical realism is still very much alive.

It was Charles Michel’s own admission in the statement linked in the above paragraph that, thus far, the EU has had the potential to be a great power without realising it. With a clear institutional framework, rule-based order for its internal market, large market size and financial resources, the EU can achieve greater bargaining power in negotiating with its counterparts, be they Russian, American, Turkish or Chinese, for the EU is important for China’s Belt and Road Initiative, an important destinations for the United States’ investments ($3.57 trillion out of a total of $5.95 trillion in 2019), Russia’s largest trading partner as well as Turkey’s largest trading partner. The EU’s geoeconomic presence does not end with these four actors, however; with all its Member States taken together, the EU is among the top trading partners for many of the world’s economies. Should the EU achieve the strategic autonomy it seeks, it would enhance its own resilience and increase its credibility towards other prospective trading partners and aspiring members, as the EU would appear to be a successful model of integration. On a geopolitical level, this would also increase the weight of its say in multilateral forums, where it might be able to leverage its economic access just like, for instance, Russia is able to leverage its oil and gas for geopolitical purposes. Another potential benefit is that, by shortening supply chains, it may help stabilise e.g. North African countries and gain greater influence in the Mediterranean. 

Decisions, dilemmas, divergences, drivers, definitions 

On the other hand, the success of this project is largely dependent upon several vital factors which, unless properly addressed, may quickly become roadblocks and hinder progress. As previously stated, the project lacks a clear definition, meaning that each Member State may well interpret “strategic autonomy” as whatever they wish. This would not be such a grave problem if it were not for the fact that economic and political cohesion between the EU is far from complete, as was demonstrated by the pandemic with the Member States first trying to solve the problem on their own before eventually turning it into a European problem instead of a national problem, and also by the economic effects, where some countries (e.g. Poland) were not as strongly affected as others (e.g. Spain and Italy). The Member States have different economic structures, different vulnerabilities, different levels of corruption and institutional competence, different policies etc. This means they would likely have divergent perspectives on what is beneficial and what is not. To echo a point stressed by the European Council on Foreign Relations, the EU’s institution focuses more on economic matters, administration and trade while leaving geopolitical matters to each Member State. But geopolitical issues, by definition, require each entity to consider its own interests and calibrate its foreign policy accordingly, so a union with insufficient internal cohesiveness that ignores its Member States’ differences and priorities may sooner break apart than unite, with centrifugal tendencies, even if only informally. This consequently acts to undermine the geopolitical interests of the EU as an entity in and of itself. Not only that, but if we consider rising Euroscepticism and the citizens’ increasing susceptibility to divisive rhetoric, then Member States may find themselves having to consider whether their membership to the EU is beneficial in the long run, as was the case of Britain’s exit.

Another stark limitation is a lack of focus on defence and security in this new initiative. There is scant reference to the development of a common European defence system; such a system would be necessary to allow the EU to become a security provider as well and provide it some independence from NATO, if only for two main reasons: a) the United States’ stances under Donald Trump have demonstrated that NATO membership is not a guarantee of security, to the extent that NATO can be used as a bargaining chip against the European Union should the White House choose to do so, as the US is the single largest contributor to NATO’s budget; b) NATO has been involved in several events that have drawn public opprobrium, such as the war in Iraq, which casts a bad light on the EU’s image as being subservient to the United States’ interests and being hypocritical about promoting human rights and values while sending troops under the NATO umbrella to invade and occupy foreign countries, further undermining its attempts to spread diplomatic influence and eliciting further resistance from precisely those countries that could benefit from its aid the most. Also, a lack of a common European defence system may well deter prospective aspirants from joining the EU especially if they feel under military threat from other powers that oppose the EU.

Finally, an important consideration that must not be disregarded in the EU’s calculations is its trade network. At present, nearly 35% of its exports and about 42% of its imports are accounted for by China, the United States, Russia and Turkey. As noted earlier, the EU’s vulnerability to supply chain disruptions not only revealed the evident socio-economic heterogeneity of its Member States, but has also raised the question of how to counter attempts by China to exploit the EU’s reliance on it for medical products (or by any other actor). This very same strategy is likely to be used for the purpose of preventing China’s geostrategic rivals from gaining a foothold in areas of importance to it. On the other side of the Atlantic, although there is hope among EU leadership that Joe Biden’s Presidency will undo the strains that the previous Administration put EU-US relations under, there is no way to tell so early in the game. Even if the new Administration will be open to this (and assuming the Europeans are still open), there may be trouble if only because some of his promised economic policies include progressively taxing the revenues of American corporations, including those of subsidiaries in Europe, in the hopes of reviving the economic welfare of the American middle class and creating more jobs in manufacturing and innovation to mitigate unemployment, which may result in several American offshore units closing down, including in Europe, which is worsened by forecasts of a heavy economic crisis to strike in the time to come. Furthermore, as the US is seeking ever greater energy independence, there is no way to foresee that the US will not elect a cabinet that would use its energy exports as an alternative towards Europe to soften its reliance on Russia, though that alternative would most likely come with a price tag. 

The only way out is through 

In order to effectively prevent itself from being boxed in or continue being liable to economic coercion by other powers, the EU needs to diversify its trading partners and expand its geoeconomic reach. EU Trade Commissioner Valdis Dombrovskis asserted that some of the methods being considered to protect EU industries from investments that could engender strategic liabilities are “on-shoring, near-shoring, stockpiling, diversifying, shortening supply chains”. Reshoring would potentially help alleviate some of the economic asymmetries between Member States by stimulating some of the economies that could most benefit from greater sophistication, such as those that rely too much on a limited scope of economic activities. However, this is not the ultimate solution, as in the end, costs will eventually rise as productivity increases and, theoretically, so would wages. The EU needs to also increase and diversify its trading network. This we have seen in recent years as the EU has gradually begun seeking deeper integration with several Asian countries, most notably free trade agreements with Vietnam, Japan, Singapore and South Korea. It is also worth noting that East and Southeast Asian countries have also managed to keep a better handle on the coronavirus pandemic compared to the rest of the world, owing to a combination of effective communication, enforcing lockdown measures and discipline from the citizenry.

That said, China has acted decisively to secure its own influence in the region and has signed the Regional Comprehensive Economic Partnership, a trade agreement between Southeast Asian countries as well as Japan, Australia, South Korea and New Zealand. It also marks the first time China signs a multilateral as opposed to a bilateral agreement. The estimated impact on the global economy amounts to $186 billion by 2030 according to BBC; however, the same source also cites analysts stating that benefits for Southeast Asia may well be only marginal, while Northeast Asia may stand to benefit the most and, moreover, that anti-China sentiment and reluctance to free trade may impede ratification in some countries. The ASEAN Post elaborates on the topic by pointing out that long-term geostrategic considerations are significant, as the trade bloc may cause trade diversion and that, by joining it, the signatory countries signal that they cannot and would not wish to cut ties with China. Nevertheless, the EU’s strategy should not pursue undermining China, but rather to prevent China or any other of the world’s powers from undermining it. Plus, the EU can act as a balancing force to China’s influence in the region.

In the end, beyond its well-known humanitarian, sanitary and economic crisis, the coronavirus pandemic calls for some soul-searching from the European Union, as it highlighted several glaring red flags that it needs to address: the lack of a union-oriented mindset, stark asymmetries between the Member States that diminish the union’s socio-economic cohesion, and a vulnerability to geopolitical movements that may turn its own adherence to liberal values and economic interdependencies against it. Aside from overcoming the damage done by the pandemic, EU needs to brace itself for a paradigmatic shift in its geopolitical outlook and adapt its strategy to keep up with the changes underway, whether it wants to or not.