How Europe responds to the rise of economic protectionism

Takeaway

Protectionism is on the rise in the global economy. The participants of the panel "Between China and the USA: the European search of an industrial strategy" focused their attention on economic challenges that result from geopolitical trends. Shahin Vallée, Senior Fellow at the German Council on Foreign Relations (DGAP), stressed that Europe will never be economically self-sufficient. Philipp Jäger, Policy Fellow at the Jacques Delors Centre, discussed the asymmetry in Europe-China trade (Europe imports more than it exports) and pointed out that the key challenge is to provide Europe with alternative sources of supply. Adam Czerniak, director for research and chief economist at Polityka Insight, argued that one of the solutions could be to strengthen economic relations with other developing economies.

Europe and the US compete for subsidies. Julia Patorska, the partner associate at Deloitte, compared the American Inflation Reduction Act (IRA) to industrial policies that have been in place for years in the European Union but stressed that the IRA will pose a challenge for Europe. Czerniak warned that Europe should not duplicate the American move towards protectionism, but try to take advantage of it, for example, by participating in the US supply chains. Jäger advocated a firm response to US state aid, particularly in sectors that are key for the green transition. Vallée, on the other hand, said the IRA's greatest strength was not in the subsidies and tax breaks, but in requirements that focus on local production – despite being more expensive, it helps maintain the necessary levels of supply.

Europe must find a place between the US and China. Our panellists agreed that it is not entirely certain what the true intentions of the United States are in foreign economic policy - whether the country is heading for a serious confrontation with China, or whether it is just competition, both economic and political. Vallée pointed out that if Washington's intention is confrontation, Europe should not take sides, but ensure the freedom to choose with whom and when it trades. Vendeline von Bredow of The Economist, who moderated the discussion, recalled Ursula von der Leyen's statement shared at the G7 summit when the latter talked about de-risking in relations with China, rather than de-coupling. She indicated that Europe should not cut itself off from trading with China, but prepare itself - also in terms of supply chains - for various scenarios that may affect mutual relations (including, for example, the possibility of a Chinese attack on Taiwan).

Friendshoring is developing slowly. Czerniak pointed out that the process of the so-called friend-shoring or near-shoring (moving production to countries that are geographically or politically closer) proceeds at a slower pace than anticipated, for instance, at the beginning of the pandemic. Although companies are not shutting down their factories in Asia, they are opening new ones closer to the markets - this can be seen in, among other things, declining levels of direct foreign investment in China. Patorska added that the shape of supply chains is determined - and has always been - by costs, but now companies attach more importance to the cost of risk, and not just incremental costs. Jäger and Vallée added that the first links on the supply chains are often based on energy-intensive goods, while energy and energy prices in Europe are likely to remain higher than in other regions of the world (and will fluctuate more) in the coming years. Also, Europe does not have sufficiently large resources of, for example, rare earth metals.

Europe needs to better control investment flows. Vallée pointed out that the EU does not have many tools to control and evaluate incoming foreign investments. As a result, some decisions taken by European decision-makers are inconsistent with each other (a good example is the approvals for Chinese investments in the ports of Hamburg and Piraeus). Jäger added that the EU has started work on the relevant guidelines, but the progress is slow. Vallée also said that Europe needs tools to control foreign investments made by European entities overseas – such tools would help better protect intellectual property and technology. Without such regulations, European companies are vulnerable to economic espionage and war for talent among specialised employees.

* The Warsaw European Conversation conference was organised by Polityka Insight and the European Council on Foreign Relations. The event's partners included Orange, Deloitte, European Climate Foundation, McDonald's, Nexity, Polish Association of Developers, Veolia, Visa and Żabka Group.