Page 8 - bne magazine February 2024_20240206

8 I Companies & Markets bne February 2024
Sanctions are inimical to the founding principles of the EU. The idea was to build an open, borderless single market where trade, people and capital could flow freely for the common good. And it has been a spectacular success.
But that open trade regime has also made it easy for Russia to evade sanctions as the flow of goods is so easily switched from one route to another. The sanctions strike at the very heart of what the EU is all about and the latest sanctions are increasingly focused on introducing more restrictions on this trade as the West engages in a game of whack a mole
as it tries to prevent banned goods from being delivered to Moscow. Almost 3,000 new harmful restrictions on trade or FDI were implemented worldwide in 2023, nearly three times the number of such restrictions introduced in 2019, and far exceeding the number of liberalising measures.
“The EU economy and its population have prospered as an open economic region, underpinned by liberal frameworks for trade and capital flows. Measured as the sum of exports and imports of goods and services, the EU is more outwardly- oriented than the US or China, despite being of a broadly similar economic size,” the IMF said.
Globalisation represented an effort to extend the EU model to the rest of the world, via the offices of institutions like the WTO. It could be argued that globalisation reached its apex in January 2013, when Russia was finally admitted to the WTO after being kept in the waiting room for 18 years. But Russia’s sojourn in the international trade club came to an end in March 2022 after the G7 stripped it of its WTO trading privileges as part of the extreme sanctions regime imposed immediately after its invasion of Ukraine.
Since then, Russia and China have been working hard to set up a new system of non-aligned economic clubs such as the expanded BRICS+ and the G20, although it remains early days for both and many countries in the global south have already rejected the idea of a “them or us” model of global commerce.
Trade openness in China has declined sharply since the mid-2000s as GDP rose faster than trade, the IMF reports.
Openness
Trade has also edged down in the US over the past decade as it becomes increasingly protectionist. The introduction of the CHIPS legislation has banned all technology transfers to China as the US seeks to preserve its competitive advantage in advanced technology.
However, trade in the EU continued to rise in the last decade and at the same time its very high stock of FDI also continued to grow – both inward and outward – the IMF reports. That is going to change now.
The EU liberalised trade restrictions earlier and to a greater extent than did any other region. Free trade is at the heart of Europe’s economic model – much more than it is for the US – and championed by Germany, the Weltexportmeister.
“The global economy underwent around 30 years of deep and substantive liberalisation, beginning around the 1970s and ending in the early 2000s, during which advanced and emerging market economies – including China – lowered barriers and the former Soviet bloc was integrated into the global economic system,” the IMF said.
For the EU, this period included several waves of enlargement, where accession required new members to liberalise their economic relations with countries outside the bloc while adopting the EU’s internal single market
for goods, services, capital and labour. The EU has been a strong supporter of the multilateral trading system, with the WTO at its centre, although it has also advocated for some reforms, including in the areas of health, energy, ecommerce, facilitating investments, and industrial subsidies.
This heady period of trade-driven prosperity has now come to an end. The Washington Post described the WTO as “worse than useless” in an article in January as the game shifted to a rules-based trading club to the raw geopolitics of banning trade as a geopolitical weapon to punish Russia for its military aggression. The US’ CHIPS legislation and Donald Trump's trade restrictions on China are the first salvos in a similar looming trade war between Washington and Beijing.
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