The EU’s new approach to trade policy is based around the idea of “strategic autonomy”. The expression covers a number of proposals. One set of proposals reflects the EU’s desire to punish trade partners for “bad behaviour”. This might include state financial support to businesses that the engage in mergers and acquisitions in the EU; restrictive procurement practices, or a failure to abide by WTO panel rulings. How should we consider this approach to dealing with the misdemeanours of partners? Isn’t a willingness to flex ones muscles precisely what is needed to bring people to the negotiating table, especially as the WTO dispute settlement system has been weakened?
To consider this, and with a hat-tip to the World Cup, we can draw on a footballing analogy. The “Maldini principle” is named after the former Italian defender, Paolo Maldini, one of the game’s all time greats. When asked about his approach, he said in substance that if he had to make a tackle, he had already made a mistake. His job was to be well positioned to stop a tackle being needed in the first place. The threat of punishment through retaliation works in a similar way: a credible threat would not need to be used.
To be credible, a threat needs to impose some costs on the person doing the threatening. To move from a footballing analogy to a parenting one – there being considerable overlap between the two disciplines – consider the following. A parent responding to their children’s squabbling by saying that the parent will treat themselves to a night out would have little effect. The parent is liable to do that anyway, even if the children behave well. But if the punishment is not going to see a film they all wanted to see, including the parent, then the children may think twice.
In practice, we see a lot of trade action in the guise of punishment or retaliation. So clearly, if we follow the Maldini principle, something is amiss. To see what is amiss we need to understand the nature of the costs imposed by standard retaliatory measures such as tariffs, or equivalent measures. Their costs fall on society as a whole. Specifically, they raise prices, tax exports, and reallocate resources to less productive activities – the ones that want protection. But therein lies the rub: that reallocation is a gain to the protected sector. Their gains are outweighed by the losses to everyone else. But because they are heavily concentrated, the beneficiaries are able to organise themselves and typically carry a lot of clout politically. Their ability to rock the political pain v gain ratio, relative the economic cost benefit ratio is why we see both “bad behaviour” and “retaliation”.
In that context, it isn’t at all clear that increasing the arsenal of punishment options, and untethering this from international rules, is likely to be to the EU’s advantage. As some of our recent research suggests, there are significant costs to this, even if we don’t assume an ever-escalating spiral of measures and counter-measures.
In the past, policymakers in the EU and elsewhere have tried their best to safeguard against these spirals. They recognised both the costs of protectionism and also why it could be politically alluring. For that reason, they sought to negotiate trade agreements and trade rules. The thinking was this: if you could offer exporters market access abroad, in exchange for commitments to partners regarding access to your markets, you could create a coalition in favour of liberal trade. That bargain lay at the heart of the “Old GATT Magic” that secured global trade rules, under which the majority of world trade still takes place. Senior trade officials in the US and the EU recognised that these rules benefitted their countries because they helped to clamp down on domestic protectionism.
Moreover, these negotiators went one step further and developed a binding system of dispute settlement. The idea is that when there are strong political currents in favour of protectionism, it helps to have an external anchor of restraint. That adds credibility to domestic policy by tying policymakers’ hands. But again, at the heart of this was a recognition that open trade was something to be promoted and protectionism to be resisted.
It is that recognition that is waning. That is not exclusive to the EU, of course, but its concept of strategic autonomy captures a turning away from the principal direction of travel followed by the EU for several decades. That is why a more unilateralist approach to punishing partners for their perceived misdemeanours may be conducive to spiralling protectionism. It would be self-defeating, the sort of own goal that Maldini would have strived to avoid at all costs.