Friday, June 17, 2016

First hit by regulation, then by protectionism. Is Europe going the way of its aluminium sector?

Published on Euractiv 

Over the years, the European Union has been closing a flurry of trade deals  with non-EU states, effectively reducing its external barriers to trade. Unfortunately, it looks as if those days may be coming to an end, with the forces of protectionism gaining ground both at the national and the EU level. While the EU has always had a wasteful and protectionist agricultural policy, a really protectionist, French-style industrial policy never managed to get off the ground. However, that may soon be changing, as both policymakers and industry groups are marching in lockstep to lock the doors of trade to the Continent.

Take the European Parliament, which is resisting awarding "market economy status" to China within the framework of the World Trade Organisation, in a bid to keep a number of possibilities to impose tariffs on Chinese products.  Opposition is also rife against TTIP, a trade deal being negotiated between the EU and the US. There even is firm opposition against the EU-Canada trade deal (CETA), which has already been signed, but the Walloon regional assembly is threatening to block it. 

A lot of the criticism against CETA and TTIP is focused on provisions that hand control over disputes arising from these trade deals to private arbitration courts. This system is already in place since the 1950s, indicating opponents are merely singling it out for criticism as they know they can’t win the argument when attacking the idea to remove barriers. A second point revolves around TTIP’s so-called “regulatory cooperation”, a process that has been painted as a threat to national sovereignty, but the truth is that the US Congress or EU policymakers would obviously never accept far reaching constraints on each other’s legislative capacity, so "regulatory cooperation" will never be much more than a marginal issue.

A good example of how the kneejerk protectionist sentiment is haunting Europe are the EU’s aluminium sector federation’s calls for higher import tariffs on aluminium.

The story begins after the sector had to cope with rigid national and EU labour market rules. On top of that, it also had to endure the EU's grand schemes for energy policy, with overzealous targets for renewable energy and a very troublesome CO2 emissions trading system - both of which ended up increasing energy costs. As a result of all this, between 2000 and 2013, primary aluminium production in the EU has fallen by 32 per cent. Today, only 30% of the primary aluminium needed to serve demand in Europe is actually produced in the EU.

Already existing EU tariffs on primary aluminium imports only made the downturn worse. Originally introduced in the 1970s as a protectionist attempt to shield European Union aluminium investments from the global market, Brussels’ tariffs system has remained strikingly stagnant despite the great deal of industrial change that has taken place across the continent. Today, EU tariffs, which stand at 4% and 6% for primary unwrought alloyed aluminium and 3% for primary unwrought unalloyed aluminium, not only fail to support EU industry but actively harm the Single Market’s predominantly downstream aluminium industry. SMEs are the most exposed, facing higher production costs as a result of these EU import tariffs. According to a study by the LUISS University in Rome, the cost to SMEs was estimated at €15.5 billion.

The story doesn’t end there. As a result of China's economic correction, a healthy phenomenon after years of overproduction brought about by Beijing’s gigantic monetary stimulus, economies worldwide are feeling the pain. In trying to dampen the effects of its industrial overcapacity, China has been flooding world markets with all its produce, including aluminium products, while paying little heed to actual demand.

As a result, large European aluminium producers have pounced on the occasion and are calling for even higher tariffs, despite the obvious harmful effect that the current level has on SMEs, their main customers. It is a surreal turn of events, with producers essentially lobbying to kill off their own industry.

Protection by raising tariffs for an industry that has lost competiveness after years of labour market and energy market regulation can never be the answer. A frequently raised argument is that China is subsidizing its producers and distorting competition. Indeed, in a 2015 interview, Gerd Gotz, the director general of European Aluminium made exactly this point, while demanding for more protection from the EU. However, if applied consistently, it would mean that the EU would have to engage in a race to the bottom for ever more protectionism with the trade policies of its most extremely protectionist competitor. Instead, the EU and its member states should obviously get rid of rigid labour market  rules and troubling energy policies causing European industry to lose competitiveness.

Policy makers in Europe have already saddled the population with excessive debt, excessive regulations and excessive taxes. Instinctive rejection of the outside world by scuttling TTIP, CETA or by denying China its MES would just mean harkening back to the continent’s worst impulses. Adding full-blown protectionism to this toxic mix may be one step too far for Europe’s economic health.

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