The EU-Mercosur Agreement, Europe’s free trade pact with Argentina, Brazil, Paraguay and Uruguay, has finally been signed. This is a win for traditional free traders, who will view it as a victory for open market principles at a time when trade nationalism and economic coercion are on the rise. Meanwhile, protectionist-minded Europeans can still take a sigh of relief, thanks to money and exemptions to their agricultural sectors. And French president Emmanuel Macron can play his part, ostensibly opposing the deal and claiming he has done what he could.
But the reality is that both sides are clinging to ideas of the past, with no fresh vision for the future. Lately, protectionists have gained the upper hand, championing “buy European” slogans and pandering to angry farmers. While not particularly future-minded, this approach at least provides voters with a coherent narrative. Meanwhile, traditional free market zealots—in governments, industry or academia, from Scandinavia to the Netherlands and Germany—continue to make an increasingly vapid case for “keeping free trade alive”. Their argument is no longer convincing.
If free traders are serious about their principles, they urgently need to refresh their story. Surprisingly, now is the perfect time to do so.
Free traders’ China problem
Europe is grappling with escalating trade restrictions in the form of tariffs imposed by Washington and Beijing’s recent assertive export restrictions on critical materials. This is coupled with China’s massive excess capacities and plummeting demand. Germany has been hit particularly hard, resulting in a skyrocketing trade deficit with China.
The European Commission has responded to this hostile economic environment with a record number of new tools and investigations. However, most of its actions are defensive and happen on a case-by-case basis. Principled objections from free traders to a more muscular response particularly against China—a monopolistic, coercive non-market economy—have resulted in weak EU action and are actively harming a real free trade agenda.
China is undercutting industrial manufacturing worldwide, spurring protective action against its trade practices across the globe. From India to Brazil and Turkey, countries are scrambling to deal with the new trade dynamics. American tariffs have only heightened the pressure, making it harder to offset trade losses with China through sales to the US. Europe is not alone in struggling to respond, but it is the only major market with the potential to turn defensive measures into a new global model of openness—but only if free traders rise to the occasion.
In its recent attempt to promote a free trade agenda based on principles, the Swedish government stated that “history shows that trade and cooperation have led to progress and growth, while isolation is a dead end.” But when trade with China in its current form is leading to deindustrialisation and vulnerability, this argument rings hollow. Free traders not only need a better story about the benefits of openness; they also need to explain how Europe can remain an attractive partner moving forward.
The new case for open markets. Here is a three-stage suggestion for building a new narrative:
First, be honest. There is no such thing as total free trade, the carve-outs for European agriculture in the EU-Mercosur deal being a case in point. Our best bet is as-free-as-possible trade. Holding on to the idea of “fully free and open” trade as the ultimate aspiration leaves markets vulnerable to the excesses of monopolistic non-market economies and superpower coercion. It also fails to resonate with key new partners, which tend to look at trade pragmatically, not ideologically. India’s ongoing negotiations of deal with Europe are not rooted in an idealistic approach to trade; what it wants is securing fairer, better trading conditions. Free traders can only make sure that this trade is as open as possible under certain constraints. The EU’s €2trn trade club is now more attractive to partners than ever. The capacity to conclude “good enough” trade deals in the current environment is not falling short of ideals—it is a real advantage. Currently, no one is offering “good enough” deals—not China, not the US. The EU is one of the few major markets capable of doing so. Good enough deals can build trust for a more expansive agenda down the road.
Second, free for all is free for none. China is turning trade impossible. Changes in its behaviour will not come from concessions but from challenging its export-oriented business model. In this context, free traders must accept that drawing a semi-permeable membrane around open trade is necessary to protect it. Imposing high barriers for non-market economies such as China enables a more robust version of as-free-as-possible trade because it protects competition. It is almost ironic that the same free traders who advocate for open markets to combat monopolies are now fighting to keep markets maximally open to a coercive, monopolistic non-market economy. Limiting access for non-market players ensures openness.
Third, address the inner demons. Self-declared free traders must confront their own contradictions and be at the spearhead of single market reform and integration. Those who have proven to be committed to openness have particularly high credibility to unleash the full power of the European economy. True free trade among Europeans is not only achievable but, as Draghi and Letta have underscored in their competitiveness reports, an absolute precondition for economic survival. It will have a vastly bigger economic impact than any external deal the EU might negotiate. Free trade within Europe should also include sensitive areas such as defence, steel or agriculture—areas that often shake the beliefs of the staunchest free traders.
In the current intra-EU dynamics, where the protectionists are setting the agenda, it is time for free traders to step up. The job seems tailor-made for them: champion openness for most, agree to serious protections against some and push hard for a truly European market. Tell your story right. Despite all odds, this could be the hour of the free traders.
About the Author:
Janka Oertel is a distinguished policy fellow with the European Power programme at the European Council on Foreign Relations.