Charlemagne: Europe’s new protectionism

EIGHT HUNDRED years after Marco Polo, Europe has rediscovered China. American policymakers have been acutely aware of growing Chinese power for two decades - but the same cannot be said of their counterparts in Europe. When European Union leaders adopted their Lisbon Agenda in 2000 - a call for economic reforms aimed at making the EU the world's most competitive knowledge-based economy within a decade - the accompanying research from the European Commission was chock full of references to the United States, but the word China did not appear once.

Belatedly, Europeans are waking up and smelling the Lapsang Souchong. The French vote on the EU constitution unleashed much debate about whether more needed to be done to protect workers from the impact of globalisation. And the lifting of tariffs on Chinese textiles at the beginning of the year provided a practical example of what that impact might be. A flood of textile imports from China was followed by panic among European competitors, and a hastily negotiated bilateral deal to place temporary restraints on Chinese textile exports. Peter Mandelson, the EU trade commissioner who negotiated this, is proud of his achievement. But he notes wryly that just days after he returned from Beijing with his textiles deal, he was visited by European shoemakers seeking similar protection. As one of Mr Mandelson's occasional advisers puts it pithily, “these measures are useless anyway. All they are allowed under WTO rules is two years' extra protection. And then what?”

Beyond the textile case is a surge in trade of all sorts. Chinese exports to the EU have grown by an annual average of 23% over the five years since the Lisbon Agenda was issued. Only 15 years ago, China was not even one of the EU's top ten trading partners. Now it is the second-largest exporter to the EU, and the third-largest importer from the EU. That trade between Europe and China is a little more balanced than between America and China may explain why Europeans were slower than Americans to worry about the Chinese threat to their jobs. The EU's trade deficit with China was $98 billion in 2004, compared with an American trade deficit of $160 billion, even though the volume of trade between Europe and China was greater. But American-style fears about China and jobs have now arrived in Europe. As Mr Mandelson notes, Europeans increasingly associate “globalisation, the rise of China and the loss of jobs and security.”

But what should be done? As so often in Europe, the two poles of the debate are represented by Britain and France. The French elite seems increasingly tempted by protectionism. Britain's Tony Blair, who took over the EU presidency this week, is using the job to urge Europeans to expose themselves more fully to the bracing winds of global competition.

Senior French politicians believe that one reason their compatriots have gone off the EU is that they no longer see it as protecting their way of life. Instead, the man on the Marseilles metro fears that “ultra-liberals” in Brussels are intent on exposing his comfortable lifestyle to merciless competition from the eight central European countries that joined the EU last year, and from even hungrier Chinese and Indian workers farther afield. Having sniffed the new mood, French politicians are responding: the government is doing its utmost to block a single market for services within the EU, and to delay the arrival of free movement of labour from the new EU members.

Senior French politicians are also beginning to talk about “community preference ” - -a phrase recently used by both Dominique de Villepin, the prime minister, and Nicolas Sarkozy, the coming man in French politics. This is understood to imply a call to erect higher tariff barriers around the EU. The targets would inevitably be China, India and the other Asian tigers. Mr de Villepin has hailed the agreement to restrain exports of Chinese textiles as an example of a united Europe at its finest.

Blair's way

Without explicitly taking aim at the French, Mr Blair had a blast at this incipient European protectionism in his presidency speech to the European Parliament in Brussels on June 23rd. He did not seek to downplay competition from China and India. On the contrary, he made it the centrepiece of his speech, using the rise of new Asian economic superpowers as support for his calls for reform within the EU. But he insisted that the EU must face up to global competition, warning that Europe would risk “failure on a grand strategic scale”, if EU countries “decide to huddle together, hoping we can avoid globalisation.”

Europe's economic and political future may hinge on which of these two approaches prevails. It is not hard to punch holes in the protectionist case. The idea that competition from Asia is the source of high unemployment in Europe is demonstrable nonsense: French unemployment was already over 10% in the early 1990s, well before the boom in trade with China. The OECD's Employment Outlook this week concluded that only a tiny fraction of job losses in western Europe can be attributed to trade liberalisation. Although the OECD acknowledges that competition from Asia will intensify for European workers, its main recommendation is labour-market reforms to encourage the creation of new jobs.

Nor is globalisation a one-way-street. Germany was the world's leading exporter last year, outselling both the United States and China. China, in particular, is a crucial market for the machine-tools that Germany excels in producing. If the EU were to get into a trade war with China, it would risk maiming the export industries of its largest economy. But big business is not popular in either Germany or France: the mood in both countries is frightened and defensive. And these are just the conditions in which plausible-sounding arguments against free trade traditionally gain ground.

Commentary feature says that the EU's fears over China encapsulates its ambivalence over globalisation.

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