Are the EU and US edging towards a new trade war?

By Nicholas Rigillo, IANS,

Brussels : People instinctively react to a threat by protecting themselves. But when it comes to international trade, most experts argue that raising barriers is not the best response.

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“We all benefit from an efficient allocation of resources, so any attempt to protect national economies undermines this basic principle,” says Simon Tilford, chief economist at the Centre for European Reform, a London-based think tank.

Yet, there are growing signs that nations on both sides of the Atlantic Ocean are seeking to defend their industries from overseas competition as they struggle to deal with one of the worst global recessions since World War II.

This, free-trade advocates argue, risks triggering a spiralling trade war between Europe and the US that would only end up dragging the world further into economic misery.

Americans, who like to call a spade a spade, are considering how to safeguard jobs through a “Buy American” bill currently being discussed in the US Senate and House of Representatives.

This would extend a 1933 ban on some foreign products to imports of iron and steel used in infrastructure projects foreseen by their $800 billion economic recovery package.

The European Union’s ambassador to Washington, John Bruton, has said Brussels regards this legislation “as setting a very dangerous precedent” at a time when the world is facing a global economic crisis.

However, Daniel Gros, an economist at the Brussels-based Centre for European Policy Studies, notes that it is quite normal for governments to favour national products when it comes to public procurement.

US President Barack Obama has now said he does not want the bill to violate the World Trade Organisation agreements and that he will try and avoid “trade wars that we can’t afford at a time when trade is sinking all across the globe”.

And in any case, Europeans are no less immune to the protectionist sirens.

This week, for instance, French Industry Minister Luc Chatel was in Brussels to seek an unlikely approval from EU officials over his controversial plans to ensure French carmakers only buy French components.

Greece’s agriculture minister was also in town to argue in favour of more farm subsidies amid violent protests over falling prices.

The EU’s agriculture commissioner, Mariann Fischer Boel, has already infuriated producers in Australia and New Zealand by re-introducing export subsidies for European dairy products.

Meanwhile, her competition colleague, Neelie Kroes, is expected to come under increasing pressure from national governments to relax the bloc’s strict rule on what kind of state aid is or is not allowed.

Spokesman Jonathan Todd says Kroes has made it clear to EU governments that any protectionist measures that were to result in “a disproportionate distortion of competition” would only make the recession worst and end up destroying the bloc’s single market, which is “a recognized source of EU growth and prosperity”.

“All member states understand that if they break ranks and lead the internal market into chaos, they will lose big time,” Todd says.

The spokesman further notes that Kroes has already “adapted” some of the rules in order to help governments bail out banks crushed by the global credit crunch.

At their traditional December summit in Brussels, EU leaders vowed in their final declaration to “reject protectionism”.

But they also stressed that they had the right to save companies that have fallen victim of the financial crisis.

Both France and Germany have since agreed to provide a multibillion-euro credit facility to cash-strapped airlines which have placed orders for European-made Airbus planes.

What has surprised analysts the most, however, is that not even Airbus’ biggest rival, US-based Boeing, has complained.

Gros says the world is witnessing a “generalised tendency towards more state intervention”.

With so many banks in both Europe and the US being nationalised, “government intervention has now become more acceptable”, Gros says.

While he plays down the risks of a new world trade war, free-trade advocates complain that the world’s powerful effectively buried the long-stalled Doha Round on trade talks during last month’s annual World Economic Forum in Davos.

CER’s Tilford argues that rather than blame Obama, EU leaders should start addressing the underlying causes of their economies’ weaknesses.

This is particularly true of Germany, whose economic growth model relies heavily on exports.

“The US has long been seen as a consumer of the last resort, meaning US consumers effectively drove world economic growth.

“This is now going to be re-balanced, and it’s going to be painful,” Tilford says.