Throughout Europe, companies are facing a quandary: How can they afford immense investments in decarbonization when a combination of now-surging energy prices, Chinese overproduction and US tariffs threatens to undermine their existing businesses?
The European Union’s leaders reasonably want to offer them some help. They should be careful, though, not to descend into self-defeating protectionism.
In an age of neo-mercantilism, the EU has generally shown restraint. Even when it imposed tariffs on imported Chinese electric vehicles, it sought to act within the rules of the World Trade Organization, beleaguered as that institution may be. This makes sense economically, in the interests of preserving competition and consumer choice, and politically. If Europe and other “middle powers” want to join forces to endure this geopolitical moment, as Canadian Prime Minister Mark Carney has advocated, they must uphold common rules and avoid alienating one another.
Still, the EU faces daunting challenges. China is seeking to dominate in a growing range of sectors, most visibly electric vehicles. US tariffs are hitting exports that had temporarily helped to offset the China shock. Together with high energy prices, now exacerbated by the war in Iran, this is crushing core industries, from steel to automobiles.
Meanwhile, these same industries are planning vast investments in clean technologies, to prepare for a post-carbon future and reduce reliance on fossil fuel producers such as Russia. Achieving competitive per-unit costs in products like batteries and electrolyzers will require significantly expanding capacity. There’s also good reason to secure more inputs from partners who won’t — as China has — cut off critical supplies.
The EU’s emissions trading system — its mechanism for pricing carbon — gives consumers and producers strong incentives to move toward cleaner technologies, but industry may still need help with the costs of transition and additional incentives to encourage innovation. Narrow, carefully targeted subsidies for new technologies and sectors essential to economic security or competitiveness can make sense.
European EV makers’ predicament, for example, is so severe, and so consequential for the green supply chain, that even pro-market economists see a case for intervention. If, for example, the ETS fails to tax EV imports from China adequately (by failing to reflect their high-emission manufacturing processes), then limiting EU subsidies for EVs to low-emission producers would both advance the cause of decarbonization and give relief to EU manufacturers, all while (arguably) complying with WTO rules.
Unfortunately, under pressure from industry, the EU is considering going much further. Under the banner of “Made in Europe,” it has proposed outright local-content requirements for everything from solar panels to EVs — the former protecting a market in which the EU has no advantage, the latter so potentially disruptive to global supply chains that even some EU carmakers are opposed. It would also limit certain foreign investments to minority stakes — as if Poland’s dynamic battery sector could’ve emerged as quickly as it did without Korean factories. Even dedicated parking spaces for small EU-made EVs are on the table.
Such blatant protectionism can do a lot of damage — repelling potential partners, hindering efforts to achieve scale, and increasing costs for consumers and businesses. It’s also a distraction from the hard work of boosting competitiveness — such as uniting capital markets, harmonizing regulation, pooling defense spending and investing in resilient infrastructure.
Granted, there’s a mitigating element. Under the EU’s proposal, which must still be approved by member states and the European Parliament, foreign trade partners can be treated as local so long as they provide the same access to EU firms. Wielded wisely, this could actually encourage greater openness between Europe and nations such as Japan, Korea and the UK — albeit in a more piecemeal and interventionist way than in the past.
One can sympathize. The EU didn’t choose this chaotic new reality, in which long-standing, mutually beneficial rules of free and fair trade are being eroded. Yet a costly foray into protectionism will only make matters worse.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by The Editors
