European Trade Commissioner from 1999 to 2004, Director General of the World Trade Organization (WTO) from 2005 to 2013, Pascal Lamy coordinates the Jacques Delors Institutes, three European think tanks in Paris, Berlin and Brussels. Given the economic weight taken by China, he defends the establishment of a new trade instrument that would make it possible to rebalance trade with this country, to protect the industrial fabric and the social model of Europe.
The European Commissioner for Trade and Economic Security, Maros Sefcovic, goes to China on Friday, October 9 to meet his counterpart and draw a path to rebalance China-Europe trade. Can he get results?
The bad news is that the imbalances are increasing. And quickly. But the good news is that there is now a shared awareness around the European Council table. The political discussion on the subject, which has long been blocked by Germany, changed over the summer after the statement of Volkswagen boss Oliver Blume, who said « stop » and demanded customs duties on imports of plug-in hybrid cars, and not just on electric models. This is reflected in the letter from Friedrich Merz and Emmanuel Macron to the President of the Commission [published on Monday, October 5, proposing new commercial defense tools], a major political signal.
We are no longer in a situation where some said « Be careful, a tidal wave is coming », and others « Oh, wait a little longer, it’s not so bad ». Today, everyone is on the bridge. We need, in the face of China, a plan A: this is what Commissioner Sefcovic is doing. He is trying to negotiate with the Chinese the measures they would take themselves to moderate their exports or their dumping in certain sectors. But we can doubt that it is enough. So we also need a plan B.
Why do you think this plan A won’t be enough?
Because we have a problem at 360 billion euros, it is the amount of Europe’s trade deficit with China. And if we take measures to restrict exports at 5 billion here, 5 billion there, it will not be enough. The Chinese government will probably make an effort to maintain its access to our internal market. It is the only rich and deep market they have left, after the closure of the American market.
But to make them move, we must show that we are determined to go further. This is why with Nicolas Köhler-Suzuki and Victor Luiz do Prado, researchers at the Jacques Delors Institute, we propose to put in place a new structural rebalancing instrument, which allows Europe to defend its market. It is compatible with the rules of the WTO, so as not to imitate Donald Trump who wants to break the system.
There is no regret of having brought China in. It agreed to reduce its industrial customs duties much more than countries such as India or Brazil, which had taxes three to five times higher. The regret I can have is that we have not strengthened the rules on subsidies and state aid. We were Europe, the United States and Japan.
In 1999, we let this provision slip and later – I take my share of responsibility – when the question rested, we listened to our lawyers who told us: « Be careful, if we tighten the net to catch more subsidies, we risk taking Airbus, Boeing and Toyota ». There, we made a historical parallax error. We did not imagine – who did it then? – that China would grow by 10% per year for twenty years, that it would fill the coffers of a state that would remain governed by a form of economic Leninism and state capitalism and would use this instrument massively.
You also say that the theory of comparative advantages, on which the rules of world trade and the WTO are based, no longer works. Why?
Because of the rise in Chinese subsidies, which support industries three or four times more than us, because of the exchange rate problem, and then, because of the Chinese macroeconomic imbalance that has amplified. In the past, Chinese leaders said: « Our system must be rebalanced. There are too many exports, too many investments, not enough domestic consumption. «
For citizens to save less, a social protection system should have been put in place. But Xi Jinping did nothing serious about it for geostrategic and ideological reasons. China’s political priority is to make itself as dependent as possible on the international economic context. Reducing macroeconomic imbalances is no longer a problem for Xi Jinping, who considers that the welfare state is for the lazy.
How has this caused the theory of comparative advantages and therefore the balance of world trade to fail?
The theory of comparative advantages is: you do something better than me, I do something better than you. I will benefit from your know-how which is better than mine, you will benefit from my know-how which is better than yours, and therefore, we have a rational interest in exchange. It’s Adam Smith, David Ricardo and a little bit of Joseph Schumpeter. This exchange of comparative advantages is a machine to create efficiencies, and the sum of these efficiencies is growth. The result of this growth, if properly distributed, is well-being.
But from the moment a country captures all the comparative advantages, it no longer works. China still manufactures toys, shoes, shirts, products for which the comparative advantage is low wages, while making cars, airplanes, artificial intelligence, where the comparative advantage is technology. With subsidies, with foreign exchange and with this dynamic of national production, they manage to export at costs that, in most sectors, beat anyone. The Chinese tell us: « Too bad for you, you are no longer competitive. But it’s not true: Europe has a competitiveness problem with China, but not with the rest of the world. It retains a significant trade surplus, despite its deficit with China.
To combat this, you propose this structural rebalancing instrument. How would it work?
It works like the safeguard clause for steel, which Europe has already played and which came into force on July 1, with a quota system. You set up a quota of imports that benefit from a reduced rate. If the country exceeds this quota, it must pay a much higher customs duty.
With this system, we can treat differently those with which we have free trade agreements, which escape this constraint, and those with which we do not have free trade agreements, that is to say essentially China and the United States. It is a means compatible with WTO rules. It is triggered on the basis of observable behavior in commercial and financial data (import peaks, price compression, intensity of public support, exchange rate interventions). And it fades if the distortion disappears.
When Chinese imports risk eliminating production in Europe, we say: we want to import as long as it is the normal game of competition – and we determine unilaterally, but with transparent criteria, what we consider to be the normal game of competition –, but beyond a critical threshold: stop.
What are we doing about the retaliatory measures that China can take?
You have to be prepared to suffer. There is no battle of this type that is painless. And we must set up a system of European solidarity, a group insurance. We propose to allocate to this insurance the customs duties borne by non-quota products, if the industry of this or that country suffers particularly from retaliatory measures. This solidarity mechanism must be part of Plan A and Plan B.
