Stable US-EU trade requires a new approach to globalization
Much has been said about the unequal terms of the US-EU trade deal reached in Turnberry, Scotland, in July. Two camps have emerged: those who see Europe as having prematurely capitulated to US coercion and those who see Europe as having had little choice.
The road to Turnberry
Any assessment of the outcome of the Turnberry negotiations—and, therefore, any assessment of where to go from here—hinges not on the negotiations themselves but on the amount of leverage the two parties brought to Turnberry. The European Union (EU) had less of it. Europeans have a goods export dependency on the United States that the United States does not have with any country, let alone those in Europe. This asymmetry is long-standing, an outcome of the post-war trade system that emerged after Bretton Woods. That system was grounded in a model of export-led growth. As the richest market and with the lone currency pegged to gold, the United States was the target designation for others’ exports, not least so that European countries could earn dollars to rebuild.
US negotiators of that era were comfortable with asymmetrical concessions because they believed the global economy as a whole would grow, aggregate demand would rise, and all trading nations could benefit from increased production. The United States did not undertake these commitments with the expectation that increased imports would come at the expense of US workers or producers. At some point, however, that is just what happened, contributing to the Nixon Shock of 1971. Part of Richard Nixon’s goal in allowing the dollar to float was to correct for overvaluation that had depressed US export competitiveness. The accession of China’s non-market economy to the World Trade Organization (WTO) in 2001 accelerated US deindustrialization and, along with it, the loss of jobs that had provided many blue-collar Americans with lifelong economic security. Today, this is known as the China Shock.
As the last three years have exposed all too well, exports are not the only area of asymmetrical European dependency. The EU has also relied on the United States for its security—another outgrowth of the post-war environment. The United States was not only the market of first and last resort, but Europe’s security guarantor. To be sure, this was not an altruistic undertaking. The United States sought to keep Europe democratic and market oriented, part of an overall effort to fend off the threat of communist encroachment.
European prosperity flourished. Today, more than half the Group of Seven (G7)—the club of rich countries—comprises European democracies as well as all three former Axis powers. Nevertheless, these dependencies persisted.
The China Shock, the financial crisis, and popular backlash
As the China Shock began to unfold in US communities, the 2008 financial crisis and resulting recession severely widened inequality and aggravated precarity in many of those same communities. The one-two punch of deindustrialization and the Great Recession sparked popular backlash against a global governance regime seen as serving the interests of elites at the expense of the middle and working classes. In retrospect, this backlash can be understood as the beginning of the end of the United States’ willingness to serve as the market of first and last resort.
In 2013, academics began to document the China Shock, formally publishing the results of their work in 2016. These results showed that US imports from China had caused a significant loss of manufacturing jobs, concentrated in particular regions, with economic effects that lasted throughout workers’ lifetimes. The researchers also linked the China Shock to electoral outcomes. In 2015, the Chinese government adopted a Made in China 2025 industrial strategy that promised to transform China into a producer and innovator of cutting-edge goods. The combination of the China Shock and Made in China 2025 triggered a profound and rapid shift in US thinking. Policymakers who had supported the effort to create a global free market confronted the rise of a non-market economy that was dominating one critical industrial sector after another. Made in China 2025 sought to expand that dominance from steel, aluminum, and glass to advanced sectors such as electric vehicles, robotics, and aerospace. It was precisely to avoid that kind of dominance that the architects of Bretton Woods planned to embed antimonopoly rules in the global trading system in 1948.
The “free trade” paradigm breaks down
Made in China 2025 was inspired by Germany 4.0, Germany’s industrial strategy, and both were grounded in export-led growth. As early as the 1970s, the United States complained that Germany was promoting exports at the expense of domestic consumption.
In 1995, Europeans and Americans led the creation of an entirely new trade regime, yet this failed to address the long-standing transatlantic tension of Germany’s export orientation. Moreover, the tariff asymmetry dating back to the founding of the General Agreement on Tariffs and Trade (GATT) lingered; the US tariff cap was 3.4 percent, while Europe’s was 5 percent. While the United States sought to use the narrower tools of trade remedies (known as “trade defence” in Europe), the WTO Appellate Body over time eroded the strength of those tools, even creating commitments that the parties had expressly declined to make during negotiations. The EU has been well aware of this dynamic, having lost the first of several disputes involving one of the commitments in question.
The 2016 double shock of Brexit and the election of Donald Trump should have served notice that popular discontent was manifesting as an angry rejection of the system as a whole. Yet trading partners who had come to rely on export-led growth largely rejected calls for change, instead pressing for more of the same. Similarly, despite a clear message that NATO partners needed to bear more of the burden of collective security, now-wealthy allies neglected to step up.
The COVID-19 pandemic drove home the vulnerability that comes with that kind of domination. Not only did shortages of personal protective equipment prove lethal, but production around the world was hamstrung when Chinese lockdowns persisted.
The Biden reset and Trump 2.0
The Joe Biden administration came into office offering strong support for the transatlantic relationship, from declaring a truce on rancorous trade disputes like Boeing-Airbus in 2021 to providing military support to Ukraine in the wake of its invasion by Russia. Europeans consistently expressed fear of a second Trump administration but, in the end, seemed disinclined to do much to bolster the Biden administration’s efforts to address the core challenge of US deindustrialization. The European posture was infused with a conviction that the only proper course was restoration of the status quo ante. Early on, one European paper characterized Biden as “Trump with manners,” a line that administration officials would routinely hear in person. To meet climate commitments, as well as to begin to address deindustrialization, the United States enacted the Inflation Reduction Act (IRA). Europeans responded by complaining that the IRA represented a “continuation of President Trump’s hard-nosed America First policies.” A more pragmatic and less ideological analysis revealed that the IRA played to European manufacturing strengths and thus presented an opportunity, rather than a constraint, for European exporters.
Now we have the second Trump administration. It is indeed engaged in hard-nosed “America First” policy, deploying tariff authorities in unprecedented ways while criticizing trading partners for regulating their economies contrary to the preferences of some US multinational corporations—the very thing the Biden administration had declined to do. This policy led not only to Turnberry, as the Europeans felt a trade war would lead to an even worse outcome, but to an ongoing discussion about European regulatory sovereignty.
The EU position is more precarious still. Europe risks not only the loss of export opportunities to the United States, but the possibility that the European market will itself become the destination of choice for the next China Shock. All this is happening as the Trump administration expresses fatigue with guaranteeing Europe’s security.
The way out
Is there a way out of this downward spiral? Yes. But it requires policymakers around the world to spend less time pining for the past and more time focused on what to build next.
Fortunately, there are signs that a shift is taking place. Germany’s willingness to remove the debt brake for defense spending suggests that the long-standing goal of having Germans consume more and export less might indeed be coming to pass—all while addressing outsized dependence on the United States for security. It is a fraught debate. If Germany pairs military Keynesianism with austerity, the result could be an acceleration of authoritarian sentiment reminiscent of the policies that ushered in the end of the Weimar Republic. Still, the shift in approach is a positive step.
Germany’s efforts have been followed by a pledge for Franco-German cooperation, signaling a shared commitment to charting a new path for Europe to extricate itself from these challenges. On a still broader European scale, the recent report by Mario Draghi rightly argues that the EU must do more to integrate and unleash the power of the internal market.
Similarly, there are signs that China is wrestling with the harmful consequences of its economic model. Xi Jinping recognizes that fierce internal competition leads to excessive production (much of which is then exported). As finance professor Michael Pettis has argued for years, China must find a way to encourage greater domestic consumption, relieving the emphasis on exports that is problematic for advanced economies and has also contributed to premature deindustrialization in less advanced economies.
The United States must also adjust. If other governments succeed in reducing their dependencies, the United States will have less influence. Shifting overnight to a world of pure power politics, coupled with the erosion of US domestic rule of law, will have implications for the long-term viability of the dollar as the reserve currency. That, in turn, will have implications for the servicing of US debt, which is expected to grow as a result of the One Big Beautiful Bill.
The answers suggested here lie principally in the domestic policies of each relevant economy. Many trade experts reach for trade tools, such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and other free trade agreements (FTAs), as the escape hatch. Yet too few understand what these agreements actually do: They lock in existing supply chains rather than diversify them. This is especially true for intermediate goods. If Europe is looking to further strategic autonomy by diversifying away from existing dependencies—one of the goals of the Franco-German alliance—then signing agreements that incentivize half the content of an FTA good to come from non-FTA partners will not do the trick.
None of these transitions is without cost or pain. Europe has struggled for decades to complete the internal market. Still, even the shock of the first Trump administration did not move Europeans to minimize their exposure in any significant way. Weighing existential threats to Europe, Draghi—who recognizes the shortcomings of the old system—pleaded before the European Parliament: “Do something!”
China’s reorientation of its economy toward consumption will not be easy either, which is why it has not yet happened. But the potential consumption power of its huge domestic market means that China is not fated to play the role of a predatory global monopolist, distorting markets and crushing the ability of market-oriented producers to compete.
The biggest obstacle to moving toward a global trading system more suited to contemporary circumstances might be intellectual: the lingering belief that there is, in essence, only one way to do globalization and it was done in 1995. History tells us otherwise. The previous great globalization boom was grounded in UK hegemony, colonialism, and the gold standard. This model also once seemed inexorable. Yet the onset of World War I proved the beginning of the end. Countries struggled for two decades thereafter to salvage the gold standard, but they were eventually forced to accept the demise of what John Maynard Keynes referred to as a “barbarous relic”—and to come up with something else.
The post-war regime, suited for its era, encouraged dependencies that shifted over time from beneficial to unhealthy. We are now living through a period in which the adverse consequences of those dependencies have become manifest. Just as the architects of the post-war vision summoned the courage and imagination to create a new system to foster peace and stability, so must we.
About the author
Beth Baltzan is a nonresident senior fellow with the Atlantic Council GeoEconomics Center. She previously served as a trade policy adviser in the Biden administration.
Related content
Explore the program
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
Image: Shutterstock.
