The European House - Ambrosetti. The dangerous path to protectionism

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1 September n 5 The European Houe - Ambroetti Thi Lettera i an initiative of Ambroetti Club. However, it content may not reflect the view of all Club member. 5 The dangerou path to protectionim The new, confrontational coure of the US trade policy aim to retore American competitivene through tariff, invetment and trade retriction and mark a major hift to the economic international relation, revering an almot three-decade old trend of trade liberalization. A full-fledged trade war i well under way between US and China and the multilateral trading ytem ha not been able to prevent it. How we got there? What will happen if the trend toward protectionim prevail? Thi Club Letter ummarize ome evidence and reflection on caue and conequence of the new world of international trade, by gathering fact and figure on the recent evolution and the current tate of trade relation between US - EU and US China in particular and by analying the economic impact of import tariff and their conequence on the international relation. Finally, the Club Letter compile a et of quote on the topic that renowned international leader hared with The European Houe Ambroetti in excluivity. HOW WE GOT THERE? Current world economic outlook i ambivalent and conjugate the poitive backdrop of a utained and widepread growth momentum with intenifying trade tenion and the propect of a imilarly broad baed conflict over international trade. Both the US and the EU international trade policy in pat decade ha been deigned around promoting reciprocal market opening and trade liberalization, creating new opportunitie for increaed level of good and ervice' trade, invetment, innovation and productivity growth. The prevention of the inefficiencie aociated with trade war ha been the fundamental rationale behind cooperation in trade agreement. The two pillar on which the WTO i built, reciprocity and non-dicrimination, enure that the temptation to ue tariff to exploit the importer market power at the expene of it export partner get neutralized, a WTO member are willing to accept not exploiting their market power when etting tariff a long a other member do the ame. Through a number of round of trade negotiation, thi ha led to an 85% reduction in average tariff ince the creation of the GATT, the predeceor to the WTO, in The pre-crii global economy enjoyed ideal condition a the quarter-century up to the crii aw the fatet increae in economic growth, globalization and properity in hitory. International trade increaed evenfold between 1980 and 2007, outpacing the increae in world GDP in the ame period. World FDI far outpaced both. Labour-intenive Aia roe, powered by the global integration of China and, to a leer extent, India. Reource-abundant Latin America, Africa and the Middle Eat performed well in a China-led commodity uper-cycle. And the capital and technology abundant Wet propered. Rapid globalization had two driving force: technology and policy liberalization. Wetern countrie experienced the Reagan, Thatcher and European Single-Market revolution in the 1980 and early Developing countrie liberalized maively and integrated into the global economy over the ame period, with ex-soviet economie following immediately after. Average tariff in developing countrie fell from about 30% in 1985 to jut above 10 % in There were correponding reduction in non-tariff trade barrier, FDI retriction and retriction on trade in ervice 1. Depite uch achievement, public optimim about the benefit of open economy, liberalization, economic integration and cooperation ha been eroded over time and particularly over the lat decade in the advanced economie by longtanding trend of job and wage polarization, coupled with peritent ubpar growth in median wage. The financial crii that exploded in September 2008, preceded by the credit crunch that tarted a year earlier, tranformed a benign global political and economic context into omething very different: a harp contraction in global growth enued, reinforced by even harper contraction in trade, FDI and other channel of globalization. The world uffered it wort de-globalization ince the WWII. The global economic crii triggered a big hift in idea and policie againt free market and in favour of government interventionim. Pro-market reform lowed down around the world and a riing cepticim about the liberalization and globalization policie aociated with the o-called Wahington Conenu aroued. A a reult, multilateral economic cooperation and the rule-baed trading ytem are today under threat by a riing protectionit entiment and initiative in nearly all major economie. 1 Source: The European Houe Ambroetti on UNCTADtat, WTO, World Bank and other ource,

2 In thi perpective and within the current radically new context ha to be read the reveral in US trade policy and it initiative of tariff hike on import of teel and aluminium, their extenion to additional China ector and to car and car part from the EU. The new US trade policy i all focued on trade deficit, interpreted a a threat on US economy and particularly on manufacturing job. In 2017 the US imported good worth $ 2.3 trillion but exported only $ 1.5 trillion. Factually, trade deficit i not a ign of weakne but, if anything, the oppoite i true: trading partner are willing to keep granting credit to the US, ecuring a table demand for dollar a long a the confidence in it tatu a the major reerve currency remain. Thi deal ha worked remarkably well for decade, allowing American conumer to buy any fancy imported good in return, although baed on a mounting amount of foreign debt. But among the main determinant of Trump election, ha been in fact the hock of globalization on the American manufacturing indutry 2, epecially in term of import from China and every trade deficit i now een a a certain number of factory job that are not yet in the US or are no longer there. Therefore, the current world trade eem about bilateral trial of trength, where the greater your country trade urplu with the US, the greater the rik that you will be the target of US import tariff increae. Preident Trump already pulled US out of the Tran-Pacific Partnerhip, inited on rewriting NAFTA and began a trade war againt China and trade tenion with other hitorical trade partner, undermining the exiting multilateral framework and agreement. INTERNATIONAL TRADE S STATE OF PLAY In 2017, the global value of export of good and ervice wa $ 22.8 trillion. The highet level of trade in good and ervice were recorded unurpriingly in ome of the bigget economie, a the EU-28 exported more good and ervice ($ 7.9 trillion) than any individual country, while the highet level of import wa recorded by the United State ($ 3 trillion) 3. The larget trade urplu for international trade in good and ervice wa recorded in the EU-28 ($ 645 billion in 2016), followed by China ($ 236 billion). By contrat, the larget trade deficit wa regitered in the United State ($ 570 billion), followed at ome ditance by India ($ 118 billion). 2 See: David Autor, David Dorn, Gordon Hanon, Kaveh Majlei: Importing Political Polarization? The Electoral Conequence of Riing Trade Expoure, MIT Department of Economic and NBER, November 2016, rev January They find a robut poitive effect of riing import competition on Republican vote hare gain in US. European author a well highlighted the import hock a a key explaining factor in the ucce of nationalit and radical right in Europe. See: Italo Colantone, Piero Stanig: The Trade Origin of Economic Nationalim: Import Competition and Voting Behavior in Wetern Europe, Bocconi Univerity BAFFI CAREFIN Centre Reearch Paper Serie No , July 2016, rev September Source: UNCTADtat, World total trade of good and ervice value (1.000 billion $) Selected economie weight on total trade of good and ervice (% hare) Source: The European Houe - Ambroetti elaboration on UNCTADtat data, 2018 Increaed trade liberalization from the 1990 onward provided a timulu for international trade. Within the EU-28, the ratio of international trade in good and ervice relative to GDP roe from 12.6 % in 2005 to 17.0 % by 2015, growing at a fater pace than the overall EU-28 economy. The ratio of trade in good and ervice relative to GDP roe in mot of the world leading economie between 2005 and 2015 and thi wa particularly the cae in Hong Kong, Mexico, South Korea and Turkey. The only exception were China (where the dometic economy grew at a fater pace than the value of international trade, even though China captured a growing hare of world trade), Singapore, Ruia and Canada. Thi relative hift may, at leat in part, be attributed to the growing importance of trade in intermediate good, which itelf wa driven by higher level of international outourcing a global production chain were etablihed. The mot triking feature concerning development for international trade in good and ervice, however, ha been the teady progreion of China a one of the world leading trading nation. China hare of the world export for good and ervice roe from 6.0 % to 10.7% during the period , while it hare of import grew from 5.1% to reach 10 % in the ame period. 12% 11% 10% 9% 8% 7% 6% 5% China weight on global trade of good and ervice (% hare of world total) Export Total Trade Import Source: The European Houe - Ambroetti elaboration on UNCTADtat data, From a trade law perpective, there are today two main et of rule governing the world trading ytem: policy commitment under the WTO and the ytem of combined et of rule aociated with everal multilateral or bilateral Trade Agreement (TA) currently in force. The recent wave of TA i changing the rule of globalization and there are in particular two key area in which they are puhing beyond the multilateral WTO commitment. The firt i by reducing import tariff even lower than WTO level, albeit on a dicriminatory bai. The econd i by negotiating beyond tariff, directly over new policy intrument. 2

3 An increaingly important characteritic of many of the current TA negotiation i that they are no longer primarily about tariff liberalization but intead are puhing toward deeper integration that addree non-tariff and behind-the-border policie. Jut before Preident Trump election the WTO and TA were on different trajectorie with talling WTO negotiation and increaingly important mega-regional trade agreement under dicuion, uch a the TTIP between the US and he EU or the TPP between the United State, Japan, and other Pacific trading partner. The world trading ytem eemed to be at a croroad, apparently experiencing a momentum hift away from the multilateral and non-dicriminatory framework of the WTO in favour of dicriminatory arena under the new TA, and away from negotiation emphaizing uperficial integration and toward negotiation treing increaingly deep integration. THE POSITION OF CHINA IN THE TRADE RELATIONS WITH THE US Looking at the decompoition of the US trade deficit, China clearly tand out ince it i reponible for more than three quarter of it, roughly $ 336 billion, while Chinee trade with the US i indeed pretty much one-way, a current account balance analyi illutrate US net poition with China (billion $) Current Account Balance Trade in good balance Trade in ervice balance Income balance Source: The European Houe - Ambroetti elaboration on UNCTADtat data, The Trump adminitration introduced on 6th July 2018 a 25 % tax on import of $34 billion of good from China, including machinery and component like emiconductor. China retaliated immediately with a 25 % tariff on import of oy bean, other agricultural product and automobile. On 23rd Augut 2018 import tariff hike of 25% have been extended from both ide to 279 Chinee product and 114 American one, reaching $ 100 billion of import, that i 1/7 of their bilateral total trade exchange. 4 Bilateral current account balance equal the um of bilateral trade in good balance, trade in ervice balance and income balance. US doe not ell many ervice to China and neither are they net recipient of invetment income from China. There are ome caveat with the data. Bilateral current account are notoriouly difficult to meaure, in particular ervice and the primary income balance, epecially due to tax-driven profit hifting within multinational corporation and i one important reaon why economit o far have paid little attention to thoe balance. 5 See for intance the Made in China 2025 program, a Chinee government initiative to tranform China into an advanced manufacturing powerhoue Thee move come on top of tariff already impoed on teel, aluminium, wahing machine and olar panel. The aggregate amount of trade affected i till moderate relative to the US and Chinee economie, but for the US thi i the mot extenive import protection ince the Preident Trump ha alo threatened a further 10 % import tax in September on a further $200 billion of import from China. Thee tariff have been introduced after the Trump adminitration concluded an invetigation into ome of China mot controverial trade practice and i baed on the Section 301 of the US Trade Act of 1974, which authorize the US Preident to take all appropriate action, including retaliation, to obtain the removal of any act, policy or practice of a foreign government that violate an international trade agreement or i unjutified, unreaonable or dicriminatory, and that burden or retrict US commerce. A number of China commercial practice have given rie to a et of eriou complaint: foreign exchange intervention; barrier to produce abroad and ell in China; upport to import ubtitution; introduction of de facto technology tranfer requirement, by linking inward invetment to technology tranfer to Chinee firm; maive dometic ubidie, directly and through tate-owned companie; adoption of informal buy China policie 5 that force foreign firm to bring production in China. In order to undertand the US Adminitration choice of not challenging China in the WTO for violation of it WTO commitment, one hould conider that many of the policie that concern the US aren t necearily WTO violation. Moreover, a the China acceion to the WTO ha been mihandled, particularly overlooking the ue of pecial afeguard to face the hock, ignificant difficultie do exit in uing a et of narrow WTO cae to challenge China for pecific violation of it WTO commitment. THE POSITION OF EU IN THE TRADE RELATIONS WITH US Even the fundamental tranatlantic partnerhip that ha allowed motly poitive relation between the EU and the US for decade i today under review by the US Adminitration. A a conequence, tariff and trade-rebalancing meaure have been threatened on a variety of EU product a well. US deficit in good trade i currently around $ 150 billion with the EU and thi put the EU in the econd pot on Preident Trump watch lit. Germany alone contribute to thi urplu by almot $ 65 billion. Invoking the national ecurity argument the US Adminitration applied additional cutom dutie of 25 % on teel import and 10 % on aluminium import from the EU on 1 June 2018, amounting to $6.4 billion in total and Preident Trump threatened to impoe tariff on other key European import, including car 6. However, the EU ha a ubtantial leverage in trade negotiation with the US, much tronger than China, becaue the current account of the EU 6 On Augut 21, 2018, Preident Trump confirmed that it i it will to impoe a 25% tariff on all car coming from the European Union. 3

4 with the US i balanced: the $ 150 billion deficit in good trade i offet by a urplu of roughly $ 50 billion in ervice and $ 100 billion in primary income, baed on a highly profitable portfolio of equity invetment. Digital companie, in particular, hold valuable intangible aet in European ubidiarie, uch a licene and patent US net poition with EU (billion $) Current Account Balance Trade in good balance Trade in ervice balance Income balance Source: The European Houe - Ambroetti elaboration on BEA data, To avoid to be caught in the middle of a trade war, European leader agreed in the lat EU ummit (June 2018) on a et of propoal to improve the WTO, which hould pave the way for finding common ground with US Preident Donald Trump and de-ecalating the ongoing trade dipute, a Jean-Claude Juncker, Preident of the European Commiion, ha tated during it viit at the White Houe on 25 July 7. He ucceeded in the particularly delicate miion of avoiding a full blown trade war, uing the meeting a an hitoric opportunity for the EU to de-dramatize tenion on trade, agreeing on reaeing the protectionit meaure taken and engaging into an open, contructive dialogue with the American partner. Moreover the Autria current EU Preidency while i committed to preerving EU unity on the US trade dipute during it mandate, openly declared the European Commiion hould prioritize a tranatlantic dialogue and avoid ecalation. ASSESSING THE CONSEQUENCES OF THE NEW TRADE ENVIRONMENT According to US Department of Commerce, the 25% teel tariff would bring to a cut in US import by 38,5 %, while implementing the 10 % aluminum tariff would caue a reduction in US import of 17,3 %. A a conequence, the etimated negative impact on Canada would be of $ 3,2 billion ($ 2 billion for teel and $ 1,2 billion for aluminum); on EU of $ 2,6 billion ($ 2,4 for teel and $ 0,2 billion for aluminum), followed by Sud Korea ($ 1,1 billion), Mexico ($ 1 billion), Brazil ($ 965 million) and Ruia ($ 823 million). Other countrie with relevant loe would be Japan, Taiwan, Turkey, India, United Arab Emirate and Vietnam. The collateral conequence of the o-called trade diverion hould be added to uch etimation, becaue in the abence of an important market a the US one, 7 See: Center for Strategic and International Studie, Tranatlantic Relation at a Croroad: A Converation with European Commiion Preident Jean-Claude Juncker, CSIS Headquarter, Wahington, D.C. July 25, production of exporter will be redirected toward other market, creating an exce in upply and price reduction. The lo caued at global level ha been conervatively etimated in $ 10 billion. However, the Trump tariff will hurt a well American conumer and uer, a much trade today take place within production chain haped acro national border. For example, the teel and aluminum tariff alo hurt US automotive indutry and US car buyer, while China retaliation affect US agriculture and manufacturing. Such complexity hould ugget caution, avoiding to conider trade urplue on pecific ector alone: ubtituting a home-made final good for an imported one i one thing, while reconfiguring entire upply chain i a completely different endeavour. Therefore the US ambition to repatriate upply chain could alo bring productive lo much greater than anticipated. The comparion with the 1930, which precipitated the world in a decent toward a traight and trong form of protectionim, could be highly mileading: then tit-for-tat trade protection rapidly followed the Wall Street crah and the world plintered into warring trade bloc. Thi ha not happened today and it i unlikely to happen anytime oon, ince crii-related protectionim today i remarkably retrained: multilateral trade rule, international policy cooperation and market-led globalization provide defence againt a full-fledged decent into 1930-tyle protectionim. Current retrenchment i much ubtler a the actual dollar amount of the US retrictive meaure i limited compared to the whole value of it international trade and invetment flow. However, they reinforce a worrying long-term trend toward lowing down globalization and therefore growth in the next decade. In thi ene, a more appropriate comparion could be with the 1970, when a erie of hock, including the collape of the Bretton Wood ytem and the oil-price hike, triggered more government intervention and capital-market regulation, inducing protectionim: indutry after indutry, encouraged by government upport at home, demanded protection from foreign competition. The reult wa a trade-to-gdp ratio hrunk in major Wetern economie and overall low GDP growth: 1980 became the lot decade for trade in many Wetern countrie. Beyond the impact of import tariff on trade and growth, what i at take i the real role of the multilateral trading ytem and the world economic order. The old world wa characterized by production ytem motly confined within national border, while obtacle to trade were about protecting dometic producer from foreign competition. By contrat, the modern world i characterized by trannational production along global upply chain of good and ervice, where obtacle to trade are focuing on protection of environment and conumer from ide rik. And the lat decade in trade policy were indeed about moving from protection (quota, tariff, and ubidie) to precaution (ecurity, afety, health, ocial and environmental utainability). The current reveral could erae uch progree. 4

5 HOW TO OVERCOME THE CURRENT TREND TOWARDS PROTECTIONISM The principle of the pot-war trading ytem are not merely a technical matter, nor they are jut about liberalizing trade important though that could be. They have a higher ignificance, becaue their purpoe i to protect the market from arbitrary government intervention and o protect tate from one another. They aim to maintain a predictable economic order in the mutual interet of tate, companie and private individual and the quet for a predictable international economic environment remain critically important. Overall, we conider the American tariff a the wrong anwer to the right iue of how we can deal with overproduction on the global market and unfair trade practice. The right anwer in our view i not new barrier to trade, but renewed negotiation on how to rationalize global production and how to avoid unfair behaviour in the global economy. Such type of negotiation can be paintaking, but the bottom line i that they do pay off, becaue thi i how global progre ha been made in the pat 70 year: from the UN to the EU, from NATO to the ILO and WTO, multilateral cooperation ha been a driver for peace and properity. The fact that Preident Trump i now on many front trying to undermine that pot-wwii world order, i an evolution we can only regret, becaue the challenge we face today, are till challenge that often need international and multilateral olution, like climate change, infectiou dieae, cyberecurity, corporate taxation and control of corruption among other. Global interdependence will only continue to grow and unle countrie face it in a pirit of collaboration, the world economy cannot proper. Intead of acrificing what ha been achieved in the pat decade, a better trategy to improve the exiting governance of international trade hould be purued. A priority, 17 year after the acceion of China into the WTO, hould be to addre meaningful complaint againt Beijing unfair trade practice and higher preure hould be applied to China. The neceary reform to enhance WTO effectivene hould be wiftly implemented. Surplu baed economie hould reconider their growth model and trengthen dometic invetment and demand, reaching a balanced economy capable to perform alo in uncertain time, without relying on credit and imbalance of partner economie. There i certainly room to trengthen the multilateral trading ytem in everal dimenion, but we hould not forget it ha been a ignificant upport for world growth in the entire pot-war period not only in the advanced economie but alo favouring convergence in emerging and low income economie, with incredible advance in the eradication of poverty and increaing a number of metric of human welfare. ADDENDUM: LEADERS' EXCLUSIVE COMMENTS ON THE TRADE WAR In thi ection we collected a few excluive tatement from a elect group of outtanding European peronalitie, to whom we aked anwering the following three quetion: how do you ae the trade war initiated by Preident Trump? Which countrie and ector will be in your view mot affected and which, if any, may benefit from it? How the EU hould react? Since it foundation, the EU ha probably been to mot ardent upporter of an open, rule-baed and fair trade and we remain o today more than ever. We indeed believe that thi i the bet way to promote mutual properity, competitivene and job creation globally. The ucce of EU' internal market for our Member State i a proof of thi. Converely, protectionim doen t work in the long run a we have een in the pat. Thi i why we have been worried by temptation to reort to it that emerged recently, notably in the US. Fortunately, after the meeting of Preident Trump and Juncker in Wahington on 25 July, we have agreed to launch a new phae in the EU-US relationhip and to focu on further opening up our market, avoiding new tariff, and enhance regulatory cooperation. Thi i the right direction to deepen our economic partnerhip in a mutually upportive way. US tariff on EU export of teel and aluminum and EU rebalancing meaure are till in place but we hope to be able to find a olution to lift them in the future. A to US-China relation, we are worried by the adoption of tariff in their bilateral trade a thi can detroy wealth globally and dirupt global value chain. We rather favor cooperation and joint work to enure a level playing field and eliminate unfair practice and economic ditortion uch a intellectual property theft, forced technology tranfer or indutrial ubidie that can contribute to overcapacity. We will work with the US, China and other to do omething concrete about thi, and notably to upgrade WTO rule in thi repect. Jyrki Katainen European Commiion Vice-Preident for Job, Growth, Invetment and Competitivene Trade war are alway negative. Not only do they have a detrimental effect on trade but they impede buine confidence, thereby negatively impacting growth and employment. The current anti-trade rhetoric and meaure from the U.S. Adminitration are largely baed on political and electoral motive and, unquetionably, they create eriou rik in what i otherwie a broadly poitive economic outlook. Beyond what ha already been announced, 5

6 6 an important matter of concern i the general tone of the U.S. Adminitration refrain. It appear to be againt the multilateral order and longtanding exiting intitution of global trade. Beyond the clear general negative impact, the countrie and ector that are affected very much depend on what concrete meaure have been and will be adopted. We have already een thi, for example, in the aluminium and teel ector which have been impacted by the tariff impoed by the U.S. Adminitration. American indutry i alo feeling the negative conequence of thee meaure and ome of the counter meaure which have been implemented. I believe that in a trade war no one i ever a winner and for that reaon we hould try to do all we can to avoid them. The EU hould firt of all how it commitment to the multilateral order on trade, not only by upporting the agreement and intitution already in place but by deepening it trade relation with other partner. In fact, we are already eeing thi happen through agreement the EU ha concluded or which are currently being negotiated and purued with real commitment. One uch example i Japan, where talk recently reulted in an agreement that i very good new from a trade liberalization point of view. The EU hould not give up on the U.S.There are many political force in the U.S. that upport free trade, including in the majority party and the EU hould continue to engage not only with Preident Trump but with Congre, the buine ector and all relevant takeholder. It i critically important, from both an economic and political perpective, that the U.S. maintain a poitive approach to global trade. But if ome meaure, like the tariff we have recently een, are implemented againt European interet, my view i that the EU hould react proportionately, whilt alway keeping the door open for further negotiation. By and large, it eem to me that the EU ha reacted in an appropriate manner to the U.S. poition and the meaure which have been impoed. Indeed, it repone ha been fitting of it duty to be the defender of a global order baed on free and fair trade. Joé Manuel Barroo European Commiion former Preident Trump big mitake i to attack friend and foe alike and imultaneouly. The dutie he decided on Chinee good follow a rationale, more than 95% are with repect to technologically advanced product. The dihwaher are the eye-catcher, but it i not about dihwaher, it about Xi 2025 plan. The dutie on European teel for example make no ene at all and hurt the American indutry more than the EU. If not Trump himelf, the indutrial and financial community have undertood and are critical at leat. It no wonder the EU and the US decided a truce a a reult of Trump and Juncker meeting in Wahington. For Trump it wa a decent way out and I expect no further action of the US againt the EU. On a number of iue, the EU and the US have the ame interet with repect to China: lack of level playing field, theft of intellectual property, ubidie, SOE, no reciprocity in market acce for ervice. But we have to tackle thi together, on ubtance and trategically. Latly, it will be very difficult if not impoible to reach an EU-US FTA-type agreement limited to good for a lack of check and balance. Karel De Gucht Former Commiioner for Trade from 2010 to 2014 The trade war initiated by Preident Trump i a looe-looe game. Wrong target (reducing US trade deficit). Wrong intrument (tariff). Will hopefully backfire oon enough not to create too much damage (ecalation). The EU hould take the lead of a coalition to addre exiting flaw in global trade rule and bring both US and China at the negotiating table. Pacal Lamy Former Director-General of the World Trade Organization from 2005 to 2013 The tenion on trade policy are at the heart of the US-EU current confrontation becaue they affect key apect of our international relation, particularly with reference to the three dimenion: the multilateral rule-baed world order, the European buine model relying on trade urplu and the trade rule protecting mature and innovative production. Such tenion are a ource of great concern and require from the EU the neceary firm and tough reaction, the deepening of it relation with Aia and India, the continued upport to multilateral fora where the trade iue are linked to the wider concern about utainability and a renewed outreach to EU citizen, in order to effectively communicate the benefit of opening market. Enrico Letta Former Prime Miniter of Italy from 2013 to 2014 Thi i a fundamental iue: the entire Wetern world benefited widely from the pot-war global order and therefore it i extremely concerning that there are external and internal force trying to move from a rule-baed into a deal-baed order. The current international trading ytem i not perfect but they are multilateral effort that are needed to improve it.preent trade policy challenge provide a great opportunity for the European union to demontrate it relevance and importance for the member tate. While the rik of the real trade war i till low, the preent trend i definitely dangerou.

7 Potential for ecalation i real. What make thing even more riky, i the fact that imultaneouly everal major economie uffer from low growth and dometic tructural problem. In preent circumtance, it i eay to blame free trade and globalization and initiate populitic protectionit policie. After all I'm optimit that after the US mid-term election thing will be changed into better direction. At leat there will be an opportunity for Preident Trump and hi adminitration to move from the campaign mode into the governance mode. Eko Aho Former Prime Miniter of Finland from 1991 to 1995 Mot concerning i the growing uncertainty. The Preident tweet influence the hare price, let currencie tumble and hift invetment. And it jut the beginning. The IMF already etimate the lo of global GDP between 0,3-0,5%. Free trade a uch will uffer and o all countrie with open market policy. In the hort run there may be ome winner, but in the end all economie will feel negative effect. Let u not forget: free trade reduced poverty, raied average income and improved our life quality. We are not in a poition to win a trade war. The EU current account urplu with the world of nearly 4% make u vulnerable. So, let u repond with care. A hift to more dometic invetment and booting defene pending could kill two bird with one tone: meeting NATO 2% target and cutting the current account urplu. Would thi appeae Trump? I doubt, but it would trengthen Europe!. Wolfgang Schüel Former Chancellor of Autria from 2000 to 2007 Aide from it obviou negative economic harm, the bigget challenge poed by the Trump adminitration trade brinkmanhip i the apparent abence of a clear de-ecalation or exit trategy. Thi i an adminitration that how unprecedented willingne to raie the take in it trade dipute without ever defining it end goal in practical term. The Trump adminitration focu on ill-defined totemic iue uch a the US trade deficit and level playing field create an ever-hifting negotiating baeline for it interlocutor, where only major conceion appear to ecure momentary relief from ad-hoc tariff threat. Thi ugget we are looking at a large-cale and protracted erie of trade conflict, with a highly uncertain outcome. The 1930 provide ample evidence of the potential devatating economic harm from unchecked tit-for-tat tariff ecalation, both dometically and globally. In the US, the Trump adminitration initial focu on intermediate indutrial good tariff ha omewhat delayed the impact of tariff on conumer good price. There i evidence that thi ha tarted to change a producer pa creeping production cot on to conumer and emblematic conumer good imported from China find their way into new USTR tariff lit. Mot global economic heavyweight tand to be affected by Wahington protectionit puh. Thi i epecially the cae for thoe countrie that have long relied on the US export market a a driver of growth, uch a Canada, Mexico, China and Germany all of which would be directly and ignificantly impacted by the Trump adminitration plan to impoe tariff on all Chinee and automotive import into the US. Notwithtanding it far-reaching economic cot, tit-for-tat tariff dipute often create localized trade diplacement opportunitie for third partie. For intance, there i ome evidence that Beijing impoition of retaliatory tariff on US product. It i important to undertand that thee opportunitie are the reult of cotly market ditortion created by new tariff, rather than from a levelling of the competitive playing field intended by the Trump adminitration. In the ort-term, there are only unatifactory option for the EU. Avoiding further unilateral tariff from Trump could mean offering immediate conceion, but thi would be a cotly hort-term fix and an invitation to Trump to ak for more in future. Alternatively, it could mean coming to the negotiating table under coercion a Juncker did in July. In both cae, it largely validate Trump choice to operate outide the boundarie of WTO rule.the better propect of a long-term olution to addre current tenion and imbalance in the global trade ytem i WTO reform. The EU and the US agree on their diagnoi of how China trade practice are harming fairne in global trade, but the challenge for Bruel i to convince Wahington that beefing up WTO rule i the bet way to olve the crii, rather than unilateral anction which only erve to undermine the rule-baed order. Thi preent a critical juncture for the EU. Bruel ha long endored the multilateral trade order but thi i the firt time the EU ha come acro a reviionit US Adminitration that eek to undermine it now i the time to aume greater reponibility for aving the WTO and trengthening the trade ytem. The EU ha kicktarted thi proce by opening up WTO reform talk with the US, China and Japan. But thi i not enough: Bruel mut how even tronger global leaderhip and muter a multilateralit coalition behind a clearly defined trategy to take thoe talk in the right direction and to a higher level. They will otherwie be driven by US and Chinee interet toward weaker binding rule and a gradual lide toward the unravelling of rule-baed trade. Allowing the law of the jungle to encroach on thi ytem i in no one long-term interet. Peter Mandelon Former Commiioner for Trade from 2004 to

8 THE DANGEROUS PATH TO PROTECTIONISM In the pat decade, ince the 50, global economy ha benefitted from a teady and generalized growth in trade, enabled by liberalization of trade in good and ervice under WTO governance Since 1947, with the General Agreement on Tariff and Trade (GATT) and then with it development in the WTO, global economy ha experienced a reduction of average tariff on trade by 85% International trade increaed tenfold between 1980 and today, outpacing world GDP growth. Global FDI growth outpaced both Average tariff in developed countrie fell from about 30% in 1985 to jut above 10% in 2005, together with correponding reduction in nontariff trade barrier, FDI retriction and retriction to trade in ervice In 2017 the global value of trade in good and ervice reached 22.8 trillion Dollar Conidering individual economie, ratio of trade value on GDP ha grown teadily everywhere but in China, Singapore, Ruia and Canada European Union affirm today a the area with larget trade urplu (conidering both good and ervice), followed by China US ha today the larget trade deficit, followed by India In the pat decade the global trade cenario experienced ome major change During the lat decade, global governance of world trade ha progreively hifted from WTO-only policy commitment to a double pillar environment: WTO rule and Bilateral Trade Agreement Bilateral Trade Agreement uch a TTIP and TPP were developing in order to go beyond WTO commitment, puhing tariff level even lower than WTO agreement, albeit on bilateral bai, and puhing toward deeper integration addreing non-tariff barrier and behind the border policie 2008 crii tranformed a benign global political and economic context, reulting in a harp contraction of global trade and FDI flow, with the world uffering it wort deglobalization ince WWII Within thi context, US new Adminitration trade policy ha changed, treing the importance of reducing US trade deficit US new trade doctrine conider trade deficit a a threat to US economy and job and a weakne of US economy and US global tance A a reult, current trade cenario i getting more and more characterized by bilateral trial of trength, menacing exiting multilateral governance and hindering pat decade progree toward trade and invetment liberalization Trump Adminitration already pulled out major bilateral trade agreement (e.g. TPP and TTIP) and inited on rewriting exiting agreement (e.g. NAFTA) US alo initiated a Trade War, which main target are thoe countrie with relevant trade urplu v. US, mainly China and EU China: In the pat decade the country ha affirmed one of the world leading trading nation. It world hare of export roe from 6% in 2005 to 10.7% in 2017 China i reponible for almot 350 billion $ trade deficit with US US introduced 25 % tax on import of $34 billion of good from China. China retaliated with a 25 % tariff on import of agricultural product and automobile. US tariff on teel, aluminum, wahing machine and olar panel add In Augut import tariff hike of 25% have been extended from both ide to 279 Chinee product and 114 American one, reaching $ 100 billion of import, that i 1/7 of their bilateral total trade exchange The rationale for US action ha been identified in everal Chinee commercial practice judged a unfair, but not addreable within WTO EU: TTIP ha already been canceled by US adminitration US deficit in good trade i currently around $ 150 billion with the EU. Germany alone contribute to thi urplu by almot $ 65 billion US Adminitration applied additional cutom dutie of 25 % on teel import and 10 % on aluminum import from the EU, amounting to $6.4 billion in total Preident Trump alo threatened to impoe tariff on other key European import, including car Differently from China, EU hold a tronger poition in trade negotiation with the US, thank to the leverage offered by a balanced current account v. the US In June 2018 EU leader agreed on a et of propoal to improve WTO, in order to find common ground with Preident Trump and de-ecalating ongoing trade dipute Global economy lo due to uch trade development ha already been etimated in over 100 billion dollar, given o, a de-ecalation of tenion hould be purued Multilateralim hould be preferred to bilateral negotiation temming from power play Meaningful complaint toward China hould bring to an improvement of WTO and multilateral governance, implementing the required reform wiftly. In thi proce, EU can take the leaderhip. The European Houe-Ambroetti Club Lettera draw on the analyi, thee and olution developed a part of Club activitie and, more generally, the profeional activity of The European Houe- Ambroetti Group. We are aware that we offer an obervatory of information and relation network, including on an international level, that i extremely high-level, but at the ame time we are cognizant of the fact that we are not the ole repoitorie of truth. In order to be of aitance to Italy and Europe one of our key commitment we incerely hope that each Lettera will provide the bai for a large number of critical uggetion, both in term of content and more generally, from thoe who receive it. Pleae end your uggetion and comment to letteraclub@ambroetti.eu. We thank you in advance for your invaluable collaboration. If you are intereted in the activitie of Ambroetti Club, pleae contact Silvia Lovati by at club@ambroetti.eu or call YEAR III NUMBER 5 Lettera Club The European Houe Ambroetti, 2018 All right reerved. EDITOR-IN-CHIEF: Nino Ciravegna Printing: TFM - Via San Pio da Pietrelcina, 15/ Pogliano Milanee EDITORIAL OFFICES: The European Houe Ambroetti S.p.A. Via F. Albani, Milan Tel Fax For information: letteraclub@ambroetti.eu 8