Hartland Capital

The European Union is more inclined towards protectionism than free trade

The ability to trade freely with the EU is an important aspiration of the government and much of the public within

Britain’s negotiations for departure and future dealings with the Continent. I will argue that for Brussels, however, free

trade is far from being the norm when considering commercial relations with non-member countries.

There are three essential economic areas about which the EU’s policy makes it a generally protectionist bloc. The first

relates to regulations of quality for goods and services entering the Union; the second has to do with tariffs and quotas and

the third is a result of Europe’s single currency.

The weight of EU regulations

The Commission and Parliament in Brussels regularly impose qualitative regulations on goods and services that can be sold

within its jurisdiction. These come in four general categories, according to the European Commission: sanitary,

environmental, technical (mostly safety, packaging regulations), and market standards of quality for which Europe has

some of the most demanding regulations in the world. In addition, the cost of compliance is high, estimated annually at

about £33 billion as of March 2015 for the UK alone. If a foreign company judges that the European market for its product

is too small, it will not choose to take on the long-term cost of adapting its manufacturing process to fit European

standards.

A lot of the Union’s regulations also add to the already heavily protected agricultural sector as it contains provisions

against GMOs for example which are common in other parts of the world. Notably, it was one of the differences that

prevented further discussion on the proposal for an extensive free trade agreement with the United States (TAFTA).

Tariffs and subsidies within the Customs Union

On the simplest definition of protectionism, the EU fits this category considering companies importing into European

member state must pay an average tariff of 1.6% (according to the World Bank). Note that this is an average tariff and not

a universal one. For instance, textiles produced in China – to take an example of a typical import from a large economy –

are subject to a tariff of 4% and cars from China can be charged 5%, sometimes even 10% and the same is true of American

cars.

The reason why the average tariff for European imports is so low despite these high tariffs on commonly traded goods, is

because the Union uses a system of quotas where each non-member state is allowed a given amount of goods to import

with lower or zero tariffs above which the full tariff comes into force. These exemption quotas are negotiated with each

member state individually, showing that in Brussels, free trade is the exception rather than the rule.

The most protectionist measure in the EU remains the Common Agricultural Policy (CAP), which contains provisions for a

tariff on foodstuffs at a mean rate of around 20%. On top of this, European farmers are heavily subsidized to level such

that CAP subsidies made up 39% of the EU’s total budget in 2013.

In addition, the Commission uses what it calls Trade Defence Instruments against foreign competition which it considers

unfair either for reasons of excessive government subsidy or dumping, i.e. when a provider sells abroad for less than the

domestic price, often less than the production cost. In either case, the Commission’s proposed response is to set a tariff

that will cancel out the benefit for the importer of the subsidy or the dumping.

Protectionism and the single currency

The effect of the Euro on European trade openness is more subtle and nuanced. For one thing it only applies to those member states which are in the Eurozone, but after the UK leaves that will be the case for all major economies in the EU, and even among countries that do use the Euro, the effect on their trade is not always the same. Clement Julhia Political Analyst +44 (0)7 392 322 476 cljulhia@hartlandcapital.com Clement Julhia | August 2017

The natural value of a country’s currency in a floating exchange rate system like we have around the world today is

determined by its balance of trade (BoT). To put it briefly, exports are made easier with a cheap currency and vice-versa;

at the same time exports cause the currency to appreciate from the demand for it and vice-versa. Therefore the long-run

value of the currency increases as the structural balance of trade improves and decreases if the balance deteriorates. This

means that countries within the EU whose BoT is higher than the EU average have a currency which is cheaper than what

their national currency would be. The Union’s average commercial excess is 0.8% whereas Germany’s is 18% and 20% for

the Netherlands. Hence for example German or Dutch producers, who can sell their products abroad at a lower price than

their BoT should allow, are faced with foreign competitors whose imports are unnaturally expensive.

The opposite situation exists for EU countries with a worse than average balance, like Spain or France, but it important to

note that European institutions also create a form of protectionism based on currency exchange arithmetic in the case of

its most successful economies.

Overall, EU regulations, tariffs and currency make protectionism the standard approach for trade relations between the

European Union and the rest of the world, although it is important to keep in mind artificial competitiveness within the EU

is not homogenous either across members or industries.