European Protectionism: Causes, Motives, and Consequences

Protectionism is one of the most significant principles of the trade policy used by various developing and developed nations. The tools and objectives of protectionist policies have changed dramatically over time in response to the evolution, complexity and rules of economic life. Tariffs remained the most important tool in trade policies until the mid-1990s. This, however, changed when the establishment of the World Trade Organization (WTO) was approved. The WTO was founded with the goal of promoting trade liberalization by monitoring the reduction of tariffs, eliminating trade quantification, abolishing quotas, and periodically reviewing the trade policies of countries across the globe with a view to determining the degree of compliance with the provisions of the agreement. 

The nations now depend on one another for the import and export of goods as a result of decades of foreign trade liberalization policies that have helped to open markets for the exchange of goods, and allowed nations to specialize in the production and export of goods from which they are relatively distinguished in accordance with the principle of comparative advantage in international trade. 

However, the integration of markets and networks across various countries around the world has expanded and become more complex. It is noteworthy that the increased imports had an adverse effect on domestic job creation opportunities because the supply of the imported goods put more pressure on domestic producers. This is because domestic consumers may prefer imported goods over local ones due to their competitive prices resulting from economies of scale in production. Moreover, domestic companies are unable to compete, and their position is threatened. Some may have closed, especially the infant industries that need support and a welcoming environment to flourish, while others may still be in operation but are facing difficulties. That, in turn, will have a negative impact on labor market. Additionally, imported products may fail to meet product safety standards and cause serious harm to consumers’ health and the environment; in these situations, protection serves to mitigate the negative effects of high imports. 

In this regard, foreign trade liberalization policies periodically experience economic crises due to the nature of capitalist economic systems. As economic crises in their various forms frequently occur and countries seek innovative ways to shield their economies from external shocks, a new trend based on the implementation of restrictive economic policies known as “New Protectionism” has spread. 

New Protectionism or protective measures on trade, are those actions taken by the government to restrict the flow of exports and imports of goods and services. One could argue that it opposes free trade. The governments put them in place to protect home businesses from foreign competition. It takes various forms, such as import tariffs, quotas, labeling, product safety, and health requirements, to protect the domestic economy’s interests from import competition. These measures aim to shield local businesses and workers. 

Although trade protection offers benefits to the domestic market in the form of a high rate of growth, employment, and income opportunities, as the import flow pressure decreases, these protective measures spark debates about their effectiveness and potential impact on the global economy. Critics say such a policy would only result in an inefficient allocation of resources at the global level. It may benefit one party, but it costs the other. Protection resulted in a less competitive industry because it depended on government support rather than promoting domestic economic development. 

This study will focus on analyzing the causes and effects of the European Union that lead to the high level of protectionism policies being applied to its international trade. As a result, the study will cover four topics: EU global trade position and challenges, EU protectionism’s reasons and motives, EU protectionism tools and instruments, and the EU’s position regarding China’s practices as a special case of protectionist policy. 

I. EU global trade position 

The EU is one of the most attractive destinations for global companies and for investment. EU economies seek open and rule-based trade and investment, secure cross-border connectivity and collaboration on research and innovation. These elements will remain critical drivers of European competitiveness and resilience. Hence, the EU needs to rely on trade and the Single Market to spur competition and ensure that they have access to the raw materials, technologies, and other inputs that are crucial for boosting their competitiveness and sustaining current and future employment and growth. Similarly, the EU wants their partners around the world to continue to benefit from access to European markets, capital and technologies for their transition to a clean and resilient economy. Achieving this balance properly is crucial to ensuring that the interests of economy and security are reinforced. In order to do this, the EU must increase its own competitiveness and protect its market from threats to economic security. 

The figure below is an illustration of the EU trade in goods between 2019 and 2023. 

As seen, Europe needs to rebalance its economy and reduce its one-sided dependencies wherever possible, change resource-intensive consumption and production patterns, increase its processing capacities and develop production facilities in future-oriented sectors, especially for high-value goods, where it is essential to maintain the EU’s technological and innovation potential. 

In this regard, the European Council stressed the necessity of protecting the EU economy and cautioned against unfair trade practices that need to be tackled efficiently, and the EU's trade defense instruments will always be effective in the face of global challenges. Hence, the European Commission implements and enforces trade rules in the EU and its trading partners to strengthen the implementation of the EU’s multilateral, regional and bilateral trade agreements and ensure that countries with whom the EU has trade agreements meet the commitments they made.[1] Therefore, the case of China needs to be addressed in this regard because of the numerous trade agreements it has allegedly violated and the obstacles and challenges it has placed in front of its trading partners. 

II. EU global trade challenges 

It should be noted that the recent and massive entry of Chinese production into international markets should be carefully considered as a factor exerting pressure on the EU and the U.S. Meanwhile, China’s growth as a technological powerhouse adds to existing concerns about trade. Consequently, the EU imposed protective measures for its domestic production to safeguard industries from an unbalanced competitive environment that may threaten its strategic autonomy and also to protect job opportunities inside its region, thus maintaining the stability of the EU’s economy. 

It's also important to highlight the BRICS group, which consists of the world economies of Brazil, Russia, India, China and South Africa. This bloc was thought to be one of the hidden causes of the protectionism imposed by the developed countries. BRICS is a political organization that was formed in 2006 after negotiations were started and it held its first summit in June 2009 in the Russian city of Yekaterinburg. After South Africa joined, this group changed its name from BRIC to BRICS in 2011. The bloc aims to develop economic relations among themselves in local currencies, reducing dependence on the US dollar. By 2050, their economies are expected to rival the economies of the richest countries in the world right now.[2]  

BRICS also established the New Development Bank (NDB), a multilateral financial institution, to challenge the dominance of European and North American nations in global finance. Its goal is to establish an economic system parallel to the current one led by the United States. The BRICS countries account for 26% of the global landmass and 20% of the total global GDP. China views this bloc as a role model for promoting developing and underdeveloped economies in this regard. As the members started to develop their comprehensive economic strategies, they created an economic force that was capable of countering the dominant Western economy. The BRICS alliance is reshaping the world order by shifting power from the “Global North” to the “Global South”. 

For decades, the US dollar has enjoyed unparalleled dominance as the world’s leading reserve currency. According to the U.S. Federal Reserve, the dollar was used in 96% of international trade invoices in the Americas, 74% in the Asia-Pacific region and 79% in the rest of the world between 1999 and 2019. 

The impact of a new BRICS currency on the US dollar remains uncertain, with experts debating its potential to challenge the dollar’s dominance. But if a new BRICS currency was to stabilize against the dollar, it could weaken the power of U.S. sanctions, leading to a further decline in the dollar’s value. It could also cause an economic crisis affecting American households. Aside from that, this new currency could accelerate the trend toward de-dollarization. 

In the last two decades, the BRICS countries have undergone dramatic land-use transformations or initiated large-scale infrastructure projects within their regions. For instance, China’s attempts to re-establish the Silk Road Economic Belt across Europe, Asia and Africa, as well as the growth of industrial large-scale farming in Brazil and South Africa, are all outcomes of the BRICS visions for ‘sustainable’ and ‘smart’ development. Furthermore, China’s significant investments in research and development (R&D) have enhanced the country’s innovation capabilities, diversified its technology knowledge base and enabled the country to venture into rapidly emerging fields of technological advancement. One significant example of this trend is the growing proportion of high-tech and knowledge-intensive patent applications being made by China. The EU had serious motives and reasons to maintain its previous level of trading performance in light of the various economic and industrial developments that have recently occurred globally. 

III. EU protectionism: reasons and motives[3] 

In recent years, the EU has been implementing a comprehensive reform of key trade-related regulations to promote fair and equitable trade in the areas of foreign direct investments, anti-dumping and trade defense tools. In order to protect Europe's producers and businesses from potential harm caused by specific trade practices by foreign entities, EU legislative entities developed initiatives in response to certain country-performed trade practices that violated the terms of the free trade agreement and caused trade distortion. Consequently, the European Union has implemented protectionist measures to protect its domestic industries from foreign competition, maintain its competitiveness, and avoid losing out to cheaper imports from other countries. Additionally, the EU has promoted national security to guarantee that it is not dependent on other nations for essential goods and services like energy, food, and defense. Moreover, it is ensuring that imported products adhere to the same environmental regulations as those produced domestically. 

So, the EU’s rules of protectionism against unfair trade practices were approved by the Council of the European Union “EU legislation” on 4 December 2017, and the updated EU anti-dumping rules are applicable in situations where the state artificially lowers the price of imported goods. The EU aims to enhance and optimize its anti-dumping and anti-subsidy mechanisms to protect its producers from potentially retaliatory actions. 

At the same time, importers should enjoy greater predictability in terms of changing duty rates, making their business planning smoother.[4] As a result, the EU government has been under pressure to resort to some of the protective measures to maintain the safety of its economy in light of the current unstable state of global trade. 

IV. EU protectionism tools and instruments[5] 

Economic coercion is defined as a situation where a third country attempts to pressure the EU or a member state into making a particular choice by applying or threatening to apply measures affecting trade or investment against the EU or a member state. In this regard, the European Council adopted the Anti-Coercion Instrument (ACI) on 23 October 2023, which aims to prevent third countries from targeting the EU and its member states. The anti-coercion tools are designed to promote discontinuation of coercive measures through dialogue. Any countermeasures taken by the EU are applied only as a last resort, which is carried out through the imposition of trade restrictions in the form of higher customs duties, import or export license requirements, and restrictions in the field of services, access to FDI or public procurement. It is important to note that the ACI and any actions that may be taken in accordance with it are fully supported by international law and are consistent with the EU's international obligations. 

In the context of the EU protectionism policy, it should be mentioned here that the EU paid €500 million to support the agricultural sector in Europe, which was in crisis. Following a sharp fall in dairy production, €150 million were set aside to support cow breeders and dairy producers and compensate for their losses. 

In the process of enforcing the protectionism policy, some measures have been implemented by the EU to ensure that its companies, workers, and citizens are protected from international trade distortion while promoting a fair and equitable global trade environment, which are as follows: 

· Common External Tariff (CET): The EU has a common tariff system for imports from non-EU countries, promoting a unified approach to external trade barriers.

· Anti-dumping and Countervailing Duties: The EU can impose anti-dumping duties on imports that are priced below fair market value and countervailing duties on goods benefiting from foreign government subsidies.

· Quotas: The EU may use quotas to control the flow of specific goods into the EU market by limiting the number of products that are imported.

· Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary (SPS) Measures: These are regulations related to product standards, safety, and health, designed to protect consumers and ensure fair competition.

· State Aid Control: The EU monitors state aid provided by member states to prevent unfair competition and distortion of the single market.

· Trade Defense Instruments: The EU employs various mechanisms to address unfair trade practices, including investigations into alleged subsidization and dumping. 

Hence, these stated measures will support the EU’s position to ensure the security of its supply chains, critical infrastructure, and technological and industrial bases against its trading partners that inflict harm on its economy. 

V. EU’s position on China practices[6] 

As major powers in the world, the European Union and China shared the same global responsibilities and interests in peace and security when functioning in the rules-based international order. There is a direct impact on the prosperity and security of people in the EU and China due to their significant economic and geopolitical common interests. It is worth mentioning that among EU member states, the Netherlands was the largest importer of goods from China and Germany was the largest exporter of goods to China in 2022. China is the EU's most important trading partner.[7] 

During an EU-China summit held in Beijing in December 2023, European leaders stressed that they would not tolerate unfair competition over their industrial production and called for the importance of negotiated solutions in this regard. Additionally, they would not accept a permanent trade deficit, which would force them to implement protective measures for their domestic market. In this regard, a reform of their economic relationship and the importance of de-risking and strengthening the flexibilities of their economies should be recognized. They added that there should be fair competition within the single market and insisted on fair competition from companies that come to their single market. 

The EU is concerned that Beijing's import restrictions and generous subsidies for China-based firms are putting European companies at an unfair disadvantage. The Asian giant is the EU's biggest trading partner, with trade in goods amounting to a staggering €2.3 billion every day. But EU imports from China now exceed its exports by almost €400 billion. This deficit has grown tenfold in the past 20 years and doubled over the past two years. In order to address concerns about its reliance on China for essential materials used in cleantech applications that could undermine its industries and jeopardize its security, EU leaders demanded from China that it take more concrete action to improve market access and the investment climate for foreign companies. This means using the EU’s trade and domestic defense tools, such as the anti-subsidy over the low-cost Chinese electric cars that are flooding the EU market. 

VIII. Conclusion 

Protectionist policies are usually implemented with the goal of improving economic activity within a domestic economy but can also be implemented for safety or quality concerns. Till now, there has been no strong evidence of a withdrawal from globalization. It is obvious that liberalization and free trade are under attack since policymakers in some of the world’s largest economies have made choices to stop further international integration in order to embrace protectionism. We could see that global trade growth slowed after the global financial crisis in 2008–09 and declined sharply during the Covid-19 pandemic in 2020. But since then, trade has rebounded to the highest value ever. 

In the case of the EU situation, we can observe that after it had a dominant power over its trading partners and controlled most of the measures and criteria because of its strong level of competitive and innovative markets, that situation started to gradually change despite the EU’s process of establishing the single market. However, there are still too many obstacles based on national interests that hinder this process due to internal conflicts among EU member states about the regulatory framework, so the EU market power is currently shrinking, particularly in relation to Asia. 

Businessmen in the EU found difficulties obtaining the basic materials needed for their production due to global competition for these resources. As a result, the EU enforced strict policies and punitive actions against its trading partners in addition to certain protective measures. 

In the process of reforming its local economy, the EU is focusing heavily on the energy sector and has made it one of its top policy priorities, as it is a major factor influencing Europe’s competitiveness, improving its trade situation, and reducing its reliance on external energy suppliers. From the EU’s point of view, these actions will have a number of effects, including increased investment in renewable energies, a decentralized energy supply that supports domestic manufactures, reduces CO2 emissions and lessens reliance on price-volatile fossil fuels. All of these factors will eventually lead to be reflected on lower energy prices. This transformation stage requires investments into research and innovation, improving the infrastructure, and educating and improving the capacities and skills of the workers and employees regarding new technologies and materials used. Wide-ranging discussions with the social representatives of civil society and the social partners are required, respectively. 

Generally, protectionism is not a fair tool used by nations because it leads to retaliatory actions and raises import prices, which will reduce consumer choice due to a limited domestic supply that will be dominated by some inefficient domestic producers. Exporters will face a decline in their product demand, which will have a direct negative effect on the level of unemployment. 

Besides, we could find that small national firms that couldn’t before benefit from economies of scale became more stable because of a lower level of competition and a decline in the pressure of product cost-cutting, which will finally adversely affect end users. 

Overall, protective measures imposed by the major economic powers, like the European Union and the United States, may significantly exacerbate economic imbalances and hinder the growth of developing markets, in addition to the negative effects of protectionism on most of the Asian trading markets, including China, Malaysia and Indonesia. This is because trade barriers imposed on market access may limit the volume of exports and the economic growth of these countries. Furthermore, these hindrances will make it harder for Asian producers to compete internationally, disrupt global supply chains and have an impact on sectors of the economy that depend on smooth cross-border trade.