The EU vs China: it’s complicated. With Bernd Lange

0:00How do you win a trade war with a country you depend on? The EU is trying to work it out as it plans to get tougher with China. Our trade deficit with China is now 1 billion euros a day. It has reached a tipping point. That's Ursula von der Leyen, the president of the European Commission, speaking in September. Cheap Chinese imports are piling into Europe in sectors from cars to chemicals. And unlike in the past, the Chinese are not buying much back. European leaders are treating it like an emergency, though it's still Europe, so quite a slow-burning emergency. But is this a trade fight the EU can win?

0:46And if so, how?

0:53This is The Economics Show with Samaya Keynes. I'm joined today by Bernard Langer, Chair of the European Parliament's Committee on International Trade and a loud and important voice in the EU's trade debates. Bernard, hello. Hello. On this show, we always start with a silly question where the answer is on a scale of 1 to 10. So on that scale of 1 to 10, a very scientific scale, how much trouble is the EU in when it comes to navigating trade wars? So zero is no trouble at all, everything is great, 10 is disaster zone and crisis is inevitable. I would say six. Okay, near the middle, hedging a bit.

1:36Exactly. We have some problems with some big trading partners, but we have also some chances to stabilize the global order. Okay. Six, though, isn't great. You have been involved in the trade debate for a long time. And correct me, but it feels to me like the rhetoric towards China right now is particularly hawkish. What is your assessment of how the reality matches up to that rhetoric, right? Because on the one hand, it could just be that, you know, you've got, protectionist interests gone mad. On the other, actually, no, this is a real challenge that's having effects on the ground, challenging the European industrial base.

2:21I guess we should really look to the effects. And you're quite right here in the parliament, but also in the European Union. As such, we have forces which really have China phobia. And on the other side, we have forces saying we are so close in our trade relations with China, don't provocate China. Both is not the reality. On the one hand, the export from China is quite aggressive. We have a lot of subsidies. More than 4 % of the GDP is going in subsidies of industrial sectors. And we have to react to that. And at the moment in China, we have also a situation that the domestic demand is going down.

3:07Car sales are more than 20 % down. So therefore, the export is so important for the economy in China that we, I guess, have a leverage. And US market is more or less closed. So the key market is Europe. So as we are recording this, the EU Trade Commissioner is, I think, on his way or in China to talk to his Chinese counterparts to try and get some sort of agreement rebalancing from the Chinese to address this huge export surge that we've seen. What do you think is reasonable to ask of the Chinese? To make clear to the Chinese side that this dramatic increase in specific products could be limited, I guess should be reasonable for the Chinese side.

3:57But I guess the important issue is that we are not arguing with specific pressure. That's my experience with the negotiations with the Chinese side as well, so that this change in the behavior has to be built on their mind and their activities. So, yes, there could be some export restrictions in China. There could be some limitations for specific cars, but it has to be clear that China should start some measures which will limit the profit for Chinese companies to sell specific cars inside the European Union. And so that's for two or three years not interesting for them to do it. It's interesting that you are talking about temporary measures because there is a school of thought, which I suppose I do subscribe to, which is that this is a structural issue.

5:00It is a structural mismatch between the way that the Chinese economy operates. It does support companies to just export their excess rather than responding to price signals to adjust. And so, you know, if you believe that, then it's kind of hard to see what that kind of agreement would achieve other than just a very temporary sticking plaster for what is a sort of semi-permanent structural challenge. Yeah, on the one hand, of course, we are sticking to the W2 rules and we are really a fair partner if others are also playing fair. And of course, the history of Europe is based on high quality and innovation in industrial sectors.

5:46and if we really have the opinion that this will be not the case in the future, then we have a serious problem. And at the moment, I see no reason why we should think so. We have the data of the production. We can combine the production with AI. And even here, we have an advantage also compared to the United States that we have the data. So there is room for improvement. And then at the end of the day, the consumer has to decide which car he or she will buy. But do you really believe that? I mean, you know, suppose that the European consumer decides, even with that temporary tariff or even a semi-permanent tariff, that they just want the Chinese cars, right?

6:34They want the flat screens. They don't want to buy European. And actually, maybe the European car industry would shrink quite a lot. Is that acceptable? as an outcome? Not at all. Therefore, we have to fight. But look, we have also some problems which really combine the really problematic situation here. So the domestic demand is also decreasing. So this is not linked to China. It's really linked also to the demand in Europe. And we have also a decrease in export to the United States. So there are different elements where we have to look. And of course, we would like to see more investment and more production of Chinese cars in Europe.

7:20We are speaking in a week where President Macron and Chancellor Mertz sent Ursula von der Leyen, the president of the European Commission, a letter with some striking proposals. There has been talk of kill switches. The commission might acquire the power just to eject a particular company from the European Union. You know, in the past, when it comes to these trade weapons, you need consensus from member states. It is hard to secure. But under these proposals, the Commission would be able to act quickly and it could only be overturned by a qualified majority of states. What do you think of that kind of new weapon?

8:05First of all, it's an idea. It's not a legislation. Secondly, I recognize that two important member states changed their mind, and that's important. I was the rapporteur for one of the tools in our toolkit, the anti-coercion instrument. And in this negotiation with the council, the council wanted to avoid quick reaction because they had really the fear that economic and political weapons and measures would be combined and would lead to diplomatic problems. Now, it seems that France and Germany have recognized that that's reality. China is using economic power as a political weapon and political pressure, sometimes really coercive.

9:01Therefore, it's good to know that now the council is ready, or at least two of the member states, to react quick. And now we have to discuss how to deal with this idea. So we have, I guess, two ways. One is to modify the under coercion instrument, so speed up and decision-making process, because we have a huge basket of possibilities to react if there are coercive measures coming from a third country. Or we are creating a new instrument, an emergency coercion instrument. There will be a discussion in the council mid-October and then we will have a discussion in the parliament in November and then we'll see how we proceed.

9:50That's really interesting. So the anti-coercion instrument is the best weapon that the EU has right now of fighting back when it comes under pressure from, say, the US or China. But in the past, when, say, President Trump made threatening moves on Greenland, they couldn't agree to actually use that anti-coercion instrument. Do you think if that were to play out again with this new instrument, they would have been able to do something? I guess this Greenland experience was really one of the elements where the change in the mindset of the member states happened. And I'm sure and I know that if the change of position of President Trump in Davos would not happen, then, of course, the integration instrument would be started.

10:43And so, yes, you're quite right. Before the Greenland exercise, the council, the members said they were really reluctant to use it. They had all their particular interests, Germany, the cars, Italy, the wine and others. But I'm quite convinced that now also this instrument might be used if it's necessary. Can I ask what you think would happen, though? You know, I think you're right. There has been this remarkable change. Suppose the Chinese were to try to coerce the European Union. Suppose these trade talks were to go really badly wrong and the Chinese were to say, nice that you have those rare earths.

11:22Sorry, we're not selling you anymore, right? We can essentially shut down a lot of your manufacturing because of the importance of China in those supply chains. Would this new weapon really work? Does the EU have anything up its sleeve that could counter that? You're quite right. The refinery of Weir is also a weakness. And this is also based on the economic calculation of European companies, because this was not naive. I had a really tough discussion with the CEO of a big German company. He said to me, oh, regarding China, we were naive. No, that was not naive. they closed refineries for rare earth in Germany and Europe and what they processed to China because of the low wages and mainly also because of the low environmental obligations so it was economically good for them and now we have the problem and therefore we need also refineries for rare earth in Europe or in reliable partner countries and we are working on that so you're quite right if we would now start an escalation regarding where earth and critical materials, China has a power.

12:37So I would not argue starting a trade war now because then it might be not clear who will win. Okay. Can I ask now about the EU's defensive policies? So there has been a proposal called the Industrial Accelerator Act, which would try to, you know, bolster European industry. And there has been, you know, questions about when it comes to European preferences, who should be included, right? And, you know, it's all very well trying to promote European industry, but does that include the UK? Does that include other trusted allies? or is this going to be home only? Where do you fall on that balance?

13:25Should the UK be included? Short answer is yes. Some of my colleagues and also some member states are saying we should really limit public procurement and support subsidies to production based in Europe. I have some problems because we have a legal obligation with the general procurement agreement with WTO. And we have also trade agreements with reliable partners like the UK, like Switzerland, like Canada, like Japan, like Korea, where we have also obligations on public procurement. Therefore, I think they should be in, but we have to really control if they are really complying with the obligation.

14:15So this should be checked. For UK, I have no problem. And we have a lot of close connections. By the way, I'm also looking quite close to the development inside the UK in the direction of getting closer to the European Union. And the prime minister mentioned last week that for him, no option will be excluded. So let's see. At the moment, I see this Switzerland plus possibility for the UK. Well, there'll be some pleased Brits listening to that. Well, look, let us go to a break now. But when we get back, I'm going to ask about the EU's other trade problem, the US.

15:26We'll be right back. win and francs win. Lenders win and so do lenders. When you build credit scores the right way, everybody wins. Get started at vantagescore.com.

15:42We are back from the break. Okay, we have mostly been talking about China, but I want to ask you about the EU's other big problematic relationship, which is with the US. although for now trade relations are pretty stable but the Trump administration has been carrying out various investigations into unfair trading practices and it looks like the EU is still in its sights so you've got investigations covering pharmaceuticals pricing digital services taxes and so-called industrial overcapacity so I think that there will be potential disruption ahead. Looking at that landscape, which of these investigations or which US trade actions are you most concerned about?

16:29Oh, that's a not so easy answer question. So as you know, after the deal for Scotland was concluded, the United States lifted products, they call it derivatives, because they are containing steel and aluminium from this agreed 15 % up to 50%. And this is still a reality and this has to be changed. And even worse, they started a new investigation for 20 additional products, so-called derivatives. And then, yeah, we have investigations. We have investigation and tariffs on pharmaceuticals, on drugs. At the moment, I think until the midterms, there will be no further measures coming on the table because all these measures, all these tariffs have an impact also on the price situation in the United States.

17:26So, therefore, I always call 2nd of April, where Trump announced the tariffs, and he named it Liberation Day. I call it always Inflation Day, because you see clearly at the moment, I guess, about 4.8 % inflation rate in the United States. That is his consequences. And therefore, I guess before the midterms, we are safe, but it's only one month to go. And then I expect that specifically the Secretary of Economy and the White House are looking for a specific solution for some particular problems. the USTR is at the moment more on a rational path. And that's also quite interesting that in the United States, there is a, let's say, slight division of interest reflecting in the different bodies of the government.

18:24So the Treasury is, you know, looking for wins, whereas the USTR, as you said, more rational? Yeah, because USTR, of course, is presenting more the industrial interest and they are also looking quite clearly to the general establishment of tariffs in relation to other countries where the Secretary of Commerce is more looking to specific products. and Peter Navarro in the White House is really more in the sphere of the MAGA movement and have more political interest. And so these are three different animals having the necessity to work together. Can I ask you about the EU-US agreement, the Turnberry Agreement?

19:17It's my understanding that the US is a bit frustrated because part of that deal involved, you know, signing up to talks, which could potentially align standards between the EU and the US. And the Americans are a bit frustrated because the talks have been quite slow. What's your impression of what's been going on? Yeah, first of all, we had some discussion about the implementation of the tariff side of the deal of Scotland, because in our parliamentarian view, we have to be clear and also integrate some safeguards. And yeah, in this deal of Scotland, we have also some aspects for further discussion.

20:01And of course, this further discussion could only start after we fixed the tariff issue. And now we are looking a little bit how to arrange this, but this has to be done in real partnership. It is not the possibility that one partner says to the other what he has to do. And we got a letter from the US side, which was more or less formulated in this way. This is, of course, not acceptable. Now we are looking how to discuss this, define the different elements. Of course, at the moment, this is also stopped because of the midterms. I suppose with the EU, the question is, as with China, if relations really did sour, could it hit back?

20:52What is the EU's leverage? Because it looks like actually the US is extraordinarily powerful, given its control over the digital sphere, financial networks. And so arguably the EU is in a pretty weak position relative to the US and China. Is there anything in the assessment I just gave that you would push back on? Is the EU in a better position with the US relative to China or vice versa? Of course. Digital, we are really depending on AI, on cloud server and so on, mainly also US, but also from China. So we have to work on that. So we need more sovereignty. We need more economic security. But I think at the moment we have also leverage.

21:40So there is a dependency in China from European products, no doubt about, and on the US side as well. So in our list of countermeasures, we have a lot of products where we could set tariffs on this product, but also some export restriction on scrap, for example. The United States have only electro-steel production and they need scrap from Europe. They are buying a lot of scrap and China is buying a lot of aluminium scrap in Europe as well. They need it. So we have also some leverage if it's needed to give pressure to them. But I think negotiations are better than escalation. Yeah, I guess in a fight between the threat to shut off the payment system and export restrictions on scrap, I think I know which side I'd want to be on.

22:36But there we go. Bernard, thank you so much for joining me. This has been great. It's a real pleasure. Thanks a lot.

22:51That is all for this week. You have been listening to The Economics Show with Samaya Keynes. If you enjoy the show, then I would be eternally grateful if you could rate and review us wherever you listen. This episode was produced by Katya Kumkova with original music and sound design from Breen Turner. Our executive producer is Manuela Saragossa. I'm Samaya Keynes. Thanks for listening.

23:44We'll see you next time. banks win and francs win, lenders win and so do lenders. When you build credit scores the right way, everybody wins. Get started at VantageScore.com. The new episode of the Next 5 podcast is all about sovereignty, data and control. Charlie Giancarlo at Everpure joins me. You always get a very embarrassed response if you ask them if they know where all their data is. As does Professor Sana Karagani. There isn't any modern AI system that's entirely sovereign. And Claire Schramm-Fergus at Lloyd's Banking Group. We really need to design for safety rather than bolting it on at the end.

24:22Listen to The Next Five wherever you get your podcasts. Enjoy.