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Europe and the ‘new Washington consensus’

Global Policy Watch | 11 July 2023

Europe and the ‘new Washington consensus’

By Jean De Ruyt

On April 27, 2023, US National Security Advisor Jake Sullivan delivered a lecture at the Brookings Institution on American economic policy in which he promoted a ‘new Washington consensus’. His speech resonated loudly within EU member states and its institutions. What he said fits very well in the current debate in Brussels on economic and trade policy – a debate which divides policy makers even inside the European Commission in Brussels.

The need for a ‘new’ consensus

Jake Sullivan’s presentation, indeed, reinforces the views of those in Europe who feel there is a need to take distance from globalization, free trade and an economic system based solely on liberalism, competition rules and the law of the market. This system was often presented as ‘the Washington consensus’; this termwas coined first by a British economist in 1989 to qualify a world of free markets, with as guarantor the United States and relying mainly on the World Bank and the IMF. This ‘consensus’ developed in Washington during the Clinton administration and extended easily to the other side of the Atlantic – until the turn of the new century.

But now, times have changed: the US is no longer the hegemon; the world has been fractured; western values are openly challenged by China and others in the ‘global south’ – and the Trump administration has renounced major multinational treaties like TTIP and the TPP. Sullivan describes superbly the reasons why a ‘new’ consensus is needed: ‘a financial crisis that shook the middle class, a pandemic which exposed the fragility of our supply chains, a changing climate that threatens lives and livelihoods, the invasion of Ukraine by Russia which underscores the asks of overdependence’ – and, on top of that, a China which continues to subsidize the growth of its industry ‘becoming a leader in critical technologies which will define the future’.

This diagnosis, and what Sullivan suggests, match perfectly the thinking by those in Europe who promote an EU ‘industrial policy’ – a novelty for the European Union. Clearly, liberalism and free trade retain strong supporters in European countries and in the EU Commission: recently the EU has ratified an agreement with Chile, concluded a treaty with New Zeeland and persists in completing the ratification of agreements with the Mercosur and Mexico. But even the Commission has to admit that the time of TTIP and other comprehensive trade agreements has passed and that those who want to relax state aid rules and encourage subsidies to the industry are dominating the scene.

European reaction to the IRA

The question then arises: if the US and the EU both develop, separately, an industrial policy instead of further reducing tariffs and obstacles to trade, what will be the consequences for the transatlantic relationship?

The first and clear answer to that question came in August 2022 with the EU reaction to the ‘Inflation Reduction Act’ (IRA), a (not well named) US legislation, which was from the outset, seen in Europe as essentially a protectionist move. And since it was not possible to stop it, the EU itself embarked on a policy along the same lines: a ‘European Green Deal Industrial Plan’ was presented, including a ‘ Net Zero Industrial Act’ and a ‘Critical Raw Materials Act’, instruments similar to the Inflation Reduction Act as they justify subsidies to the industry by the fight against climate change and supply chains disruption. The Net Zero Industrial Act aims to ensure that ‘at least 40% of EU demand for clean tech is made domestically by 2030’; the Critical Raw Materials Act is supposed to ‘significantly improve refining, processing and recycling of them in Europe’.

As the Inflation Reduction Act had raised eyebrows in Europe, these European initiatives have also immediately created problems with the US. And these seem difficult to address, since they come on top of the quarrels developed during the Trump administration, some of which are not yet settled.

The current US-EU dialogue takes place in a transatlantic body created in September 2021 to address trade disputes, the ‘EU-US Trade and technology Council’ (TTC); It meets regularly but still has to concentrate mainly on repairing the damage caused by the Trump administration, so as the levies on steel and aluminium, suspended for the moment but which will be automatically reinstated in October this year if an agreement is not reached by then. Nevertheless, the ‘Council’ meetings take place in a positive atmosphere – even if they are hindered by radical positions expressed in Congress.

The revival of the transatlantic relationship

The tensions caused by the ‘new Washington consensus’ and its equivalent in Europe come paradoxically at a time when, from a geopolitical point of view, with the war in Ukraine, the transatlantic relationship has been spectacularly revived. Nobody today fears the ‘brain death’ of NATO; The US were the first to warn allies of the upcoming Russian operation in February 2022 and the day after the operation started, the US, the UK and the EU announced in parallel that they would give lethal military assistance to Ukraine; decisions on sanctions to be imposed on Russia were closely coordinated, Finland and Sweden asked to join the Alliance and more troops equipment and weapons stockpiles are now based in Eastern Europe.

In this context, and with an American administration keen to promote transatlantic links, efforts are also made at the highest level to make US and European economic policies compatible. President of the EU Commission Ursula von der Leyen went to Washington in March this year to meet President Biden; they released a common statement committing themselves to align their respective clean energy incentives and launching a negotiation on supply chains for ‘critical minerals’ and batteries. In his Brookings lecture, Jake Sullivan noted that these initiatives, extended to other allies like Canada and Japan, ‘will turn the IRA from a source of friction into a source of strength and reliability’.

So, even with the new challenges of today’s world – and at least until the next presidential election in the US – the transatlantic relationship seems to have found a new ‘consensus’, thanks to a move on both sides towards a trade policy aiming at a coordination of industrial strategies rather than just tariff reductions through free trade agreements . But the elephant in the room is obviously China.

The elephant in the room : China

In the year 2000, in the context of the ‘Washington consensus’, Clinton had urged Congress to admit China into the WTO by arguing that China’s entry would enrich Americans and help convert China to freedom. Now, Jake Sullivan notes that ‘by the time president Biden came to office, we have to contend with the reality that a large non-market economy has been integrated into the international economic order in a way that poses considerable challenges…’But, echoing Ursula von der Leyen, he adds that: ‘we are for de-risking and diversifying, not decoupling’ – which is a rather middle of the ground stance clearly not shared by everyone in Washington – on the Republican side but also, for different reasons, among the Democrats.

On the topic of China, considered as ‘simultaneously a partner, a competitor and a systemic rival’, the EU at this stage is also divided but in another way : you have those who want to ‘de-risk’ or even ‘de-couple’ and those who want to continue to engage actively:

The von der Leyen Commission proposed recently a ‘de-risking strategy’, aiming at increasing scrutiny of foreign direct investments (even outbound investments) , exert export controls to fend off ‘economic coercion’ and address risks industries that have military applications such as quantum computing, advanced semi-conductors and Artificial Intelligence.
It is clear that Germany and France as well as other EU countries want to maintain an open dialogue with China. The best reason is that EU exports to China amount to 230 billion a year; and most Europeans are afraid by the increased tensions between Washington and Beijing, the provocations on Taiwan – and the fact that China-bashing is one of the only issues on which there is a bipartisan agreement in the US Congress.
The 2023 June session of the European Council of the EU had a long discussion on China and concluded that ‘the EU will ‘continue to engage with China to tackle global challenges such as climate change, pandemic preparedness and the Russian war on Ukraine and to ensure a level playing field for the economy and trade’.

In the US too, efforts are being made to find a modus vivendi with China, as illustrated by the recent visit to Beijing by Secretary of the Treasury Janet Yellen. But China did not give up anything substantive and tensions remain high, notably because of restrictions on both sides on exports of ‘critical raw materials’ – an issue which creates also tensions between China and EU members.

Towards a new transatlantic consensus ?

This is where we are: far from the original Washington consensus, far from globalization but eager to preserve a strong transatlantic link. So what would be the best ‘new transatlantic consensus’ ?

The best hope, at this stage, is that the US, the EU, and other countries sharing our values, take sufficiently into account the geostrategic challenges of the time; major efforts, definitely, have to be made to coordinate our industrial strategies, but without renouncing, where possible, the benefits of free trade; we should continue to engage China, while keeping ‘a small yard with a high fence’ for what we agree is needed. And also engage better with the ‘global South’, the countries in Africa and South America which suffered more than us from the pandemic and will also suffer more from the consequences of global warming.

 source: Global Policy Watch