Much more also needs to be done to ensure that everyone, from companies to countries, plays by the agreed rules
The OECD’s policy brief ‘Levelling the playing field
The OECD reminds us in its policy brief Levelling the playing field, “Where fairness is questioned, the sustainability of open global trade and investment is at risk. Whether it is rules that ensure that private and state-owned firms compete on the same terms, or that countries are not able to subsidise their own firms or farms at the expense of others, governments have an important role to play in negotiating disciplines that level the playing field in global trade and investment. Much more also needs to be done to ensure that everyone, from companies to countries, plays by the agreed rules.”3
However, perception has grown among EU (and other trading bloc) leaders that market forces alone might not be enough to keep Europe afloat.
In the 2000s, calls for stronger regulatory efforts as well as direct government intervention grew louder. Covid-19 “finally shifted the tide” towards a more prominent role for the state in the economy. Industrial policy, previously sidelined in Western market economies is, says the briefing paper, again fashionable due to several factors:
- Faith in the corrective mechanism of markets was shaken by the 2008 financial crisis and its aftermath. Several South Europe economies experienced a long and painful recoveries and have since suffered weak growth trajectories.
- The impact of technological change and digital transformation on EU industries and broader economies has become more visible. Europe seems behind in key technological fields, risking its long-term competitiveness and prosperity.
- Mitigating climate change challenges Europe’s industrial economies, while the transition towards green economies requires a concerted and socio-economically challenging transformation.
- Shifting global economic and geopolitical balances reveal Europe’s economic vulnerabilities. China’s rise as a “strategic rival” in key industries and technologies and the success of its state capitalist economic model challenge the EU’s own perception as an innovative and efficient high-tech economy.
- EU leaders had to respond to Covid-19’s economic impact and the need to address post-pandemic growth and development prospects.
- Dependency on global value chains, importing essential goods such as healthcare equipment and recent trade wars caused EU leaders to reassess the preferred degree of global economic integration and strengthened the belief that strategic independence and technological sovereignty should become political priorities.
Calls for a coordinated and holistic European policy approach to industry have grown. On 10 March 2020, the EC released A new industrial strategy for Europe4 followed on 17 June by the white paper, Levelling the playing field as regards foreign subsidies.5
“Openness to trade and investment is part of the economy’s resilience, but it must go hand in hand with fairness and predictable rules. The current global economic environment is the most difficult in recent memory,” says the white paper.
The pandemic has seen the EC temporarily suspend key aspects of competition law on state aid and antitrust rules, which normally protect the single market against distortions and anti-competitive conduct. But this is not designed to be any kind of new normal. Looser state aid rules enabled member states scope to support their economies. The framework is set to expire at the year-end and member states must notify the EC about state aids and justify them.
Despite a coordinated approach, the size and scope of state aid among member states varies. About half the €2trn approved by the EC in May 2020 came from Germany. Concerns have developed that differences in fiscal firepower among EU members may lead long-term to unequal conditions and distortions of competition in the single market. One recent controversy arose from the German government’s €9bn rescue package for Lufthansa (with the state taking a 20% stake), approved by the EC.6 But it is not the only government to channel state support into its aviation industry. The George Mason University notes that from 2007 to 2017, 34% of all aid from the US export credit agency, the US-Exim Bank “went to just one exporter: Boeing”.7
The changing global economic and technological environment and increasing involvement of non-EU players in the EU’s single market have highlighted regulation that needs updating.
“Increasingly, the single market showed itself exposed to unfair competition, the risk of forced technology transfer and increased import dependencies in critical areas such as healthcare or infrastructure,” says Körner. He adds, “Issues of lacking reciprocity when it comes to market access and intellectual property rights, in particular with China, remain insufficiently resolved. Unfair trade practices repeatedly led to legal proceedings in the WTO, even though the role of the institution as a trade arbiter was paralysed in the ongoing trade war between the US and China.”
The EU has already started addressing some issues. A foreign direct investment screening framework monitors and advises members on foreign investments in strategically important sectors. The industrial strategy foresees an Intellectual Property Action Plan to uphold technological sovereignty, promote a global level playing field, better fight intellectual property theft and adapt the legal framework to the green and digital transitions.