Leusder is explaining why Europe's response to Chinese trade pressure is slow. He describes a "joint decision trap": internal coalitions at home, then unanimous or qualified-majority voting among the member states, ending in consensus bargaining and policy that regresses to the lowest common denominator. China's retaliation, by contrast, he calls institutionalised and rapid.
Yeah, I mean, I think you could actually even say that the fact that this door was opened by Trump and his advisors first, it became politically a bit unpalatable for other people. So the actual evidence of the effects of China, the worsening of China's mechanicalist turn in the late 2010s and 2020s, was ignored for a while because it was associated with a different political camp.
That's one way to put it. I
should add to that the Europeans are also very much stuck in the past when it comes to thinking about trade. So the US policy sector is much more open to changes in ideas. But in Europe, another friend, and I think also a recent former guest on your show is Adam Toos. I think that the Europeans are the Taliban of neoliberalism, at least with regard to their attitudes towards trade. And that has certainly inflected their position on China. And it's one of the reasons why they took so long in actually doing something about this. A couple of my friends, Brad Setzer, whom you know, of course, and Sander Toroa, have, I think, almost single-handedly responsible for pushing that consensus over the last 18 months, at least in Germany and elsewhere, towards getting people to recognize that. This is a problem, by the way. No, you can't hang on. It's too late to hang on to visions of level playing fields and international trade. You have to do something before this gets out of control. And it's now showing to have real political consequences in Germany electorally with regard to these regional elections in which the far right is doing very, very well in these elections and the incumbents are polling very poorly because the far right has been has managed to frame the issue of industrial decline not really around China, but around a failure of the incumbents and the failure of green policies and energy policy, which play a role certainly, but there's evidence to believe that this is mostly driven by the external trade shock at the moment. So people are doing something now. You may not be surprised to know that nothing really has happened though, despite there being a lot of noise. So the main core of the European efforts to counter Chinese trade is the so-called Industrial Accelerator Act, which is proposed in earlier this year. It's currently in review and it might be implemented earlier mid-line next year. That shows you how long the timelines are in Europe as well. It's suffering from internal division. So there was the more protectionist camp around France and the initially more skeptical around Germany because Germany obviously is also, you know, there's a lot of exporter interests in Germany that are opposed to any sort of trade restrictions, plus they're quite conservative around these issues. There are also internal divisions like the labor unions in Germany also don't disagree on these things. And of course, the problem with European politics, as opposed to the US and particularly China, is that it has this terrible sort of joint decision trap where domestically there are these aggregation problems where you have internal coalitions. And of course, at the European intergovernmental level, you have 27 countries that all sort of hate each other, but all have different veto powers. And you operate in a situation where you have to have sometimes you have to have unanimous voting or qualified majority voting. And eventually you have a lot of consensus bargaining and you end up with very suboptimal policies. Policy outcomes that are often too little too late. The policy responses are slow, dysfunctional, and even if they produce something, it regresses to the lowest common denominator. That Industrial Accelerator Act could have teeth in that it has these buy Europe provisions. It has certain provisions on that essentially as formulated only, not in name, but they only really, only China clears those hurdles in terms of what exports are, imports are actually allowed. That's the attempt to actually protect the German and the European auto market in particular. Some people say that it doesn't have enough scope. But China, of course, has immediately gone on the offensive on this matter, immediately filed a request, filed a complaint with the European Commission, very interestingly, actually outlining their own position, saying our capacity utilization rate domestically is normal for economies that are still growing and that are not yet adjusting to being driven by internal demand. So there's sort of a concession that these imbalances domestically in China are real and are seen as a real problem by Chinese authorities. And I do agree with that and also think that it's a political economy obstacle for Chinese policymakers to do something about it. To sort of lower the temperature a bit, there's a separate mechanism in Europe called the trade and investment consultation mechanism. It's between the European trade chief and the corresponding minister in China. It's supposed to deliver, it was supposed to deliver something now-ish. So I think in early October, there's going to be a meeting in Beijing. Nothing concrete has come of it, really, apart from some assurances around rare earths, which are quite vague and Europeans have been a bit unhappy about it. And there's some sort of Franco-German thing about monitoring these imbalances. Nothing much has happened. My worry is that either the because there's a separate part about the foreign exchange mechanism. So that Raxature again and Shaheen Ville have written about is really a separate issue is that China, in addition to industrial policy, is also really resisting any appreciation of the yuan. And that is further contributing to the imbalances. The Europeans are also slowly thinking about countering China on revaluation. My fear is that strategically, their escalation, their willingness to escalate might outrun their ability to actually be resilient to Chinese responses, retaliations to whatever they end up doing. And the Chinese have shown that unlike the fairly dysfunctional European process that I just outlined, their retaliation has been institutionalized, rapid, really extensive and increasingly comprehensive. So for instance, I think in late July, the Commission, the Europeans, placed a few more Chinese entities on the sanctions list because they were supporting, deemed to be supporting the Russian war effort the day after the Chinese responded by immediately putting a whole bunch of major European industrial firms on the same, the equivalent entity list that they have. And we don't have that kind of ability to respond. And I think a likely scenario is that the EU does something eventually next year that because of these problems in finding decisions, it will be too little to actually do something about the situation and that the Chinese will respond with some sort of concession because I think it's clear that because indeed they are dependent on export growth and the EU is a very big market, the only big market open at the moment. But this concession will not be, it will not really change the momentum behind the shift in industrial activity. But the EU will accept it because it can't actually find a consensus at home for anything else than they propose. And that probably will not really change anything about this. And that's, I think, the best scenario. The worst scenario is a full-born trade war.
Dominic, we could go on for a very long time. We could talk a lot more about the 27 governments that all hate each other. We could talk about how Eastern Europe and they have probably different perspectives than Central Europe and so forth. But that was a fantastic overview. Really appreciate you coming on. Odd lots, and let's do it again sometime.
Thanks so much for having me, guys. It was a pleasure.
Tracy, I thought that was a really interesting conversation. You don't really get, I thought that, you know, it's cliche nuance, you know, actual nuance that, like, there is a lot of aspects of the conversation that are either misunderstood or something like that. I feel like I actually learned something in that conversation.