For over a year, US President Donald Trump's protectionist war against China – and his broader use of import tariffs to advance geopolitical objectives – has been fueling anxiety about the future of world trade. But tariffs are only the tip of the iceberg of economic nationalism. If the world doesn't navigate carefully, hidden hazards could sink the global trading system.
The United States has not found any followers in its aggressive use of tariffs. In developing countries, there is little pressure to implement similar measures, because so many firms manufacture globally, and even those that do not depend on global supply chains. And in developed economies, major sectors that struggled to cope with import competition in the past – such as the clothing and steel industries – have by now mostly adjusted, and no longer play an important role. This explains why US business leaders largely opposed Trump's tariffs. It thus seems unlikely that the use of tariffs will spread beyond the US-China dispute.
Despite involving the world's two largest economies, the tariff war seems to be petering out. Even the self-declared "tariff man" is starting to recognize the limits of this policy instrument. A growing body of evidence indicates that, contrary to most economists' expectations, Chinese firms have increased their prices in line with tariffs, negating any benefit the US might reap from squeezing its suppliers.
Last month, the US and China reached a "phase one" deal that will, it is hoped, lead to an agreement that ends the trade war. But even if such an agreement is not forthcoming, the fallout for the global economy may not be as severe as many fear. After all, bilateral US-China trade amounts to about $700 billion – less than 1% of global GDP.
Nonetheless, markets are reacting to every new development in the US-China tariff saga. They recognize the deeper – and far more serious – risks generated by economic nationalism, the belief that national security is compromised when a country's economy and military depend on imports.
The clearest example might be US fears of imports of products from China containing computer chips. But should all such imports be banned in the name of national security? What about exports of computer chips or software? Do they also threaten national security? Judging by its decision to add the Chinese tech giant Huawei to the US Department of Commerce's Entity List (thereby prohibiting US firms from selling the company the components it needs), the Trump administration thinks so.
Of course, this is not lost on Chinese policymakers. They recognize that the US may cut off China's access to advanced microchips or designs at any time, in order to stymie the development of its high-tech industries. And now, as part of the Made in China 2025 policy, they are working to make the country self-sufficient in key technologies.
The original motivation behind Made in China 2025 might have been economic: to ensure the growth of the high-tech sectors that will be vital to future competitiveness. But in the new geopolitical environment, the plan has mutated into strategic import substitution, which has never been an effective formula for sustained growth.
Such geostrategic efforts to reduce interdependence have a much greater and more far-reaching economic impact than bilateral tariffs, which at least create opportunities for other suppliers (Vietnamese smartphone exports, for example, are booming). By contrast, the spillover effects of national-security measures are mostly negative. High-tech firms worldwide might soon have to choose between the Chinese and American markets.
But the risk of economic nationalism extends beyond the US and China to include the world's largest trading bloc, the European Union. The EU was founded on the belief that interdependence would make conflict less likely. There was little economic logic in uniting France and Germany's coal and steel industries. But the political logic was clear: with those vital sectors under a common authority, it would be materially impossible for either side to plan war against the other.
More recently, however, Europe seems to be taking a different tack, at least in relation to the other major powers. This shift is exemplified by a recent report by the European Commission's in-house think tank, which called for Europe to aim for more "strategic autonomy."
At first glance, it seems like an innocuous goal: if the EU wants to defend its values globally, it first needs to consolidate its own capacity to act. But this drive for strategic autonomy could easily take an economic-nationalist turn. Already, experts in foreign policy are leading the call for a European industrial policy that would have more than a little in common with Made in China 2025.
Some might ask what's wrong with that. If China's government can intervene to protect or foster certain high-tech sectors for security reasons, Europe should be able to subsidize the domestic production of strategically significant technologies, such as 5G equipment and artificial intelligence. But such a subsidy race makes little sense, in economic or security terms.
Trade naturally creates mutual dependence. If Europe imports certain high-tech goods, it is likely to export others, including, perhaps, the machines to make those goods. When it comes to 5G equipment and software, for example, no single supplier can develop and produce all the necessary components. That is why the companies in this market have created a patent pool that enables them to use their rivals' technology.
To be sure, there is a case for increasing investment in research and development, so that more European enterprises can participate in developing the technologies of tomorrow. But economic nationalism – whether in the form of a subsidy race or an attempt to become self-sufficient in some technologies – will do a lot more harm than good.
Daniel Gros is Director of the Centre for European Policy Studies.