The European Union must become less “passive” in defending its economic interests against the threat of countries such as China that have “unfair advantages”, former Italian prime minister Mario Draghi has said.
The economic bloc should be ready to use more tariffs and subsidies, Draghi said, in comments that signal he is likely to favour a more interventionist industrial policy in his report due next month on how to fix Europe’s faltering competitiveness.
In a speech just days after the EU announced sharply higher tariffs on Chinese electric vehicle imports, Draghi said: “We do not want to become protectionist in Europe, but we cannot be passive if the actions of others are threatening our prosperity.
“Even recent US decisions to impose tariffs on China have implications for our economy through the redirection of exports,” he said, adding that Europe faced greater challenges than the US because it was “more vulnerable both to inaction on trade and to retaliation”.
Draghi has been tasked by the European Commission to prepare a report on how the EU can tackle its eroding global competitiveness, as fears grow that the region’s economy has lost ground on the US and China since being hit harder by the coronavirus pandemic and Russia’s invasion of Ukraine.
The former president of the European Central Bank was speaking in Spain, where he received the Carlos V European Award by Spain’s King Felipe VI for his contribution to the region.
The EU notified carmakers on Wednesday that it would provisionally increase tariffs on imported Chinese EVs from 10 per cent to as high as 48 per cent, depending how much they are judged to benefit from state subsidies.
The move followed the US decision to quadruple tariffs on Chinese EV imports to 100 per cent this year. But it was opposed by some EU members including Germany, where officials and executives worry its carmakers could suffer the brunt of any retaliation by Beijing.
German economy minister Robert Habeck, who plans to visit China next week, said after the EU decision: “Tariffs are always a last resort as a political tool and are often the worst option,” adding that a tariff war with Beijing risked “throwing the baby out with the bathwater”.
European manufacturers employed more than double the number of people as their US counterparts, Draghi said, adding that more than a third of Europe’s manufacturing output was shipped outside the EU, compared with only a fifth in the US.
The former ECB president cited estimates that China spent about three times the amount of Germany or France on industrial policy relative to the size of their economies. He said the EU should make greater use of tariffs and subsidies “to offset unfair advantages created by industrial policies and real exchange rate devaluations abroad”.
Warning that Europe faced “a wave of cheaper and sometimes more technologically advanced Chinese imports”, Draghi said there was “ample evidence that part of China’s progress owes to sizeable cost subsidies, trade protection and demand suppression, and that will lead to lower employment for our economy”.
However, increasing tariffs and subsidies should be done as part of a “pragmatic, cautious and consistent” approach, he said, while calling for efforts to revive multilateral trading rules and to encourage more foreign direct investment into Europe.
Recommending a “foreign economic policy” to reduce Europe’s dependency on countries it can no longer trust in strategic areas like defence, space, critical minerals and pharmaceuticals, Draghi said the EU could start “applying more explicit local content requirements for EU-produced products and components” in military procurement.
The former Italian leader appears to have accepted that the EU is unlikely to establish a permanent debt-issuance capacity to finance investment in areas such as defence, green energy and digitisation – something he has long called for.
“The financing needs for the green and digital transitions are massive and, with limited fiscal space in Europe both at the national and, at least so far, EU levels, they will have to be mostly provided by the private sector,” he said. – Copyright The Financial Times Limited 2024
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