The “Other Trade War”

J. Soedradjad Djiwandono

The ongoing trade dispute between the United States of America and the People’s Republic of China has attracted a great deal of attention and has now become a source of public debate; the market tensions it generates do not appear to be headed for resolution any time soon. Some would argue that this disagreement may persist, inasmuch as it is not simply a matter of adjusting trade imbalances between the two biggest economies in the world. In fact, the underlying conflict of this stubborn confrontation arises from the concerted efforts of the USA to avoid losing its technological advantage in the digital era; this is obviously much more than a simple matter of trade. It is a struggle that cannot be easily resolved. In other words, this “trade war” is likely to be a lengthy one.

Meanwhile, I would like to draw the attention of our readers to a recent development in trade-related issues, involving competing interests of European Union member countries, as well as those of the EU, the USA and China: for the sake of convenience I shall refer to this as “the other trade war”. What is this (or rather “What are they”)? A planned merger between German and French rolling stock manufacturers Siemens AG and Alstom SA has been floated, in an arrangement similar to the multinational agreement of Airbus for the production of commercial and military aircraft. As announced, the plan as it stands will definitely not qualify for approval, as such a merger would violate the rules of competition of the EU, under the eagle-eyed supervision of EU Commissioner for Competition Madame Margrethe Vestager. It is curious to analyze what indeed has motivated these two gigantic firms to merge, noting that both the French and German governments are enthusiastic supporters of the plan.

That is not the only contemporary development demanding our attention: Deutsche Bank and Commerzbank, two prominent German financial institutions, have commenced merger negotiations, likewise with the backing of the German Government.  In fact, this new tendency for certain EU members to support the conglomeration of firms has been codified by the French and German governments, in a “Manifesto for European Industrial Policy”, released shortly after the EU Competition Commissioner blocked the proposed Siemens-Alstom merger.

What are the salient points of this manifesto, and what seems to be behind the decision of the two leading member countries of the EU to champion it? According to DW News, (19-02-2019)   the declaration rests on three pillars: investment, rules and measures to protect European industries. The most important section of the policy concerns the effort to make Europe a world leader in Artificial Intelligence (AI). Proposed rules would ensure European companies remain globally competitive, while a current regulation protects strategic European technologies. The reasoning behind the support of the French and German governments for the Siemen-Alstom merger, as well as Germany’s backing for the Deutsche Bank and Commerzbank one, is undoubtedly the intention of the two leading EU countries to defend their competitiveness globally, not simply nationally nor within the EU.

A shifting trade relations landscape
We seek to achieve a more thorough understanding of the somewhat unusual moves by the above companies – with the overt support of their governments, while contravening the sacred EU rules on competition that Germany and France historically defend.  There is no way that the nations in question were not aware of the competition rule explicitly prohibiting such mergers. The obvious conclusion is that the proposed moves must have been an intentional gambit, as demonstrated by their release of a position paper shortly afterwards.

It is also revealing to consider other developments, ones not yet part of the intense public debate on trade relations between the USA and the PRC. Despite encouraging signs, such as the opening of fresh negotiations between Washington and Beijing (in lieu of tariff escalation) as agreed upon by Presidents Trump and Xi in Buenos Aires, the trade war does not appear to be headed for any early resolution. There are indeed ominous signals that the dispute will linger, as the issues in question are not simply about trade imbalances, but are set on a subtext of the long-term competition between the two powers over technological development in a digital era.

As mentioned above, ramifications of the trade war are not limited to the USA and China, but also encompass relationships between the USA and the EU, as well as other players. Aside from a showy reaction of jacking up import tariffs on steel and steel products (which also impacted EU members, as a matter of fact) the USA has raised the import duty on European cars, a direct message to Germany and France. Is the EU move to protect European strategic technologies (as mentioned in the manifesto referred to above) a response to US protectionism? If so, this certainly resembles a trade war phenomenon whereby one country’s protectionist policy triggers a similar retaliation, or “Beggar thy neighbour” as it has traditionally been known in international economics.

But what about the proposed merger that contravenes the EU‘s own rules of competition? Here I think we see a new reality: in the face of a harshly competitive global environment encompassing the USA and China (and Asia as well for that matter), the EU looks to be under pressure to rethink its place in future global trade (bearing in mind the storm signal of the exit of the UK). When France and Germany unveiled their industrial manifesto in a press conference, following a meeting of Bruno Le Maire and Peter Altmeier, economics ministers of the two countries, it was pointedly announced that there were only 5 European firms among world’s 40 top companies. This is likely the reasoning for a proposed policy change in the competition rule, aligned with a yardstick of global competition (beyond that of the EU alone).

It is relevant to point out that the trigger point impelling the merger of Siemens AG and Alstom SA is the threat of competition from China’s CRRP Corp, the world’s largest manufacturer of rolling stock. Note that the largest per capita recipient of Chinese investment in Europe is ailing Portugal, dating from the time the country was afflicted by sovereign debt, exacerbated by its 2010 banking crisis; today it is one of the most seriously-burdened debt-cum banking crisis countries on the EU periphery (the ironically-named “PIGS”, for “Portugal, Ireland, Greece and Spain”). Chinese groups have poured billions of Euros into power utilities, insurance firms, banks, hospital groups and other sectors. It is thus no surprise that the government of Portugal launched fierce criticism of the “Manifesto for European Industrial Policy”, stating that it opens a door to naked protectionism.

To complicate the picture, the USA has unleashed a barrage of complaints at the EU, after Brussels declined to pass a resolution naming Saudi Arabia and American territories such as Guam, the US Virgin Islands, American Samoa and Puerto Rico as complicit in money laundering and financing of terrorist groups (FT, March 4, 2019).

Final Notes
Some readers might understandably respond with “So what?  What do such events have to do with Indonesia?” I will require another column to elaborate on this topic. Suffice it here to say that it is important for us to understand the issue and it is certainly relevant to the present public debate in our society, if only over the longer run.

I suggest the ongoing confrontation within Europe, as well as the ones involving Europe, the USA and China referred to above, are indeed relevant to debate in our news, during the last few weeks of campaigning preceding the Presidential and Legislative elections of April 17. To be specific, Presidential candidate Prabowo has been steadily criticized by the other camp and by certain political analysts, stating that he talks in generalities, reframing old stories in normative terms, saying he is void of concrete programs, exhibits pessimism about the future of Indonesia, etc. In fact, his campaign rallies encourage the nation to stand on its own foundation and not succumb to the temptation of selling out to foreign powers, and not allow itself to be manipulated and eventually enslaved by other countries. This stance has become a subject for criticism, as some observers accuse him of being too nationalistic, or chauvinistic.

But is this in fact the case? I am convinced that this characterization is completely baseless. By pointing out recent developments in Europe, as well as those in the USA and China, I wish to show how even leaders in Germany and France, and of course the USA under President Trump, are alarmed about their respective (shaky) roles in global competition, as we find ourselves at a crossroads in time. Prevailing conventional wisdom, entrenched after WW II, embraces faith in multilateralism, openness and cooperation for advancing national welfare; such an idealistic view of the road to global welfare is being severely eroded and replaced by a “new conventional wisdom”. President Trump with his “Make America Great Again”, President Macron’ s “Make our planet great again”, and other currents, such as I touched on above.

If even such powerful countries feel this is the right time to embrace a new conventional wisdom, why should Indonesia, still a vulnerable emerging economy, stake our future on the “old conventional wisdom”, one which day by day looks more like orthodoxy? I will revert to examining this topic.  For now, let us simply reflect on this issue, remaining open to further discussion.