Brexit has made the EU less liberal and open

Brussels’ embrace of protectionism is a problem for those who yearn for closer ties with Europe.

Illustration by Daniel Pudles / Ikon Images

One consequence of Brexit is that there are no longer British commissioners left in Brussels to press the case for free trade. Germany is fighting other battles. Margrethe Vestager, the formidable Danish competition commissioner, has been the resident free-marketeer in Brussels. But she has lost a brutal power battle, the winner of which is Thierry Breton, the French commissioner for the EU’s internal market. His big trophy last week was to get the European Commission to start a one-year investigation that will surely end with tariffs on Chinese electric cars.

The policy is unashamedly protectionist. You cannot accuse the Chinese of anti-dumping because they are selling their cars in Europe for more than they do at home. Nor are there any issues with national security as there were with Huawei’s 5G contracts. This is a purely commercial war. Three years ago, the Chinese share of the EU car markets was near zero. Now it is around 8 per cent, and likely to double again in two years. The car industry has never experienced anything like this.

Europeans have only recently started to notice that they are hopelessly behind China in electric cars. I recall the Germans dismissing the electric car as hype as late as two years ago. While German car makers were fitting emission-test-cheating devices to their diesel engines in the last decade, the Chinese invested in the entire electric-car supply chain: lithium, used in batteries; the batteries themselves; rare-earth magnets used in the production of electric engines; and artificial intelligence. The self-driving car is still some way off. But in Europe, it is much further away than in the US or China.

The reason is a creeping anti-tech attitude – as embodied by Thierry Breton. The EU is not interested in the business opportunities that arise from a data-based economy, but in the protection of data. It is focused on the threat, not the opportunity.

But the more immediate problem will be China’s predictable counter-sanctions. Beijing will retaliate against European car makers – or rather German producers, because they are the ones with the largest presence in China; it is where Mercedes-Benz derives 40 per cent of its revenue from. A trade war with China is a nightmare for Germany’s export-dependent economy. With Brexit, the Germans lost the single largest source of their trade surpluses. Then they lost Russia. Without China, the country’s economic model will be irreparably broken.

The EU argues that China has paid unfair subsidies to the car industry. This is true, but so has everybody. An example is Germany’s €10bn subsidy to get Intel to build a chip factory in the country’s east. The big idea behind this record subsidy is that it would guarantee the semiconductor supply chain for car makers. It’s a lot of money for a single factory. The big profits in the car business come through ownership and control of the supply chain. The Germans knew that better than anybody else.

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But for the electric car business, it is already too late. The Chinese are the new Germans. The Germans will be what Peugeot and Fiat used to be in the outgoing market: national champions, still hanging on, competing on price. What the Germans did not see for a long time is that the electric car is not merely a technological evolution, a better car. It is not a car at all any more. It is an iPad with wheels. German cars are driving machines, designed by engineers for engineers. Chinese e-cars have karaoke systems in every seat.

This geopolitical stand-off is ultimately about technology. When the Biden administration imposed a ban on the export of high-performance semiconductors to China, it was not only concerned about the potential use of such chips in weapons systems. It was also worried about the competitiveness of US industry.

The EU is behind the US and China in several 21st-century technologies – all things digital. Even more worryingly, the EU is falling behind China in the one area it was supposed to do better: environmental technologies like solar panels and heat pumps.

Protectionism is a predictable response to economic decline. But it comes at a price. The World Trade Organisation has done some maths on how various global trade-war scenarios could play out. In a technical paper published last year, it concluded that the total impact on economic output could be as high as 12 per cent for some countries. It is going to be less for the US and the euro area – both large economies with a large domestic market. But it would be significant for countries like Germany, which is highly dependent on China as an export market for its growth.

For those in the UK seeking to reconnect with the EU, Brussels’s leap into protectionism is going to be a problem – which few in the UK have even started to appreciate yet. Brexit has made the EU less liberal and open. Next year’s European elections could shift the power balance in Brussels further towards protectionism. I see absolutely no scenario in which liberal forces will gain the upper hand.

It would make no sense for the UK to follow the EU in imposing its own tariffs on Chinese cars. The UK has fewer car makers to protect. A tariff would be a tax on consumers. The regulatory divergence everybody feared so much is happening not on the UK’s side but on the EU’s.