Business is booming.

Why the EU’s plan to protect key industries spooks free traders

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Good morning. We start with a warning for the European economy as German exports to China recorded a double-digit drop since the start of the year, with a stronger euro and high energy prices dashing hopes that the EU’s biggest economy would benefit from a rebound in Chinese demand.

Today, our Brussels bureau chief assesses the fight over the future of EU trade rules and we have news on Hungary’s latest clash with Kyiv.

Trade off

These are anxious times for the EU’s free traders. With the enthusiastic backing of France and its allies, Brussels is seeking to build up the union’s geopolitical power in the pursuit of “strategic autonomy,” hardening trade defences and intervening ever more deeply in key industrial sectors, writes Sam Fleming. 

Context: Next month the European Commission will propose an economic security strategy aimed at further protecting the EU’s interests, in response to US pressure for a tougher approach to China in particular. 

This sits uncomfortably with EU governments that like to proclaim their enthusiasm for an open, rules-based global trading system. They aren’t alone: In a new policy paper, lobby group BusinessEurope makes the corporate case for the EU to stay in touch with its liberal roots.

There cannot be strategic autonomy without openness, according to the paper. Trade agreements with New Zealand, Chile, Mexico and Mercosur should therefore be brought into force during the lifespan of the current commission, it says, calling for accelerated talks with Australia, India and Indonesia.

It strikes a notably sceptical note when assessing two key policy innovations likely to feature in the commission’s strategy paper: the possible creation of new powers to impose EU-wide export controls on key technologies, coupled with tighter scrutiny of outbound investment flows.

BusinessEurope says that, on principle, it does not support limitations on outbound investments, arguing these should only be used in “exceptional cases” to address serious security concerns.

Export controls, meanwhile, should only be imposed on a case-by-case basis in consultation with the private sector and in co-ordination with key international allies.

Businesses are not the only questioning voices. With EU trade ministers due to meet tomorrow, more “liberal-minded” member states are worried the EU is creating too many trade barriers, said one EU diplomat.

There is, accordingly, little chance of capitals reaching a quick consensus on the contentious topic of investment controls. When it comes to the commission’s wider economic security proposals, “the strongest proponents of a more liberal market economy are a bit concerned about what this will entail in terms of obstacles to trade,” the diplomat added.

Chart du jour: New world order

Bar chart of Exports as a % of GDP, 2022. Selected G20 economies showing For some countries, trade with China rivals or exceeds that with the entire G7

The G7 must accept that it cannot run the world, writes Martin Wolf, even if it is still the world’s most powerful and cohesive economic bloc and produces all leading reserve currencies.

So Hungary

It is almost a month since the European Commission trumpeted a deal to end a blockade of Ukrainian foodstuffs by several EU members by offering Brussels-blessed curbs instead and some bushels of cash.

But Hungary is delaying its implementation, according to the commission, holding up €100mn in EU cash to support farmers in Poland, Slovakia, Bulgaria, Romania and Hungary, write Andy Bounds and Marton Dunai.

Context: Brussels lifted tariffs and quotas on Ukrainian produce last year and set up fast-track import procedures. But much got stuck in neighbouring countries because of a lack of onward transport, harming local farmers and prompting national import bans.

Budapest now says it must maintain its ban on goods imported under contracts signed before May 2 as the commission’s proposal does not cover them. “We are currently waiting for the commission to resolve this issue in a satisfactory manner and to ensure the protection of Hungarian farmers,” the country’s agriculture ministry said.

The other countries have lifted their bans and will put pressure on Hungary to bend at an EU agriculture ministers’ meeting on May 30, helped by a special guest: Ukrainian agriculture minister Mykola Solskyi.

The stand-off reflects growing tensions between Budapest and Kyiv. 

At yesterday’s meeting of EU defence ministers, Hungary continued to block the allocation of another €500mn to Ukraine for weapons on the grounds that Kyiv has declared Hungary’s OTP Bank supportive of Russia.

“If a country like Ukraine . . . needs our money, please respect us and don’t sanction our companies,” Hungarian leader Viktor Orbán told the Qatar Economic Forum yesterday.

A special EU fund has spent €3.6bn on providing reimbursement against some €10bn worth of weapons supplied to Ukraine, but needs a fresh top-up to continue paying out. 

Separately, Orbán made painfully clear his divergence from the rest of his EU and Nato allies by saying at the same Qatar event that Ukraine has “no chance to win this war.”

What to watch today

  1. German president Frank-Walter Steinmeier meets Romanian president Klaus Iohannis in Bucharest

  2. Nato secretary-general Jens Stoltenberg speaks at the Brussels Forum from 2:45pm.

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