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27.03.2018

TRADE POLICY REACHES A CROSSROADS

Free trade is essential for the existence of mechanical engineering. Exports account for around 77 percent of the German sales of 224 billion euros (2017). 660,000 jobs depend directly on these exports. More than one third of exports already go to countries with high import barriers.

By Oliver Richtberg

The importance of open markets will only continue to grow in future. In 20 or 30 years' time, the majority of global demand will be from outside Europe. Further free trade agreements like those with the USA and the Mercosur states in South America would make export easier for mechanical engineering.

Medium-sized companies in particular have neither the financial capacity nor the staff to invest abroad, so they rely on a working system of free trade.

Protectionism increasing worldwide

The protectionist tendencies currently on display around the world are endangering free trade and, with it, jobs in mechanical engineering in Germany.

The USA is the biggest cause for concern in trade policy at the moment, with President Donald Trump following up his "America first" threats with ever more actions. He began by withdrawing the USA from the Trans-Pacific Partnership (TPP) and initiating renegotiation of the North American Free Trade Agreement (NAFTA), the results of which are still unknown. In mid-January, the President then used US trade law as the basis for introducing temporary tariffs that affect imported solar cells and washing machines. The next bombshell was dropped in early March, when punitive tariffs on steel and aluminum imports were introduced. This is exactly in line with the administration’s trade policy agenda, which includes aggressive defense of American sovereignty in trade policy and vehement assertion of US trade law and protective trade policy instruments.

China also remains one of the nations with the toughest trade barriers - despite announcements to the contrary from President Xi Jinping. Foreign companies continue to struggle with the joint venture obligation, limits on investment, technology transfer obligations and national technical regulations. It remains to be seen how China's development of its own norms and standards, as well as the cybersecurity act that came into force in 2017, will affect mechanical engineering.

Another country with tough protectionist obstacles is India. At the World Economic Forum in Davos in January 2018, the Indian Prime Minister Narendra Modi warned of further tariffs and trade barriers. Just a month later, his government slapped import tariffs of up to 100 percent on a wide range of everyday products, including shoes, watches and televisions. India also has some of the toughest trade barriers in the world in mechanical engineering.

Russia continues to use trade barriers to protect its domestic industry as well. State bodies and companies generally give preference to Russian products in procurement, while subsidies for Russian products in certain sectors distort the market.

For many mechanical engineering goods, there are very far-reaching rules about when a product can be recognized as Russian.

Further trade barriers are currently being put up within Europe. Given the slow progress of Brexit negotiations, the best that can be hoped for by the exit date at the end of March 2019 is that the way has been paved for a simple free trade agreement.

This means a significant step backwards from the current status quo. Even the option of a "hard Brexit", where the United Kingdom would revert to the status of a third country with tariffs, is not entirely off the table.

In all cases, trade partners have met the protectionist measures with strong criticism and even threats of countermeasures. The danger here is that protectionist measures spiral out of control - in the worst case leading to a trade war in which there can only be losers. With its dependence on exports, the mechanical engineering sector would suffer immensely.

EU promotes bilateral trade

Despite all the doom and gloom, there is some positive news in trade policy. As well as the conclusion of the free trade agreement with Japan and the provisional entry into force of the agreement with Canada (CETA), the nearly completed modernization of the free trade agreement with Mexico is also relevant to the mechanical engineering sector. The EU and Mexico want to show that, where there is political will on both sides, negotiations can be concluded quickly. This could set an example for further negotiations between the EU and the Mercosur states, which have entered the final straight.

VDMA advocates open markets

VDMA represents the interests of mechanical engineering towards the European Union in trade policy. The main objective here is to use free trade agreements - negotiated only by the EU Commission - to consistently dismantle tariff and technical barriers to the export of mechanical engineering products. One important initiative VDMA is currently pursuing is the addition of a chapter on dismantling technical trade barriers to all future free trade agreements. There has already been some success: The EU Commission's proposals for the free trade agreements with Mercosur, Mexico and Indonesia all include such a chapter.

Further Information

VDMA Foreign Trade   |   VDMA Russia   |   VDMA China   |   VDMAimpulse 02-2018: "China on course for expansion, but more openness needed"   |    VDMAimpulse 02-2018: "Moscow is ready to use protectionism"   |   VDMAimpulse 02-2018: "Buy Russian regulations do not make life easier"   |   VDMAimpulse 02-2018: "Sanction policies have let to uncertainty for exporters to Russia"   |    VDMAimpulse 02-2018: "Trade after Brexit: A matter of cake and cherries"

 

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Contact
Oliver Richtberg, VDMA Foreign Trade.