World Geostrategic Insights interview with Massimo Ortolani, geoeconomic analyst, on the prospects for economic diplomacy between the EU and the United States. In a previous interview published on WGI last year, Ortolani had already highlighted the serious geo-economic challenges facing the European Union.
Massimo Ortolani, author of the book ‘Economic Intelligence and Geo-Economic Conflict’, is a professor, economist, international consultant and analyst of geo-economic aspects of international relations. He provides advice on how to assess the risks and opportunities arising from transnational investments/exports and on actions and tools to be adopted to mitigate geo-economic risks.
Q. Never before has there been such a concentrated focus on geopolitical issues. Are Trump’s tariffs clear evidence that issues, once considered separate in the management of international relations, such as geoeconomics and geopolitics, should instead be seen as a unifying expression of strategic thinking?
A. I believe that this statement should be generalised on a historical level. As we all know, in the past, various forms of forced levies, and customs tariffs in particular, have been widely explained by political reasons.
Undoubtedly, in the new global competition – think of the striking case of the current antagonism between the United States and China or, if you prefer, the generalised reappearance of a new Cold War – the subordination of the economy to geopolitics, which was dominant in the Cold War of a few decades ago, has almost completely disappeared. But, today, a primary role is being assumed, namely by the overlap of the strategic contents existing between the two disciplines.
Q. What exactly do you mean when talking about the overlap of strategic contents?
A. I am referring in particular to the so-called weaponization of the supply of goods and services, and the geo-politicization of technology, that have become instruments for the strategic supremacy, and currently reflected in the economic warfare policies typical of geoeconomics. But the normative weapon, while playing a strategic role in conflicts between global rival powers, also exerts dangerous side effects on other countries
Perhaps the most noticeable impact can be seen in the EU’s anti-coercive economic policies, as well as in those measures taken by States’ governments to protect national security.
This context of tensions – both geopolitical and geoeconomic – has even given rise in recent years to processes of so-called selective interdependence. That is, to an adaptation to to trends of decoupling and de-risking caused by the structural reconfiguration of globalisation; by which countries seek to balance the need for strategic autonomy trying to exploit coopetition in key sectors with reliable partners, while – at the same time – sharpening strategic protectionism towards rival countries.
Q. However, the recent Trump’s tariffs measures enacted by the Trump presidency seem only partly to constitute an aggressive geo-economic policy aimed at countering rival China, as they are exerting a significant impact also on the economic systems of US’s historical allies. Is this true?
A. That’s true. But it is also necessary to make some important distinctions in this regard. Because, in the view of building what is commonly referred to as a nation’s economic statecraft, institutional constraints are not as restrictive for the BRICS countries as for the EU members, to the extent that they allow the former for opportunistic policies (think of India).
Whereas for EU countries these constraints are conversely very stringent, as International trade policy is in an exclusive domain of the European Union Commission. Which has full awareness that its negotiating choices with the US may impact very differently each member State. If the final customs tariffs had to be applied on a product-by-product basis, countries exporting marginal quantities of products heavily hit by tariffs, and large quantities of low-tariff products would gain comparative benefits vis a vis other countries in the opposite situation.
Q. Many authoritative observers argue that Trump’s proposals and threats can be dangerous to the global economy, not only because of the uncertainty and unpredictability of the proponent, but also because they are clearly detached from orthodox economic models.
A. Surely the theses advanced by S. Miran in his “A User’s Guide to Restructuring the Global Trading System” – and which Trump seems to be inspired by with his aim of restructuring the global system of trade and finance – seem very hardly agreeable. Apart from that, what is currently impacting global economic systems are the results of a Trumpian policy aimed at achieving too many objectives using only tariffs as a tool.
At the same time, the failures to meet expectations along with his ups and downs with counterparties, give this sort of negotiating strategy a touch of bizarre originality. This could even be tolerated if the proposed solutions had to be only initially confronted with adverse market reactions. Conversely this approach does not seem to take into due account the fact that the uncertainty associated with the ambiguity of the tariffs, in addition to the criticisms of the FED’s behavior and to the potential inflationary pressure, can generate systemic risks of prolonged economic instability.
Q. Isn’t it premature to express unfavourable judgments on Trump’s policies?
A. No, if we consider that Trump’s primary objective to reduce the public deficit through tariff revenues will be offset by his planned reduction in corporate and in high personal income taxes, and by the planned subsidies to U.S. exporters affected by importers’ tariffs. Moreover the IMF forecasts an increase in the US debt-to-GDP ratio over the next three years, as well as global GDP growth in 2025 lower than previously estimated. All impacts partly due to the prospect of regulatory instability, but difficult to recover from over time, due to the negative systemic effects on international trade.
But the real reason for geopolitical concern, which Trump obviously does not mention, lies in the prospective decline of the dollar and the associated capital flight. This means a loss of confidence in the reserve currency par excellence and the consequent risk of losing the extraordinary seigniorage benefits enjoyed by the US.
An unmistakable sign of this is Washington’s pro-cryptocurrency policies, which could even jeopardise the European financial system. So much so that the ECB and the European Commission are actively discussing whether the fundamental rules governing cryptocurrencies are strong enough to withstand the invasive impact of new US regulations, aimed at supporting and expanding the reach of the dollar.
Q. So you seem to be predicting a future of tensions generated by interdependencies in both the real and financial economy.
A. This is certainly a very plausible and probable scenario. But, right now, I would more properly qualify it as a typical economic intelligence scenario. As to the response to tariffs, and their temporary suspension, it is enough to note that the countries affected are now embarking on a series of diversified negotiations, ranging from: appeasement, to a symmetrical and frontal reaction, to the search for possible substitutes for the US market, to the renunciation of tit-for-tat namely by many of the countries linked by bilateral agreements with the US, which find themselves constrained by the most-favoured-nation clause. However, this could be a sequence game that does allow finding a proper solution in the “ongoing process of negotiation”, not in advance.
Since the outcome of a decision by the first mover A, towards countries U and C, is going to be influenced simultaneously not only by the confrontation with each of them individually, but also by that of U with C. If A’s plausible target is to hit C, A may try to blackmail U by committing to eliminate tariffs on condition that U undertakes not to act as a transit route or production base for C’s products.
However, today, C also seems to be threatening to blackmail A if it takes actions that are highly detrimental to its national interest in its trade relations with U. Therefore, in this context of so-called strategic uncertainty, it becomes of utmost importance not to make the counterparty understand where you want to go.
That said, and in relation to the preliminary negotiations between EU and China, two fundamental aspects should not be forgotten: firstly, that Beijing now has an overproduction of high-tech goods that compete with those produced – either in Europe or U.S. – and that it also intends to further develop this capability thanks to the recent reduction in the number of activities subject to restrictions. Secondly, it should moreover be remembered that the institutional obstacles that have so far prevented the finalisation of an FTA between EU and China (dumping, the respect of values:Uighurs, health requirements, etc.) cannot be swept away within the 90-day tariff suspension period.
Q. In this context of waiting and provisionality, rather than uncertainty, what could be some basic (sound) criteria to follow in the upcoming EU-US negotiations?
A. First, it should be kept in mind that Trump is a president who likes to favour short-term solutions, so that would never embark in a long lasting negotiation with the EU for a new TTIP. Secondly, strategic attention should be paid both to his high sensitivity to the response of the financial markets and to the mood of his inner circle of advisers, given the now clear dependence of presidential decisions on the small circle of his collaborators. This makes it theoretically plausible, from an antropic point of view, that a fiscal attack on the profits of the US telecom big tech – which supported him in the election campaign – would certainly strike at his Achilles heel.
That said, the EU’s trade diplomacy should rely in these early stages on predictive intelligence exercises that take into account the impact on Members’ economic systems in relation to the diversified level of tariffs. The possibility of keeping them for instance, below or close to 10%, could allow the burden to be spread across the entire chain of commercial distribution. Meanwhile, the granting of state aids, to compensate exporters hit by U.S. tariffs, should also take into account the competitive effects of equivalent aid measures offered by other States to their exporters of the same products.
It would be excessive to dwell on the well-known regulatory procedures that would allow the impact of tariffs to be mitigated or circumvented under certain conditions, which could be adopted in the event of high tariffs. Finally, and however naive it may seem to point this out, in order to counter Trump’s position against alleged ‘fraudulent’ behaviour of the EU, diplomacy would also be needed to convince him, through persuasive storytelling, that the high safety standards required for imports of agricultural products, or the restrictions on the use of data provided for in EU regulations, have been put in place to apply to anyone in the world wishing to do business with the EU, and not just to US farmers or big tech companies.
Q. In conclusion, do you nevertheless support the criticism about excessive EU regulation as an obstacle to its trade diplomacy?
A. Unfortunately, this is the case. Let’s remember that the finalisation of the Mercosur FTA has been greatly slowed down by regulatory conflicts. Moreover, think about how the three legal systems overlap within the Union: national law, EU law and European Council law, with national constitutional courts, the EU Court of Justice and the European Court of Human Rights. Although the Commission is trying to improve and simplify its regulatory output, for example with the Omnibus package aimed at simplifying EU sustainability rules, including directives on ESG reporting and due diligence.
It would obviously be tedious to list all the laws and regulations that increase the costs of over-regulation on sustainability and investment for EU companies, particularly for the small and medium-sized ones, due to fragmented rules and lack of simplification.
However, it has long been pointed out in this regard that the EU should move more quickly to harmonise, where possible, national legislation that makes it difficult to exploit the potential of its internal market, both in relation to financial markets and the real economy, so as to arrive, for example, at a single European code for business practice, if not intra-Community electronic invoicing. And always keeping in mind that, if we are moving towards another type of global order, in which the world is no longer dominated by a single power, Europe would need to roll up its sleeves and really start thinking like the third global power.
While, regulatory simplification would still lack the strategic element that could be achieved with the contribution of a Community statecraft, that is more visible and perceptible to businesses and workers. In other words, a strategy for a wider range of products and services that can be classified as European public goods, not only in the field of defence, but also in the fields of digitalisation (Continent Action Plan), resilience, anti-corruption, green transition and, above all, social cohesion.
In relation to this last point, initiatives spread across Member States and aimed at making EU citizens feel closer to, or more a part of, an EU that has so far been seen primarily as a centre for issuing rules would also be effective. The creation of a European civil service, unifying national civil services, has already been proposed in this regard, and I would hope for the expansion of similar initiatives in the fields of education, health and military services.
Massimo Ortolani – Professor, economist, international consultant and analyst.