The European Union as a specific case of economic protectionism

World economics has had an interesting development in the last decades. On the one hand, a movement towards open markets seemed to exist but, on the other hand, this shift is only a mild one if one is to consider the already engrained structures that keep the European Union (EU) as an extremely protected market against world competition by its supranational institutions. The research question of this paper is thus: how protectionist is the EU?

There is not only one type of capitalism, there are several types. Varieties of capitalism (VoC) and its vast literature are defined based on the role and influence of the state in the economy, the type of fiscal policy, the state’s relationship with private sector and the level of market openness, which in turn relate to quotas for imports or exports, quotas or incentives for food production or fisheries, and so on.

In this article the economic and political space of the European Union (EU) is considered a space for a very specific kind of capitalism – protectionist capitalism. Protectionist capitalism or liberal protectionism are a form of economic protectionism.

This type of economic system (including its subtypes and different examples around the world) already existed in the 19th century and in many authoritarian or democratic European and world systems.

To what extent is the EU protectionist then?

It is also readily applied nowadays in the EU although practiced under democratic procedures, respect for human rights and free elections.

I would argue that protectionist capitalism is, in fact, the most popular economic system in the world overall. To what extent is the EU protectionist then?

Most literature prefers to analyze the evolution of the EU, its institutions, and common policies as they developed but not under the realm of the concept of protectionism which is what this article will also do.

The European Union’s protectionist capitalism

On one end of the political and economic spectrum would be communist or Soviet-inspired systems, where all economic sectors are run by state officials. Exports are similarly controlled, as are imports: an extreme case of protectionism. The State automatically gains monopoly positions within multiple sectors or economic areas.

This all too readily serves as a foundation for possible structural corruption and waste.

Another similar case would be authoritarian protectionism as was exemplified by the Estado Novo in Portugal (1933–1974) or Benito Mussolini’s Italy.

These authoritarian systems tended to have severely restricted economic and political freedom, with a small number of companies receiving special treatment by state officials benefiting from systems such as customs taxes against foreign competitors and financial support for national exporters.

In the middle, there are protectionist but democratic systems, being the most prevalent the EU, the United States, Canada, and Japan, among others, with varying degrees of market openness and private competitiveness.

There is a third, theoretical system of pure neoliberalism, where there would be no market barrier imposed by the state or any other public institution or even private lobby, whether it be quotas for imports, subsidies for exports or for production. Hong Kong in the 1980s – despite its status as a crown colony – is given as an example of this by Milton and Rose Friedman.

Free trade has been shrinking from a globalizing trend towards trade blocks.

Free trade has been shrinking from a globalizing trend towards trade blocks even before the presidency of Donald Trump and the subsequent, somewhat protectionist, economic policies. For example, the EU has recently promoted Preferential Trade Agreements (PTAs) to secure common grounds with other nations and not damage its own position at the negotiating table.

However, PTAs appear to be of a limited free trade philosophy and can actually serve as one more system for the EU to progressively gain greater control of the markets with which it makes agreements.

In summary, although the EU has supported free trade in some sectors, it has also acted in a distinctly protectionist way in others.

Common Agricultural Policy (CAP)

The most obvious case of the EU’s protectionism can be found in the Common Agricultural Policy (CAP). It is a system that is presently designed to ensure that farmers in the EU can get supranational financial support and position themselves as the beneficiaries of relatively unfair competitive advantages in terms of global exports and trade made under the guise of a push for greener agriculture.

The need for agricultural support was supported right after the war in order to boost productivity in this severely depleted economic area that still employed large sectors of population in the 1950s. With time, following the “butter mountains” crisis of the 1970s, limits were set for the production of certain agricultural products.

However, the farmer has remained protected because he continued to receive communitarian funds. This path dependency is possibly one of the biggest reasons as for why agri-environmental support is still in place.

Presently, the barriers or quotas for agricultural production in the CAP almost disappeared and one can talk of a more liberal and perhaps greener CAP but the existence of vast agricultural subsidies is possibly the greatest aspect of the EU’s protectionist common policy.

Protectionism in the guise of free trade

Although some market barriers may have been broken and the CAP remains as a visible, even exceptional case within the EU, there are other internal mechanisms to consider that can be seen as protectionist.

Private entrepreneurs and companies in the EU consistently and repeatedly gain from the access to all kinds of EU funds (whether for agriculture, to start a business or for other kinds of development) that are usually financially vastly superior to most countries in the world.

The EU budget is thus one of the greatest instruments in the EU’s political economy to uphold its duty to secure EU markets against multiple world competitors.

Private entrepreneurs and companies in the EU consistently and repeatedly gain from the access to all kinds of EU funds.

These trade deals can be profitable for all participants, but the fact that vast amounts of financial assistance are available for EU companies through EU funds can make these deals as one more system for EU companies to, in the long run, gain access to new markets and possibly be able to overwhelm these markets with their products.

Economic protectionism tends to undermine free competition, to increase consumer prices in order to benefit the facilitator or seller of services or products that is already installed in a particular country and who may not be affected by customs duties or any other similar tax or fee.

Most of these measures are designed at the member-state level (such as import quotas) but, at a larger view, the European single-market appears to be open to itself and to its participants but not as open to the rest of the world.

As a major trading block, the EU supports indirect protectionism from the national to the supranational level.

Another example of economic protectionism taken at the supranational level is the ability of any citizen or company in the EU to file a complaint to EU institutions and accuse a non-EU company of unfair market practices and unfair competition.

This is another case of supranational support made for market protection, as they are typically targeted at non-EU companies (as the legal text clearly states, with China and its companies having great emphasis here).

The specific type of protectionism upheld at the EU level is also a foreign policy mechanism for political and economic integration as countries neighboring the EU would feel tempted to not only be able to participate in the decision-making processes at the EU institutions’ level but also be able to enter a single-market that is much more free to those that are part of that economic union (even if they sometimes do not participate in the decision-making such as the case of Norway).

At the financial and banking level, a certain degree of protectionism is also visible as the recent policies and analysis of the European Central Bank (ECB) seem to show.

The very idea of the banking union, although not completely realized, is one designed to ensure that citizens would not have to be severely affected by the failure of banks but it can also be understood as a policy to ensure the protection and stability of certain banks despite their hypothetical negative outlook.

The free movement of people should also be addressed as an area where protectionism of labor markets may negatively impact the success of the Schengen area.

The positioning of the ECB as a lender of last resort indirectly providing states and the banking system with the ability to acquire capital under easier conditions and setting monetary policy under low interest rates can also serve as a somewhat protectionist policy as it is ensuring the stability of these financial organizations and states, even if some of these (especially states in the Eurozone that no longer have the power to devalue currency) might not have been able to stay solvent at pre-crisis interest rates.

While the focus of this article has been on protectionist economic policy, the free movement of people should also be addressed as an area where protectionism of labor markets may negatively impact the success of the Schengen area. It bears reminding that this system is mostly available only for EU citizens.

Trade policy has always had a tendency for protectionism

The EU and its member-states form a very complicated political and economic union that has established different and characteristic political and economic relationships with various governments around the world. Trade policy has always had a relative tendency for protectionism.

After World War II, a push for free trade agreements occurred that more or less lasted until the end of the century. Recently, a push for protectionism has been visible, however, and despite their free trade policies, in truth, the EU has always been keeping protectionist elements in place in its economic policy and will probably continue to do so in the future.

Luís Sargento Freitas (Ph.D.) finished his Ph.D. at the University of Jyväskylä in Finland in 2018 and is presently developing his post-doctoral project.

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