Donald Trump recently stepped back from the brink of a trade war with the EU. Following a visit to the White House by the European Commission chief, Jean Claude Juncker, the two leaders issued a joint statement where they agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods”.
Investors and executives in Silicon Valley will be breathing a sigh of relief. A trade war with Europe would not only have an immediate cost to American exporters, it might also provide the EU with an opportunity to dismantle some of America’s most successful businesses on the basis of competition regulations and strengthen its own entrepreneurial tech ecosystem.
European and US online markets have been integrated from their genesis. Much of the technology they are built on came out of NASA developments, which has given the US an edge ever since the invention of the internet. Both economies are deeply linked as most US services are equally available and used in Europe as well. Accordingly, much of the revenues of the tech giants result from their presence around the world. Europe is seen as the key market for expansion, as the US market becomes saturated.
As well as applications and hardware, a huge proportion of retail is now online. Much of the advertising market and significant proportions of the media, entertainment, fashion, gaming and financial transactions markets are also online. The global presence of these markets makes the US-EU market deeply integrated.
This is why a trade war with Europe would be much more costly than one with China, where trade is more focused on physical goods and logistics. Two markets where the balance is in China’s favour.
Since coming to office, Trump has put forward a protectionist economic agenda. China has been the main focus of attention – geared toward reducing the US trade deficit and winning electoral support among blue-collar workers. But tariffs against Chinese companies are also geared toward protecting US tech giants like Amazon, Facebook and Google from growing Chinese competition. Plus, less economic integration with its biggest rival on the world stage may have national security benefits.
In contrast, the way that the EU and US are economically integrated means that sanctions against one another would have much more serious effects. The three US giants Amazon, Facebook, and Google are omnipresent in Europe and the EU competition authority has taken a strong interest in them over potential exploitation of their monopolistic position. A recent fine went to Google – a record-breaking €4.3 billion by EU regulators for breaking antitrust laws.
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A trade war may offer the EU an opportunity to rectify the so far cautious actions of the EU competition guardians. With US tech giants increasingly in the EU’s regulatory crosshairs, a trade war could provide grounds for further action from the EU to limit the dominance of the likes of Google and Facebook. Not only would this hurt the US in an important market, it may come with an offer towards Chinese competitors like Alibaba, Tencent, and Baidu to enter the market.
It could even facilitate the emergence of some non-US and non-China forces to join the competition for Europe’s sizeable online advertising and retail market. This would be good for competition and innovation in the long run and may bring dynamism back to these sectors. Eventually, the US would suffer and consumers outside the US would benefit.
Some argue that the three US giants are natural monopolies, which means that their dominance is justified and efficient. For example, Facebook’s true value lies in the fact that everyone is on it – it’s a social network that allows people to connect.
While that’s true, natural monopolies should at least be limited to their natural habitat. Alphabet – Google’s holding company – offers a number of services from search to email to shopping. Similarly Facebook has ventured into complementary services, from event promoting to media and a marketplace for goods. This means that these giants have long exceeded their natural habitats and have started hunting in other regions. Both the US and EU competition guardians are increasingly aware of this.
Dismantling the US tech giants or giving anyone cause to, however, is hardly in Trump’s interest. Entrepreneurship culture in the US has been shaped by their successes in creating much of the customer-facing internet infrastructure. Major setbacks for the players that stand for American success could cost Trump his presidency and America much of its competitive spirit.
Taking this into account, it makes sense that he has worked to stave off a trade war with the EU – something he has not done with China. The former would disassemble a close, decades-long relationship of trust, reliance and goodwill. A relationship both parties rely on much more deeply than they may want to admit.
The US relationship to China, on the other hand, is much younger and their economies are not at the same stage of integration. Trade war with China does not qualify as a rehearsal for opening up another front with the EU. Fighting on two fronts would likely accelerate America’s decline as an economic power and engine of innovation.
This piece was originally published on The Conversation.
Felix Arndt is a Professor in Strategic Management at De Montfort University.