Tag Archives: EU

Protectionism wears the skin of health and safety

Regulations wrapped in red tape

Trump is an unusual figure among the world’s politicians. It is not that he is a nativist and a protectionist, but that he is open and direct about his nativist and protectionist beliefs. Trump says that foreign companies are harming American companies by undercutting on price, and that foreigners are stealing American jobs by working in America.

There are many reasons to attack these beliefs and to tell Trump he’s wrong. Here are some reasons give on the left or the right, maybe you agree with one of them:

  • If foreign companies sell for cheaper, than that means blocking foreign goods raises prices. And raising prices (aka inflation) directly harms all American consumers way worse than foreign goods harm a single American company
  • “Oh your company can’t compete? Sounds like a skill issue. Your company deserves to go bankrupt, free market in action.”
  • Foreigners do jobs Americans don’t want to do
  • It’s unethical to prevent foreigners from moving to America to look for a better life
  • “Oh you can’t compete against foreign workers? Sounds like a skill issue. You deserve to go bankrupt, free market in action.”
  • Trade barriers will wreck the economy by driving up prices, and any claims of fairness are necessarily secondary to this single overriding truth: trade barriers are bad for the economy

Politicians in and out of America have made each of these arguments in turn as they argue against Trumps new tariffs. But the single-minded opposition to tariffs hides something deeper: almost every politician globally throws up trade barriers just like Trump, but they have different excuses.

  • “Those goods contain chemicals that harm our health”
  • “Those goods contain chemicals that harm our environment”
  • “For national security or data privacy, we cannot allow foreigners to hold our market or buy our data”
  • And the old reliable: “those goods and services don’t comply with our regulations.”

This last one is pernicious because of how vapid and all-encompassing it is. It only works because people have a knee-jerk reaction against deregulation, but as I have pointed out, there’s a lot of anti-consumer regulation out there raising our prices and harming our economies. Regulation doesn’t actually mean “good,” but enough people believe it does that politicians can hide all their protectionist bullshit behind an aegis of “regulations.”

I say all this because I’m bashing the EU again today. A former EU minister of parliament put out a post which demonstrates a lot of this BS EU protectionism. I had already known that the EU uses “regulation” to protect its market from foreign goods, what is commonly termed “protectionism.” What I did not know is how much EU countries use this to protect their national markets from the single market itself.

The whole idea of the single market is free trade and free movement. If a company is allowed to sell goods in one country, it should be allowed to sell goods in all of them. If a person is allowed to work in one country, they should be allowed to work in all of them. This reduces barriers, brings countries closer together, and is much more efficient economically than a world of barriers and tariffs. It should bring everyone prosperity.

But the countries of the single market still want to “protect” their national markets and their national workers, just like Trump does. But unlike Trump, EU countries are legally forbidden from erecting tariffs. So they use health, safety, and regulation instead to do their dirty work. Here’s some examples from the article:

  • Denmark claiming that adding vitamins and nutrients to breakfast cereal “could be toxic,” with absolutely no justification whatsoever. The cereals are consumed EU-wide, and one would think the burden of proof would be on the accuser in that case. But no, a baseless “could be toxic” claim is enough to ban a product in Denmark unless the company making it is willing to go through a long court battle against a national government.
  • Spain and Italy trying to force foreign chocolate (consumed in every EU state, legally chocolate by EU law) to be explicitly marketed as “not true chocolate” even though every law says its chocolate.
  • France forcing Dutch biodiesel to comply with expensive testing that is waived for French biodiesel.
  • Germany forcing foreign professionals to undergo expensive “equivalence checks” before allowing them to work in the country. This is just more BS occupational licensing by the way, a horse-groomer shouldn’t need a license to begin with let alone an “equivalence check” to make sure their Italian license is valid in Germany.
  • Adding new national regulation that must be complied with *on top* of any EU regulation. This is the most pernicious, because most EU regulations explicitly mention that they are there to “harmonize” the market, make goods acceptable in every country. But EU regulations in the past decade have not decrease trade barriers, because countries have learned to add a new national regulation on top of every EU one, forcing foreign companies to increase their compliance cost if they want to break into a national market.

For years and years, Europe was indeed a continent of decreasing trade barriers. While they continued to be strongly protectionist against the outside world (erecting anti-GMO laws primarily as protectionism for EU farms), they were at least reducing barriers within the block. But Europe is not immune to the anti-globalization sentiment that has swept across Britain and America since 2016. It’s just that much like Biden, European politicians are caught between maintaining their appearance as internationalists while still wanting to be protectionists and nativists.

So rather than erect tariffs, the EU countries have recently relied on “soft” barriers, barriers which don’t *technically* forbid entry of foreign goods, but which do place onerous costs on anyone who wants to enter the market. And a supposed internationalist has to justify their protectionism somehow, they don’t have Trump’s luxury of just honestly stating their beliefs. So they rely on their old faithful excuses: health and safety.

Biden claimed that foreign goods were a national security issue. China was the security threat that we were supposedly countering, but we countered China in part by banning Vietnamese solar panels, Mexican cars, and Canadian lumber.

And for the EU countries health, environmentalism, and data privacy are paramount. They’re part of what separates Europe from America after all. So who cares that added calcium isn’t unhealthy, or that Dutch companies are making biodiesel the same way French companies do, if it’s foreign we can claim it’s unhealthy and unsafe by default. And then we ban it until they comply with our expensive tests, or until they start making the product in our country, or until they stop being foreign and sell themselves to locals.

This is exactly what Biden and Trump wanted: American goods instead of foreign goods. But the EU countries use regulation to achieve this goal since they can’t tariff the single market.

And this is one of the main reasons I push back against regulation. I’ve said over and over, regulation is not intrinsically good or bad. Good regulation is good, bad regulation is bad. But I’ve seen over and over how politicians hide their protectionism behind a coat of regulation. And I’ve seen how most people have an intrinsic distrust of deregulation, meaning whenever I point this protectionism out I’m accused of wanting to destroy health and safety.

“Foreign cereal is unhealthy,” “foreign biodiesel is bad for the environment,” “foreign Tech companies will steal our data,” it’s very easy to just claim this without evidence and get people on board with you. And it’s *surprisingly* easy to do when “foreign” just means another country in the EU, wasn’t Europe supposed to have solidarity?

And it’s impossible to prove a negative, so proving that the cereal is no less unhealthy, the biodiesel is no different, the foreign Tech has the same policies as the native Tech, this is a losing proposition and expensive to boot. So protectionism goes on unabated, and then people wonder why the EU is still falling behind economically. Well Mario Draghi told you why, it’s because even before Trump the EU was putting tariffs on itself.

I write this in part out of frustration and in part as an attempt at education. People are negatively polarized against Trump, and so even people who never heard or cared about tariffs are deciding that tariffs are bad and we shouldn’t do them. Some neoliberal Democrats are hoping that this lets them finally remake the coalition, and kick out the protectionists like Biden and Sanders in favor of rebuilding the Clinton-Bush-Obama consensus of free trade.

But even if this happens, I’ve seen way too much evidence that this will not be a radical remaking of ideology. Protectionism will, as it has in the EU, simply become the purvey of health and safety. Even the neoliberals of the party have trouble arguing against health and safety, especially when Democrats as a whole are so negatively polarized against deregulation.

So that’s what I really wanted to say: regulations are not always good. They are not always bad, but they are not always good. Don’t assume that just because the government banned something, it was right to do so. Be open to the possibility that they’re protecting their markets just like Trump is.

Draghi wants to unify Europe’s capital markets 

Note that this one’s more rambly than I wish, but I have a lot of thoughts and am not good at editing.  Suggestions for how to cut this down are appreciated if you want to leave a comment or an email. 

You might as well be lighting your money on fire…

When talking about the American vs European economies, the discussion always turns towards Tech.  “Europe missed the Tech boom” is a true, but surface level description of Europe’s stagnation in high tech industries.  Cloud computing, social media, AI, all the buzzwords of the last 20 years have been American, and some wonder why Europe doesn’t have trillion-dollar companies like Apple and Microsoft.  I’ve already pushed back on the “cultural” explanations for this, but I want to look deeper at some of the proposed solutions for helping Europe’s economy catch up. 

If you ask why Europe has a smaller Tech industry, there’s a few common answers given.  One is that Europe is fragmented linguistically, most people don’t speak each other’s language, while America has 300 million people all speaking one language.  But I’ve never been convinced by the argument that tech companies stop at the border.   

You can maybe make the argument that social media spreads fastest among people who speak the same language, but I’ve never seen this argument be well-quantified.  Facebook is used by half the earth’s population, they don’t all speak English, so why did it spread so easily even after maxing out in the English-speaking world?  And TikTok has been a viral hit among westerners, even though it started in China.  The language argument is often presented as obvious but without any evidence to support it, and I don’t think it’s reasonable until I see some evidence. 

Furthermore, social media is just a tiny piece of the Tech industry.  Apple, Microsoft, Spotify, Samsung, these aren’t social media companies.  So what explains why half of them are American, and the non-American ones aren’t even in the top 10? 

Another argument is that Europe is fragmented economically.  Still, I don’t really buy this.  It’s true that Europe is not wholly unified, different countries have different regulations.  But the EU is a common market of goods and services, overwhelmingly products sold in one country can likewise be sold in another.  If there was a European version of Apple or Samsung, their smartphones would almost certainly be buyable in any EU country.  Indeed, the market fragmentation never stopped Nokia from its 1-time dominance of cell phones, so why did this fragmentation prevent the emergence of a European smartphone company, if it never stopped the top European cell phone company? 

The final common answer is the one I want to discuss today: European investment is low because there is no unified capital market.  German investors invest in German companies, French investors in French companies, and this drastically limits how much capital is available for startups.  While Europe is trying to have 27 different capital markets, American capital is clustered in just 1 (Silicon Valley) or 2 (if you count Boston, New York, or one of the other “also rans”). 

I buy this argument more, but I want to start with some clarity on what it *really means* for a capital market to be “unified.” 

We’d say a market is unified when investors from one area are equally capable of investing in any other area.  Why might investors not invest across the border?  Tax and regulation mostly.   

Taxes don’t have to be *higher* to deter investment, *different* is more than enough.  Think of capital gains tax when an investor sells something they’ve invested in.  Some places allow a lower tax when you hold the investment longer (long-term capital gains), while others don’t make a distinction.  This may lead to a lower tax burden overall, but more tax-season headache in proving how long each investment was held, and proving it was held in the correct jurisdiction which allows this long-term capital gains distinction.  Sometimes it’s better to just invest everything in one place and hire less accountants. 

Different regulations would also be self-explanatory, there’s more bureaucratic overhead in understanding and applying different regulations for each different investment.  But here we come to the difficult part, and why I think Draghi’s drive for unification will face stiff headwinds.  Regulations have a moral component for lack of a better word.  When discussing regulations online, it’s not uncommon to see “regulations are written in blood” as an emotive argument put forth against deregulation.  Any attempt to pair back anything in the way of “red tape” faces a mountain of pushback from voters, and unifying the regulations will require *some* deregulation.   

*Some* country’s regulations will have to be cut, even if they’re simply replaced with those of another countries.  Even if regulations are “harmonized” by trying to bring them closer together, that still means some things get cut and some things get added.  And this will necessarily inflame the passions of the voters and commentators who say that “regulations are written in blood.”  Because while regulation of the capital markets might not have to do with healthcare and worker’s rights directly, they do have much to do with bankruptcy and ownership, which can be even more emotive. 

Trump is often jeered for his numerous corporate bankruptcies.  He in turn calls bankruptcy a smart business move when needed.  It’s true that an investor can expect 9 investments to go bust for every 1 that succeeds.  And it’s true that American bankruptcy laws are quite lenient.  And it’s also true that a smart investor be foolish to not take advantage of any edge the law can give them, lenient bankruptcy is one such edge. 

But bankruptcy stirs passions because someone’s left holding the bag.  If Europe is going to unify its capital markets, it’s going to inflame those passions.  When the banks went bankrupt in 2008, it stirred immense passion because of who had to pay and who was left holding the bag.  Changing these laws raises the specter of the financial crisis, and any recent bankruptcies will get put under a microscope to point out how things would be different in a unified EU capital market.   

To put some meat on these bones, let’s say a car company is going bankrupt in Bulgaria.  We’ll call it “Bulgarian Cars,” its owner and CEO is Mr Car, its workers belong to the “United Car Workers Union,” UCWU.  It has purchasing agreements for steel with “Steely Corp” and its sole creditor is “Big Banking,” who is unfortunately unaware that Mr Car is about to go bankrupt. 

Under the current Bulgarian system, Big Banking can (if they desire) simply take possession of all the “Bulgarian Cars” assets, and sell them in a fire sale to get back the money they are owed.  This means the factory, the showroom, and anything else could be closed down in an instant.  Big Banking gets back their money, Mr Car is broke, UCWU are out of their jobs, and Steely Corp lost its biggest customer. 

But how would this situation be effected by Draghi’s directive to unify EU capital markets?  How would the bankruptcy be altered?  Who would win, and who would lose? 

Draghi has already signaled that unified EU bankruptcy must allow for “debtor in possession,” meaning Mr Car can keep control of his company while working out a repayment plan with Big Banking.  This system allows Mr Car (or any investor) to try to rescue their company, even in bankruptcy. It’s part of what made Trump’s bankruptcies so painless. 

In France, a debtor is immediately granted relief from creditors upon filing restructuring plans.  In Germany, the debtor may *request relief*, but it isn’t automatic.  But if the capital markets are to be unified, Bulgaria must follow the direction of France and Germany and give Mr Car a reprieve from his creditors.

But should Mr Car even be *granted* relief?  He drove the company into the ground in the first place!  Why does he get to stay in charge, paying himself an obscene salary all the while?  Draghi’s unified capital markets would allow a lot more “Trump-like” bankruptcies ripe for this kind of outrage-bait, with a villainous CEO stiffing creditors, unions, and business partners while still bringing home fat checks. 

And what happens to UCWU?  They just finished negotiating a new contract with Bulgarian Cars. The contract included conditions and a long notice period before a new contract can be renegotiated.  But most EU countries allow the suspension of a union contract to help the company exit bankruptcy.  So Draghi’s unified capital market raises the possibility of workers losing out so that bankers and executives can keep the company going.  Workers’ pain for bosses’ gain. 

And through all this, what about Steely Corp, who just lost its biggest customer?  Bankruptcies are always politically fraught as they can cause a domino effect into other industries.  This is why some nations focus so much on business continuity, even if it comes at the expense of creditors and workers.  Steely Corp will want to lobby the government that UCWU and Big Banking can go to hell, they want to ensure that Bulgarian Cars returns to solvency no matter what.  Otherwise Steely Corp itself may go under, and the national news will blame the Government for letting not one, but *two* major employers go bankrupt.   

How much will Draghi’s unified capital market allow Governments to “save” companies this way?  Under certain restructuring scenarios, the Government will essentially be picking winners and losers in the market.  Demand Big Banking take a debt restructuring, demand UCWU accept a new contract, and you’re making banks and workers lose so that car and steel companies can win.  This doesn’t always fly with EU rules around fairness, and certainly won’t fly with some sections of the commentariat. 

This post was a lot less focused than usual, but it’s been in my mind for weeks.  “Unify the EU’s capital markets” sounds so obvious, why haven’t they done it?  They haven’t done it because it involves politically fraught trade-offs about ownership and hierarchy.  “Who wins and loses in a bankruptcy case” is just the top of the mountain.  Questions of equity investment, investor’s rights, corporate governance, union rights, these are also fraught questions that will have to be answered in a unified capital market.  Whatever answer is chosen will inevitably piss *someone* off, which is why countries are so slow to change these laws.  But until countries are willing to make big changes, the EU capital markets will never be unified.