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In The Dip, Abraham Newman and Hosuk Lee-Makiyama ask: Can Europe stay influential in a new geoeconomic era, or is it falling behind the US and China?
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00:00It's budget season in Brussels and there's a whiff of protectionism in the air.
00:04That's because Europe is stuck between a rock and a hard place, namely between the U.S. and
00:08China. These two economic behemoths have increasingly tried to set the terms by which
00:14business is conducted. And now Europe is looking to push back. Welcome to The Dip,
00:19the podcast about money, power and consequences. I'm Cassandra. And today I want to know,
00:25is Europe still living up to its reputation as a leader of free trade or whether the age of Trump
00:32tariffs and China shock 2.0, that Europe is simply embracing economic defense. And to do that,
00:39I'm joined by two really great guests. Up first, I've got Abraham Newman, co-author of Underground
00:44Empire, How America Weaponized the World Economy. And he's also a professor at Georgetown University,
00:50joining us today from New York City. Abe, thanks for joining the show.
00:54Thanks for having me, Cassandra.
00:56And also on the line from Brussels, I'm joined by Hosok Lee Makayama. He's an economist,
01:00trade lawyer and director of ECPAY based in Brussels. Hosok, thank you as well.
01:09One thing I want to know is, you know, I feel like we're kind of swimming in this sea of
01:14constant trade tension, if not trade war. Abraham, let's start with you. What items have you noticed
01:20are maybe becoming less available or more expensive where you are?
01:24Well, right now, the big thing is bananas. And I'm going bananas. This is just crazy. What are we
01:30doing? Why is the world happening this way? So whether it's, you know, from the tariffs or the
01:36conflict in Iran, you go to the store and now even bananas are expensive.
01:41Hosok, are you also going bananas in Brussels? Or what are you noticing?
01:46Well, since I'm allergic to bananas, both as a policy person as well as a consumer,
01:52that won't be on top of my list. But on the whole, I would say that the rise of cost
01:58of living has
01:59been very little about the trade wars because Europe already pays a relatively severe tax on
02:05anything. So it's been actually quite remarkably stable.
02:11Let's level set then. And when thinking about where Europe stands now on a scale of maybe one
02:17one to 10, Hosok, one being unfettered free trade and 10 being like an extreme Soviet style state managed
02:24trade, where does the EU fall for you?
02:28Well, from a scale from one to 10, I would say it's Northwest to put it on a scale from
02:35one to 10.
02:37It's just something that you could, you can't really say. I mean, Europe is
02:43minus 10 in terms of protectionism on all the things that it wants to export. And it has retained
02:50a relatively moderate but constant trade production on all the things it wants to produce by itself.
02:58Very, very hard to say.
03:00Abe, what's your take? Scale of one to 10, Compass, how are you rating things?
03:04Well, I think it's really a split screen. You know, on the one hand, Europe is on a tear.
03:09They are signing free trade agreements in a way that very few other countries or regions are doing.
03:15America, Sur, Indonesia, India, Australia. But on the same side, they are trying to figure out how
03:22do they maintain competitiveness in a world where, you know, their major sectors, whether that's autos
03:29or chemicals, are increasingly being encroached by China. And so it's a really, you know, it's a new
03:36world for Europe, and they are trying to adjust in a rapid clip.
03:42Jose, when we were speaking earlier off camera, we were, I was, I was mentioning that I thought
03:47things were changing, that we were in a new world. But you challenged me on that, saying,
03:52for example, that the US has behaved this way for a long time. Have things changed or
03:56slowly been escalating? How do you, how do you view the state of play?
04:01Well, I mean, obviously, we haven't had this public attention to trade policy,
04:07perhaps never in the history of the European Union. That's absolutely for sure. And this has
04:14been the state of play for many, many years. And we've had numerous trade conflicts. But it's not
04:23until now that we have seen United States leaving the system that it built and that worked perfectly
04:30well for Europeans. It was a structure and especially in the last two decades, we had a
04:37remarkable period of peace, rule based, everything was predictable where Europe could trade with
04:42anyone on the planet on reasonable terms, it got very cheap energy coming from Russia, at the same
04:50time as it could exploit the Chinese market. And that's a war. And we shouldn't forget while the
04:56Americans were actually defending Europe for free. So we could build hospitals and schools and the
05:02factories. And that's a world that will ever, ever come back. But trade tensions in terms of
05:08commercial rivalry between Europe and United States have been relatively constant. And we think of
05:14China as the big rival. But yet to this day, if you think about in what price gaps, what kind
05:20of
05:21qualities and what kind of commodity we are actually exporting from Europe, U.S. is still Europe's
05:28biggest rival.
05:29Abe, I see you nodding along here. Jump in.
05:32Yeah, I just want to say, I mean, there was a bargain. You know, Europe's business was underpinned by
05:38the U.S. security guarantee and export markets to China. And both of those have unraveled. And so,
05:44you know, there is an existential threat, I think, to Europe's business model. And so it's going to
05:50have to figure out how does it defend itself? And that's going to cost more money. And how does it
05:56export or things that the world wants? And that's going to create or require a lot of investment.
06:02And so, you know, European citizens have to be prepared for politicians and politicians have to
06:08be prepared to really be straight with their voters that the, you know, there was a nice setup.
06:14It was a perfect package. Europe benefited. And that's now over. And it really has to,
06:20reach deep to figure out what is its new place in the world.
06:25Abe, from your vantage point in the U.S., what's changed? Is it Europe's changed? The United States
06:31has changed? China changed? Is it simply the whole world? What do you see?
06:36Well, I mean, I think politics has changed all over the world. You know, the support for free trade
06:41in the United States, I don't think that there's really a coalition on the left or the right. You
06:46don't see the Democrats saying, you know, when we take back power, we're going back to the WTO system.
06:51You know, that's not what's happening. And so on the one hand, you have the reality that the kind of
06:57the, you know, I will call it sometimes like the neoliberal dream is waning. You know, people realize
07:03that trade comes with both benefits. It expands the pie. But it's also creates vulnerabilities,
07:08whether that's supply chain shocks, rare earth metal coercion. You know, Henry Farrell, my co-author
07:14and I, we talk about it as weaponized, interdependent, that these networks can be used
07:19to, you know, as vulnerabilities, not just for opportunities. So on the one hand, that's
07:24happening. But on the other hand, you know, the U.S. is just losing power in the world. So it
07:28cannot
07:28defend everybody's interests and it cannot provide the global kind of security guarantee that it did in
07:34the past. And those things are coming together. And that I think for Europe, they had kind of,
07:39it was a symbiotic relationship for decades. And so, you know, unfortunately, you know,
07:44now we need to kind of figure out what is the new game. And I what I'm worried about is
07:49that Europe is
07:50still really tinkering on the margins. If you look at the recent budget proposal that the EU came out,
07:56it's it's not sufficient to deal with these levels of problems. And so, you know, it's easier to kind
08:02of fight over should pensions be 63 or 67 when the real game is just so much bigger.
08:10Abe, we you mentioned your your term that you coined with your co-author, weaponized interdependence.
08:17That sounds a lot like a phrase we heard here in Europe quite a bit from Angela Merkel.
08:22Wandel der Handel basically changed through trade. But that didn't work in Russia, for example,
08:28when the EU and Russia had quite close ties, specifically Germany and Russia with fossil fuel
08:35energy. Why didn't it work?
08:39Yeah. So, I mean, in some ways, this argument that we have, it's the opposite of Wandel der Handel.
08:46Wandel der Handel was the idea that if you traded with people, they would take values and your norms.
08:52And that didn't happen because basically countries like China or Russia, they understood that they
08:58could use the market to enrich factions within their societies that didn't support democracy or
09:06freedom. We had talked ourselves into this idea, you know, it was like if we trade, everybody will
09:10also become democratic. No. I mean, people have been traders for centuries and they've not, you know,
09:16the groups have not been democratic. There's it doesn't need to hang together in that way. And there's
09:20actually very little political science research that demonstrates that. The flip side of the
09:25argument, the one that Henry and I make is, is just that when you create these interdependencies,
09:31that they also come with risks that people can then use them to put pressure on you. And that's
09:37what you see in the case of the rare earth metals debate with China is that, you know, they want
09:43to
09:43push back against US tariffs. And then they say, you know, we're going to cut you off from these
09:47things that you're highly dependent on if you want to electrify your society. And guess what,
09:53we're also going to have that spill over Europe. And so Europe is going to complain to the United
09:58States as well. And that type of maneuver is becoming more and more common. The US uses it
10:04all the time against its adversaries. And increasingly, Europe does as well. And so I think societies have to
10:10be prepared for that trade and economic platforms, whether it's digital or financial, that they're not just an
10:17opportunity, but they're also a vulnerability.
10:20Josec, is Europe just behind the times here in terms of moves that other countries have been making
10:26for years, if not decades?
10:31Well, one can say like this, Europe is built for a time that is based on predictable rule-based free
10:37trade. Sure. And I don't think, come back to the previous topic, I don't think Europe has necessarily
10:44abandoned free trade. But I think free trade has perhaps abandoned Europe. The institutions it built
10:51and it perfected over the last half century just doesn't work anymore.
10:56Josec, you know, I'm just wondering, is this because of the nature of the EU being made up
11:01of member states that were in this pickle or potentially moving a bit slowly? Or is the EU
11:07just too optimistic, not able to get with the times?
11:12Well, there is certainly an element of indecision on the part of Europe. And there has been a lot of
11:19talks about reforming that and moving into more security and sanctions and other decisions based
11:29on a qualified majority. But we should also remember that Europe has done always the unthinkable
11:35when faced with a dead end. It has found a way to deal with the problems, for example, when it
11:43comes
11:43to sanctioning with Russia, dealing with China, and circumventing these institutional flaws that has been
11:49built into Europe because basically came to its prime during a remarkable period that will never ever come
11:56back to history again. So certainly, Europe is not a hard power. And it is very much a soft power.
12:04And if you are the Xi Jinping's or the Donald Trump's of the world, you don't recognize soft power.
12:09It has no meaning to you. And that's perhaps one of the hardest conclusions that has been to swallow,
12:16which is that if you ask the world leaders today, whether you look at G7, or you're looking at the
12:22top two countries that are sitting at the big boys table, I'm thinking about United States and China,
12:28or you're thinking about G20, or any range of the world powers in the world, they will more or less
12:35unanimously say that Europe is important, but Europe cannot change the outcome on the existential question
12:44that is basically bugging the leaders right now or the population. I'm thinking about questions
12:50around territory integrity. I'm thinking about security. I'm talking about, well, the economic
12:58security as well as technological arms race that we have on the planet right now. So across a number
13:04of these issues that really, really matters, Europe cannot actually change the course of the future.
13:12Abe, jump off of what Hosek was saying there. Is Europe, especially when we're talking about
13:16free trade, is Europe just stuck at the kids' table? Yeah. So, I mean, I think my take is that
13:25Europe has a self-confidence problem. It's one of the largest economies in the world. I mean,
13:32it has got the most advanced researchers on many issues. It has a significant military. I think if you
13:40want to ask, like, can Europe manage this transition compared to most other countries, like think about
13:47a country like Indonesia and where they sit in this really unstable, uncertain world. Europe has so much
13:55opportunity. They also have, you know, like when you look at Germans, the German budget compared to
14:01U.S. deficits, they have a lot of capability to bring to the table. So, I kind of, I want
14:08Europe
14:08to find its agency to realize, first of all, its major security challenge, Russia, is weak. You know,
14:16the Ukraine war has demonstrated that Russia is, you know, not the adversary that Europe had built it
14:23up to be. Now, that doesn't mean that Europe doesn't need to invest in its military. It does.
14:28But it should not see this as an insurmountable challenge. And on the economy, once again,
14:34it's the second or first or third largest economy in the world, to think that it's neutered and
14:40incapable of playing a role in the global order is just, I think it's ridiculous. Europe has to have
14:48a vision, though. And this budget that was laid out, it doesn't have a vision. And if you listen to
14:53Meritz, he doesn't have a vision of what the world should look like, what a European-led version of the
14:59world. It's always, Europe is very much trying to respond either to China or to the United States
15:04who are offering visions. And that's why I think Europe is stuck. It's mostly, in my mind, it's
15:10political. Yeah, I have to disagree. I don't think Europe has a self-confidence problem. If there is
15:16a self-confidence problem, it's that Europe has too much of it. I would put the cliche, I would really
15:23like to put the cliche of the size of the markets to sleep. If you're in the trade world, sure,
15:30the
15:30size of the single market, yeah, the most important market in the world, yada, yada, yada, that's true
15:38to some degree. But if you want to export, and if you want to grow, well, for the big firms
15:47who are
15:47trying to grow their markets, the size of the market is almost irrelevant. Because if you just
15:53look at the European market, all the markets are already taken. What people are looking at is
15:57actually growth. If you want to expand, you need to look at market shares that will come in the future.
16:03In other words, the markets are growing where the markets are not taken. And we live now in an
16:10economy, according to the IMF, where half the world's growth, 50%, is produced by two countries.
16:18United States and China. Europe accounts for slightly south of 10%. It's on par with somewhere
16:25between India and Indonesia. And despite the number of people we have, and despite the massive GDP,
16:34we are not growing. There is no new money to be made in Europe. And this is the problem that
16:41the
16:42European multinationals are also seeing. We are the biggest investor around the world. Why?
16:46Because we stop investing at home. It's a sign of strength at the same time as a sign of weakness.
16:53And that's, I think, something that we need to really bear in mind, that it's not just about
16:59having a vision. It's not just having a goal, having a dream. I mean, Europe is full of dreams.
17:04Actually, we have a surplus of dreams. And we can actually export into other countries around the
17:08world if we would like to. And the Russia angle is a really interesting question, because it is true,
17:14Russia is weak. But what you say about 27 countries who can't even win against Russia,
17:20Russia has basically one claim in global governance. It has no relevance in the global system,
17:28except for one, which is that it can create very expensive problems for Europe very cheaply.
17:35Right. And we can open its borders to swamping migrants, and it can shut down an airport by
17:42sending a drone. And it could create a very massive and expensive problem in Ukraine that Europe needs
17:51to clean up. We've seen some of those problems that you've outlined for sure. I want to cast our
17:55vision a little bit to the future because you've both worked in the policy sphere for a long time.
17:59I believe you've both worked alongside or advised directly European policymakers.
18:04If you were to be talking to Friedrich Mertz or other leaders of top economies in Europe right now,
18:11Abe, I'd like to start with you. What advice would you be giving him?
18:17Well, I mean, I think the first is you have to recognize that the other actors in the world,
18:22they're facing their own problems. So China is going to have a huge demographic crisis. Its
18:28leadership is aging. The United States, I mean, is daily chaos. So, you know, there's a lot of
18:35projection of, you know, these other actors are so strong and we're so weak. But actually,
18:39you know, Europe is a dynamic economy, but it does need to be honest with its citizens that
18:47it is going to have to pony up. It has to invest in the core resources so that it can
18:53create new
18:54markets. And it's going to have to invest in its military. I mean, I think the reality is, is that
19:01this, it's a hard sell for populations because it's going to require solidarity. Then, you know,
19:07higher taxes and more investment in these core resources. But it also requires, it does require
19:13a vision. It has to have leadership where you can convince people that it's worth spending that
19:18money. And the alternative right now, if they don't, is to become a vassal of either the United
19:25States or China. And so the stakes are very real and they're very real right now. It's not like you
19:30can kick this can, like do a miracle, you know, and wait another 10 years and see what happens.
19:35And so I think it's just important to get the kind of the scale of the transition clear to those
19:40policymakers and then make clear that the action is needed now if they want to have a European future
19:47and not just a future that's being dictated by the other kind of larger countries.
19:53How do we balance here efficiency versus resiliency? I'm thinking of energy or
20:01semiconductor chips, things that are critical to business here in Europe. It's obviously cheaper to
20:08get them from the countries that have been experts in this for a long time, Russia or TSMC in Taiwan,
20:15for example. But then there's this idea that if the world goes wacky or wackier than it has been
20:21recently, that those supply lines are cut off. So how do we, how should we be thinking about this
20:26balance between efficiency, but also resiliency?
20:32Well, resiliency and sourcing locally are two distinct, distinctly separate concepts. If we made
20:43everything here and that will be the worst way to go, that would make North Korea and the Juche ideology
20:50the most efficient ideology in the world. It's not. I think we can all agree on that across the
20:56political spectrum, at least in Europe. And also, if you look at, you mentioned
21:02semiconductors, that's an interesting part. We have basically two companies that account for the most
21:08advanced semiconductors. Well, basically all of the consumption of or the purchases of the most
21:17advanced chips that go into, well, the top-of-the-line computers and ICT equipment around
21:24or in Europe, we only have two that needs them. And that's Ericsson Nokia. Why? Because they make
21:29base stations. And their take is that they don't actually want to pay for the premium to have TSMC
21:35build factories here in Europe. Why? They're light. They travel and they can travel the first class
21:44and it wouldn't make any difference on the price. And the European multinationals have basically
21:50forgot to risk in geopolitical risks. So they have put all the eggs in one basket. They have been
21:56obsessed with scale, doing something cheaply, suppress the prices, produce as many as you can,
22:03and sell them to a reasonable price to quality ratio around the world. And this is the Nordic
22:09slash German model of, well, export-led capitalism, which have basically stopped working.
22:16It doesn't. We need to price in the geopolitical risk as for what they are, which many countries,
22:22including Japan and China, have done for decades.
22:26Abe, I'm wondering, is there a risk that, especially here in Europe, but maybe with some of these other
22:31big economic players like the US and China as well, is there a risk of, I don't know if I'm
22:37making up
22:37this term, probably not, security-washing something, saying that this plan for changing
22:43the rules or the barriers, that it's because of economic security, when in reality it might just be,
22:49I don't know, protecting a local business?
22:53I mean, there's always risk that basically lobbyists, you know, they use these types of
23:01arguments to increase their, you know, their market. But honestly, I have been shocked about how
23:11little this is happening. I mean, just take Youssef's example about Nokia and Ericsson. And
23:19in that case, you know, if I was Europe, I would have subsidized the purchase of Nokia and Ericsson products
23:27for the entire 5G, you know, 6G infrastructure. Instead, they still had these, you know, basically
23:35competitive auctions, you know, where Huawei often had an opportunity to get into these markets.
23:41You know, so I think that if you identify, if you do a risk assessment and you say,
23:46these are the places where there's really a risk, then there should actually, I think, be
23:51interventions in order to promote economic security. The problem in many cases is that
23:58those risk assessments have not yet been done across markets. And so policymakers are often,
24:05you know, going blind. And that creates the opportunity for that type of protectionism.
24:10Jens, you've been both so generous with your time. I want to close with hopefully some vision from the
24:16both of you, Abe. And I'll come to you in a moment as well, Josek. Abe, in 10 years,
24:21Europe's going to regret what, in your view, either doing or not doing?
24:28I think, you know, I really think it's about being bold and having a vision. I think the US and
24:34China
24:34both have very clear, they're articulating how they see the future of the international economy.
24:40And when you listen to most European leaders, it is either, you know, reiterating, you know,
24:46the rules-based order, or it's about defense. It's about kind of trying to protect that little pot of
24:54gold that they have in front of them. And I think for Europe to succeed in 10 years or in
24:5950 years,
25:00they need to have a bold vision, one that third countries will join onto. Because many third countries,
25:06Indonesia, Vietnam, they're not happy with either the Chinese or the US vision,
25:11but they really don't have an alternative right now. And so I think that's, you know,
25:16number one priority right now is, what's the European order? And how, you know, how can they
25:23sell that to the rest of the world? And you, Josek, in 10 years, Europe's going to regret what?
25:28That's a slightly different question, but I actually don't think Europe will have any regrets
25:36in 10 years from now. It may have so in 30 years, but what Europe has proven over and over
25:41again,
25:42that faced with something that is seem insurmountable, they have always done the unthinkable.
25:49Whether we look at the West Balkans, where we talk about Brexit, we're talking about
25:53the huge migration crisis we had 10 years ago, or COVID, we have always done the unthinkable
26:01when the situation has called for it. But it has always created a second order impact
26:07that has been paid another 20 years later. And that's where we are right now. We need to undo
26:13a lot of bad policy decisions, as well as boardroom decisions that have been taken by European
26:20corporates, and to return into competitiveness. And that's a very different problem than the China
26:27problems. And these two problems can actually coexist and enforce each other. And unless Europe
26:34digs itself, it's out of its trench, we are going to have after the China problem, we're going to have
26:41an India problem, we're going to have Indonesia problem, we're going to have a Latin problem,
26:46there's a long, long queue of countries and economists that wants to have a share of the
26:52world market that wants to try industrialization, and export led growth. And the problem is that
27:02Europe, unlike United States and Japan, and many other OECD countries have basically chosen to remain
27:09doing what it always does, rather than develop its own economy into new things that the emerging markets
27:15countries cannot produce. And that's why we are where we are.
27:18Abe Hosek, well, we'll reconvene around this time in 2036 and see where we are. Hosek Lee Makayama
27:26joining us from Brussels today. Thank you so much for making the time.
27:31And Abe Newman on the line from New York City. Thank you as well.
27:37That is it for us this week on The Dip. Thank you very much for tuning in. And if you
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