Such measures include industry policy measures, import tariffs and other restrictions on foreign trade, strategic holdings, and the creation of dependencies.
The European Union, for example, is set to impose punitive tariffs of up to 38 per cent on electric vehicles imported from China, arguing that the manufacturers have received unfair government subsidies. Beijing hit back at the 27-country bloc by accusing it of trade protectionism and breaches of trade rules.
The US in May raised the tariffs on Chinese-made electric vehicles from 25 to 100 per cent, citing “unfair practices,” to protect domestic manufacturers from cheap imports.
Jyrki Ali-Yrkkö, the director in charge of the research project at Etla, told Helsingin Sanomat last week that the shift from globalisation to geopolitics has shaped presumptions about how the economy works.
“During the era of globalisation, it was believed that everyone plays by the agreed rules. Now the presumption is often that great powers use economic means to promote their own interests,” he stated to the newspaper. “Small countries have no choice but to find the best tools to adapt.”
“Even though Finland as a small country cannot respond to the subsidy competition between large countries, the situation may yet turn in our favour. It is by no means clear that the benefits of subsidies are sufficient in light of their enormous costs,” he added in a press release issued in June.
One key turning point, he estimated, was the import tariffs imposed on Chinese steel and aluminium by US President Donald Trump. Later, Brexit, the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine have all exposed dependencies between countries, vulnerabilities in supply chains and placed emphasis on crisis resilience.
Ali-Yrkkö predicted that the EU will encounter problems in the short term as China and the US invest heavily in building up their research and manufacturing capabilities in order to gain an advantage in critical future technologies. The key for the bloc is to remain united and prevent the underlying national interests from leading into a subsidy competition.
“If the EU engages in industrial policy or subsidy policy, the competition shouldn’t take place within the EU,” he stressed to Helsingin Sanomat.
Internal competition, he warned, would lead to ineffective production and undermine the union’s standing in external markets. Smaller member states would be unable to compete with government subsidies, meaning they have a particular interest in fostering unity.
“We have to call attention within the EU that if EU countries compete against each other with business subsidies, everyone will suffer,” said Ali-Yrkkö.
“We have to try to draw attention within the EU that if each EU country competes against each other with business subsidies, everyone will suffer,” he said. “Even though speeches often point to unity, also EU countries think about their own interests.”
As the 27-country bloc remains one of the largest marketplaces in the world, it should remain attractive to countries including China and the US.
“If investments in the EU were allocated between member states based on market logic rather than subsidies, it would create the preconditions to succeed also in global competition. At the same time, the union should actively build co-operation with other allies,” he argued in the press release.
The Finnish government is expected to unveil its industrial policy strategy in the autumn. Etla stated last week that the country should ask three questions when weighing up any policy measure: If the industrial policy measure is the solution, what is the problem? Why cannot the problem be solved through private markets? If the problem can be solved with several policy measures, what would yield the best outcome?
“Because small countries have limited resources, the most important thing for them is that the resources go to areas where the likelihood of success is the highest,” Ali-Yrkkö said to Helsingin Sanomat.
He also stressed that business subsidies should be targeted not at preserving old industrial structures, but rather at industrial renewal. Also the permit processes associated with investments should be rationalised in Finland.
The report was produced as part of the government’s analysis, assessment and research activities.
Aleksi Teivainen – HT
