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  1. The Weekend Essay
2 December 2023

The case for an Atlantic Union

In a world of great-power rivalry, Europe and America need each other.

By Michael Lind

“There are increasing signs that the global economy is fragmenting into competing blocs,” Christine Lagarde, president of the European Central Bank, observed in a speech on 17 November. For a generation after the end of the Cold War, elites on both sides of the Atlantic took for granted a world without great-power rivalries in which the unchallenged US would export security to Europe and other regions and import their manufactured goods in return. The rise of China, however, has brought the return of great-power conflict and created a world with two military poles – China and the US – and three economic ones – China, the US and the EU.

In 2022 the populations of the US, the EU and China were 338 million, 448 million and 1.4 billion, respectively. According to the European Central Bank, their shares of global GDP, measured using purchasing power parity (PPP), were 15.5 per cent (US), 12 per cent (EU), and 18.5 per cent (China). In 2017, PricewaterhouseCoopers estimated that by 2050 in terms of its global share of GDP (PPP), the US at 12 per cent would fall to number three below China at 20 per cent and India at 15 per cent, with the EU-27 in fourth place at 9 per cent.

All such projections are guesswork, of course. And for decades to come, if not longer, per capita GDP is likely to be higher in Europe and America than China and India. On the other hand, as the French economist Jacques Sapir has argued, conventional GDP calculations understate the actual strength of the Chinese and Russian economies, in which manufacturing and mining play a greater role than in the US and Europe.

In any event, the regimes of Xi Jinping and Narendra Modi and Vladimir Putin have discredited the naive delusion that the two most populous countries on Earth and geographically the largest would be unable to resist a supposed global trend towards democratisation and market liberalisation. And the proxy war in Ukraine – which is, among other things, a war of industrial attrition between the Nato powers and Russia and its enabler China – serves as a reminder that military power and diplomatic influence are inseparable from manufacturing capability.

Now that a de facto Sino-Russian bloc is engaged in the Second Cold War with the US and its Nato allies in Europe and elsewhere, and now that China has a “Made in China 2025” import substitution strategy (while India has a similar “Make in India” initiative), the realpolitik case for deeper transatlantic collaboration in the interest of pooled security and the defence of European and American market shares in a multipolar world must be taken seriously.

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In 2009, the former French prime minister Édouard Balladur, in his book For a Union of the West between Europe and the United States, called for the US and EU to combine their economic and military resources so they could compete with rising giants like China and India. Balladur’s proposed design, centred on a US-EU council, found few supporters on either side of the Atlantic. And an “Atlantic Union” modelled on the EU with its own flag, parliament, court and currency would be as absurd as it would be unpopular. Nevertheless, a case can be made for a set of common transatlantic institutions and policies with the limited mission of promoting strategic sectors of combined military and commercial importance to the US and its European allies – in other words, a common Atlantic industrial policy.

Only a decade ago the term “industrial policy” was taboo for policymakers on both sides of the Atlantic. But the separation of trade and state has been the exception in history, not the rule. Most polities, from ancient Greek city-states to early modern European mercantilist empires to 19th-century Germany and the US and contemporary China, have sought to minimise the threat of dependence on potentially hostile foreign powers by using military, political or commercial methods to enlarge consumer markets, promote their own strategic manufacturing capabilities, and secure reliable sources of supply. Universal free trade tends to be espoused only by two kinds of states. One consists of small countries that fear being locked out of foreign markets. Free trade was also taken up as a cause by countries such as the UK in the 19th century, the US in the 20th century, and China in the 21st century, which hope that global free trade will permanently lock in their temporary leadership in manufacturing, by preventing other countries from using protectionism and industrial policy to catch up. 

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In a world economy divided among rival great powers free-market globalisation is irrelevant, and it is imperative for great powers to become “independent on foreign nations for military and other essential supplies”, in the words of Alexander Hamilton in his Report on Manufactures (1791). Industrial policy today may need to be made at the level of the military-economic bloc rather than the individual nation. The American economist Robert D Atkinson, among others, has called for a “Nato for trade”.

Another analogy might be the European Coal and Steel Community (ECSC) that was founded in 1952, the precursor to the European Economic Community and its successor, the European Union. To be sure, the ECSC was viewed by its founders as a stepping stone to ever-greater European integration, culminating in the EU with its single market, common currency, European Parliament and European Court of Justice. In contrast, to discourage paranoid populist claims that a transatlantic industrial policy system would be the precursor to a tyrannical Atlantic superstate or “the new world order”, common policies should be limited to a small number of sectors of both military and commercial importance. To further minimise the power of transnational technocracy, the agencies that implement a shared Atlantic industrial policy should be limited in their discretion and subordinate to the supervision of democratically accountable national governments, directly or through the EU.

The purpose of an Atlantic industrial community would be geopolitical and geo-economic, not cultural. To avoid false accusations that a common industrial policy represents Euro-American neocolonialism or white supremacy, the geographic term “Atlantic” should be preferred to “Western”, which in some versions has religious and racial overtones.

The Biden administration, together with the European Commission and the European Council, has already established a US-EU Trade and Technology Council (TTC). But a similar Transatlantic Economic Council (TEC) has existed since 2007. Less talk and more action are needed. A limited but robust Atlantic industrial community might include some or all of the following institutions:

A customs union in strategic sectors. Most discussions of industrial policy are incomplete because they focus solely on supply-side objects such as subsidies, tariffs, procurement, research and development (R&D), and skills training, while ignoring demand-side policies. The most important demand-side industrial policy is the creation of the largest possible market for the products of firms and industries that a country or bloc wants to sell. But industrial performance is often correlated with market size. Manufacturing industries tend to enjoy increasing returns to scale, meaning that the costs of production go down as output goes up. In a virtuous circle, the larger the market becomes, the bigger and more productive successful manufacturing firms can be. As Mae West observed, “Too much of a good thing is wonderful.”

What economists call the “home market effect” refers to the phenomenon that countries with successful firms in industries for which there is a large local demand tend to dominate the same industries in global markets. This explains why lists of leading global corporations are dominated by American and Chinese firms, and why Japanese and German firms, from some of the most populous democratic-capitalist nations, also are over-represented among successful multinationals. In competing with countries like China and India perhaps later, which have billion-plus populations, in certain strategic sectors, the US and EU along with the countries of the Anglosphere could benefit from the scale economies possible in a shared home market of nearly a billion consumers.

An Atlantic industrial community should take the form of a customs union – not a free-trade area alone, but a free-trade area with common external tariffs, like the contemporary EU and its predecessor, the European Economic Community, beginning in 1968. A free-trade area without common tariffs is too vulnerable to commercial arbitrage, with components or products made outside of the area making their way inside.

As an alternative to cross-border trade, firms based in countries outside of the customs union would have an incentive to jump over tariffs by creating “transplant” factories inside the economic bloc, hiring local workers, relying on suppliers within the customs union, and obeying national security, labour and environmental laws. In a future great-power détente, Chinese and Indian transplants might be as welcome in North America and Europe as the facilities of German, Japanese and Korean carmakers are welcome in the US today, with reciprocal arrangements for American and European transplants.

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In the case of the proposed Atlantic industrial community, the common external tariffs shared by the US, the EU and perhaps the Anglosphere nations should be few in number and limited to strategic sectors – steel and aerospace and cars and drones and robots and batteries, among others. When possible, strategic import-substitution policies should also encourage the local sourcing and processing of critical raw materials needed for a high degree of strategic self-sufficiency, including chemical drug precursors, rare earth elements, and oil and gas.

Members of the new Atlantic bloc would be free to liberalise or protect non-strategic sectors – such as cheese and wine-makers, local retailers – as national governments and the EU already see fit. Immigration policies, too, should be national. An Atlantic customs union should be an end point, not the path to a single market with free labour mobility, much less a currency union.

A common investment oversight and sanctions policy. The Atlantic industrial community might also benefit from a transatlantic institution that coordinates the review by national security agencies of both inward and outward investment, such as the Committee on Foreign Investment in the United States, as well as to oversee export controls and sanctions. The agency would complement, not replace, existing national and EU institutions.

Specialised public development banks. Public development banks, like the European Investment Bank and the US Export-Import Bank can support national or bloc industrial policy by means of targeted lending, as an alternative to the promotion of strategic industries through controversial direct appropriations or scattershot tax breaks.

Like long-term investments in infrastructure, investment in long-lasting assets such as factories in strategic industries should be financed by borrowing money that is repaid to creditors over many years, rather than funded up front out of existing taxation. In addition to issuing bonds for infrastructure development and school construction, state and local governments in the US can issue industrial revenue bonds to help private-sector businesses like manufacturing firms as part of economic development programmes. Specialised public development banks that can issue debt instruments, and are explicitly or implicitly backed by governments, can “crowd in” large amounts of money for local purposes from global investors in search of safe financial assets.

China’s Belt and Road Initiative is financed in part by the China Development Bank, the Export-Import Bank of China, and the Silk Road Fund. A new Atlantic industrial community might create an Atlantic industrial investment bank, an Atlantic infrastructure investment bank, and even an Atlantic R&D bank. Any transatlantic public development banks should be overseen by transnational boards that are answerable to democratic member governments.

Research consortiums. With renewed great-power rivalries, the members of the Atlantic alliance should lead the global competition in science and technological innovation. Consortiums among Atlantic governments, universities and businesses to promote both science and R&D might be established to that end. Technological innovations could be spread to small and big businesses alike through organisations including Germany’s Fraunhofer institutes and the National Network for Manufacturing Innovation in the US.

Anti-trust realism. Anti-trust laws, which stop companies from working together to undermine markets, can be useful, but those that hinder national and bloc-level industrial policies need to be revised. The “small is beautiful” ideology that underpins US anti-trust law and European competition law seeks to create an economy based on high levels of competition among many small producers. But in a modern industrial economy, as the economists Joseph Schumpeter and William Baumol once pointed out, the most important manufacturing and infrastructure markets are imperfect, competition in increasing-returns industries tends to produce market-dominating winners, and dynamic oligopolies that use their market power to fund R&D to create new product lines or to scale up innovations are essential to technological progress.

To compete in the rest of the world for consumers and procurement by businesses and governments with giant, state-backed Chinese corporations, “Atlantic champions” on a scale larger than American and European “national champions” may be needed. State-owned steel industries and the like had a bad record in postwar Europe, so a merger of Airbus and Boeing would probably be a bad idea. Instead, the emphasis of a common Atlantic industrial policy should be on cultivating several firms of sufficient scale that compete with one another in the transatlantic home market and abroad. In strategic industries, Atlantic governments and transnational agencies might even encourage the merger of small, less efficient firms into bigger entities that can reap the benefits of increasing returns to scale or network effects. In the 1920s, John Maynard Keynes argued on these grounds for the rationalisation and consolidation of Britain’s inefficient Lancashire cotton textile industry, which had too many small businesses, not too few.

Managed European and American exchange rates. The replacement of the dollar and the euro and the pound by an “Atlanto” currency is not necessary for transatlantic collaboration in a limited number of strategic industrial sectors. But some degree of coordination among the currencies of an Atlantic bloc’s members would be desirable, to prevent currency fluctuations from wrecking transatlantic supply chains. 

Strategic commodity reserves. Support for buffer stocks for commodities, like America’s Strategic Petroleum Reserve, fell out of favour in the era of neoliberal globalisation. The just-in-time strategy in business discouraged the build-up of large private inventories. Neoclassical economic theory held that shortages of essential raw materials could be prevented by futures markets and by diverse sources of supply in a globalised economy. This complacent conviction ignored the fact that the winner-take-all dynamic of industrial markets characterised by increasing returns to scale tends to concentrate supply chains in fewer and fewer companies and countries. 

Jointly-managed stocks deserve a second look. During military or economic crises, transatlantic strategic commodity reserves could prevent the kind of selfish scramble to hoard scarce resources and products that the Covid-19 pandemic set off among allied nations of Europe and North America.

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Policies in the areas of taxes, labour, the environment and education should remain the responsibility of national governments, or in some cases EU authorities.

Genuine democracy can exist only in nation-states, so the power to use the tax code to shape the economy should not be delegated to supranational institutions. A transnational industrial policy should be promoted by methods including common external tariffs and targeted lending, not by wasteful, indiscriminate and exploitable tax breaks showered on companies and investors of the kind relied upon by the US in its Chips and Science Act and the Inflation Reduction Act.

Any attempt to include common labour provisions in the charters of organisations serving a new Atlantic industrial community would be fatal to its political prospects. However, reshoring essential supply chains from low-wage and anti-union regimes to the US and Europe indirectly would strengthen the bargaining power of organised labour, by reducing opportunities for companies to offshore workers.

While there could be an Atlantic industrial policy overlap between the European Green Deal and the American progressive Green New Deal, these are two distinct enterprises with distinct rationales. The goal of an Atlantic industrial policy is shared military security and global commercial competitiveness, not long-term decarbonisation. The range of strategic industries that need to be reshored or friend-shored is much larger than the narrow set of conventional “green” technologies such as batteries and solar panels and windmill components. Moreover, the importance of North American oil and gas in freeing Europe from dependence on Russia and reducing the dependence of both the US and Europe on the Middle East, along with the importance of cheap electricity in transatlantic manufacturing, mean that a common Atlantic industrial policy must reject the elimination of fossil fuels and nuclear energy as a goal in the near and medium term, whatever the distant future may hold.

Arguments that the climate change “emergency” requires the West to appease both Chinese mercantilism and geopolitical revisionism and import green technology from Chinese factories must be rejected. A gun-metal-coloured Grey New Deal should take priority over a Green New Deal.

Multinational corporations for the most part are lying when they claim that they have transferred industrial production to China because of its skilled labour, rather than to exploit low wages, unfree workers and government aid. Even if that is true in some cases, if Western companies, together with the Chinese government, can train workers in China for jobs in strategic industries that did not even exist a decade or two ago, they can do the same with government aid in Europe and North America as well.

Subsidies for vocational training should go to businesses and trade associations for on-the-job training and apprenticeships, perhaps in partnership with local education institutions. Funding for skills training should not go to students who rely on guesswork about the future job market, or rent-seeking colleges and universities that have an interest in perpetual institutional expansion by turning out more graduates whether their diplomas are useful or not.

In whatever form it may take, a common Atlantic industrial policy should be explicitly limited from the beginning, not only in its scope but also in its membership. 

By law the US Congress has already included Canada, Britain and Australia (though not New Zealand) in America’s National Technology Industrial Base, so the incorporation of these “Anglosphere” countries into an Atlantic industrial community would be logical.

Mexico, however, should be excluded for now. While it has great long-term potential, at present Mexico is a failed state, weakened by corruption and criminal violence fuelled in part by the endless appetite of American consumers for contraband drugs and the demand of American employers for inexpensive and powerless illegal immigrant workers. The corporate transfer of many US car supply chains to this roiling Lebanon on America’s southern border, encouraged by the US government, was as great a folly as the offshoring of other American manufacturing to mercantilist, authoritarian China, America’s major rival.

Why not include Japan, South Korea and Taiwan, turning the Atlantic industrial community into a trilateral industrial community? The accession of America’s East Asian protectorates might be considered in time. But in the short run, the national industrial policies that have enabled Japan and the Little Tigers to succeed may be impediments to their cooperation in a transnational industrial policy. Moreover, these economies are relatively small compared with the US and EU, and the future of Taiwan’s effective independence from China is in doubt. Furthermore, the project of a common industrial policy might die from dilution, if membership came to be seen as the equivalent of the free-trade agreements that the US has handed out as rewards to countries like Panama, Oman or Honduras in the service of various diplomatic goals.

The benefits of an Atlantic industrial community for the US are evident. The economies of the US, Britain and the EU are already deeply integrated. In return for sharing decision-making power in a limited number of strategic industrial sectors, the US could enhance its security through greater “friend-shoring”, even as American firms and suppliers take advantage of increasing returns to scale in a much larger home market.

What of Germany and France? The plates that Germany was juggling as it sought to avoid alienating either the US, China or Russia, by benefiting from America’s military protection, selling goods to China, and relying on Russian natural gas, have fallen and shattered as a result of the Ukraine war and Washington’s pressure on Berlin to pick a side in the Second Cold War. Today, as in the Konrad Adenauer years in the 1950s, Atlanticism is a better option for Germany than neutrality between the blocs.

In the past, French opposition has contributed to the failure of proposals for greater Euro-American economic integration, such as the failed Transatlantic Trade and Investment Partnership and earlier proposals for a transatlantic free-trade area. On a recent trip to China, the French president Emmanuel Macron called for Europe to become a “third pole” in world politics to avoid being “vassals”. But from a French perspective, transatlantic institutions in which Europeans had a voice would surely be less demeaning than the present pattern, in which, under Donald Trump or Joe Biden, the US unilaterally enacts America-only industrial policies and European leaders complain after the fact. Even among French Gaullists there have been Atlanticists, including Balladur and his protégé Nicolas Sarkozy.

Finland, Sweden and the newest members of the EU in central and eastern Europe, like Poland, tend to be pro-Nato and see the US as a defender of their sovereignty rather than a threat to it. Most, if not all, would welcome the chance to join a new Atlantic industrial union.

Post-Brexit Britain might benefit the most from membership in a common Atlantic industrial community. Participation in transatlantic industrial policy institutions would give London a voice in decision-making, and perhaps greater access to strategic markets and technology and investment in the US, the Anglosphere and the EU.

In 1904 the British statesman Leo Amery predicted correctly that “the successful powers will be those who have the greatest industrial base. It will not matter whether they are in the centre of a continent or on an island; those people who have the industrial power and the power of invention and of science will be able to defeat all others.” No one will ever speak of an “Atlantic dream” as inspiring as the American Dream or the dream of European unification. But in a deglobalising world of great-power rivalries, an Atlantic industrial community only needs to inspire pragmatic collaboration to promote “the industrial power and the power of invention and science” to succeed.

[See also: Cheap weapons, new wars]

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