THE world’s most ambitious free-trade area is colliding with a surge in economic nationalism.
Unfettered trade is the law of the land across the 28-country European Union, and Emmanuel Macron won the French presidency in May on a campaign of more European unity, not less, proudly posing with the EU’s blue and gold flag.
In July, though, Mr. Macron nationalized a French shipyard to block its takeover by Italian company Fincantieri SpA, citing what he called “national interest.” The takeover went ahead three months later, after Mr. Macron secured unusual guarantees for the French state. He supports limiting employment from lower-paying countries such as Poland and Romania. A French food-labeling rule co-written by Mr. Macron when he was economy minister has gutted dairy imports from Belgium, Sweden and Germany. All six countries are members of the EU.
Italy outlawed the much-coveted words “Made in Italy” from any food products that contain imported ingredients. That means Baci hazelnut-filled chocolates, first made in 1922 in the Italian city of Perugia, can’t be labeled as Italian because their cocoa comes from Africa. Across the rest of Europe, Baci are still marketed as “the true Italian chocolates.”
These new barriers are overturning a generation of moves toward trade liberalization—and driving countries further away from a well-functioning common market. Trade hurdles increase the cost of existing and potential new businesses, disrupt cross-border supply chains and discourage multinational investments.
“Sometimes, the local measures taken for naive reasons create lots of unintended consequences,” says Marco Settembri, the chief executive of Nestlé SA in Europe, the Middle East and North Africa (Nestlé makes Baci). He worries that political leaders take the single market for granted.
Europe’s single market is one of the most significant postwar economic achievements, and it celebrates its 25th anniversary in January. It began one year before the North American Free Trade Agreement, which President Donald Trump is attempting to renegotiate. Products, services, labor and capital freely move across Europe, which, with more than 500 million consumers, would be the world’s largest economy by output and demand.
In practice, implementation in each of these areas has varied widely, with goods—until recently—moving mostly freely and services less so.
Many economists say standardization fostered by the EU has lowered costs for producers and consumers alike. Labor unions and small businesses counter that it bestows overwhelming advantages on corporate behemoths.
The EU rode out a string of recent crises more resiliently than even optimists had predicted a year ago. A debt crisis, a wave of migrants, the U.K.’s decision to quit the bloc and the popularity of anti-EU politicians have only dented the EU so far, while stiffening the resolve of many EU supporters.
In many ways, though, the single market remains a work in progress, partly because national regulations vary from country to country. Not all EU rules are translated into national laws, some rules can be interpreted differently and the EU’s single-market rules are enforced less strictly than its competition rules.
That is one explanation for the new proliferating trade barriers. Last year, the European Commission, the EU’s executive arm, launched more than three times as many legal actions against alleged violations of single-market rules compared with 2015.
While there have been fewer cases this year, “protectionist sentiment is on the rise almost everywhere,” says Frits Bolkestein, a Dutch politician who was the EU’s single-market commissioner from 1999 to 2004. His last project while in office was adopting EU rules that allow cross-border takeovers. France objected, but the rules went through anyway.
Mr. Macron sidestepped the very same rules to block the shipyard deal in July. In September, the French government agreed to the sale of effective control in the shipyard but can undo the deal if Fincantieri fails to fulfill commitments on jobs, governance and intellectual property.
The French president and other political leaders say they are responding to voter concerns that free trade is jeopardizing domestic industries and jobs. Those concerns are increasingly exploited by populist politicians in Europe proposing even more drastic forms of economic nationalism. Mr. Macron’s rival for the French presidency, Marine Le Pen, advocated rolling back much of the EU’s integration and said she would bring back the franc if elected.
Resurgent parochialism could gain even more momentum with the looming departure of the U.K., long one of the EU’s strongest single-market proponents.
Many multinational companies that thrived selling standardized products across dozens of countries are now worried, partly because they are now competing with voters, unions and other groups that complain their home countries ceded too much autonomy to Brussels.
The EU’s single market is “one of the world’s largest and most attractive markets,” says Susan Danger, chairwoman of AmCham EU, a trade group representing American business in Europe. AmCham is lobbying European institutions to be more forceful against the rising barriers.
Francesco Tramontin, the European public affairs director at Mondelez International Inc., the maker of Oreo cookies and Trident gum, says “the trend is most worrying if this spirals into a more and more fragmented approach.”
So far, Mondelez hasn’t suffered a painful financial hit because it is large enough to absorb the extra bureaucratic costs and tinker with its businesses and supply chain.
The creation of the single market in 1993 lifted restrictions and initiated the harmonization of rules and standards for cars, chocolate bars and other products.
Even though many Europeans groused about EU rules that seemed arbitrary, commerce and air travel mushroomed. Intra-EU trade climbed to about 20% of the region’s gross domestic product in 2008 from 14% in 1995, according to data from Eurostat, the EU’s statistical agency.
The financial crisis that erupted in 2008 caused a drop in trade between EU countries, with little rebound since then beyond precrisis levels. As Europe’s economic swoon dragged on, many politicians strove to prop up their own countries with fixes that prioritized domestic markets over the EU. Those forces have persisted even though the eurozone is closing in on its fastest annual economic growth rate in a decade.
Further economic integration within the EU could add more than a half percentage point to GDP, creating 1.3 million jobs, estimates AmCham EU. Given the current mood, that may not be likely. The potential impact is hard to quantify, but the World Bank estimates that Brexit could decrease U.K. commerce with the region by more than 12%.
The food-labeling requirements Mr. Macron co-wrote were meant to help French milk and meat producers, core constituencies of Ms. Le Pen’s far-right National Front party. The law, which took effect in January, requires meat and dairy products sold in France to identify the country of origin, rearing and processing. Failure to comply can result in fines of as much as €1,500 ($1,760).
European Commission experts from two departments reviewed the law and warned of a domino effect that would damage the single market. Nevertheless, the EU’s executive branch allowed the requirements to go through because the changes are supposed to last for just two years. A senior EU official says fears of a victory by Ms. Le Pen also factored into some commission decisions at the time, including this one. Since then, other EU countries have adopted similar labeling requirements.
Anca Paduraru, a European Commission spokeswoman, says it has requested reports about the impact of the new labeling rules, and will “monitor the situation and could intervene if necessary.” She wouldn’t comment whether Ms. Le Pen influenced the commission’s decision.
Belgian packaged-milk exports to France fell 24% in the first half of 2017 from the same period last year, the most recently available data. As of the end of September, also the most recent data, Swedish dairy exports to France were down 25% from 2016.
“It sets us back 25 years, before the creation of the single market,” says Renaat Debergh, president of the Belgian Milk Federation, a trade group.
Nestlé’s Mr. Settembri, a 30-year company veteran, calls Italy’s copycat crackdown a step backward from the integration that has helped the entire continent “eliminate huge inefficiencies and waste.”
As the EU expanded eastward, opportunities opened up for companies in former communist countries. Hungarian paprika maker Rubin Paprika started in the town of Szeged as a domestic producer after the fall of communism. Last year, its sales hit $5.2 million, mainly from exports around the EU.
“Before Hungary joined the single market, our staff had to go to Budapest and collect different stamps from different offices for each delivery,” says Tamas Biacsi, the company’s export manager. “Now it’s much easier [because] I can arrange everything from my desk.”
The opening of poorer Eastern markets to Western competitors also meant that new, local firms often were no match for multinational companies. As a result, the welcome that many Western companies got from consumers immediately after communism ended has worn thin. Local politicians now want to protect homegrown businesses, even at the expense of the single market.
In February, the European Commission took legal action against Hungary and Romania for ordering retailers that operate in those countries to buy more food and agriculture products domestically. In June, the commission ordered Poland to scrap a retail-sales tax that the EU said discriminates against large chains, mostly foreign. Poland defied the order.
Former Polish Prime Minister Beata Szydlo, who stepped down earlier in December, has accused the EU of “interfering in domestic matters.”
Renata Juszkiewicz, president of the Polish Chamber of Trade and Distribution, says the retail-sales tax and other moves, are “worsening the investment climate” and causing “a kind of spillover effect of populism and protectionism in the region.”
Ms. Szydlo and her successor, Mateusz Morawiecki, who until December was the country’s finance minister, have accused Mr. Macron of double standards in trying to restrict the access of cheap workers on the French market while insisting that Poland should comply with EU rules. The consequences have been especially bruising in the trucking industry.
Grzegorz Banaszek, logistics manager at Polish transport company Arrowsped, says it has become almost impossible in the past two years for small trucking firms to navigate the bureaucracy of making deliveries in France.
All paperwork, including a driver’s employment contract, must be translated into French. Austria and Germany have adopted similar rules. The European Commission has challenged the restrictions, but Mr. Banaszek has seen little improvement. Arrowsped now focuses on Nordic countries instead.
“It was a big wow to join the EU, and there were hopes it will get better, but this is a big disappointment,” he says. Western companies “use us to sell their goods in Poland, but otherwise they don’t want to give us their market.”
In the plumbing industry, the single market offered the potential for any faucet approved in one EU country to be sold throughout the region. Increasingly, though, manufacturers are struggling with country-by-country requirements.
“In the old days, we had a common understanding of what is needed, and we were able to sell nearly all over the world,” says Ole Sander, chief executive of Denmark’s FM Mattsson Mora Group AB. “But countries have gotten more protective of their own rules, and now you can no longer sell if you don’t comply with local standards.”
In April, Germany required plumbing products to contain only alloys authorized by the German government. The change ended years of mutual recognition of approvals by Nordic countries and Germany.
It costs as much as €70,000 to test each product for the German market. “When you have 300 to 400 products, it gets very costly,” Mr. Sander says. Separate restrictions in other EU countries mean that some products are authorized in certain geographic markets but banned in others.
Ingrid Chorus, a spokeswoman for the German environment ministry, says Germany, France, the U.K. and the Netherlands are trying to unify standards for drinking-water plumbing, since the EU has failed to.
“The Scandinavians are welcome to join,” she says. “If the commission can’t bring it together, then countries have to act alone.”
European Commission President Jean-Claude Juncker has shown little interest in trying to halt the rise of economic nationalism through harmonized standards and specific rules. He has repeatedly vowed to be “big on big things” such as Brexit, “and small on small things,” such as faucet standards. Since taking office in 2014, Mr. Juncker’s team has made fewer than 25 legislative proposals a year, compared with more than 100 under previous presidents.
Mondelez is trying to persuade the European Commission to propose common nutrition labeling, since some countries have begun developing their own requirements. The company had opposed such labels but now thinks one common system would be better than 28.
“Sometimes, it feels like we are promoting the single market more than they are,” says Mr. Tramontin, Mondelez’s European public affairs director. - WSJ
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