Terms of Trade: Has Europe gone from ‘end of history’ to end of the road?

The most vocal proponents of this rhetoric will perhaps see such a resolution as the proverbial antichrist moment for the so-called ‘end of history’ project which declared the victory of liberal democracy over totalitarian communism. The more level headed ones will perhaps describe it as yet another broken promise by Europe to avoid going belly up from the financial costs of supporting Ukraine in the ongoing war. For context, the phrase broken promises is borrowed from the excellent book called The Triumph of Broken Promises: The End of the Cold War and the Rise of Neoliberalism by Fritz Bartel. The problem, this time, however, is that reneging on this promise to Ukraine, unlike the broken promise of the welfare state during the Cold War, might not be enough to save Europe from its current troubles.

This is where the second crisis becomes important. Europe’s fast-eroding economic competitiveness. This was best captured in a piece published this week by the Financial Times’s Asia editor Robin Harding. It was provocatively titled ‘China is making trade impossible’. Harding’s take has gone almost viral and generated a lot of debate. While China’s growing export prowess and the challenges it has created for the rest of the world are well known, Harding’s analysis suffers from a fundamental logical flaw. It is known as the fallacy of secundum quid in logic. Simply speaking, it means that you have taken something which is true in a qualified or specific sense and are treating it as true in an absolute or universal sense. This is worth engaging with in a little bit of detail.

The strap in Harding’s article makes a valid point. “Europe has nothing to offer (to China) and difficult decisions to make”. But a lot of the article goes on to generalise the argument: “So what is the product, in the future, that China would like to buy from the rest of the world…It is a train of thought that gives away the real answer to the question. Which is: nothing”.

Such an argument falls flat as soon as one looks at data. China is the second largest importer in the world. It imported goods worth $2.6 trillion in 2024, second only to the US which imported goods worth $3.6 trillion. For context all of the EU put together had imports of $2.4 trillion from outside the block. China’s exports and imports have been rising consistently over time. The fact that China does not need to import anything from Europe – we are talking BMWs and Louis Vuittons here – does not mean it has embraced blatant mercantilism which is what Harding’s piece seems to suggest in places. What China has done very smartly is avoid the fate the famous Prebisch-Singer hypothesis in economics predicts for developing countries – if you export only primary commodities, your terms of trade are bound to decline. China now buys primary products from the rest of the world and exports industrialized goods to both the developing and the developed world. Sure, there are significant problems in the way in which China has achieved and is maintaining this prowess but that’s an issue for another column.What Europe needs to figure out, and here Harding is bang on, is where does it go from here. It does not have the geopolitical muscle like the US to put tariffs on Chinese goods. This is where Europe needs to ask itself tough questions.

Did it commit a fundamental mistake in drinking the kool-aid of ‘end of history’ and we will live happily ever after in a liberal democracy? While the elite in the advanced capitalist countries were occupied with debates about ‘they/them’ (read woke debates detached from material challenges) the Chinese figured out all the ‘its/these’ (economic prowess). The Chinese advance owes a great deal to capitalists from the western countries relocating production (and leaking technology) to China to maximise profits. Europe is today left with a situation where most of its major economies are having to choose between sustaining the welfare state (and political legitimacy) and the fiscal health of their economies. Such juggling is leading to strengthening of politicians which are not necessarily going to make things better but are thriving because they are at least telling the truth that the status quo isn’t working for the vast majority.Politics, in a way, has become an exercise in truth telling but not necessarily pareto efficient. Does this mean it is the end of the road for Europe? History never ends. But shaping it requires logical clarity and conviction.