German chancellor Angela Merkel wants to stand tough against Russia, but Austria, France, Italy, Hungary, Greece, and Portugal have had enough of sanctions that have backfired.

Talking tough may be Merkel’s official stance but circumstances have changed. She is no longer calling all the shots.

Step-by-Step Rapprochement

Please consider Step-by-Step Rapprochement: Germany Considers Easing of Russia Sanctions.

As expected, G-7 leaders reiterated their hardline approach to Moscow in the Japan summit’s closing statement. Chancellor Angela Merkel complained last Thursday that there still isn’t a stable cease-fire in Ukraine and the law pertaining to local elections in eastern Ukraine, as called for by the Minsk Protocol, still hasn’t been passed. That, she said, is why “it is not to be expected” that the West will change its approach to Russia.

What Merkel didn’t say, though, is that behind the scenes, her government has long since developed concrete plans for a step-by-step easing of the sanctions against Russia and that the process could begin as early as this year.

Two weeks ago, German Foreign Minister Frank-Walter Steinmeier warned that, with Brussels set to vote on an extension of the penalties soon, resistance to doing so is growing within Europe. It is becoming more difficult, he said, to arrive at a uniform EU position on the issue, which is necessary since the sanctions extension must be passed unanimously. The German line is that Putin must not be given the impression that he can divide the EU.

In Brussels, the European Council, the powerful body representing the leaders of the 28 EU member states, and the European Commission, the EU executive, are staying firm officially: Only after the Minsk Protocol has been 100 percent fulfilled can sanctions be lifted. That is the approach passed unanimously last year and extended for six months last December.

But more and more EU member states have begun questioning the strict penalty regime, particularly given that it hasn’t always been the Russians who have blocked the Minsk process. Despite Tusk’s apparent optimism, indications are mounting that getting all 28 EU members to approve the extension of the sanctions at the end of June might not be quite so simple.

Members of some governments, though, have very clearly indicated that they are not interested in extending the sanctions in their current stringent form. Austrian Vice Chancellor Reinhold Mitterlehner is among the skeptics as is French Economics Minister Emmanuel Macron. So too are officials from Italy, Spain, Greece and Portugal.

Hungary has been particularly outspoken. Hungarian Foreign Minister Peter Szijjarto said last Wednesday following a meeting with his Russian counterpart Sergey Lavrov in Budapest that his country would not accept an automatic extension of the sanctions regime. Hungarian exports to Russia have collapsed as a result of the penalties, a problem experienced by the Czech Republic and other Eastern European countries as well.

Italian Prime Minister Matteo Renzi is another EU leader who has long been critical of the EU’s approach to Russia. Renzi is bothered by the fact that his country has suffered economic losses as a result of the sanctions while Germany has continued working together with Russia on the Nordstream Pipeline across the Baltic Sea. Italy, the EU’s third largest economy, is one of Russia’s largest trading partners in Europe.

The mood is changing in France as well. At the end of April, the French parliament adopted a non-binding resolution calling for the end of the penalties imposed on Moscow. One of the reasons cited was that French farmers are suffering the consequences. Sanctions critics also argue that Moscow is a necessary partner when it comes to pacifying Syria and that constantly keeping Russia at arm’s length is counterproductive.

The Netherlands, which currently holds the rotating EU presidency, is in a difficult situation. In an April referendum, the Dutch voted against the planned European Union association agreement with Ukraine. The issue wasn’t directly related to the issue of Russian sanctions, but some have interpreted it as a pro-Russian vote. Since then, the Dutch government has been acting extremely carefully.

It is certain, however, that Berlin’s plans will not be particularly well received on the other side of the Atlantic. “The sanctions against Russia should only be lifted once the Protocol is comprehensively implemented,” says US Ambassador to Germany John B. Emerson. “A modification would not send a strong message. It could become a dangerous precedent.”

Sanctions Backfired

The idiotic sanctions hurt the EU as much if not more than they hurt Russia. Putin’s popularity rose following the sanctions.

Tariffs and sanctions are heads and tails on on a coin that is a lose-lose proposition the moment it is flipped. In contrast, free trade is always good.

Merkel may or may not be ready to kiss and make up with Putin,  but events are going to force that outcome.

Stunning Idiocy of Steel Tariffs

Yesterday, Pater Tenebrarum at the Acting Man Blog wrote an exceptional post on the Stunning Idiocy of Steel Tariffs. Here are a few snips.

The Return of “Just Prices”

It seems glaringly obvious that in Western countries, the industries benefiting from low steel prices are far larger and far more important than the steel industry. And it should go without saying that anything that benefits consumers should be enthusiastically welcomed. In fact, the benefit to consumers should be the only standard by which such situations should be judged.

Moreover, lower steel prices are an important signal to the marketplace – they tell entrepreneurs that investments need to be shifted. There is no point in tying up factors of production in steel factories – it will be far better if they are deployed elsewhere.

All of this makes it utterly absurd that the EU, the US and China have begun slapping each other with massive tariffs on steel imports over the past several months.

The assertion that steel is “dumped below its fair value” requires us to accept the ludicrous idea that a bunch of bureaucrats actually knows what the “fair value” of steel is supposed to be.

In case you were wondering how the International Trade Commission of the department of commerce determines whether dumping takes place, here is the official definition of “unfair” prices (get out those prayer beads, ye unbelievers, as we familiarize you with official doctrine!):

“Dumping occurs when imported merchandise is sold in, or for export to, the United States at less than the normal value of the merchandise.”

Even if allegations that China’s government is subsidizing its steelmakers are true (i.e., to be precise, if it is true that it is subsidizing them more than other governments are subsidizing theirs), it seems to us that the party that would be hurt the most by said dumping activity would be the dumpers themselves. We should happily let them proceed, in fact, they should be encouraged! The dumpers are evidently subsidizing US consumers and helping to raise their living standards. What’s not to like?

Coalition of Obsolete Industries

Obviously though, the governments involved in this trade spat are only acting in the best interests of steel workers. Just as they are only acting in the best interests of taxi drivers when regulating Uber out of existence in a city. Why, we should actually consider bringing back VHS video while we’re at it. Someone must have made those tape machines and tapes, and obviously they’re all out of a job as well.

We have remarked on previous occasions that stopping and reversing economic progress seems to be a major function of governments – and as the makers of the video below rightly ask: How are we ever going to have jobs if we don’t stop progress? Naturally, the same applies to free trade.

Conclusion

If Western steelmakers are not able to compete with Asian ones at current steel prices, then jacking import prices up by 200% may temporarily help to keep them in business, but they will no longer have an incentive to become more efficient. In the long run, they will simply be set up for an even bigger fall. The may enjoy an advantage for a brief time, but it isn’t going to last.

Since the amount of capital is finite, tying up capital and labor in an inefficient sector of the economy perforce deprives other sectors of these resources. Here one can interweave our example of the consumer who considers whether or not to buy a car, and finds to his delight that it is offered at a 30% discount one day. The money he saves will now be available for other uses.

In other words, not only is our hypothetical consumer’s living standard raised immediately, but the funds he saves will also benefit others. Whether he saves the money or spends it on other consumer goods, more economic opportunity will ensue. The important thing is that it is the consumer making the allocation decision. Ultimately the economy’s production structure is supposed to serve consumers after all – not government bureaucrats and cronies.

Fair Trade vs. Free Trade

If China wanted to give steel, glass, and copper away for free, we should gladly accept the offer. The price of a car would plunge as would the price of anything with those components. And if the EU and Japan were stupid enough to impose “dumping” tariffs, US car manufacturers would have a tremendous competitive advantage.

I wrote about free trade yesterday as well, in Stacked Deck: US Bullies WTO, TPP Revisited.

Fair trade and free trade are one and the same. Protectionists attempt to persuade you otherwise for their own vested interests.

Mike “Mish” Shedlock