The transatlantic negotiation process will continue because it is the prerequisite to maintain the truce between the EU and the US. But it will be characterised by further foot-dragging and lack of interest on both sides, argues Gabriel Felbermayr.
The EU and the US were close to a spiraling trade war when, on 25 July, US President Donald Trump and European Commission President Jean-Claude Juncker met at the White House and, to the surprise of many, sealed what one may dub the Rose Garden Truce.
The two presidents informed the stunned public about their wish to “work together toward zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods”. They explained that their objective was to boost US exports of soybeans and of liquefied natural gas to the EU, in Trump’s words, “almost immediately” and “massively”. Trump and Juncker agreed to “not go against the spirit of this agreement, unless either party terminates the negotiation”.
The truce has held up for more than six months now – a surprising fact given the frenzy in the first half of 2018, which saw threats and counter-threats, failed negotiations and then imposition of duties on EU steel and aluminium exports on alleged grounds of national security concerns; the EU’s rebalancing tariffs on an array of US goods ranging from peanut butter to motorcycles; Trump’s order to investigate tariffs on cars; and the nasty showdown in La Malbaie, Canada, at the G7 summit.
In the second half of 2018, one could think that Trump had lost interest in the EU. In June, he said the EU was “worse than China” in trade. A month later, he toned down his judgement to “as bad as China, just smaller”. His ranting about the EU has died down. We have not seen any provocative tweets complaining about German cars lately.
Trump administration learns from (some) mistakes
Why? Maybe hard to believe, but it seems that the White House is capable of learning. The most important lesson, for sure, is that the economic cost of an escalating trade war to the US economy – or, more precisely, to US share prices, dear to Trump’s heart – has become quite visible. Moreover, after losing of control of the House of Representatives, it has become hard for him to compensate domestic losers from future trade battles. So, the political fallout of a trade conflict is now much harder to contain.
Second, the EU has shown muscle by retaliating against Trump’s first wave of tariffs. This may have surprised some in the US who had banked on the traditional European slowness and undecidedness. But it has boosted the EU’s credibility. The loss of influence of London in Brussels’ policymaking further strengthens the case for a robust transatlantic trade policy strategy.
Third, the economic relationship between the EU and the US is not at all as unbalanced as Trump might have thought. US data show very clearly that for more than a decade, the country’s current account has been in surplus with the EU. Even stripping out the soon-to-leave UK, US services exports and multinational profits in Europe largely compensate its deficit in goods trade.
Commission has stronger bargaining hand
This strengthens the commission’s hand both in terms of arguments and in terms of bargaining power: Europe’s capacity to cause damage to the US is not smaller than the other way round. Chancellor Angela Merkel’s speech last May at the Global Solutions Summit in Berlin, where she praised the digital sales tax – rightly unloved in Washington – in a speech on multilateralism, made this very clear: if needed, Europe could carry the conflict into the services industry, where corporate America makes the lion’s share of its profits.
Finally, the US and the EU have common concerns about China. Joining forces to wring out concessions from Beijing in areas ranging from intellectual property protection to market access was a part of the Rose Garden communiqué, even if not the most prominent one. But it is now well understood in Washington that a successful strategy works only if China can be isolated.
These arguments continue to hold even if the Section 232 investigation concludes that car imports threaten American national security so that auto tariffs are warranted. With or without a piece of official legalese, this threat is on the table. What has become more obvious since May 2018 is that neither side can have an interest in escalation.
Many lessons learned from TTIP negotiations
It may be surprising that both sides have dragged their feet in empowering their trade executives to engage in formal negotiations. But the lack of speed is probably due to another lesson learned the hard way – namely, in the Transatlantic Trade and Investment Partnership process from 2013 to 2016. The many quantitative studies on TTIP have shown very clearly that the bulk of economic gains from any transatlantic trade deal must come from tackling non-tariff barriers, in particular in the areas of agri-food, services and public procurement.
In any case, any meaningful agreement with broad coverage would require massive investment of political capital on both sides. At a time when the popularity of the US in European public opinion is at rock bottom and where the trust in trade policy to achieve improvements for citizens is low everywhere, a deep deal is hard to imagine.
Foot-dragging, disinterest to persist
Tariffs, in contrast, despite the existence of spikes and the issue of double taxation when goods cross the Atlantic more than once, are almost irrelevant for macroeconomic outcomes but cause substantial redistribution. Moreover, it is easy to see that a trade accord covering industrial goods only would primarily benefit those European countries with competitive manufacturing sectors (such as Germany) rather than EU members with large services sectors and, of course, the US. It is even possible that such an agreement drives up the US trade deficit in goods with the EU – a problem for Trump.
So, this makes even a TTIP-light approach unattractive. As a consequence of all this, one can expect that the negotiation process will continue, simply because it is the prerequisite to maintain the truce. But it will be characterised by further foot-dragging and lack of interest on both sides.
Having said this, there might be opportunities for small-scale, low-profile agreements in regulatory affairs that face little intra-national opposition but carry substantial potential benefits for business. Expect a series of boring mutual recognition agreements, not a “big deal” worthy of this name.
Gabriel Felbermayr (@GFelbermayr) is director of the ifo Center for International Economics
Opinion pieces published by Borderlex are those of their authors only.