1. Introduction: Recent Episodes in Transatlantic Economic Relations
Since the election of President Trump in 2016 and the adoption of his ‘America First’ trade policy, the transatlantic trade relationship has been experiencing turbulent times. Although the trade and investment links between the US and the EU are deep and extensive, the imposition of US tariffs – and retaliatory tariffs by the EU – threatens to diminish economic prospects on both sides of the Atlantic, damages transatlantic political ties, and undermines the rules-based international trading system. But since July 2018 there have also been some positive signs that could mark an important turning point. If a new phase in the bilateral trade relationship can be launched, this could potentially lead to a deeper integration of the transatlantic marketplace, recement the US–EU relationship, and help address the shortcomings of the architecture and rules of global trading. As the US and the EU decide which way to move their trade relationship forward, the stakes are high for both sides, and indeed for the rest of the world.
The US and the EU remain each other’s largest trade and investment partners, notwithstanding the rise of China, and together represent the largest bilateral economic relationship in the world.1 Trade in goods and services (exports plus imports) between the US and the EU surpassed $1.1 trillion in 2017.2 Investment ties are even more substantial, with US foreign direct investment (FDI) in the EU totalling $3.2 trillion and outflows of FDI from the EU to the US standing at $2.3 trillion in 2016.3 Total US investment in the EU is three times higher than in Asia.4 The US and EU economies together account for approximately half of global GDP, and for nearly a third of world trade flows.5
The US and the EU remain each other’s largest trade and investment partners, notwithstanding the rise of China, and together represent the largest bilateral economic relationship in the world.
Given the scale and level of integration of the transatlantic economy, there has been continued interest in formalizing the framework that underpins the US–EU economic relationship. The Transatlantic Economic Council was set up in 2007 in order to guide efforts to strengthen economic ties between the US and the EU. Negotiations for the Transatlantic Trade and Investment Partnership (TTIP) were formally launched in 2013. However, following 15 rounds of negotiations, the talks were suspended at the end of 2016. This was in part due to the change of administration in the US. However, TTIP was in trouble even before the election of Donald Trump, with negotiations having stalled over contentious issues such as agriculture, public procurement and investment protection. Growing public concern over TTIP – especially, on the European side, worries about investment protection provisions and fears of a potential lowering of health and environmental safety standards – also played a major part in the negotiations being put on hold.
Neither the US nor the EU has officially withdrawn from the TTIP negotiations. Whereas the EU Trade Commissioner considers the negotiations to be ‘in the freezer’,6 the Trump administration has declared that the talks remain under consideration.7 All the same, while the economic and strategic arguments for deepening the transatlantic trade and investment relationship remain strong, TTIP is unlikely to be revived in the current environment.8 Under the Trump administration, trade and economic relations between the US and the EU are experiencing friction.
A major area of transatlantic trade tension is steel and aluminium tariffs (imposed by the US on imports at rates of 25 per cent and 10 per cent respectively), which the Trump administration introduced in March 2018 under Section 232 of the Trade Expansion Act of 1962, citing US national security concerns. The EU received a temporary exemption, and tariffs came into force on 1 June 2018.
The EU regards the US steel and aluminium tariffs as unjustified and inconsistent with the rules of the World Trade Organization.
The EU regards the US steel and aluminium tariffs as unjustified and inconsistent with the rules of the World Trade Organization (WTO). In response to the US’s action, the EU has taken three measures: launching legal proceedings against the US at the WTO; applying retaliatory tariffs on US products (including on iconic and politically sensitive products such as Harley-Davidson motorcycles and bourbon whiskey, respectively produced in Wisconsin and Kentucky, the home states of former Speaker of the House of Representatives Paul Ryan and of Senate Majority Leader Mitch McConnell); and opening a safeguard investigation into potential damage stemming from additional imports coming into the EU as a result of the US market being closed off to a greater extent.9 The US is challenging the EU’s (and other countries’) retaliatory tariffs through a dispute settlement action at the WTO. Despite a trade détente reached between President Trump and the President of the European Commission, Jean-Claude Juncker, in July 2018, the US steel and aluminium tariffs and the EU’s retaliatory tariffs remained in force at the time of publication of this paper.
Another area of transatlantic trade friction is President Trump’s repeated threat to impose up to 25 per cent tariffs on imports of automobiles and automotive parts. In May 2018 the US Department of Commerce initiated a Section 232 investigation to determine whether automotive imports threaten to impair US national security.10 The department submitted its report to the White House in mid-February 2019, but did not publicly release the findings and recommendations. The president has 90 days to decide on a course of action. Notwithstanding the US–EU agreement to refrain from imposing new tariffs on each other as part of the July 2018 trade truce, the EU fears that the automotive tariffs by the US may yet be implemented.11
In addition to these unilateral tariff measures by the US, the EU’s leaders are worried about the Trump administration’s attitudes and actions towards the rules-based international trading architecture, specifically the WTO. Even though the US government’s blocking of appointments to the WTO’s Appellate Body precedes the current administration, President Trump is willing to push US concerns much further. In particular, the US government believes that Appellate Body members should be obligated to end their activities when their mandate expires. The US has also raised concerns about the Appellate Body overstepping its authority through its ‘expansive interpretations that effectively create new WTO law’.12
The Appellate Body impasse has now reached a critical juncture as a result of the US’s continued blocking of appointments: as of 30 September 2018, the number of judges on the roster of the Appellate Body (each of whom serves a four-year term, renewable once) has been reduced from the usual seven to three – the minimum required for the system to function. The caseload has thus become very difficult to manage, and the WTO dispute settlement process is grinding to a halt. Once the roster of the WTO Appellate Body falls to two members, as is due to happen in December 2019, it can no longer formally operate. Developments such as this risk in effect hollowing out the WTO. Meanwhile, the current US administration is also endangering the global trading system in more direct ways: President Trump has repeatedly threatened to pull the US out of the WTO. Although the incumbent US Trade Representative (USTR) Robert Lighthizer still sees value in the institution, he is seeking a course correction and has stated that the US would not comply with adverse WTO rulings.
Another source of friction has been President Trump’s decision to withdraw the US from the Joint Comprehensive Plan of Action (JCPOA – the Iran nuclear deal agreed in July 2015 between Iran, the EU and the five permanent members of the UN Security Council) and the extraterritorial effect of US economic sanctions against Iran. EU leaders have been trying to shield European businesses operating in Iran from the US measures without causing a major rift in the fraught transatlantic relationship. More broadly, many EU governments view the US’s shift away from international economic cooperation with concern. Their worries are fuelled, for example, by President Trump’s withdrawal of support from the joint communiqué released at the end of the G7 summit in June 2018.13
Transatlantic tensions over trade were to some degree de-escalated in late July 2018, as President Trump and European Commission President Juncker stepped back from the brink of a trade war and announced, in a joint statement, their intention to ‘launch a new phase in the relationship between the United States and the European Union’.14 The two leaders announced lofty ambitions ‘to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods’, as well as to reduce barriers and increase trade in specific sectors (including services, chemicals, pharmaceuticals, medical products and soybeans). As already noted, the two sides agreed ‘to resolve the steel and aluminum tariff issues and retaliatory tariffs’, and to refrain from imposing further tariffs (particularly on automobiles and automotive parts) while negotiations are in progress. Trump and Juncker also announced their intention to strengthen bilateral cooperation with respect to energy, to launch a dialogue on standards, and to ‘work closely together with like-minded partners to reform the WTO and to address unfair trading practices’ such as intellectual property theft and forced technology transfer.15 To move this joint agenda forward, the leaders set up an Executive Working Group – led by USTR Lighthizer and European Commissioner for Trade Cecilia Malmström.
The Executive Working Group has met subsequently to explore how to best implement the joint statement. The European Commission has been following up on different elements of the joint statement by reporting on increases in imports of US soybeans16 and imports of US liquefied natural gas.17 Moreover, the EU member states have authorized the Commission to open negotiations with the US regarding imports of hormone-free beef into the EU – the size of the quota for which has been a persistent source of conflict between the two sides.18
The question now is whether the recent trade rapprochement between the US and the EU can be turned into a genuine and lasting deal, or whether it is only a temporary truce in the transatlantic trade dispute.
In October 2018 USTR Lighthizer notified Congress that the Trump administration intended to negotiate a trade agreement with the EU.19 Then, in January 2019, the administration released its negotiating objectives for trade talks with the EU.20 These steps are in line with Trade Promotion Authority (TPA) legislative requirements.21
For its part, the European Commission has presented to the Council of the EU draft negotiating mandates for trade talks with the US, which will have to be approved by the member states before negotiations can begin.22 The Council is expected to adopt a decision authorizing the Commission to open negotiations with the US in the coming weeks. Meanwhile, in mid-February 2019 the European Parliament’s International Trade Committee voted in favour of a resolution calling for US–EU trade talks to commence if certain conditions are met.23 The parliament is expected to adopt its position on the Commission’s mandates in March; and though non-binding, its stance carries weight given the parliament’s role in approving any final transatlantic trade agreements.
The question now is whether the recent trade rapprochement can be turned into a genuine and lasting deal, or whether it is only a temporary truce in the transatlantic trade dispute.
This paper focuses on the bilateral US–EU trade relationship. The greatest challenge presented by the Trump administration is to the multilateral, rules-based international trading system, but a new phase of closer collaboration and stronger trade relations between the US and the EU could help to address constructively some of the shortcomings of the current architecture and rules of the global trading system.
1 Ilias Akhtar, S. (2018), ‘U.S.-EU Trade and Investment Ties: Magnitude and Scope’, Congressional Research Service, https://fas.org/sgp/crs/row/IF10930.pdf (accessed 20 Nov. 2018).
2 US Bureau of Economic Analysis (2018), ‘U.S. Trade in Goods and Services by Selected Countries and Areas, 1999-present’, https://www.bea.gov/
system/files/2018-12/trad-geo-time-series-1018.xlsx (accessed 20 Nov. 2018).
3 Ilias Akhtar (2018), ‘U.S.-EU Trade and Investment Ties: Magnitude and Scope’.
4 European Commission (2018), ‘United States – Trade picture’, http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/index_en.htm (accessed 20 Nov. 2018).
5 Ibid.
6 EURACTIV.com with Reuters and AFP (2016), ‘Malmström: EU-US trade deal ‘frozen’ after Trump vote’, 12 November 2016, https://www.euractiv.com/section/trade-society/news/malmstrom-eu-us-trade-deal-frozen-after-trump-vote/ (accessed 20 Nov. 2018).
7 Office of the United States Trade Representative (2017), 2017 Trade Policy Agenda and 2016 Annual Report of the President of the United States on the Trade Agreements Program, https://ustr.gov/sites/default/files/files/reports/2017/AnnualReport/AnnualReport2017.pdf (accessed 20 Nov. 2018).
8 Various studies have shown that TTIP would have helped to generate jobs and economic growth in the US and the EU – though the estimated gains were not huge. According to an independent study for the European Commission, GDP was projected to be approximately 0.5 per cent higher each year for the EU, and 0.4 per cent higher for the US, as a result of TTIP. The broader advantages of TTIP would have been the potential strategic benefits – such as cementing the transatlantic partnership and setting the rules and standards for trade in the 21st century. See Ecorys (2017), SIA in support of the negotiations on a Transatlantic Trade and Investment Partnership (TTIP), Final Report prepared for the European Commission, http://www.trade-sia.com/ttip/wp-content/uploads/sites/6/2017/03/TSIA-TTIP-Final-Report-03-17.pdf (accessed 20 Nov. 2018).
9 European Commission (2018), ‘EU adopts rebalancing measures in reaction to US steel and aluminium tariffs’, 20 June 2018, http://europa.eu/rapid/press-release_IP-18-4220_en.htm (accessed 20 Nov. 2018).
10 US Department of Commerce (2018), ‘U.S. Department of Commerce Initiates Section 232 Investigation into Auto Imports’, 23 May 2018, https://www.commerce.gov/news/press-releases/2018/05/us-department-commerce-initiates-section-232-investigation-auto-imports (accessed 20 Nov. 2018).
11 Shalal, A. and Dalgleish, J. (2018), ‘German industry warns U.S. auto tariffs not completely off table yet’, Reuters, 25 July 2018, https://www.reuters.com/article/us-usa-trade-eu-industry/german-industry-warns-u-s-auto-tariffs-not-completely-off-table-yet-idUSKBN1KF30E (accessed 20 Nov. 2018).
12 US Mission to International Organizations in Geneva (2018), ‘Ambassador Dennis Shea’s Statement at the WTO General Council’, 8 May 2018, https://geneva.usmission.gov/2018/05/08/ambassador-dennis-sheas-statement-at-the-wto-general-council/ (accessed 20 Nov. 2018).
13 Differences between the US and the other G7 members over the former’s tariffs on steel and aluminium seemed to have been concealed by the language of the joint communiqué, which called for a ‘rules-based trading system’. During a post-summit news conference, the Canadian host, Prime Minister Justin Trudeau, vowed to move forward with retaliatory tariffs. In response, President Trump, who was already en route to his next scheduled meeting in Singapore, announced via Twitter that he had instructed US officials not to endorse the communiqué, and that the US was considering imposing tariffs on automobiles.
14 European Commission (2018), ‘Joint U.S.-EU Statement following President Juncker’s visit to the White House’, 25 July 2018, http://europa.eu/rapid/press-release_STATEMENT-18-4687_en.htm (accessed 20 Nov. 2018).
15 Ibid.
16 The EU has put in place a reporting mechanism whereby it publishes the changes of EU imports of US soybeans every two months. For the first report, see European Commission (2018), ‘Follow-up to the EU-U.S. Joint Statement of 25 July: Imports of U.S. soybeans increase by over 280%’, 1 August 2018, http://europa.eu/rapid/press-release_IP-18-4768_en.htm (accessed 20 Nov. 2018).
17 European Commission (2018), ‘EU-U.S. Joint Statement of 25 July: European Union imports of U.S. Liquefied Natural Gas (LNG) are on the rise’, 9 August 2018, http://europa.eu/rapid/press-release_IP-18-4920_en.htm (accessed 20 Nov. 2018).
18 European Commission (2018), ‘European Commission welcomes Member States’ support to settle WTO dispute with the United States’, 19 October 2018, http://europa.eu/rapid/press-release_IP-18-6103_en.htm (accessed 20 Nov. 2018).
19 Office of the United States Trade Representative (2018), ‘Trump Administration Announces Intent to Negotiate Trade Agreements with Japan, the European Union and the United Kingdom’, 16 October 2018, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/october/trump-administration-announces (accessed 20 Nov. 2018).
20 Office of the United States Trade Representative (2019), ‘United States–European Union Negotiations: Summary of Specific Negotiating Objectives’, 11 January 2019, https://ustr.gov/sites/default/files/01.11.2019_Summary_of_U.S.-EU_Negotiating_Objectives.pdf (accessed 17 Jan. 2019).
21 According to TPA laws, the USTR must notify Congress 90 days prior to initiating negotiations and release detailed negotiating objectives 30 days prior to the start of trade negotiations.
22 European Commission (2019), ‘EU-U.S. Trade Talks: European Commission presents draft negotiating mandates’, 18 January 2019, http://europa.eu/rapid/press-release_IP-19-502_en.htm (accessed 18 Jan. 2019).
23 European Parliament (2019), ‘Trade negotiations with US can start under certain conditions’, 19 February 2019, http://www.europarl.europa.eu/news/en/press-room/20190219IPR27357/trade-negotiations-with-us-can-start-under-certain-conditions (accessed 19 Feb. 2019).