07 Challenges for a transatlantic partnership
Without transatlantic cooperation, WTO modernization will be impossible. While the US and the EU are aligned on many reform issues, bilateral trade tensions risk impeding joint efforts.
In July 2018, President Trump and the then president of the European Commission, Jean-Claude Juncker, vowed to work together with like-minded partners to reform the WTO.97 Depending on the particular aspect of WTO reform, there is a broad range of variation in how close or apart the US and the EU positions and proposals are.
The US and the EU agree that new rules for 21st-century trade are needed. The EU shares many of the US’s concerns regarding China’s trade policies and practices. Despite the trilateral efforts involving the US, the EU and Japan, transatlantic differences remain over the methods for tackling the problem. Where the US and the EU views differ the most is on reforming the WTO Appellate Body and dispute settlement system.
But even in the areas of WTO reform where the US and the EU are mostly aligned, current transatlantic trade tensions risk undermining joint efforts to modernize the organization.98 Without addressing underlying bilateral frictions, reforming the WTO will be more challenging.
Underlying trade frictions
A dispute dating back to 2004 over alleged unfair subsidies to the aircraft manufacturers Boeing and Airbus is coming to a head, and could have implications for ongoing WTO reform efforts. Over the years, various WTO panel and Appellate Body reports have found both the US, on the one side, and the EU, France, Germany, Spain and the UK, on the other, at fault for unfairly subsidizing aircraft manufacturers. In October 2019, the WTO authorized the US to impose tariffs of up to $7.5 billion on a wide range of EU products (including many unrelated to the aviation sector).99 In a parallel case, the WTO is expected to rule in the EU’s favour later this year, likely clearing the path for the EU to impose tariffs on imports of US products.100 This would probably draw the ire of President Trump at a delicate time. It could set back the US’s willingness to reform the WTO, and could also derail US and EU efforts to strike a bilateral trade deal.
Another highly sensitive area has developed around US steel and aluminium tariffs levied on alleged grounds of national security, and the EU’s countermeasures to these. Following the US decision in mid-2018 to impose additional tariffs of 10 per cent on imports of aluminium products and 25 per cent on imports of certain steel products (under Section 232 of the US Trade Expansion Act of 1962), the EU launched proceedings at the WTO and in June 2018 put in place rebalancing duties.101 The EU disagrees with the US’s national security rationale, and argues that the US tariffs are thinly disguised safeguard measures taken to protect the US steel and aluminium industries from a surge in imports. In response to the EU’s countermeasures, the US launched its own WTO case.102 The WTO panels are expected to issue their findings later in 2020.
The fact that the US has turned to the WTO in this case shows that the Trump administration – despite all its criticism of the organization – still sees some use in the multilateral trade body. This is a promising sign. However, the fact that the EU did not wait for a WTO panel ruling, but instead retaliated immediately, is troublesome. Regardless of the legal merits of the EU’s case, the bloc’s actions undermine the WTO.103
Digital taxes have also become a flashpoint for transatlantic trade relations. In June 2020, the US Trade Representative launched an investigation into digital services taxes that have been adopted or are being considered by a number of trade partners (including the EU and the UK) and that could result in new tariffs. While a clash between the US and France over the latter’s digital taxes was effectively de-escalated in January, the matter is far from settled: in June the US paused talks to find a multilateral taxation framework at the level of the OECD.104 Whether the digital services tax is consistent with WTO law has yet to be tested.
Individual EU members have a key role to play in advancing WTO reform, including in charting a common course with the US in pursuit of institutional modernization. Germany and France in particular can help unify the EU around WTO reform.
Individual EU members have a key role to play in advancing WTO reform, including in charting a common course with the US in pursuit of institutional modernization. Germany and France in particular can help unify the EU around WTO reform, even though trade policy falls under the exclusive competence of the EU. The two countries can use their roles in the G7 and G20 to advance the EU’s position and build political will to reform the WTO. The 2019 G7 summit in France and the 2019 G20 summit in Japan showed that WTO reform is high on the agenda.105
At the same time, action by EU member states has the potential to weaken the bloc’s WTO reform efforts. For instance, Germany and France’s push for a ‘European industrial strategy’106 seems to have complicated the EU’s discussions with the US and Japan on strengthening existing WTO rules on industrial subsidies, and is a likely reason why the trilateral discussions stalled at one point. But in the end, the US, the EU and Japan made progress and finally issued a joint statement in January 2020.107
What role for the UK?
The UK has a very large stake in the future of the WTO. The country has been a member in its own right since 1995. Until 31 January 2020, the UK had also been a WTO member by virtue of its membership of the EU.
The UK’s withdrawal from the EU has a number of implications for the country’s position in the WTO. The UK can speak more independently, but it also loses some of the EU’s amplifying power to be heard. The UK will also have to defend itself on its own when challenged by other WTO members in dispute settlement cases.
The UK will fall back to trading with the EU on WTO terms if, by the end of the Brexit transition period on 31 December 2020, no deal for the future relationship between the UK and the EU has been struck, and no extension to the transition has been agreed. The UK may also lose continuity of trade agreements with the countries that have free-trade agreements with the EU. While the UK is in the process of rolling over many of its agreements, any failure to do so would result in trade with the relevant partner defaulting to WTO terms.
In line with its vision of a ‘Global Britain’, the UK government has stated that it will ‘support efforts to strengthen the multilateral rules-based trading system, and to modernise the WTO’.108 The UK has also vowed to work towards restoring the full functioning of the WTO dispute settlement system, and to drive forward initiatives at the WTO on issues of particular relevance to the UK, such as the ongoing e-commerce negotiations.
What concrete steps can the UK take to achieve these ambitions? First, it can advance the discussions from within the WTO committees where most of the work is conducted.
Second, the UK can leverage its role in the G7, G20 and the Commonwealth. While the UK has long had these platforms, it is not necessarily maximizing their use. In particular, the UK can play a role in putting WTO reform and new trade rules on the agenda when it holds the G7 presidency in 2021.
Third, the UK can leverage the transatlantic relationship to advance WTO reform by engaging with the US constructively. However, this route is likely to be underused, as US–UK trade discussions will focus on concluding a bilateral free-trade agreement. Any efforts to work closely together on reforming the WTO will be put on the back-burner.
Fourth, in order to build on the existing efforts by like-minded countries to address the shortcomings of the current rules-based international system, it would be advantageous for the UK to join the (currently trilateral) US–EU–Japan discussion format.
Finally, the UK can work with other ‘middle powers’ to drive forward WTO reform efforts. In particular, it could be helpful for the UK to join the Canada-led ‘Ottawa Group’ (as the EU is also participating and as Canada is part of the Commonwealth).
97 European Commission (2018), ‘Joint EU-U.S. Statement following President Juncker’s visit to the White House’, 25 July 2018, https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_18_4687 (accessed 14 Jul. 2020).
98 A similar point is made by Lamprecht, P. and Abbott, R. (2019), ‘Time is running out to address trade frictions. For effective WTO reform to happen the US, EU and China need to live up to their responsibilities’, European Centre for International Political Economy (ECIPE), October 2019, https://ecipe.org/blog/time-is-running-wto/ (accessed 14 Jul. 2020).
99 World Trade Organization (undated), ‘DS316: European Communities and Certain member States — Measures Affecting Trade in Large Civil Aircraft’, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds316_e.htm (accessed 14 Jul. 2020).
100 Brunsden, J. and Williams, A. (2020), ‘Brussels warns new US tariff threat over Airbus will harm both sides’, Financial Times, 24 June 2020, https://www.ft.com/content/7cabefbe-5a58-4f96-96c4-e18718d17e44 (accessed 14 Jul. 2020).
101 European Commission (2018), ‘EU adopts rebalancing measures in reaction to US steel and aluminium tariffs’, 20 June 2018, https://trade.ec.europa.eu/doclib/press/index.cfm?id=1868 (accessed 14 Jul. 2020).
102 World Trade Organization (undated), ‘DS559: European Union — Additional Duties on Certain Products from the United States’, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds559_e.htm (accessed 14 Jul. 2020).
103 For a more detailed assessment, see Schneider-Petsinger (2019), ‘Stretching the rules will not save global trade’.
104 Specifically, the US paused discussions of Pillar 1 (which concerns the allocation of taxing rights), but is still seeking to conclude talks regarding Pillar 2 (on a global minimum tax) before the end of 2020.
105 Government of France (2019), ‘G7 Leaders’ Declaration’, 26 August 2019, https://www.elysee.fr/en/g7/2019/08/26/g7-leaders-declaration (accessed 14 Jul. 2020); Government of Japan (2019), ‘G20 Osaka Leaders’ Declaration’, 29 June 2019, https://www.mofa.go.jp/policy/economy/g20_summit/osaka19/en/documents/final_g20_osaka_leaders_declaration.html (accessed 14 Jul. 2020).
106 Government of France (2019), ‘A Franco-German Manifesto for a European industrial policy fit for the 21st Century’, 19 February 2019, https://www.gouvernement.fr/en/a-franco-german-manifesto-for-a-european-industrial-policy-fit-for-the-21st-century (accessed 14 Jul. 2020).
107 European Commission (2020), ‘EU, U.S. and Japan agree on new ways to strengthen global rules on industrial subsidies’, 14 January 2020, https://trade.ec.europa.eu/doclib/press/index.cfm?id=2101 (accessed 14 Jul. 2020).
108 World Trade Organization (2020), ‘The United Kingdom’s Withdrawal from the European Union’, Communication from the United Kingdom, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=
q:/WT/GC/206.pdf (accessed 14 Jul. 2020).