Transatlantic Action Plan: Economics and Trade

This Transatlantic Action Plan originally appeared in Stronger Together: A Strategy to Revitalize Transatlantic Power, a collaborative report from the Belfer Center and the German Council on Foreign Relations.

Relations between the U.S. and Europe are at an-all time low, largely because the Trump administration departed from six decades of bi-partisan U.S. foreign policy of supporting European integration. The president and many members of his administration categorized the EU as an enemy and as “worse than China, but smaller.” He has cast the EU as a “consortium” set up by Germany to beat the United States in trade.

Whereas the Trump administration worked effectively with Europe in some areas, including energy security and law enforcement, the U.S-EU relationship disintegrated in many other areas, above all in trade following U.S. tariffs on imports of aluminum and steel and threats to restrict car imports. While some members of the United Kingdom’s Conservative Party have appreciated President Trump’s endorsement of Brexit, the core interests of the United Kingdom (including free trade, the fight against climate change and defense of multilateral institutions) diverge from those of the Trump administration.

The next U.S. administration will face the challenge of re-engaging with Europe on matters of joint concern, not only on climate and Iran but also on concluding a trade agreement, resolving outstanding economic disputes and leading efforts to reform the World Trade Organization (WTO).

Challenges

Both the United States and Europe struggle to cope with China’s model of state-sponsored capitalism, massive subsidies and abusive trade and market access practices that thirty-year old WTO rules have failed to address. Both (but especially Europe) face the challenge of maintaining global leadership in industries of the future as China implements a focused state-run program to dominate many of them, including artificial intelligence and big data analytics, super-computing, genomics, 3-D printing, industrial batteries, electric vehicles, the industrial internet, nanotechnology and robotics.

Both face the challenge of a China increasingly intent on controlling key international standard setting bodies and enshrining standards that will give an advantage to Chinese exporters and values. Moreover, both face the challenge of reducing a high degree of dependence on certain raw materials from China, including rare earth minerals that are key inputs for many products, such as automobiles, aircraft, cell phones and computers. Both will continue to struggle to control coronavirus infections in their territories and eventually to cure the pandemic through massive vaccinations.

Where U.S/European Interests Converge and Diverge

Europe will not want to choose between the United States and China as the latter will remain a key partner in some areas (including climate change) and is a critical export market for some member states. The United States should not, therefore, push Europe to join Washington in an overt anti-Chinese campaign. However, rarely have U.S. and European perceptions of China been so aligned as most member states and the EU institutions have adopted an increasingly critical stance.

China remains very astute in its policy of dividing Europe by strategically placed investments, especially in essential infrastructure, that buy influence and dilute common EU foreign policy positions critical of China. On the other hand, China’s efforts to capitalize on the coronavirus epidemic by posing as Europe’s humanitarian savior appear to have backfired, in part because early shipments of protective equipment proved defective.

The U.S. and Europe are converging around more restrictive rules regarding foreign direct investment in strategic sectors; in the past few years, new EU rules ensure greater coordination and new national rules impose strict screening requirements. Both are increasingly insisting that China respect reciprocity in trade and market access conditions. The EU’s recent International Public Procurement Initiative threatens third countries (especially China) with closure of the EU’s lucrative public procurement market if they do not provide equivalent access. The U.S. and Europe, in cooperation with key partners, should consider strengthening their export control rules and their cooperation to combat cyber-theft.

Moreover, the U.S. and Europe share the desire to establish global trading rules that provide high standards of protection for intellectual property, the environment, labor standards and data privacy. They also seek to preserve a free and open internet, as opposed to the model of restrictive state control espoused by some countries, including China and Russia. Both the U.S. and Europe want to ensure that together they can prevent global standards-setting bodies from being captured by countries promoting agendas inimical to the principals of an open society. The battle for standards relating to such sensitive areas as facial recognition, video monitoring, 5G, and city and vehicle surveillance are cases in point. Finally, the U.S. and Europe have a common interest in ensuring that after Brexit the United Kingdom remains a close partner with the bloc in order to minimize trade frictions and maximize cooperation in areas such as military security and law enforcement.

There are important areas of divergence between the U.S. and Europe in trade and economic policy, however. One long-standing source of friction is agricultural trade: although they should have complementary interests in light of the fact that the EU exports mostly alcoholic beverages and high value-added processed foods to the U.S. whereas the U.S. is especially competitive in bulk commodities such as soybeans and grains, the two place significant obstacles to agri-food imports from the other. EU rules on plant and animal health are particularly burdensome for U.S. exporters and explain why the U.S. agricultural trade balance with the EU is negative and getting worse (unlike its balance with the rest of the world).

There are other important areas of divergence, including several that will need to be addressed urgently after the presidential election. Europe and the United States are increasingly drifting apart with regard to how international taxation rules should better reflect the new realities of the digital economy, such as the fact that sales and value can be generated in countries where companies have no permanent physical establishment. The Trump administration’s withdrawal from the OECD negotiations aimed at setting global rules, existing and threatened legislation at EU and member state level that appears tailor-made to target large U.S. online platforms and the U.S. Trade Representative’s threat of retaliatory sanctions have increased the risk of a transatlantic trade war. Moreover, there is a risk of further transatlantic tensions over the 16-year-old dispute between Boeing and Airbus about the degree to which each has received illegal state support. The only real winners are the lawyers and Chinese ambitions to launch a third competitor.

Opportunities and Obstacles for Enhancing Cooperation

There are numerous opportunities for greater U.S-European cooperation. Depending on the outcome of the presidential election, the U.S. and the EU should be able to lift U.S. unilateral tariffs and EU retaliatory tariffs, settle the Boeing-Airbus dispute, work more closely together on reforming WTO rules and leveraging their joint economic power to force China to change its abusive trade and market access practices. Rather than disdaining the EU as a dysfunctional entity that is irrelevant to U.S. bilateral trade negotiations with China, a new administration might grasp that the EU is a trade and regulatory superpower with whom Washington can partner to achieve its objectives.

The U.S. and the EU could learn the lessons of their failed efforts to sign the Transatlantic Trade and Investment Partnership agreement by focusing on a series of more modest, quick and economically significant measures to boost transatlantic commerce. These include eliminating tariffs on industrial goods trade, engaging in some focused regulatory cooperation and reducing some frictions around plant and animal health rules. The U.S. and EU also have an opportunity expand the scope of their mutual recognition agreement for inspections of manufacturing sites for certain human medicines in their respective territories.

Both sides need to be pragmatic about which obstacles are unlikely to be removed: these include (on the U.S. side), federal and state-level restrictions on public procurement and maritime commerce and (on the EU side) restrictive rules regarding geographical indications and widely shared public opposition to allowing imports of certain foods, such hormone-treated beef, poultry carcasses disinfected with chlorine washes, pork from pigs fattened with growth promoters and genetically modified foods. The United States also has an opportunity to conclude a free trade agreement with the United Kingdom if Brexit does not result in an inter-Irish border and imperil the Good Friday peace accords. The ability of the U.S. to sign free trade agreements will, however, be constrained by the expiry of Trade Promotion Authority on July 1, 2021.

The U.S. and Europe should seek to align, or at least minimize divergences between, their approaches to implementing a WTO-compliant carbon border adjustment mechanism that penalizes imports (especially from countries that shirk their commitments under the Paris Climate Accords) of goods, such as steel and cement, that are associated with significant carbon emissions. And they should continue to drive global measures to eliminate fossil fuel subsidies and to terminate lending to highly polluting energy projects such as coal-fired power plants.

There are many other opportunities. A Biden administration could re-engage in the OECD negotiations on digital taxation in good faith, in return for the EU and member states freezing their digital sales taxes. Consensus on rules regarding global minimum corporate tax appears possible; greater effort is required to reach consensus on rules regarding how countries can tax profits from sales made to customers located in their jurisdictions. The U.S. and Europe can once again demonstrate global leadership in the fight against pandemics, just as they did in combating the outbreak of Ebola in West Africa in 2014-2015. A transatlantic partnership could include joint research, stockpiling of equipment and medicines, rules to avoid a competitive scramble for vaccines, elimination of tariffs on goods necessary to fight pandemics and the implementation of a global early warning system.

As the EU is poised to revise its 20-year-old E-Commerce Directive and to draft a wide-ranging Digital Services Act (DSA), the time is also ripe for enhanced U.S.–EU cooperation on the digital economy. The focus of the DSA is twofold: (1) to define the responsibilities of digital services to address the risks faced by their users and to define their rights; and (2) to propose ex ante rules covering large online platforms acting as gatekeepers that now set the rules of the game for their users and their competitors. For the past four years the EU has acted as the only de facto regulator of Silicon Valley as U.S. antitrust enforcement has been largely absent. The conclusions of the recently published report by the House Judiciary Committee on whether Amazon, Google, Facebook and Apple are violating antitrust law indicate that the political winds in the U.S. are shifting. The U.S. and the EU have the opportunity to define together tougher rules regarding the use of social media to interfere in elections and spread illegal content and/or propaganda, the proper balance between the interests of content creators and online platforms, and the ethical use of artificial intelligence.

Important obstacles will persist, however. Among the most serious and intractable stems from the EU Court’s recent invalidation of the Privacy Shield agreement that has enabled thousands of companies in Europe to transfer personal data to the United States. Although there are other legal methods of transfer, they are either restrictive and/or legally questionable as a result of the court’s judgment. While encryption and data localization would address the problem, this approach would be economically destructive, would complicate law enforcement and might not improve data security. The next U.S. administration will face the challenge of how to address the court’s core objection that U.S. law does not afford EU citizens sufficient rights of legal redress before U.S. courts, especially with regard to improper government surveillance.

Recommendations

The following steps are among the most significant steps that could be implemented in the short term:

• Eliminate tariffs on industrial goods trade
• Reduce sanitary and phytosanitary restrictions, building on recent implementation of the U.S.–EU agreement to relax trade in molluscan shellfish
• Settle the Airbus-Boeing dispute; while a settlement is being negotiated, neither side should take steps to implement WTO-authorized retaliation
• Expand the scope of the U.S.–EU pharmaceutical mutual recognition agreement
• Enter into agreements recognizing each side’s non-safety auto regulations as being “functionally equivalent”
• Drive reform of WTO rules, especially with regard to Chinese abusive trade and market access practices.
• Build on the U.S.–EU–Japan Trilateral Agreement on industrial subsidies
• Relaunch some plurilateral trade negotiations, especially the Environmental Goods Agreement that aims to eliminate tariffs on green goods
• Coordinate approaches to WTO-compliant carbon border adjustment mechanisms
• Promote global measures to eliminate fossil fuel subsidies and to terminate lending to highly polluting energy projects such as coal-fired power plants
• Establish a U.S-EU Trade and Technology Council to discuss standards for emerging technologies
• Re-engage at the OECD to drive a global deal on digital taxation
• Align policies whenever possible on digital economy issues, including antitrust aspects, ethical AI and restrictions on abuse of social media to disseminate illegal content and propaganda
• Align policies on supply chain resilience and diversification
• Cooperate to strengthen export controls and address cyber-theft, especially with regard to China
• Establish high-level working group to align transatlantic strategies to contain the coronavirus pandemic and improve preparedness for future pandemics
• Seek to address the EU Court’s objections to Privacy Shield, especially relating to EU citizens’ rights of redress; the passage of federal privacy legislation in the United States may help in this regard