services

Trade between the United States and the European Union – What Will 2020 Bring?

There have been strong trade and investment ties between the United States and the European Union for decades. Now that the United Kingdom is outside of the EU (with an interim status quo during 2020), the EU (27 countries) is still the largest trading partner of the United States in goods ($719.6 billion in total trade in 2019), followed by Mexico ($614.5 billion), Canada ($612.1 billion) and China ($552.8 billion). China is the largest source of U.S. general imports ($452.2 billion) compared to the EU which is a close second at $451.7 billion. Canada is the largest destination for U.S. total exports i($292.4 billion in 2019), the EU is second at $267.9 billion.

While this post does not look at services trade, the US and EU are also major trading partners in services, and services are subject to negotiations at the WTO and in ongoing bilateral talks.

Both the U.S. and the EU are major players in the World Trade Organization. Since both the U.S. and the EU are leading developed countries with huge investments in each other, one would expect relations to be close and the opportunity for joint leadership in trade liberalization and addressing distortions in global markets to be the normal course. That has been true to some extent in the past and even today, but there has been a larger focus on differences in regulatory regimes, different views of the role of dispute settlement, different approaches to addressing major distortions in global markets and a decades-old concern in the U.S. about EU agricultural policies and efforts to keep U.S. agriculture out of the EU markets. More recently there has been conflict over France’s efforts to impose a tax on digital services (a move being reviewed by other countries within the EU and elsewhere), action that the U.S. strongly objects to and has threatened retaliation if adopted.

For the EU, the current US Administration’s use of Section 232 of the Trade Expansion Act of 1962, as amended, to impose or threaten to impose large tariffs on significant manufacturing sectors of trading partners have been viewed as unilateral actions contrary to WTO obligations. The U.S. willingness to use aggressive tactics to obtain leverage on trading partners and the U.S. willingness to enter partial trade agreements and/or to agree with trading partners for minimum purchases are viewed as threatening to the global trading system. Moreover, the withdrawal of the U.S. from the Paris Climate Agreement runs contrary to EU efforts to speed up actions to address climate change and the EU’s current policy of having new agreements include a chapter addressing climate change.

While there is agreement between the U.S. and the EU that state-directed, nonmarket economies are creating major distortions in global markets (massive industrial subsidies, role of state-owned enterprises, forced technology transfer, excess capacity in many sectors driven by state planning and subsidies), the U.S. and EU have been at loggerheads on the need for reform of the WTO dispute settlement system. There are broad areas of agreement on e-commerce with the exception of privacy rules. However, there has been long-term disagreement between the U.S. and the EU on the consistency of actions by each other and subcentral governments in supporting various aspects of their major civil aircraft manufacturers — Boeing and Airbus.

The U.S. has imposed tariffs on steel and aluminum products from the EU and many other countries pursuant to the national security statute, Section 232 of the Trade Expansion Act of 1962, as amended, and has recently imposed duties on various EU products following WTO disputes on Airbus subsidies and whether changes made by the EU brought the EU into compliance. While the U.S. has the argument that Section 232 investigations are covered by GATT Art. XXI, the EU has retaliated on the theory that the U.S. action was a safeguard. It has adopted other provisions to permit the EU to retaliate against actions that it considers unjustified. On the civil aircraft dispute, the EU has stated that it is seeking negotiations but believes the U.S. is waiting until the final decision on the Boeing case is issued this summer and has threatened its own retaliation on the U.S. when the decision is issued.

The July 2018 Joint Statement on US-EU trade negotiations (goods and services)

Faced with increased tariffs on steel and aluminum and the threat of automotive products, the EU had a meeting with President Trump in July 2018 and issued a joint statement at the end on the road forward:

“Joint U.S.-EU Statement following President Juncker’s visit to the White House

“Washington, 25 July 2018

“STATEMENT/18/4687

“European Commission – Statement

“We met today in Washington, D.C. to launch a new phase in the relationship between the United States and the European Union – a phase of close friendship, of strong trade relations in which both of us will win, of working better together for global security and prosperity, and of fighting jointly against terrorism.

“The United States and the European Union together count more than 830 million citizens and more than 50 percent of global GDP. If we team up, we can make our planet a better, more secure, and more prosperous place.

“Already today, the United States and the European Union have a $1 trillion bilateral trade relationship – the largest economic relationship in the world. We want to further strengthen this trade relationship to the benefit of all American and European citizens.

“This is why we agreed today, first of all, to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. We will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans.

“This will open markets for farmers and workers, increase investment, and lead to greater prosperity in both the United States and the European Union. It will also make trade fairer and more reciprocal.

“Secondly, we agreed today to strengthen our strategic cooperation with respect to energy. The European Union wants to import more liquefied natural gas (LNG) from the United States to diversify its energy supply.

“Thirdly, we agreed today to launch a close dialogue on standards in order to ease trade, reduce bureaucratic obstacles, and slash costs.

“Fourthly, we agreed today to join forces to protect American and European companies better from unfair global trade practices. We will therefore work closely together with like-minded partners to reform the WTO and to address unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state owned enterprises, and overcapacity.

“We decided to set up immediately an Executive Working Group of our closest advisors to carry this joint agenda forward. In addition, it will identify short-term measures to facilitate commercial exchanges and assess existing tariff measures. While we are working on this, we will not go against the spirit of this agreement, unless either party terminates the negotiations.

“We also want to resolve the steel and aluminum tariff issues and retaliatory tariffs.”

The approach outlined above would not be consistent with the US tabled negotiating objectives submitted to Congress in January 2019 for possible trade promotion authority eligibility, where tariff reductions on agricultural products is specifically identified on the first page of the objectives. https://ustr.gov/sites/default/files/01.11.2019_Summary_of_U.S.-EU_Negotiating_Objectives.pdf. And the approach ignores the longstanding concerns in Congress about agricultural market access, regulatory barriers in agriculture, including whether EU actions are science based and other agricultural related matters. The US negotiating objectives from January 2019 are included below.

01.11.2019_Summary_of_U.S.-EU_Negotiating_Objectives

Not surprising, in the U.S., there has been strong pushback from the members of Congress with strong agricultural interests, including by the Chairman of the Senate Finance Committee.

The EU viewed the US-EU joint statement as representing an agreed narrower-than-all-trade-topic agreement. The EU did not get government procurement, geographical indications or other issues of interest to them in the joint statement, and the European Commission’s mandate does not include negotiating to liberalize agriculture tariffs. The new DG Trade Commissioner Hogan during a hearing before the European Parliament’s INTA Committee meeting on February 19, 2020 confirmed that the EU would not be negotiating to change EU standards in areas viewed as relevant to consumer safety, food safety, etc. despite receiving from the U.S. a list of regulations, the U.S. wishes to have as part of the negotiations.

Ongoing Talks and the Visit of EU Parliament INTA Committee Members the week of February 24, 2020

With a new EC trade Commissioner, the EU and U.S. are increasing their efforts at finding a path forward on a host of issues. The EU has indicated recently a recognition of many of the issues of concern to the U.S. in the WTO’s dispute settlement impasse. The U.S. did not expand the range of products (at least for 30 days) that would be subject to retaliatory tariffs for Airbus subsidies. There are more frequent meetings at senior levels. Work continues on issues of mutual interest within the WTO as well. These are all positive signs.

For the first time in nearly seven years, a delegation from the International Trade Committee of the EU Parliament will be visiting Washington this coming week (Feb. 24) to meet with Congressional leaders and with the Administration. In other words, significant efforts by all sides are being made to see if closer relations can be developed. But the challenges are many.

A review of the EU Parliament INTA hearing with EC Commissioner Hogan from February 19th shows deep commitments by the Parliament to current agricultural policies and regulatory approaches, to inclusion of climate change chapters in all negotiations, to efforts to establish a carbon tax to address situations where trading partners are not contributing to a sustainable environment and more. There is significant concern about the U.S.-China Phase 1 agreement and its implications for diversion of EU sales and a deep skepticism of the current Administration’s commitment to the rule of law. Such views and positions will test the ability of the U.S. and the EU to find meaningful solutions to enough issues to justify an agreement.

Conclusion

If there is going to be an agreement between the U.S. and the EU in 2020, it will likely have to be along the lines of the joint communication from July 2018. While such an agreement could meet the FTA requirements of GATT Art. XXIV (substantially all goods test is the issue – excluding autos and agriculture would raise questions), such an agreement would not likely be viewed by Congress as meeting the U.S. negotiating objectives under TPA or as presented by the Administration in January 2019. An agreement that covers what is in the joint communication also could not colorably be presented as a Phase 1 agreement like the U.S.-Japan tariff reduction package, with agriculture to be addressed in a Phase 2. Thus, Congress will be presented with an agreement with our largest trading partner where agricultural liberalization is unlikely.

Hopefully, there will be additional convergence on issues at the WTO so a more united front on more issues can be presented. As well, it is hoped that 2020 will see the resolution of some of the longstanding disputes or unilateral actions by either side that are of concern to the other. While such outcomes are not certain, the U.S. and EU have too much to lose not to find a broader area of consensus in trade going forward. 2020 may be the year to see the start of greater cooperation.

U.S.-China Phase 1 Agreement – Details on the Expanding Trade Chapter

The retaliation that China has pursued against U.S. exports in response to the U.S. 301 investigation and resulting U.S. actions reduced total US domestic exports of goods by some $10 billion between 2017 and 2018 and a further $15 billion in the first eleven months of 2019.

While the U.S.-China Phase 1 Agreement does not include obligations for China to reduce retaliatory tariffs on U.S. exports, the Chapter 6 Expanding Trade obligations that China has assumed would not be plausible if China doesn’t unilaterally reduce retaliatory tariffs on many products. It has done that on some products in 2019 and it is assumed when the agreement takes effect in mid-February 2020 a significant number of retaliatory tariffs will be reduced at least temporarily to permit China to honor its purchase commitments.

The U.S. and China agreed to different levels of ambition in terms of increased U.S. exports depending on four broad categories of goods and services – manufactured goods, agriculture, energy and services. What isn’t immediately apparent is that the increases in goods exports does not cover all U.S. export categories but rather refers to levels of ambition for the categories shown in Annex I and detailed in the Attachment to Annex 6-1 of the Agreement (pages 6-4 to 6-23).

But in fact, manufactured goods (8 subcategories), agriculture (6 subcategories) and energy (4 subcategories) account for less than 60% of all U.S. domestic exports of goods to China in 2017 (59.17%). This suggests both larger percentage increases for the products that are covered to achieve the growth in goods exports and an unknown future for the 40.83% of export products not included in the Attachment, products which saw sharp declines in the first eleven months of 2019 of over $12 billion (a decline of 28.12% from the comparable period in 2018). While the service categories covered in the Attachment are also not inclusive of all service sectors, the select categories account for 98.97% of all service exports to China reflected in U.S. statistics for 2017.

Thus, the level of stretch in achieving the very ambitious figures in Annex 1 depends on a number of factors, including whether one compares increases to the products and services identified versus total goods and services and how one factors in U.S. exports of goods and service not covered by specific commitments.

For example, in 2017 total US domestic exports and U.S. service exports were $175.9 billion. From page 6-3 of the US-China Phase 1 Agreement, the total commitments for increased purchases by China over 2017 levels are $76.7 billion in the first year (Feb. 14, 2020-Feb. 13 2021) and $123.3 billion in the second year (Feb. 14, 2021 – Feb. 13, 2022). The level of increases versus 2017 total exports of goods and services would be 43.6% and 70.0%.

However, only $126.9 billion of goods and services are included in the Attachment to Annex 6-1. If the increases presented are against those smaller numbers, the level of increase needed is obviously greater — 60.4% and 97.2%.

And there doesn’t appear to be any level of trade projected for the $49 billion of goods exports and $600 million services exports not included in the Attachment to Annex 6-1. Since many of the goods exports are subject to retaliatory tariffs, there is not likely to be a rebound in exports from the U.S. to China of these non-specified goods in the near term suggesting that the experience in 2019 (data through November) is likely the best scenario for those products. If so, total U.S. goods exports would be $12 billion lower (services not covered are minor and unlikely to be negatively affected). Increases over 2017 actual (adjusted for the decline for non-covered goods in 2019) would represent an increase of 40.02% in the first year and 68.62% in year two.

Below is a review of the four categories to see the level of ambition being undertaken in each.

Manufactured goods

The manufactured goods listed in the Attachment to Annex 6-1 are broken into the following eight subcategories: industrial machinery, electrical equipment and machinery, pharmaceutical products, aircraft (orders and deliveries), vehicles, optical and medical equipment, iron ad steel, and other manufactured goods. The HS categories listed show total U.S. domestic exports to China in 2017 of $42.521 billion (and most non-covered US exports of goods would be in this grouping). The level of increase in exports of manufactured goods is $32.9 billion in year one and $44.8 billion in year two – increases over actual 2017 of 77.37% and 105.36% respectively.

Agriculture

The agriculture category in Annex 6-1 has six subcategories: oilseeds, meats, cereals, cotton, other agricultural commodities, and seafood. The 2017 U.S. domestic exports for the HS categories included under agriculture in the Attachment to Annex 6-1 were $20.851 billion. Annex 6-1 calls for increased U.S. exports of $12.5 billion in year one and $19.5 billion in year two, increases of 59.95% and 93.52% respectively.

Energy

The energy group products is broken into four subcategories: liquefied natural gas, crude oil, refined products and coal. The increased exports are the largest percentage wise for this category as 2017 exports are relatively modest, just $7.57 billion. With growth of $18.5 billion in year one and $33.9 billion in year two, the rate of increase needs to be 244.23% in year one and 447.53% in year two over actual 2017 levels. Presumably the aggressive increases reflect China’s energy needs and the developments in the U.S. energy sector in recent years.

Data on each of the goods categories is contained in the table below. For simplicity, year 1 is referred to as 2020 and year 2 as 2021.

Services

Data on U.S. trade in services with China show growing U.S. exports from 2016 to 2017 and continuing to grow in 2018. Data for 2017 show U.S. exports to China of $56.009 billion growing to $57.140 billion in 2018.

The service sectors covered in Annex 6-1 include charges for use of intellectual property, business travel and tourism, financial services and insurance, other services, and cloud and related services. These categories in 2017 accounted for $55.434 billion with one of the BEA categories not showing exports to China to preserve confidentiality. The growth objectives included in Annex 6-1 are for $12.8 billion additional US exports in year one and $25.1 billion in year two representing growth rates over 2017 action of 22.85% and 44.81% respectively. U.S. data are presented below.

As reviewed in the post on January 15, there are significant commitments by China in a number of the chapters which should make a significant expansion of exports from the U.S. doable in the short run. Such a result is envisioned in Chapter 6 of the Phase 1 Agreement with specific commitments on Chinese purchases broken down by categories and possibly by subcategories. Such commitments will require a reduction or elimination of retaliatory tariff on many products to permit results in the first two years of the agreement.

While a lot of attention understandably is focused on what remains to be done with China on a host of critical issues (industrial subsidies, SOEs, China 2025 policies, etc.), a strong growth in demand from China for U.S. products and services is important if achieved. Let’s hope that the Agreement surprises many by its early and complete implementation.