U.S.-EU trade negotiations

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.