July 31, 2018 U.S.-European Union (EU) Trade Relations

Can Negotiations Really Solve America's Main Europe Trade Problems?

By Alan Tonelson

July 26, 2018

Whenever an agreement raises many more, and bigger, questions than it answers, it’s legit to ask whether it’s much of an agreement. And the questions raised by yesterday’s U.S.-European Union (EU) announcement on trade relations are numerous and immense.

For example, the statement, released following talks between President Trump and European Commission President Jean-Claude Juncker, said nothing directly about the U.S. auto trade tariff threat that raised transatlantic trade tensions to a whole new level. To be sure, the two leaders did agree that, while a joint “Executive Working Group” would begin work on implementing a new trade agenda between the two economic giants, neither “will not go against the spirit of this agreement, unless either party terminates the negotiations” – which sounds like a deal to forego any new trade restrictions. Moreover, Juncker reportedly has stated that this agreement specifically rules out the automotive levies.

Nonetheless, there’s been no announcement yet that the United States will terminate the study it launched in May to determine whether or not new tariffs are needed to bolster the American automotive sector for national security reasons. And regarding the U.S. levies still in place on certain metals products from Europe, the statement simply declared an intention “to resolve the steel and aluminum tariff issues and retaliatory tariffs” issue.

But there are far bigger questions about the agreement, its execution, and the implications for U.S. trade flows and industries that haven’t been answered – or even asked. Of special importance: First, will Washington and Brussels agree to tackle – and eliminate — all the barriers impeding and distorting transatlantic trade? Second, will any such agreement be genuinely enforceable. Major doubts are justified on both counts.

Regarding the barriers to be addressed, it’s encouraging that the statement targeted the complete elimination of not only tariffs, but non-tariff barriers and subsidies on “non-auto industrial goods.” But why was the automotive sector omitted? And why, when it comes to “trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans,” is the aim simply to “reduce barriers.”

Even more important, what about the towering value-added taxes (VATs) imposed by European Union members? Not only do they typically add between 20 and 25 percent to the cost of imports. They subsidize exports to the same degree. Unless they’re on the agenda, the proverbial playing field will remain badly tilted. Yet the joint statement made no mention of them.

Monitoring and enforcement is a major concern, too. As indicated above, it’s heartening that the Trump administration recognize the importance of non-tariff trade barriers and subsidies. But recognizing their importance is a far cry from devising a strategy to eliminate or even reduce them verifiably.

Principally, although the European Union’s bureaucracy is less opaque than similar complexes in East Asia, for example, it still suffers major transparency problems – as even its officials admit. So even identifying many non-tariff barriers and subsidies – much less eliminating them – will be exceedingly difficult at very best. America’s governing processes, by contrast, are highly transparent. All rules and regulations and budgetary expenditures are published regularly, frequently, and in full.

Relatively secretive bureaucracies such as Europe’s enjoy another important trade-related advantage over the American system. Subsidies and non-tariff trade barriers have proved to be eminently fungible. In other words, they are easily reshuffled and renamed. But when such shell games are played by systems such as the EU’s, they’re typically played behind closed doors. Such American gambits, however, are pursued and agreed on in the open.

Finally, the joint statement made no mention of currency manipulation. Admittedly, there’s precious little consensus even within the United States as to defining this protectionist practice. Yet there’s a serious case to be made that it’s been engaged in by the eurozone, which includes many EU members, by virtue of the European Central Bank’s ultra-easy monetary policies.

Not that the America’s central bank, the Federal Reserve, hasn’t kept interest rates very low for long periods of time, and pursued similar forms of stimulus, such as Quantitative Easing. But given the consumption-oriented structure of the U.S. economy and the gigantic trade and current account deficits it chronically runs, it’s hard to make the currency manipulation charge stick. Given the major international surpluses racked up by the eurozone and EU, and how net exports have led their growth, they’re much more plausible culprits.

Interestingly, for all these differences, Europe’s economic and political systems are surely closer to and more compatible with America’s than those of nearly all other major economies. If Washington can’t overcome the above obstacles and negotiate a truly win-win deal with Brussels, how promising can trade talks with other countries and regions be?

ALAN TONELSON
Alan Tonelson is Founder of the blog RealityChek – www.alantonelson.wordpress.com – which covers a wide range of domestic and international policy issues along with political and social trends.

For 18 years before leaving to launch RealityChek, Tonelson followed the impact of globalization on the U.S. economy, domestic manufacturing, and U.S. national security for the U.S. Business and Industry Council. This national business organization represents nearly 2,000 domestic American companies, most of them small and medium-sized manufacturers.

Alan Tonelson is a regular columnist with Industry Today.

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