The EU is facing big challenges on the trade front. First, how to deal with President Donald Trump’s ‘America First’ policy that has resulted in US tariffs on the EU, Canada, Mexico, Japan, Korea and above all, China. Second, how to preserve the rules-based, multilateral trading system, and especially the WTO that Trump has threatened to leave? And third, how to respond to Brexit and the UK’s aim of securing quick trade deals with some of the EU’s most important partners?
The EU was totally unprepared for Trump’s approach on trade. On his first day in office he withdrew the US from the TPP. He then announced that NAFTA would have to be renegotiated – which happened to his advantage – and that the EU would have to buy more American goods or else jeopardise NATO. We have seen transatlantic trade disputes in the past, including over TTIP, but in essence the US was always a supporter of global free trade. It was after all the US that after the Second World War stablished the GATT, the forerunner of the WTO system that the US president is now challenging.
Now, Trump demands reciprocity and instructed his officials to achieve this through: strict enforcement of US procurement (Buy American) and trade defence laws; expansive tax provisions; blocking WTO dispute settlements; withdrawing from and forcing others to renegotiate existing trade agreements; adopting a ‘national security’ argument to justify breaking WTO tariff commitments for steel, aluminium and possibly cars; and enacting punitive tariffs on billions of dollars of imports from China, unleashing a trade war.
In July, European Commission President Jean-Claude Juncker met with Trump in the White House to try to cut a deal. The EU would buy more soya beans and LNG from the US, and the US would refrain from putting tariffs on European cars. The deal did not lift the tariffs on steel and aluminium but it did give the two sides breathing space. The EU has now offered to increase its beef quota from the US and is looking into some low-hanging fruits on standardisation agreements in sectors like medical devices.
The worry in Brussels, however, is that some sectors such as the German car lobby may seek side deals with the US. The reality is that Trump’s trade strategy has been strong-arming smaller and weaker countries into accepting export quotas in return for salvaging their trade agreements with the US, signing on to rules preferred by the US (Korea, Canada, Mexico), or simply their exports to the US (Brazil, Argentina). Trump is now trying to bully the EU and Japan into trade concessions?
The problems surrounding international trade were on open display at the G20 summit in Buenos Aires which concluded with the understatement: ‘We also note current trade issues.’ The US refused to endorse calls to fight protectionism, something the G20 has agreed to at every meeting since 2008. The statement did accept that ‘international trade and investment are important engines of growth, productivity, innovation, job creation and development’ but added that the system is currently falling short of its objectives and support the reform of the WTO.
The EU has been pushing the reform of the WTO as a means to exert pressure on China to open its market and to keep the US from leaving the organisation. The big question is the extent to which China will go along with WTO reform. Following the Trump-Xi dinner in Buenos Aires, the US has given China 90 days to meet US requirements, before doubling the tariffs. The arrest of Meng Wanzhou, Huawei’s chief financial officer, in Canada on a US extradition request has further complicated matters.
Some in the EU fear Trump really wants to pull the US out of the WTO. The signals are mixed. The US has filed a dozen complaints in the WTO in the past 18 months, against China, the EU, Turkey, Canada and India. At the same time, it has blocked the appointment of judges necessary for the proper functioning of the WTO dispute settlement system. The clock is ticking.
While seeking to preserve the WTO, the EU has pursued bilateral deals too. It has a largely positive record in negotiating trade agreements in recent years. But as one senior trade official remarked ‘it’s a pity we are not so good at ratifying the deals’. The crown jewel EU trade deal is the FTA with Japan, with the two countries representing 27% of global GDP. It follows the successful trade deal with Korea which has seen trade increase by 30% in the last five years. Deals with Singapore and Vietnam await ratification. The Japan and Singapore deals should squeeze through the ratification procedures before the European Parliament elections in May, but Vietnam is likely to be delayed. Negotiations with Malaysia and Indonesia are progressing, while talks with Thailand may restart after the upcoming elections next spring.
Negotiations with Australia and New Zealand should proceed swiftly, as both are like-minded partners in many areas. However, both are also large agricultural exporters, a factor which could be sensitive in EU farming circles. The EU has already run into problems with Mercosur on agriculture. Officials reckon the New Zealand deal could be done in 12-18 months and with Australia in 24-36 months.
Brexit is the classic lose-lose situation. The UK-EU withdrawal agreement includes a status-quo transition period during which everything stays the same, except for British participation in EU institutions. This can be extended once for up to two years and allows for Britain to remain in a customs union with the EU should there be no satisfactory deal – and to avoid the ‘Irish backstop’ that leaves Northern Ireland in the EU regulatory and customs area.
Until the UK clarifies its future trading arrangements with the EU it is difficult to imagine any third country entering negotiations with the UK. This was made quite clear by Japanese Premier Shinzo Abe at the G20 meeting in Buenos Aires who was lukewarm about the UK joining the revised TPP. At the G20, Premier May also mentioned Argentina, Chile, Australia and New Zealand as early targets, and with few experienced trade negotiators this will already be a challenge. Interestingly she omitted the US, perhaps because Trump had tweeted that the EU-UK withdrawal agreement was ‘good for the EU’ but made it ‘difficult to see how the UK could do a trade deal with the US.’
The outlook for transatlantic trade relations as well as the global trading system is anything but rosy. Trade has become ever-more politicised and mixed up with climate change, sustainable development, environmental and labour standards. Above all, it is part of the new geo-politics standards set by Trump. There is little sign that the US approach will change even with the Democrats in charge of the House of Representatives. There is also little sign of China really reforming in a way that would satisfy the US and EU.
This leaves the EU in a difficult position. As champions of the multilateral, rules-based system, the EU will continue to seek like-minded partners to preserve the WTO and its essential dispute settlement mechanism. At the same time, it must defend the interests of its member states. This will mean a continuation of the mixed approach, working where it can through the WTO but also seeking to negotiate bilateral deals.
As recent years have shown, and with internal centrifugal pressures rising, the EU should not linger until another global or DC consensus is found. Before it is too late, Europe should leverage its huge single market as much as possible, sharing standards and allowing exchanges with all trading partners open for business.
Fraser Cameron is a Senior Advisor at Cambre Associates and Director of the EU-Asia Centre