At their meeting Wednesday, President Trump and EU Commission President Juncker agreed to a truce in the war of tariffs that threatened to undermine the transatlantic alliance and deliver a severe blow to the world trade system.
The two leaders worked out a plan to suspend any new tariffs, notably on automobiles, while negotiating a new bilateral framework whose goal is “zero tariffs, zero new non-tariff barriers and zero subsidies” on non-auto industrial goods. They also agreed to negotiate removal of barriers to access in their respective goods markets resulting from different standards. The EU pledged to increase purchase of U.S. soybeans and liquefied natural gas (LNG). The two sides will seek a resolution to existing U.S. steel and aluminum tariffs (including countermeasures by the EU) and to differences in auto tariffs. Finally, the U.S. and the EU pledged to work constructively to reform the World Trade Organization (WTO), primarily to make its dispute settlement process function more efficiently and devise methods to offset new trade-distorting practices such as the use of subsidies and forced technology transfer. This aspect of the agreement includes enhanced use of WTO rules to counter aggressive new Chinese efforts that are undermining the economies on both sides of the Atlantic and flaunting WTO disciplines.
Provided that the details of the new agreement are quickly articulated and implemented, it will mark an important turning point for the world trading system and for advancing Trump’s trade agenda. Importantly, it will give a boost to transatlantic economies and joint efforts to meet the challenge of Chinese mercantilism.
In the first place, it clearly reduces the threat of an all-out trade ware occasioned by a possible 25% U.S. tariff on autos and by EU intransigence in admitting that there is a problem in its huge and persistent trade imbalance with the U.S. and the rest of the world. Second, it shows that President Trump can be flexible in achieving his stated goals on trade. This is especially important to maintaining a good working relationship with traditional trade allies in Europe. The transatlantic partners are huge customers of each other and the pillars of support for a free market-based trading system. One can hope that the agreement will be a model for a similar truce with Japan in the upcoming meeting between U.S. Trade Representative Lighthizer and Japanese economy minister Motegi.
Third, the U.S.-EU accord rekindles hope for a revived Transatlantic Trade and Investment Partnership (TTIP), at least for the industrial sector. The Trump administration had never ruled out such a move, even though both domestic and European public opinion ranges from cool to adamantly opposed to the mooted TTIP. Agriculture has always been a stumbling block to TTIP, and its exclusion will possibly open the door to a mini-agreement. An intriguing question which may be significant in the long run arises from the EU commitment to increase purchases of U.S. soybeans. Does this imply that the EU will relent in their traditional, science-denying opposition to buying genetically modified organisms (GMOs), since most U.S. soybeans utilize modern GMO technology? If this is the case it would remove a previously immovable obstacle to increased agricultural trade.
Fourth, the inclusion of a joint commitment to WTO reform, along with the pledge to use that institution’s existing rules to counter Chinese mercantilism, is an encouraging sign that the focus of ongoing trade discussions will be on China, the biggest existential threat to the WTO. China has exploited differences between the U.S. and its allies, including Japan and other Asian trading powers, to promote the idea of an anti-U.S. coalition led by the Middle Kingdom. In recent days, for instance, the signing of a new EU-Japan trade agreement was accompanied by calls for working together to turn back alleged U.S. protectionism. Many experts in the EU, Japan and the U.S. recognized the irony of China posing as a champion of free trade. China is also systematically using its “One Belt, One Road” initiative to buy economic and political influence in Europe, Australia and Asia. Its persistent violations of the WTO rules on intellectual property, subsidies and forced technology transfer suggest a form of “free trade with Chinese characteristics” rather than a firm commitment to the open trading system the WTO was built to promote.
The U.S. and the EU will need to work together in good faith to bring the Trump-Juncker accord into practice. Reestablishing the leadership of these traditional allies would be a positive step not only for taking on China, but in avoiding an economically damaging trade war. The early impact of a spiraling cycle of tariffs can already be seen in reduced earnings for U.S. industrial giants like Ford and Whirlpool, and in China’s death sentence on the Qualcomm-NXP merger. The U.S.-EU agreement is the first step in reversing this negative economic result, rebalancing trade flows that have by and large disadvantaged the U.S. industrial sector and coordinating international efforts to meeting the Chinese mercantilist challenge.