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Season 1, Episode 50

Host: Deepesh Patel (DP), Editor, Trade Finance Global

Featuring: Elitsa Garnizova (EG), Senior Project Manager and Researcher, London School of Economics

The United States and the European Union are the two most integrated trading blocks in the world, having increased their economic interdependence with the linkages in global supply chains, e-commerce, and investment.

TFG heard from Elitsa Garnizova, Senior Project Manager and Researcher, London School of Economics on the current updates and what we can expect in this UK-EU-US economic relationship.

Deepesh Patel (DP): I’m Deepesh Patel, Editor at Trade Finance Global.

The trade flows between the United States and the European Union account for a third of world trade flows, totalling more than £1 trillion in 2019, and the two account for more than half of global foreign direct investment.

Yet this triangle of trade has gone through a lot recently. With the UK leaving the EU, the current political stance of the US administration, and the increasing role of China in the global economy changes the dynamics of these three trading blocs, and the position of the UK post-Brexit.

So what’s next for this powerful trio? Today I’m joined by Elitsa Garnizova, from the Trade Policy Hub at London School of Economics.

UK – EU – US triangle: An Overview

Deepesh Patel (DP): So let’s start with a bit of a trade outlook, historically, on the EU and the US. Where was trade policy headed, pre Brexit, pre the current Trump administration? What are the key changes since then and with the current Covid-19 pandemic?

Elitsa Garnizova (EG): In August in the midst of Europe’s holiday season, the EU and the US agreed on the first package of tariff reductions in “more than two decades”. The EU will eliminate tariffs on imports of US live and frozen lobster products. In exchange, the US will reduce by half tariffs on range of EU manufacturing products, among which some prepared meals, glassware, surface preparations, propellant powders, cigarette lighters and lighter parts. This breakthrough, which the parties framed as “just the beginning of a process” comes at a time when EU-US relations looked particularly grim.

Lighthizer’s counterpart, Phil Hogan, resigned after only nine months at the job, raising questions on whether the progress in EU-US relations can endure. Observers comment that his successor Valdis Dombrovskis nomination to signals continuity in the trade policy approach as well as possible prioritisation to US and China relations. Improving relations with the US comes at a crucial time when the EU will be looking for ways to generate growth in the context of COVID-19.

Against this backdrop, the UK and the US have delivered their third round of trade negotiations, while serious divergences remain in the negotiations between the UK and the EU and the threat of no-deal Brexit is looming once again.

The transatlantic relationship has been confronted by the new domestic politics of international trade and the specific challenges of Brexit, the trade policy stance of the US administration, and the role of China in the global economy. The UK forms a large share of US trade and investment with Europe, and Brexit makes the North Atlantic Trade Triangle between the three partners very important for global trade.

The US approach to trade: Trump 2.0 or Biden?

DP: From a US administration perspective, what’s the current approach to trade and what’s the strategy been behind retaliation or tit-for-tat tariffs? What is the current US relationship with the WTO and how this has affected global trade?

EG: The current approach of the US administration to trade policy has been described as transactional and grounded in ad hoc deal-making with a strong belief in bilateral over multilateral negotiations. The US administration’s current motto “tariffs work great” contradicts a range of economic and policy assessments, including Fed’s own economic analysis. While rumours of an agreement on Airbus-Boeing are in the news, the administration has until this date imposed or considering a range of tariffs on the EU, among which:

In 2018 the US imposed tariffs of 25% and 10% on steel and aluminium on the basis of national security concerns;
In 2019 The US also threatened its trade partners with tariffs on cars and car parts, also on national security concerns;
In late 2019 the US imposed countermeasures on certain EU goods following a favourable ruling by the WTO in the Boeing case;
In 2020 the US has threatened Section 301 investigations into countries adopting digital services taxes, after withdrawing from international talks.

The WTO reform is also a thorny topic for discussion. In a recent op-ed, Lighthizer put forward his assessment of WTO’s ailments and a range of solutions that have been deemed backward-looking, mercantilist, and “too confrontational to work”.

One area where cooperation is emerging, despite being long overdue, is the dialogue on China: currently few details exist, but the goal of the forum would be to tackle issues such as Chinese disinformation, with trade remaining a less likely topic of discussions. However, China seems to be a priority topic for the other candidate for president as well.

Joe Biden, the Democratic presidential nomination, is an internationalist, who is keen to work within the multilateral rules-based system and work to strengthen it. He would probably abandon recourse to the Section 232 national security exception, rebuilding alliances and restoring credibility. However, Biden is not fully persuaded on the economic benefits of trade versus the strategic ones and he will have to win over blue-collar voters in battleground states.

Tension between the US and the EU will persist regardless of the administration, particularly on security (burden-sharing), trade (agriculture and future of world trade such as digital trade, green economy, healthcare product and services), and China (from disinformation to trade). From a business perspective tariffs, public procurement and standards are perceived as thorny subjects. There is a need for the EU to prepare, once Biden is in place, to engage with clear priorities and offerings.

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The EU’s trade priorities and engagement with the US

DP: What are the EU’s trade priorities with the US and what is current engagement like?

EG: One of the main goals for the EU has been to keep the dialogue with the US alive while pursuing other bilateral agreements and sustaining commitment over multilateral fora. After the suspension of the Transatlantic Trade and Investment Partnership, talks with the US were restarted in 2017 between Cecilia Malmström, then EU’s trade commissioner, and Wilbur Ross, the Trump administration’s commerce secretary. Three years later, there is a very low level of ambition, mostly in terms of low-level liberalisation as indicated by the recent breakthrough. The EU is engaging with the US on the trilateral dialogue with Japan on industrial subsidies, on taking China to WTO court and on specific instances of regulatory cooperation. The main aim is to depoliticise and deescalate the trade tensions due to the high price EU businesses are paying and the pervasive uncertainty with new tariffs looming over the horizon.

The key question for the European Union is whether it is ready to act more strategically – for example, by using existing resources in a more intelligent way. The European Commission has coined the term “open strategic autonomy” to signify its goal to address the resilience of international supply chain. The new phraseology highlights the recognition that the EU should be more strategic in addressing distortive state interventions, export restrictions, and foreign investment. Given that trade is the only area of foreign policy making where the European Commission can lead the way and can rely on qualified majority voting, this is a natural place to start. While in 2019 the Commission and the European External Action Service took a large leap and declared China a “systemic rival”, the EU is still divided on how to be tougher in strategic investment, human rights, and values. How far it is willing to go for an agreement, and what it would be offering?

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The UK’s position in the North Atlantic Trade Triangle

DP: What’s the UK’s current external economic position in the North Atlantic Trade Triangle? And Liz Truss’s ambition for the UK post-Brexit is to “advance trade for the modern era”…

EG: One of the stumbling blocks to being a critical friend in the North Atlantic Triangle is the UK’s ideological desire to break free from the EU, regardless of the price that it has to pay and whether this is the best way forward. The UK has not clarified what its priorities in trade negotiations are. We had a preview of what is bound to happen in early July, when the National Farmers Union gathered more than 1,038,900 signatures for a petition to maintain the UK’s high food standards. The US has signalled readiness to work with the UK on a swift agreement, but US business are waiting to see the outcome of the EU-UK negotiations. The US administration is also keen to ensure full access for US agricultural products.

One of the UK’s ambitions post-Brexit is to “advance trade for the modern era”, focusing on services, environment and digital, with an emphasis on the UK’s desire for leadership. This signals possible areas of cooperation in the North Atlantic Triangle, where the UK can possibly identify opportunities such as ecommerce and progress discussions on the green and circular economy. While divergence remains on internet taxes and data privacy, there is a possibility for a low-ambition agreement, particularly in the absence of a wider WTO agreement.

Research shows that even if the UK pursues a policy of seeking new trade agreements, the UK will incur substantial losses from increased trade barriers with the EU. Therefore, agreement with its largest trade and investment partner is absolutely crucial.

What’s next for the Transatlantic Trio?

DP: What is next for the North Atlantic Trade Triangle? What can we expect in the near term?

EG: While another TTIP-style agreement might not be on the table, there is scope for smaller negotiations to take place to sustain the dialogue between the EU and the US and avoid further escalation. Particularly in the context of COVID-19 recovery, this will be very welcomed by businesses on both sides of the Atlantic.

The aim of both sides will be to build a forward-looking agenda – kick-start the EU-US Dialogue on China and extend that to trade policy issues, as well as reach agreement on digital tax and broader approach on regulating the tech giants, focus on green goods and greening economies, and healthcare products and services in view of Covid-19. There are also immediate wins to be gained by eliminating tariffs on industrial goods, where support exists on both sides. One thing is for sure that the contested issues between the EU and the US will not disappear with a Biden administration and that cooperation is worth actively pursuing. The recent agreement is a good start.

The UK will have to be pragmatic towards both the EU and the US and put ideology aside. The United States-Mexico-Canada Agreement (USMCA) negotiations provide a good example for the UK negotiators: it is likely that the UK will have to follow the US template in multiple chapters and part of the success will be the optics of the negotiations, i.e. making sure that it is a win for any US administration.