Blog Post

The EU is in the US trade war crosshairs. It should further raise its game

The incoming European Commission faces a dilemma on the transatlantic trade relationship, because of the unpredictable policies of the Trump administration. The EU must rally its citizens; the greater the divides between member states and EU institutions, the lesser the chances are of forging effective policies toward the United States and China.

By: and Date: September 19, 2019 Topic: European Macroeconomics & Governance

The incoming European Commission led by Ursula von der Leyen faces a dilemma on the transatlantic trade relationship because of the unpredictable policies of the Trump administration. Should the Commission negotiate with the United States to de-escalate sanctions and defuse myriad issues and work through the World Trade Organisation (WTO)? Or should the Europeans simply wait the administration out, knowing that making a significant deal is nearly impossible and hoping that President Donald Trump will no longer be in the White House after 2020?

Brussels cannot afford to just wait and see whether or not President Trump follows through on his threats of more tariffs on Europe. It should test whether the administration can agree to some specific timely deals to minimise the risk of car tariffs because the conditions for a broader agreement are not there, however. It should also also try to settle the long-standing dispute over subsidies pitting Boeing against Airbus. Most important, Europe must bring together China and like-minded countries to uphold and reform the WTO. A united EU internal front is critical to delivering on these goals.

The Trump administration has repeatedly expressed unhappiness with Europe. In August 2019,  President Trump reiterated that “the European Union is worse than China, just smaller. It treats us horribly.” The July 2018 visit of European Commission President Jean-Claude Juncker to the White House brought the European Union some respite, but points of contention have only increased since.

The EU is the world’s largest and most open trading bloc. In dealing with the US, it is affected by Washington’s approach toward China and its attack on the WTO. But Europe is itself also a target of the disruptive US trade policy stance, and its bilateral trade deficit with the United States has not shrunk (see figure). The threat of national security tariffs on automobiles and automobile parts from the European Union hangs in the air, along with the possibility of more tit-for-tat tariffs over the long-running Airbus-Boeing dispute and French plans for a digital tax on technology companies.

Source: United States Census Bureau

In recent months, Washington has made rapid progress on a limited deal with Tokyo, granting concessions on auto tariffs in return for Japan allowing market access for some US agricultural products (similar to what it has agreed to in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership). A similar “agriculture for cars” deal with Europe would be hard to attain since the United States and Europe are at odds on negotiating objectives. The new European Commission could revise the European stance. But French farmers are unlikely to cede on agriculture to save German carmakers, even if German car production draws heavily on imports of auto parts from all over Europe. Moreover, the European Union has stated it will not accept quotas or any form of managed trade in automobiles, making a “zone of possible agreement” uncertain at best.

The alternative to no agreement, however, is not good either. The European Union could face higher tariffs in its most important market for car exports, which could add up to $11,000 to the price of each EU car. Also, in addition to filing a WTO case against the United States, Brussels would likely retaliate with tariffs on imports of US products. The new European Commission announced it will strengthen its toolbox to use sanctions when other countries adopt illegal measures and simultaneously block the WTO dispute settlement process. While necessary from the perspective of power politics, “tariff rebalancing” would harm EU producers and consumers.

But some creative options to avert an escalation are not impossible. For example, a recent low-profile deal to improve US access to the EU beef market has created some goodwill. At the G-7 meeting in August 2019 in Biarritz, France offered a compromise on digital taxes in which it would repatriate revenue from the tax if there is a global deal on taxing technology companies.

Meanwhile, the 15-year-old dispute between Airbus and Boeing is coming to a head. The WTO has found both sides at fault for subsidizing their companies and authorised them to retaliate. Washington estimates damages caused to Boeing from EU subsidies at $11 billion while Brussels’ assessment of damages is $12 billion. Both sides have already produced lists of items to be potentially hit by tariff increases. Conditions are, therefore, ripe for a stand-down. The United States and the European Union have both misbehaved, but a negotiated settlement to bring them into compliance with multilateral rules and a long-overdue new framework to govern export financing in this sector would be the wiser course of action.

American and European views diverge on multiple other topics, including the use of Huawei equipment in 5G networks, the impact of China’s Belt and Road initiative, sanctions on Iran, and the strengthened extraterritorial application of US law on Cuba. Some escalation on these and other tensions may be unavoidable, but cooler heads should at least try to find alternative ways of managing differences in the next year.

The EU has a special role in sustaining the multilateral trading system and preventing its potential demise. While the US approach has been less than constructive, the EU is well placed to exercise leadership among middle-sized powers and developing countries to build a large coalition in support of the system. It may even be able to bring China around to play a constructive role in effective WTO reform. The immediate concern is focused on the Appellate Body crisis, which most likely cannot be sorted out without a greater commitment by emerging-market countries to the system and negotiation of new rules on subsidies, forced technology transfer, notifications, and others. Temporary solutions may be necessary, but ultimately, engagement with Washington is indispensable.

With established policy instruments, and with its economic might, the EU has long drawn credibility from its long-standing principled commitment to the rules-based order. But it must further rally its citizens around the compatibility of an open trade policy and the fight against climate change while opposing economic-nationalistic proclivities among some of its members. The greater the divides between member states and the EU institutions, the lesser the chances are of the European Union forging effective policies toward the United States and China.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Opinion

Why China should fear the EU's carbon border tax

Expect Beijing to soon start lobbying against the proposal.

By: Alicia García-Herrero Topic: Energy & Climate, Global Economics & Governance Date: July 26, 2021
Read about event More on this topic
 

Upcoming Event

Sep
2
11:15

Towards a new global trade regime: reform of the WTO

Bruegel Annual Meetings, Day 2 - the World Trade Organisation has been going through trying times, a phenomenon amplified by the pandemic. Why are we headed towards a new global trade regime? And what lies ahead for the WTO?

Speakers: Ngozi Okonjo-Iweala and Guntram B. Wolff Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read article More on this topic More by this author
 

Opinion

Could the RMB dislodge the dollar as a reserve currency?

The dollar remains the world’s largest reserve currency, but it is facing both domestic and external risks.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read about event More on this topic
 

Past Event

Past Event

Strengthening the weak links: future of supply chains

What new supply chains trends will we see in the post-pandemic era?

Speakers: Ebru Özdemir, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Date: July 7, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

CCP's 100th Anniversary: Reflecting and looking forward

As the Chinese Communist Party celebrates its 100th anniversary, we looked into the past, future and present of the country's economic development.

By: The Sound of Economics Topic: Global Economics & Governance Date: July 7, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 1, 2021
Read about event More on this topic
 

Past Event

Past Event

EU debt vs national debts: friends or foes?

The EU will become into a major issuer of safe assets in the coming years. How will this interact with the debt issuance of European sovereign debts?

Speakers: Grégory Claeys, Yves Jacob, Gert-Jan Koopman, Pablo de Ramón-Laca and Imène Rahmouni-Rousseau Topic: European Macroeconomics & Governance Date: June 29, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Avoiding a requiem for the WTO

The WTO has been 'missing in action': how can we restore the organisation's role as a global forum for cooperation on trade?

By: The Sound of Economics Topic: Global Economics & Governance Date: June 16, 2021
Load more posts