Prospects for a Transatlantic Trade Deal

Brunswick Geopolitical’s Anthony Gardner, former US ambassador to the EU, outlines the potential for a US-EU trade deal.

In the months following the visit of European Commission President Jean-Claude Juncker to the White House, businesses on both sides of the Atlantic have harbored high hopes that a transatlantic trade deal might be possible. Seven months have elapsed since the US-EU communique on a possible deal was issued after Juncker’s meeting with President Trump. What are the likely prospects of one happening?

It is important to remember that 90 per cent of the communique was a work of fiction, albeit a useful one from the EU’s perspective because it delayed the imposition of US tariffs on car imports from the EU. The document declared that the parties would work together toward “zero tariffs, zero non-tariff barriers and zero subsidies.” The chances of this were always going to be zero. Neither side is seriously contemplating eliminating all non-tariff barriers and subsidies. Eliminating nearly all tariffs is another matter: the US and the EU did agree under the TTIP negotiations under President Obama to eliminate 97 per cent of all tariff lines. But even that agreement left out many sensitive tariff lines relating to agricultural products.

The communique was also fiction in that the parties declared their intention to work closely together to reform the WTO. However, to date there has been scant evidence that the US has engaged with the very detailed proposals the EU has made in that regard. Indeed, the US continues to block the appointment of judges to the WTO appellate body. It appears likely that at least some influential members of the Trump administration do not want the WTO to be reformed, preferring the US to deal with trade disputes unilaterally.

The communique also repackaged developments that were already happening. It promised that the EU would buy more US soybeans and liquified natural gas. Private market operators, rather than the EU, make those decisions of course. But more importantly, those operators have been buying more of both for some time, regardless of the communique.

There are more fundamental reasons for skepticism. In mid-January the European Commission published recommendations for mandates from the Council (representing EU member states) authorizing the opening of negotiations with the US on the elimination of tariffs for industrial goods, as well on conformity assessment (relating to testing, inspection and certification requirements). These mandates were necessary because the European Commission does not have the power to negotiate such deals on its own.

The draft EU mandate on tariff elimination makes clear that agriculture will be left out of the discussions. This is entirely consistent with the reports of several individuals who were in the Oval Office during the Juncker-Trump meeting last year. But the US continues to insist that agriculture must be included. Even more problematically, the European Parliament’s Committee on International Trade (INTA) issued in late January a draft motion for a resolution on the opening of trade negotiations between the US and the EU.

Any deal on tariffs or conformity assessment would have to gain parliamentary approval, so INTA’s opinion matters. The motion is scathingly negative, taking the view that even a limited agreement on tariff elimination is incompatible with world trade rules. Moreover, the motion states that the EU should not negotiate under the threat of US tariffs and that the EU should not sign any deal unless the US implements the Paris climate change agreement.

The EU also notes that the United States has made no movement toward lifting the Section 232 steel and aluminum tariffs, notwithstanding the specific agreement in the communique that the parties wanted to resolve the issue. Removing these restrictions is a precondition for the EU to conclude negotiations on industrial tariff elimination.

It is rather revealing to compare the negotiating objectives for a transatlantic trade deal that have been released by the EU and the US. The one from the US Trade Representative is extremely detailed, lengthy and ambitious, in some cases repeating the objectives of the TTIP negotiations, but in some cases amounting to a demand on the EU to radically change its regulatory regimes, including in competition law and IP protection. The demand that the EU adopt the US-style system of antitrust enforcement before judicial authorities is extraordinary. It also makes clear that the US will not negotiate to open sub-federal government procurement markets and is not interesting in offering much, if anything, on federal procurement. The EU statement of negotiating objectives is far shorter, more precise and realistic.

Does this clash of expectations mean that nothing will be achieved? Not necessarily. The US and the EU have agreed in principle to expand the scope of the US-EU Pharmaceutical Good Manufacturing Practices Mutual Recognition Agreement to include veterinary drugs. The two sides already rely on each other’s inspections of pharmaceutical manufacturing facilities when determining whether to approve certain drugs. Both sides appear willing to start joint inspections of facilities for human vaccines and plasma-derived pharmaceuticals, paving the way for the potential extension of an agreement on mutual recognition by 2022.

It is also possible that the two sides may make progress on a long-standing irritant in the trade relationship – the inability of the US to ship substantial quantities of beef to the EU. The US is currently using about half of its allocated quota to sell “high-quality” non-hormone treated beef to the EU (other countries are able to sell their beef to the EU under the quota). In June 2018 the EU asked the Council for a mandate to open negotiations with the US on reforming the quota. Possible solutions that would mollify the United States might include substantially increasing the quota or making the definition of “high-quality” beef more stringent such that the quota can in effect only be used by US beef exporters.

It will soon become apparent whether the US-EU truce and negotiations are durable or whether they will collapse. A confidential Commerce Department report sent to President Trump over the weekend appears to have recommended imposing 25 per cent duties on imported autos and auto parts by designating the imports as threats to national security. The President has 90 days to decide whether to take action. Chancellor Merkel, echoing the view of Germany’s auto industry that would bear the brunt of the tariffs, has said that it is “shocking” to hear that such imports could be considered a national security threat. There is no doubt that if the US imposes tariffs the EU will retaliate swiftly and all discussions of trade liberalization will cease.

Anthony Gardner is a Senior Adviser at Brunswick Group and its Geopolitical offer, based across our London and Brussels offices. Anthony was previously the US Ambassador to the EU 2014-2017. In that capacity, he was intimately involved in the transatlantic trade negotiations, as well as data privacy, digital economy, sanctions and energy security. He is also member of the board of directors of Brookfield Business Partners LP and Iberdrola S.A., and senior counsel in the law firm Sidley Austin LLP. These notes are his personal views.