Trans-Atlantic Trade Is Headed Toward Disaster

After an Oval Office meeting last month between U.S. President Donald Trump and Irish Prime Minister Leo Varadkar, Trump took a hard line on trade with the European Union. “We’re going to tariff a lot of their products,” he said, unless Europe compromises on long-standing trade issues.

U.S. Trade Representative Robert Lighthizer, responding to pressure from Congress, added that the trade agreement between Washington and Brussels would be a “dead letter” absent the inclusion of agricultural issues. On the European side, however, trade commissioner Cecilia Malmstrom reiterated the refusal to include any discussion of agriculture in these talks. Moreover, the European Parliament failed to endorse the proposed European Commission mandate for negotiations, and both institutions mulled banning all talks until the United States rejoined the Paris climate accord, a position that French President Emmanuel Macron has advanced. The French also blocked the adoption of a negotiating mandate in late March.

Unless both sides reconsider their intractable positions, and Malmstrom gets approval to open talks, an impatient Trump could impose 25 percent auto tariffs. Such a move would likely put the already weak European economy into a recession and cause a breakdown in trans-Atlantic economic cooperation, which has been a pillar of the global economic order since the Bretton Woods system was established in 1944.

The EU enjoys a nearly $170 billion merchandise trade surplus with the United States, of which Germany alone accounts for some $70 billion. In some part, this represents trade benefits built up by Europe over time as the United States assisted it in regaining economic vitality after World War II, which were never relinquished despite continued U.S. efforts over many decades. This is certainly irritating to Trump. The EU maintains agricultural tariffs well above those of the United States and has employed restrictions on U.S. exports such as chicken, genetically modified crops, hormone-treated beef, and a wide variety of dairy products. It maintains a 10 percent tariff on imported automobiles and parts, subsidizes its commercial aviation sector, deploys competition policy, and threatens new tax measures to punish U.S. technology and financial firms. It circles wagons around the auto industry in spite of its blatant cheating on emission standards. It is slow to correct problems when the United States wins relief through the dispute settlement system of the World Trade Organization (WTO). Europe also has not been especially helpful to the United States in mounting a serious challenge to Chinese mercantilist practices.

The U.S. Treasury has put Germany on its watch list for currency manipulation, partly because it consistently runs a global trade surplus around 8 percent of GDP. As a member of the eurozone, Germany can hide behind the easy monetary policy of Mario Draghi’s European Central Bank, which was recently renewed, and the currency weakening effects of being in the same currency zone as Southern European economic laggards. Germany also resolutely refuses to stimulate its weakening economy, consistently running budget surpluses against the advice of the European Commission. European and German economic policy hence promises to exacerbate trade imbalances with the faster-growing U.S. economy

The United States has traditionally been tolerant of the EU’s soft protectionism, especially in the decades devoted to bringing Europe back to prosperity and into the anti-Soviet bloc after World War II and later to help convince the Chinese to move in a democratic, market-oriented direction. But in recent decades the costs of the growing trade imbalances on the industrial and technology sectors have led to a shift in thinking about the trade-offs in a liberal trade regime and helped propel Trump to the presidency.

The other serious trans-Atlantic conflict is over reform of the WTO. All sides agree that current rules fail to cover issues of great importance to the 21st-century economy, such as digital trade, subsidized state-owned enterprises, and protection of intellectual property. The rise of the huge, mercantilist Chinese economy is an important stimulus to agree on new rules. Since the George W. Bush administration, the United States has also built a critique of the operations of the WTO, centered on its desultory pace of action and the judicial activism of its Appellate Body, which settles disputes.

The United States, the EU, and Japan have been working diligently since late 2017 to devise solutions to the problems of the WTO. But European unwillingness to recognize in a substantial way the U.S. critique of the Appellate Body overstepping its mandates and assuming rule-making powers threatens this process as well. (The emblematic case of this overreach is the 2006 ruling invalidating the methodology for imposing anti-dumping duties used by the United States and accepted in the negotiations establishing the WTO.) Since the Appellate Body will cease to be operational by December because the United States, beginning under the Obama administration, has refused to appoint new judges to it, the future of the WTO itself may be hanging in the balance. Moreover, the need for consensus on new rules has paralyzed the WTO since its inception and has led many to question the effectiveness of the institution.

Trump certainly does not help matters by constantly invoking the looming threat of tariffs. While his proposed auto tariffs are a bad idea, Trump’s frustration with Europe can certainly be understood. Congress could help by limiting the president’s power to use tariffs but needs to suggest alternatives to incentivize Europe to act. Failure to bridge differences in the dispute settlement problem and agree on broader WTO reform could result in the effective demise of this foundational part of global economic order.

Unfortunately, some EU leaders in recent weeks have further raised tensions by promoting subsidized industries, as they did with Airbus and contemplate doing for artificial intelligence and electric batteries, in the guise of national champions; renewing an easy money policy that weakens the euro; siding with the Chinese mobile communications powerhouse Huawei in the dispute over 5G deployment; and joining China’s multibillion-dollar Belt and Road Initiative. This may be enough to provoke Trump into pulling the trigger on auto tariffs and send the global economy into a tailspin.