US economy

EU v US: who wins in a regulatory showdown?


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Good day from Brussels. EU trade commissioner Phil Hogan (there’ll be a quiz on his nickname later) is back from his trip to Washington DC last week, where he dissed the US-China phase-one trade agreement, promised to take a case against the deal to the World Trade Organization if it broke international trade law and took a swipe at UK prime minister Boris Johnson over Brexit while he was at it. A good couple of days’ work, we think. (He spoke again in Brussels this morning and was disappointingly much more cautious.)

This week’s main piece will examine one of the issues that arose out of that US-China deal: the transatlantic rivalry over rules and regulations. Today’s Tit for Tat is with Hanna Norberg, founder and principal of Trade Economista, while our chart of the day looks at the US’s possibly overly ambitious plans to export more to China.

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Whose regs are ruling the roost?

We’re assured, though we’re not 100 per cent convinced, that it was just a coincidence Hogan (have you remembered yet?) happened to be in Washington DC last week when the first-phase US-China deal was being signed.

But in any case it’s a good opportunity to have a look at an ever-present tension in the transatlantic relationship — the kind of thing Trade Secrets lives for, if we’re honest — that spills over into dealings with third countries such as China. If there’s a showdown between EU regulations and US regulations, whose rule book comes out on top?

There’s a phenomenon called the “Brussels effect” that we’ll come back to in another newsletter soon. European regulations, often the world’s toughest, are adopted internationally by companies as the price of getting into the European market.

This makes American policymakers cross to begin with. The EU section of the US trade representative’s annual report on foreign trade barriers is quite entertaining for those whose sense of humour is aroused by irate depreciations of allegedly unscientific and inefficient regulatory philosophy.

But they get even tetchier with Brussels actively pushing geographical indications (GIs) — legal protection for food names such as prosecco and feta — as part of its bilateral trade deals. The EU sneaking in and getting a deal over GIs with China in November last year didn’t make Washington happy, and it counter-attacked, inserting pointed provisions about GIs into the phase-one deal with China.

In the deal, Beijing agreed that any “pending or future requests from any other trading partner” for GI protection would not stop US goods using generic terms entering its market. Since the US has contended that, for example, “feta” is a name so generic it cannot be protected, this could in theory invalidate parts of the EU-China deal. There were similar provisions in the USMCA deal, but the EU had already concluded GI agreements with Canada and Mexico by the time USMCA was done.

It’s not clear whether the US is too late in the China case. The EU-China GI deal was agreed in principle in November but has not yet been signed or ratified, so whether or not it counts as “pending” or “future” remains to be seen.

WASHINGTON, DC - JULY 25: U.S. President Donald Trump (R) and European Commission President Jean-Claude Juncker (L) deliver a joint statement on trade in the Rose Garden of the White House July 25, 2018 in Washington, DC. Trump and Juncker announced the beginning of negotiations to eliminate trade tensions between the European Union and the United States. (Photo by Win McNamee/Getty Images)
US president Donald Trump, right, with and then EU Commission president Jean-Claude Juncker in Washington in July 2018 © Getty

In theory, Brussels and Washington are working on aligning, if not actually agricultural and goods regulations themselves, the way their respective rules are set. Part of the detente in the transatlantic trade war struck by US president Donald Trump and the then EU Commission president Jean-Claude Juncker in July 2018 involved talks on regulatory coherence.

It’s safe to say those discussions are not exactly turning transatlantic trading relations upside down. There has been some progress on pharmaceutical manufacturing and on recognising each other’s testing procedures, but no big breakthroughs in the vexed areas of food and agriculture. The EU is keen to emphasise that it’s not the only one with exclusionary food standards such as chlorine-washed chicken and beef raised with growth hormone. “Big Phil” (two points if you remembered) Hogan made a point in Washington of reminding his hosts that European apples and pears were kept out of the US by hygiene regulations. Today in Brussels, as part of his more positive tone, Hogan said that the EU and US would work together on eliminating technical barriers to agricultural trade between the two, though we’re not expecting rapid progress.

In the meantime, both sides are pushing their own rules on third countries. Along with the GI provisions, the US-China deal committed Beijing to a series of exceedingly specific regulatory actions, including a pledge to “eliminate the use of polymerase chain reaction testing on all US pet food products containing ruminant ingredients”, which we feel confident means something to someone somewhere.

We nearly got through an edition of Trade Secrets without mentioning Brexit. But of course the UK will similarly become a combat zone for rival regulatory forces — and at the moment is making defiant noises about breaking away from the EU ranks.

There’s a lot more tension over competing regulations than often appears. It might not be the first irritation with Europe that American policymakers bring up in public, but it’s often one of the priorities their officials talk about in private. Expect to hear more about polymerase chain reaction testing for ruminant ingredients of pet food in the future, because the European and American rule books are engaged in a long and determined battle for dominance.

Charted waters

Soyabean prices slid after the US and China inked their phase-one trade agreement last week amid uncertainty about Beijing’s promises to purchase more farm goods. Their promises to accept more manufacturing and services imports from the US are even more ambitious.

Column chart of US exports to China ($bn )  showing How the trade pact could jump-start US exports

Tit-for-tat

Hanna Norberg, founder and principal of Trade Economista, joins us to answer three blunt questions.

Blockchain has been touted as having the potential to make the whole trade process from farm to fork more transparent. What are the stumbling blocks?

Just as the container lowered the costs of transportation and ICT the cost of communication, blockchain stands to lower the cost of information that is both crucial to, and a significant bottleneck, for international trade. Customers in the supermarket armed with a smartphone can scan a QR sticker and instantly find out where this particular apple was grown or whether this chicken has been given antibiotics. There is huge potential here, for consumers who want to make more informed decisions and for SMEs that want to compete on things other than price, such as sourcing ethically or sustainably. But no chain, including blockchain, is stronger than its weakest link, so if this is really going to take off, blockchain needs to be compatible with national and international regulations.

What’s your take on the US-China trade deal? Is EU trade commissioner Phil Hogan right to say that it offers more political than economic benefits?

Politically it is an improvement to the US-China political climate a few weeks ago, so there I guess I’m with Phil. If you compare it to the political situation at the beginning of the current White House administration, not so much.

If you look at it from a more aggregate perspective, what may be a touted as a short-term political benefit for the US and China may very well be muddying the political waters for other trade partners, since issues such as China’s commitment to increase purchases from the US might be a violation of WTO rules and, courtesy of the US, there is no appellate body to take it to for enforcement.

If you were on the negotiating team for the UK as it attempts to thrash out a trade deal with the EU, what would be your top tip?

I’d make sure that those on my team who will be making the decisions at the finish line know what the implications of the respective outcomes are and what we would be willing to give up to get it.

If it was all about tariffs, then that would be one thing, since then you could handle trade deals sequentially. During the TTIP negotiations, we learnt about the incompatible differences in regulation, for example, between the EU and the US. This means that you need to have your tactics regarding the one ready before you embark on negotiating with the other.

Don’t miss

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  • Rana Foroohar on tech wars: China has become a very good place to protect innovation, while the US seems to be going in the opposite direction.
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  • Gavyn Davies on the phase-one US-China deal: the main immediate benefit is simply that the self-inflicted damage to the American economy caused by the tariffs will begin to be reversed.
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Tokyo talk

The best trade stories from the Nikkei Asian Review

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