US economy

The EU needs to stand up to the US on trade


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Hello from Brussels. The EU institutions and member states are back into the swing of things in the new year. Mainly they’re pretending that they have something useful to add to the Iran situation by issuing high-minded statements. But in between times the European Commission is gearing up for a tricky few months ahead dealing with the potential of renewed hostility on the trade front from the US, girding its loins for Brexit talks with the UK and starting the long process of designing a carbon border tax.

We’ll take a look at the first of those problems below. Our Tall Tales of Trade is centred on a frankly baffling intervention from a UK cabinet minister on the subject of post-Brexit agriculture in the UK, which we fear will not be the last. Our chart of the day looks at waning US auto imports.

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Trump’s basilisk glare turns towards Europe

You know what they say: when one door closes, another opens. Unfortunately for the EU, for Donald Trump the new aperture seems likely to be a transatlantic viewfinder through which his administration, having got the only (minimal) trade concessions from China that are likely for now, is turning its basilisk glare on Brussels.

Washington has already signalled that its attention on trade policy will swivel from China to Europe. EU policies may be less trade-distorting than China’s, but Brussels is more likely than Beijing to be amenable to changing them.

The Trump administration has a healthy list of grievances. The most venerable is the latest stage in the Airbus-Boeing litigation, aka the Jarndyce vs Jarndyce of the World Trade Organization dispute settlement system. The US has already imposed tariffs on the EU after a ruling against Airbus subsidies. Brussels will get WTO authorisation this summer to impose its own measures because of illicit tax breaks for Boeing. The sensible thing would be to start negotiations now for mutual reductions in state support to end the issue. But Washington has declined to engage. The US seems to prefer having at least a period where each puts tariffs on the other.

An air of rivalrous transatlantic argy-bargy has emerged more generally at the WTO. The EU is trying to bypass the US block on the dispute settlement system by setting up its own workaround version of the Appellate Body (AB). It is also amending its domestic enforcement regulations to allow it to impose tariffs on governments that stall a case they are losing by appealing it to the non-existent AB. It’s not explicitly aimed at the US, but the likely first target is fairly clear. American companies are also likely to suffer from the EU’s proposed carbon border tax, given the absence of a federal emissions pricing regime in the US.

And in December, a spicy new item entered the list when the US trade representative’s office unexpectedly threatened proceedings against the EU over France’s digital services tax on tech companies. The detailed 93-page complaint came in defiance of a deal between French finance minister Bruno Le Maire and US Treasury secretary Steven Mnuchin to temporarily tolerate the tax while a multilateral version was worked out. This week in Paris the EU trade commissioner — “le grand Phil” Hogan as he’s known there — met Le Maire amid the usual unspecified but firm promises about standing up to Washington.

Mandatory Credit: Photo by Mario Guzman/EPA-EFE/Shutterstock (10501355b) Robert Lighthizer, commercial representative of the United States government during the signing, of the new version of the T-MEC trade agreement, at the National Palace in Mexico City, Mexico, 10 December 2019, which includes the agreed modifications between the White House and the US legislators of the Democratic Party. Mexico, USA and Canada sign the T-MEC with modifications of the Democrats, Mexico City - 10 Dec 2019
Robert Lighthizer, US trade representative, managed to persuade Donald Trump not to impose national security tariffs on EU cars last year © Mario Guzman/EPA-EFE/Shutterstock

What lessons and principles can the EU follow in the months ahead? One is to respect the central role of Robert Lighthizer, the US trade representative. In retrospect France was perhaps a touch naive to think that a deal with Mnuchin would bind Lighthizer (Mnuchin has been credibility-sappingly over-optimistic on trade issues before).

This is not entirely bad news. Lighthizer is tough but not given to lashing out wildly. He and others managed to persuade Trump, for example, not to impose national security tariffs on EU cars last year.

Another lesson is the need to communicate subtly, particularly in public. Hogan might, on the face of it, be a better fit with the frankly rather macho culture of trade policy in Washington than his predecessor, Cecilia Malmstrom. But he has already managed to raise hackles with blunt criticism of the Trump administration. He will be in Washington next week, and the tone he takes could be important.

A final lesson is not to be bullied and be prepared to pay the cost for what it believes is right. If the EU firmly believes in carbon border taxes (as it should, in principle) and the price is dealing with litigation and possibly unauthorised retaliation from the US, so be it.

It’s not going to be fun for EU trade people over the next few months. They will be hoping even more fervently for a change in the administration after November’s elections. But Trump’s evil eye is turning on them again, and they need to be prepared.

Charted waters

Trump may have stepped back from slapping auto tariffs on trading partners at the end of last year, but US auto imports have been in decline in any case, led by Germany. US auto sales last year were still strong, but lower than the previous year.

Line chart of Annual % change (3-month average) in US auto imports (value terms) showing Germany leads the decline in US car imports

Tall Tales of Trade

Environment, Food and Rural Affairs Secretary Theresa Villiers who will confirm on Wednesday that new laws will see farmers paid for "public goods" such as boosting nature and tackling climate change. PA Photo. Issue date: Wednesday January 8, 2020.  Villiers will tell the Oxford Farming Conference that the Government's Agriculture Bill, which will govern farming after Brexit, will be introduced to Parliament this month. See PA story FARM Environment. Photo credit should read: Victoria Jones/PA Wire
© PA

What’s the tall tale?

We’re clearly going to be spoilt for choice over the coming year as the Brexit talks generate a whole butcher’s shop of tripe (history suggests, unfortunately, this will mainly come from the UK side). This week’s peculiar intervention was from Theresa Villiers, pictured above, Britain’s secretary of state for the environment, food and rural affairs. She suggested that the UK could raise tariffs to keep out food produced to different standards — presumably including our old friend, chlorine-washed chicken from the US.

Why is it wrong?

Applying varying tariffs to the same food produced in different ways would, frankly, be a bizarre way of managing food hygiene rather than simply applying technical regulations as at present. The trade world’s sages have been at work on this and concluded that it isn’t necessarily absolutely 100 per cent WTO-illegal. But short of running up to US trade representative Robert Lighthizer and kicking him in the shins, it’s hard to imagine a better way of riling the Americans. Dropping regulatory barriers to US imports only to reinstate them using tariffs is clearly an invitation to the USTR to litigate. The intervention seems to have been Villiers freelancing rather than a stated policy position. Our firm prediction: it won’t happen.

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