Businesses must act now to prevent a transatlantic trade war

Diplomats involved in testy transatlantic trade negotiations this past year have likened talks between the United States and European Union to “relatives fighting over money”.

For businesses invested on both sides of the ocean, it can feel like being children jostled and powerless in a family row.

Discussions at BCW with senior officials from Washington and Brussels lately suggest the arguments could get worse in 2019 before they get better. A “trade truce” concluded on July 25 when European Commission President Jean-Claude Juncker met U.S. President Donald Trump at the White House is looking frayed.

Five months after a surprise deal that stayed Trump’s hand at the 11th hour before he imposed a 25% levy on EU auto imports in return for European pledges to help cut the U.S. merchandise trade deficit, both sides are feeling sore. Europeans complain that the 25% tariff Trump imposed in March on their steel (and 10% on aluminium) is still in place; Americans complain that the deficit is too.

Trump, impatient though also focusing more immediately on forcing China into better trade terms, is again brandishing the threat of auto tariffs. He hauled in German carmakers in December, seeking pledges of new investment in U.S. plants – a chance for them to remind the president of how much they have already invested in creating American jobs at their U.S. plants. The EU in turn is reminding Washington that it still has 20 billion euros worth of countermeasures all lined up to retaliate, just as it did on steel and aluminium, if the U.S. hits its cars.

Troubling for businesses caught in the middle – including many U.S. firms in Europe who are keen to remind the White House that investment returns they send home largely offset the trade deficit with the EU – is a sense of irritation on either side that has replaced a virtual Trump-Juncker love-in in July.

Neither ever imagined a return to the kind of detailed free trade talks seen under President Barack Obama – the TTIP negotiations were already sinking under the weight of their own complexity even before Trump killed them off. But things have gone sour since the summer.

U.S. officials complain that Brussels has failed to respond to its calls to cut not so much tariffs but regulatory barriers to U.S. imports — rules on food quality, for example — which Washington sees as vital to meeting Trump’s goal of greatly reducing a $150-billion a year merchandise trade deficit.

Having effectively refused to listen to appeals for talks on the deficit for over a year after Trump took office, the steel and aluminium tariffs got Europe’s attention, say U.S. officials – who now charge that Brussels has failed to follow through on promises.

Among the toughest issues is a European refusal to include agricultural produce in any trade talks. That is not only an old bone of contention, but the two sides even disagree about whether Juncker made a promise on July 25 to discuss food, drink and animal feed imports when he agreed to open markets for “farmers”.

There is an element of Christmas pantomime in the “oh, yes he did” and “oh, no he didn’t” verbal skirmishing between Washington and Brussels.

Juncker can show Trump that Europeans are indeed buying more soy from American farmers — but that was always going to happen thanks to market forces after China banned U.S. soy imports, driving down the price compared to animal feed from competitors.

The EU can also say it is making good on promises to buy more U.S. liquefied natural gas (LNG), but that is, as it were, a slow burn, requiring first years of infrastructure investment.

But Washington takes the view that there has been little of substance so far in the trade dialogue implemented after July, especially in what it sees as a European mentality to regulate innovative American companies, preventing them from expanding U.S. exports into the bloc.

That’s not fair, the Europeans argue, who say they are faithfully implementing July commitments to cut tariffs, subsidies and other non-tariff barriers, including fast-tracking efforts to harmonise standards or recognise U.S. standards. It’s not fast enough for Washington, though, which accuses Europe of double-standards on standards.

Europeans visiting the United States don’t think twice about the safety of medicines or cars, yet a raft of EU regulations on such products keep U.S. competitors out.

Trump, U.S. officials insist, is not demanding the deficit be entirely eliminated; if U.S. exporters cannot compete on a level playing field, he says, so be it. But for Europeans, trade with the United States is always going to be unbalanced.

It’s like dealing with a Third World country, is the startling view of some EU officials. Not because of standards but because of the focus on bulk agricultural commodities in the U.S. goods export basket to Europe compared to the high-value manufactures that Europeans typically ship Stateside. A tonne of prairie wheat versus a Mercedes limousine from Stuttgart.

But U.S. businesses manufacturing in Europe, providing services to Europeans or selling U.S.-branded products made in Asia are all sending home euros they earn in the EU. These subtleties, Europeans say, seem to be lost on the real estate tycoon-turned-reality TV star, who as head of state still appears eager to strike headline-making deals.

Brussels and Washington are both grappling with similar economic challenges from China, and the EU is claiming the mantle of leadership on multilateral global trading rules that the U.S. has laid aside. Yet an oceanic gulf in understanding has opened up, with both sides threatening tit-for-tat measures.

It may now be time for the businesses caught in the crossfire to make their voices heard before the Western allies sleepwalk into a deeper trade war nobody wants.

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