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Gabriele Bertani

The transatlantic economy: from the tariff war to the Trade and Technology Council


Photo credit: Shutterstock


Introduction

The transatlantic relationship has had a bumpy ride in the last few years, from Trump’s bashing of Europe over the level of military spending to US imposition of trade tariffs on the EU, and Europe’s grievances about the extraterritorial outreach of US financial sanctions. Yet, with the new Biden administration, the relation markedly improved, though some disagreements still remain. This article explores the shifting economic relationship between the United States (US) and the European Union (EU) under the Trump and Biden administrations. Firstly, it will analyse the trade and economic irritants that affected the two sides of the Atlantic under the Trump presidency. Secondly, it will delve into the resolution of some of these stumbling blocks with the advent of the Biden administration, with a particular focus on the set up of the EU-US Trade and Technology Council. Finally, it will examine the challenges that lie ahead in the economic domain between the two Western powerhouses.


Trump bashing


The Trump administration has adopted a unilateralist, mercantilist, and transactional approach to trade, based on bilateral dealings rather than multilateral negotiations, a stark break from the Obama presidency. Indeed, a few days into his presidency Trump withdrew the US from the Trans-Pacific Partnership (TPP), the 12-nation Free Trade Agreement (FTA), that was one of the main pillars of former President Obama’s Asia policy (Rampton and Holland, 2017). Similarly, Trump halted negotiations for a free-trade pact with the EU, known as the Trans-Atlantic Trade and Investment Partnership (TTIP), though the prospects of concluding the agreement were already weak before the arrival of Trump, due to widespread opposition from civil society and some European governments (Erlanger, 2018). The protectionist approach adopted by the administration was due to the will to bring back manufacturing jobs to the US shores and to reduce the huge trade deficit that the US has with other countries, which totalled at around $500 billion in 2016 (Scott, 2017). The US trade deficit with the EU, around $145 billion in 2016, was a particular irritant in the economic relationships between the two sides (United States Census Bureau, 2022a). Particularly, Trump often attacked Germany over its trade surplus with the US, nearly $65 billion in 2016 (United States Census Bureau, 2022b).


Hence, from the onset of its presidency Trump adopted a confrontational approach with Brussels in the commercial and economic field. The main dispute between the EU and the US was due to the imposition of tariffs. Two spats tied to tariffs erupted during Trump's years. First, following a monthslong investigation by the US Commerce Department, Trump in 2018 established levies of 25% on steel imports and of 10% on aluminium imports from a raft of countries including the EU. The US administration argued that the tariffs were justified on national security grounds and that the imports of the two materials threatened the long-term viability of the steel and aluminium industries in the US. The legal basis for the tariffs was Section 232 of the Trade Expansion Act, which allows the President of the US to impose tariffs on articles if these imports are deemed to threaten national security. In response, the EU launched a raft of retaliatory tariffs against US exports into the EU, choosing goods produced in Republican-led states, in order to maximise their political effects. Additionally, the EU filed a complaint to the World Trade Organisation’s (WTO) dispute resolution mechanism to get US sanctions declared illegal. Moreover, Trump often threatened to impose duties on European automotive imports, though he eventually avoided imposing them (Schneider-Petsinger, 2019).


Second, another long-standing trade dispute that skyrocketed under the Trump administration was the spat over subsidies to rival aircraft-makers Boeing and Airbus. The US imposed $7.5 billion in tariffs on European exports in 2019 following the greenlight by the WTO after the organisation ruled that the EU had not complied with a previous ruling over subsidies for Airbus. Similarly, the EU retaliated in 2020 with punitive tariffs after the WTO decision that the US had provided illegal subsidies to Boeing (Euractiv, 2020). The WTO itself has also been a reason for disagreement between the EU and the US under Trump. Indeed, since 2017 the US has blocked the appointment of new members to the Appellate Body of the WTO, the highest body of the dispute settlement mechanism of the WTO, due to dissatisfaction over the way the Appellate Body operates. Because of the US blockage, in 2019 the Appellate Body reached the point where it did not have enough members to function, weakening the dispute resolution mechanism of the WTO (Erken, 2019). In response, the EU and other countries agreed to set up a temporary new trade dispute resolution system based on existing WTO rules, which will last until a solution to the US blockage will be found (Government of Canada, 2020).


Another vexing problem from the EU’s perspective has been the extraterritorial outreach of the financial sanctions imposed by the US. This has been particularly the case in the context of the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA), better known as the Iran nuclear deal. The EU and its members remained in favour of the deal with Iran. After withdrawing from the agreement in 2018 Trump imposed a raft of sanctions against Iran to cripple its economy. Thanks to the dollar’s status as the global reserve currency and its widespread use in international trade, the US sanctions also discourage companies and individuals of third countries from dealing with the concerned entities, effectively having an extraterritorial outreach. In response, EU policymakers tried to keep the Iran deal from falling apart, trying to protect EU-based companies from tunilateral US sanctions, allowing them to continue their business with Iran through a payment mechanism independent from the US dollar (Wintour, 2019). However, the EU steps failed to assuage EU companies' concerns about US sanctions (Brzozowski, 2020). Similarly, Trump approved extraterritorial financial sanctions against the companies involved in the construction of the now halted North Stream 2 gas pipeline, that should have run undersea from Russia to Germany (BBC, 2019). The US feared that the project would have strengthened Russia’s grip over Europe’s energy supply and the sanctions were meant to stop the final works on the pipeline from going on. The US sanctions angered many EU policymakers, particularly in Berlin, which say that the EU should be free to decide its own energy policy.


Finally, a further snag between the US and the EU materialised in July 2020, when the Court of Justice of the European Union (CJEU) struck down the US-EU Privacy Shield. The Privacy Shield was the framework that regulated the flows of personal data for commercial purposes across the Atlantic, a stream vital for the transatlantic economy. EU’s judges invalidated the agreement due to concerns over the privacyof Europeans citizens' data once transferred to the US. This was the second time that the EU’s top court invalidated a data transfer agreement between the EU and the US, after having struck down in 2015 the Safe Harbour deal, the predecessor of the Privacy Shield (Manancourt, 2020).


Renewed partnership


With the new Biden administration in place since January 2020, the relationship between the EU and the US took a turn for the better. Biden is a self-avowed transatlantic and supporter of multilateralism, and though some thorny issues are still present, the economic and trade relationships between the Europeans and the Americans markedly improved compared to Trump’s era. To begin with, after having expressed its objection to the project, Biden decided in May 2021 to waive US sanctions on companies and people involved in the building of the North Stream 2 pipeline, considering that it was too late to halt the project, and prioritising the healing of the relation with Germany, heavily strained after four years of Trump (BBC, 2021).


Above all, however, the two parties have been able to sort out, at least temporarily, their disputes over tariffs and subsidies that erupted under the Trump presidency. First, in June 2021, during the first EU-US Summit to be held in seven years, the two sides agreed to a five-year ceasefire on the Airbus-Boeing subsidies dispute (Boffey and Jolley, 2021). The deal, despite being only temporary, will remove the threat of retaliatory tariffs for the next few years. Moreover, the EU and the US agreed to a set of principles to avoid over-subsidisation of their aircraft-makers. This agreement follows a four-month suspension of the Airbus-Boeing tariffs agreed in March, which paved the way for the longer reprieve. Second, in October 2021 after months of negotiations, the Biden Administration agreed to ease tariffs on aluminium and steel from the EU, under a deal that set an amount of steel and aluminium that the EU will be permitted to send duty-free into the US each year. Imports above the set amount will be subject to a tariff. On the same occasion Brussel and Washington agreed to develop long-term plans to confront China excess steel production and reduce carbon emissions from the steel and aluminium industries. Although the quota set by the agreement was lower than the amount of Europe’s export to the US prior to Trump’s implementation of the tariffs, the deal was important insofar asit eliminated EU’s retaliatory tariffs that were set to double in December of the same year (Overly, 2021b).


Furthermore, during Biden's visit to Brussels in late March 2022 to attend a NATO summit and a meeting of the European Council to address the conflict in Ukraine, the EU and the US reached an agreement in principle on a revamped data transfer framework, which would allow Europeans’ personal data to flow to the US. The deal would end months of legal uncertainty for businesses on both sides of the Atlantic, though any final deal is likely to be challenged in the courts by privacy campaigners as its predecessors (Manancourt, 2022).


Tech and trade alliance


A new layer of cooperation between the EU and the US during the Biden administration materialised in the setup of the EU-US Trade and Technology Council (TTC). First proposed by the European Commission in December 2020 to strengthen common technological, industrial, and green standards, while bolstering transatlantic trade and investments, the TTC was officially launched on June 15 2021, during the EU-US Summit in Brussels (European Parliament, 2021). The aim of this fora is to intensify cooperation on technological and digital issues, enhance transatlantic trade and investment, and develop international standards in the sectors concerned. The cooperation will be based on democratic values and respect for human rights. Indeed, the TTC is considered by many as a way to push back against China’s rise in the digital and trade realms (Scott and Barigazzi, 2021). Regular political meetings of the TTC lead the work. At these gatherings the EU is represented by the EU Competition Commissioner and the EU Trade Commissioner, while for the US is present the Secretary of State, the Secretary of Commerce, and the US Trade Representative. The decisions taken at the political meetings are concretised and operationalised by the work of ten working groups on topics such as Artificial Intelligence (AI), green tech, supply chains, semiconductors, data governance, and global trade.


To date, two political meetings of the TTC took place. The first inaugural summit was held in Pittsburgh on 29 September 2021. This meeting happened shortly after the AUKUS row between France, US, and Australia. Yet, despite the diplomatic uproar the meeting went ahead as planned. There EU and US officials agreed to fight unfair foreign trade practices, enumerating provisions usually attributed to China, to tackle the global semiconductor shortage, and to coordinate their efforts to screen investments and control exports on dual-use technologies to prevent authoritarian governments from using them to undermine national security or human rights (Overly, 2021a). The second meeting was held in Paris on 15 and 16 May 2022 with the war in Ukraine as a backdrop. Hence, a large part of the discussions focused on how to push back on Russia and help Ukraine (Scott, Moens and Palmer, 2022). The two sides agreed to further cooperate in sanctioning Russia, fight against disinformation and foreign interference, and expand trade and investment with and in Ukraine. Moreover, the EU and the US pledged to strengthen the resilience of the transatlantic supply chains in key sectors as rare earths and semiconductors. In this regard they created an early warning system to speed up cooperation when trade barriers are created, or bottlenecks emerge in the semiconductor supply chains. Other areas of discussion centred on emerging technologies and sustainability issues (European Commission, 2021).


The third TTC political meeting will be held before the end of 2022 in the US. The summit is expected to address AI, supply chains, export restrictions, investment screening, assistance to small and medium enterprises, response to non-market practices, and deepening bilateral trade and investments between the EU and the US (US Department of Commerce, 2022). Furthermore, the US will likely try to push the EU to cope more forcefully against China’s technological and commercial rise, hoping to leverage the hard language used toward Russia in the second meeting into similar wordings addressed to Beijing. Yet, the EU has so far been more lukewarm in calling out Beijing, given its internal division on the matter. Thus, the approach toward China's economic and tech power will be a thorny issue that will haunt the next TTC’s meetings. Though, as the new NATO Strategic Concept has shown, with the assertion that China’s behaviours pose a systemic challenge to the alliance interests and values, the EU and the US are closer on this issue than they were a few years ago.


Challenges ahead

In addition to the approach to adopt toward China, other lingering policy differences persist in the economic domain between Washington and Brussels. The US are worried by the alleged protectionist impulses and unfair focus on US companies behind the Digital Markets Act, the wide-ranging EU’s legislation to tame “Big Tech” power in the digital markets and ensure a high degree of competition. Similarly, some in the US see the EU Carbon Border Adjustment Mechanism (CBAM) proposal, the legislation introduced to charge a levy on the imports of some goods from jurisdictions with laxer environmental rules than the EU, as a tool to protect EU industries from external competition. From the Brussels standpoint, the concerns lie mainly behind the “Buy America” rules, a set of regulations which require the US government to prioritise US-made products in its purchases. Moreover, the EU is concerned with Republican opposition in the US Congress to the Pillar One of the global tax deal brokered by the OECD in October 2021. Pillar One would allow countries to tax the profits of the largest companies where they make their sales, rather than where they have their tax residence. For the US to adopt the agreement the approval of two thirds of the Senate is required, and without Republican support there is no way to get it (Hamilton and Quinlan, 2022). Furthermore, as of now the Biden administration has not yet unblocked the appointment of new judges to the WTO’s Appellate Body, citing “systemic concerns” over its functioning (Rapoza, 2021).


Despite these policy differences, the transatlantic economy remains the largest bilateral relationship in the world, able to endure the Trump era and influence the global economy. The US and Europe account for roughly 65% of both global inward and outward stock of foreign direct investment (FDI), the great majority of which are in the other economy (Hamilton and Quinlan, 2022). Moreover, they represent 42% of world trade, and around 34% of global GDP. Also, transatlantic personal consumption accounted for around 50% of global consumption in 2020 (European Parliament, 2021). Hence, the economic relationship between the US and Europe is deep and resilient, as shown also by the coordination on economic sanctions against Russia for the invasion of Ukraine. The Trade and Technology Council is a new instrument that could allow the two sides to deepen their economic and technological ties, better face China’s rise in the tech sector, and alleviate some of the persistent irritants that still plague the relationship.




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