Cognitive dissonance on trade policy across the Atlantic is nothing new. But it is reaching new levels as United States tensions with China grow. These are some impressions on the state of the transatlantic trade gained during a visit to Washington.
In the current geopolitical context and given the climate change emergency, the failure by Washington and Brussels so far to reach some basic common understanding the fundamental approaches to the trade rules and order in the 21st century they require means we are entering a systemic danger zone.
The instable equilibrium built on trade truces achieved between the EU and US under the Biden administration can blow up at any moment.
On both sides of the Atlantic trade policy discussions among trade policy veterans appear detached from the politics of today.
Detached trade policy discourses
They are detached from their own social and institutional realities that shape decision-making. And they are detached from the geopolitical storm that is brewing at the moment as Washington grapples with the fallout of the Chinese balloon affair.
Both the United States and the European Union have severe domestic political and institutional problems that make finding consensus on any policy at home particularly challenging.
Trade policy generally being the consequence of domestic politics rather than the other way round, the political undercurrents on both sides of the Atlantic mean that both sides are taking different paths towards the same type of outcome: an overall more protectionist and unilateralist trade policy.
On both sides divided societies and an ageing median voter – combined with broken mainstream parties that are being taken on by insurgent contenders – mean nation states are less able to garner consensus for any meaningful policy, let alone international trade.
Those watching the French government’s – likely fatal – difficulties over a relatively modest change in its pensions regime know what we are talking about: the institutional system in many EU member states has zombified.
Populist tendencies are gaining ground in EU member states, including when they are ruled by so-called mainstream political parties. This is amenable to a creeping far-right-shift in policies in a range of areas – migration of course also towards anything that is global or European or ‘liberal’ in both the US and European sense.
In such a context, trade policy has become a very divisive topic – an ideal scapegoat alongside The Migrant.
Achieving any meaningful trade agreements and liberalisation is practically impossible today.
For example ratifying the EU Mercosur free trade agreement, concluded initially in 2019, remains a tall order and will be a real test for EU trade policy going forward.
One feels thrown into a parallel universe when listening in these early weeks of 2023 to European Commission leaders saying there is a “window of opportunity” to seal the deal with the South Americans this year.
US shift away from traditional trade policy is here to stay
The United States are in an even more advanced state of paralysis over trade policy and this shift has happened earlier than in Europe. The insurgents on the right and left of the Republican and Democratic parties are hijacking the policy.
The Biden administration has not even made an effort at pretending that it will use serious trade policy – i.e. concret market access options for partner countries – to buttress its supply chain diversification efforts away from China.
The Biden administration now offers Frameworks – such as the Indo-Pacific Economic Framework – and Councils such as the EU US Trade and Technology Council. These are talk shops, political handholding exercises and vehicles to strong-arm allies to align with US export controls to China whose strict military goals are at times hard to perceive.
Some politicians and officials don’t agree with the direction the US is going.
This is the case of Republican Senator Mike Crapo who, speaking at a Washington International Trade Association event on Washington this week. Crapo said he was in “very strong disagreement with the direction in our current trade policy in the United States” and the he wanted to see a return to “comprehensive congressionally approved market access agreements”.
In 2016 Richard Katz wrote an article in Foreign Affairs entitled ‘Is the TPP Making the United States a Less Benign Hegemon?.
In this piece Katz said the US was, as a power in relative decline, less able to garner the domestic consensus needed to get the changes – in other words offer market access – over the line domestically to secure the required buy-in from trading partners for its preferred economic and trade policies.
All this means it is setting ever tougher conditions – market access, labour rights and other political conditions, etc – to liberalising trade with countries it considers political friends whilst trying to give away as little as possible. This was the path taken with the the Asia-Pacific friends of the defunct Trans-Pacific Partnership.
But despite all these negotiating efforts the US was still not able to garner sufficient consensus around the trade agreement back home. Katz wrote his article before the election of Donald Trump in November 2016 and the subsequent US pullout of TPP. The TTP withdrawal was preordained.
There is no realistic prospect for a return to traditional trade policy in Washington. One cannot but get the impression that that boat has sailed and the US has now entered the rough waters of geo-politically determined trade policy backed by domestic paralysis on trade liberalization.
EU hegemonic decline
The EU is facing its own version of ‘hegemonic decline’ usually ascribed by international relations scholars to the United States.
The EU is not the global hegemon but it is one of the three, previously two global commercial hegemons.
The is rapidly losing global share of gross domestic output and its innovation capacity is much more limited than the US’. Its economy is increasingly dependent on exporting to markets access to which is not to be taken for granted –in particular China but also in some areas the US. This comes as the multilateral trade rules of the WTO are losing in force.
The EU’s geo-economic predicament is worse than the US’ in many ways.
While to the US the major security threat is China above all, the EU’s security threat is multiple: there is the Russian aggressor next door and there is growing uncertainty over the US long-term commitment to the EU security order within NATO. China comes on top and is rising in significance as a security challenge – but it is less central in the perception of European security than in the US. Geography is destiny here.
Though the prospect was temporarily eclipsed by the war in Ukraine, the EU has seen the writings on the wall on security in the Trump era. Things will never be the same again for the EU after a range of NATO-related episodes in 2016-2020 and being targeted under Section 301 and Section 232 regulations as if it were some international pariah.
Frictions and frustrations: the return
Hence Brussels confused and confusing but sincere aim at developing ‘strategic autonomy’ in the industrial, tech and perhaps even one day in the security field.
Transatlantic trade relations in the Biden era are a mix of truces and rising frustration and frictions.
The much-touted Trade and Technology Council established in 2021 to set the relationship has failed in its core mission to avoid a descent into a subsidy race. The process has delivered more outside its formal framework than within. It has become a vehicle for coordinating export control measures to Russia. But it has little else to show for, apart perhaps a joint electric vehicle plug standard and non binding principles for artificial intelligence governance.
EU frustrations with the US are mounting.
The EU holds gripes about the US attitude towards the World Trade Organization dispute settlement mechanism, the refusal to remove Section 232 tariffs on steel and its WTO-flouting proposal to slap tariffs on Chinese steel as part of a Green Steel Deal.
Other areas of frustration are its public procurement policies as part of its Build Back Better agenda and last but not least the discrimination and level-playing field distortions induced by the Inflation Reduction Act.
On the US side there is pent-up anger at EU refusal taking into account the concerns of its digital giants as it regulates its digital markets through the Digital Services Act, the Digital Markets Act and new cybersecurity and cloud regulations.
The new EU foreign subsidies regulation, the reciprocity in public procurement instrument, and CBAM – which will affect US metals and fertilisers – mean that the slow tide of EU climate and security policy changes will soon be an ocean of new regulatory trade barriers and the US is business sector is noticing.
The latest reason for US frustration are current plans by the EU to abolish de minimis rules on imports of low-value consignments of goods as part of its customs overhaul.
The EU’s very own industrial policies in the area of batteries, green tech – built up in recent years are also eyed with irony and suspicion at a time when the EU complains about the Inflation Reduction Act. “There is no sympathy for the Europeans” on this issue an insider told me.
It is high time the US and EU both line up their ducks in thinking about the nexus between trade and security domestically and start serious engagement on their China policy.
