In late June, trade and LSE experts met over Zoom to talk about the future of the North Atlantic Trade Triangle. Elitsa Garnizova (LSE) reports on the discussion

Garnizova, Elitsa

English

LSE Research Online

LSE	Continental	Breakfast	17:	The	North	AtlanticTrade	TriangleIn	late	June,	trade	and	LSE	experts	met	over	Zoom	to	talk	about	the	future	of	the	North	Atlantic	Trade	Triangle.Elitsa	Garnizova	(LSE)	reports	on	the	discussion.The	United	States	and	the	European	Union	are	the	two	most	integrated	trading	blocs	in	the	world.	They	haveincreased	their	economic	interdependence	with	linkages	in	global	supply	chains,	ecommerce	and	investment.	Thetrade	flows	between	the	two	partners	account	for	a	third	of	world	trade	flows,	totalling	more	than	£1	trillion	in	2019,and	the	two	account	for	more	than	half	of	global	foreign	direct	investment.Boris	Johnson	and	Donald	Trump	in	a	bilateral	meeting	at	the	UN,	September	2019.	Photo:White	House.	Public	domainThe	transatlantic	relationship	has	been	confronted	by	the	new	domestic	politics	of	international	trade	and	thespecific	challenges	of	Brexit,	the	trade	policy	stance	of	the	US	administration,	and	the	role	of	China	in	the	globaleconomy.	The	UK	forms	a	large	share	of	US	trade	and	investment	with	Europe,	and	Brexit	makes	the	North	AtlanticTrade	Triangle	between	the	three	partners	very	important	for	global	trade.In	a	hearing	before	the	House	of	Representatives	in	June,	US	Trade	Representative	Robert	E	Lighthizer	accusedthe	European	Union	of	“thinly	veiled	protectionism”	for	lack	of	access	of	American	agricultural	products	to	the	EUmarket.	He	also	declared	that	a	deal	between	the	EU	and	US	is	“not	looking	good	in	the	short	term”.	Threats	ofmore	tariffs	from	the	US	side	are	on	the	table,	at	a	time	when	EU	businesses	are	trying	to	recover	from	COVID-19and	any	additional	costs	may	further	impede	recovery.Against	this	backdrop,	the	UK	and	the	US	have	formally	launched	trade	negotiations,	while	“serious	divergencesremain”	in	the	negotiations	between	the	UK	and	the	EU.The	US	approach	to	trade:	Trump	2.0	or	Biden?LSE Brexit: LSE Continental Breakfast 17: The North Atlantic Trade Triangle Page 1 of 4		Date originally posted: 2020-07-16Permalink: https://blogs.lse.ac.uk/brexit/2020/07/16/lse-continental-breakfast-17-the-north-atlantic-trade-triangle/Blog homepage: https://blogs.lse.ac.uk/brexit/The	current	approach	of	the	US	administration	to	trade	policy	has	been	described	as	transactional	and	grounded	inad	hoc	deal-making	with	a	strong	belief	in	bilateral	over	multilateral	negotiations.	As	Lighthizer’s	testimony	stated“the	President	will	use	tariffs	if	he	has	to	to	get	a	fair	share	for	American	businesses.”	The	US	administration’scurrent	motto	“tariffs	work	great”	contradicts	a	range	of	economic	and	policy	assessments.	Fed	economists	AaronFlaaen	and	Justin	Pierce	found	that	“tariff	increases	enacted	in	2018	are	associated	with	relative	reductions	inmanufacturing	employment	and	relative	increases	in	producer	prices”.	The	study	also	highlighted	that	the	smallpositive	effect	tariffs	have	on	reducing	competition	via	import	protection	are	offset	by	the	negative	effect	viaincreased	input	costs	and	retaliatory	tariffs.Not	only	that,	but	the	administration	has	spiralled	into	what	economists	call	“cascading	protection”,	where	it	needsto	impose	new	tariffs	to	help	industries	suffering	because	of	previous	tariffs.	In	turn	this	causes	significantuncertainty	for	both	US	and	EU	businesses.	Only	in	the	past	month,	the	administration	has	initiated	consultationson	additional	tariffs	on	wines,	cheeses,	olives,	coffees	and	biscuits	as	part	of	the	Boeing	case,	and	has	threatenedSection	301	investigations	into	countries	adopting	digital	services	taxes,	after	withdrawing	from	international	talks.Lurking	in	the	background	is	the	threat	of	car	tariffs,	which	were	initially	raised	in	2019.The	EU	does	not	have	too	many	obvious	moves	–	it	can	negotiate	and	be	perceived	as	negotiating	under	threat(European	Parliament	resolution)	or	refuse	to	negotiate	and	risk	major	impact	on	key	industries,	including	its	carsector	(Ifo	study).	Those	who	recall	the	challenges	surrounding	Transatlantic	Trade	and	Investment	Partnership(TTIP)	will	remember	that	any	new	negotiations	will	be	very	challenging,	due	to	consumer	and	environmentalcampaigners’	grievances	with	the	US.	It	is	one	of	those	situations	where	a	win	is	hard	to	define.A	second	Trump	administration	is	expected	to	be	more	of	the	same	or	worse,	with	continued	antagonism	towardsEurope	and	little	sign	of	cooperation.	One	area	where	cooperation	is	emerging,	despite	being	long	overdue,	is	thedialogue	on	China:	currently	few	details	exist,	but	the	goal	of	the	forum	would	be	to	tackle	issues	such	as	Chinesedisinformation,	with	trade	remaining	a	less	likely	topic	of	discussions.	The	US	administration	is	also	disengagingfrom	the	World	Trade	Organisation	(WTO).In	contrast	to	Trump,	Joe	Biden,	the	Democratic	presidential	nomination,	is	an	internationalist,	who	is	keen	to	workwithin	the	multilateral	rules-based	system	and	work	to	strengthen	it.	He	would	probably	abandon	recourse	to	theSection	232	national	security	exception,	rebuilding	alliances	and	restoring	credibility.	However,	Biden	is	not	fullypersuaded	on	the	economic	benefits	of	trade	versus	the	strategic	ones	and	he	will	have	to	win	over	blue-collarvoters	in	battleground	states.Tension	between	the	US	and	the	EU	will	persist	regardless	of	the	administration,	particularly	on	security	(burden-sharing),	trade	(agriculture	and	future	of	world	trade	such	as	digital	trade,	green	economy,	healthcare	product	andservices),	and	China	(from	disinformation	to	trade).	From	a	business	perspective	tariffs,	public	procurement	andstandards	are	perceived	as	thorny	subjects.	There	is	a	need	for	the	EU	to	prepare,	once	Biden	is	in	place,	toengage	with	clear	priorities	and	offerings.Most	importantly,	some	of	the	changes	we	have	seen	over	trade	policy	are	not	only	down	to	the	currentadministration.	There	has	been	a	tremendous	reversal	of	Republicans	and	Democrats	positions	vis-à-vis	tradepolicy.	The	politics	of	trade	among	policy	makers	is	not	as	clear-cut	as	before.	While	a	majority	of	US	citizens	saythat	trade	is	a	good	thing,	long	term	changes	have	ambiguous	effects	on	trade	policy:	ageing	populations	andyounger	voters’	preference	for	Democratic	candidates	will	have	uncertain	effects.The	EU’s	trade	priorities	and	engagement	with	the	USOne	of	the	main	goals	for	the	EU	has	been	to	keep	the	dialogue	with	the	US	alive	while	pursuing	other	bilateralagreements	and	sustaining	commitment	over	multilateral	fora.	After	the	suspension	of	the	Transatlantic	Trade	andInvestment	Partnership,	talks	with	the	US	were	restarted	in	2017	between	Cecilia	Malmström,	then	EU’s	tradecommissioner,	and	Wilbur	Ross,	the	Trump	administration’s	commerce	secretary.	Three	years	later,	there	is	a	verylow	level	of	ambition,	mostly	in	terms	of	low-level	liberalisation	of	agricultural	trade	or	imports	of	American	oystersand	other	shellfish	to	the	EU	in	return	for	European	sales	of	apples	and	pears	in	the	US.	The	EU	is	engaging	withthe	US	on	the	trilateral	dialogue	with	Japan	on	industrial	subsidies,	on	taking	China	to	WTO	court	and	on	specificinstances	of	regulatory	cooperation.LSE Brexit: LSE Continental Breakfast 17: The North Atlantic Trade Triangle Page 2 of 4		Date originally posted: 2020-07-16Permalink: https://blogs.lse.ac.uk/brexit/2020/07/16/lse-continental-breakfast-17-the-north-atlantic-trade-triangle/Blog homepage: https://blogs.lse.ac.uk/brexit/The	key	question	for	the	European	Union	is	whether	it	is	ready	to	act	more	strategically	–	for	example,	by	usingexisting	resources	in	a	more	intelligent	way.	The	European	Commission	has	coined	the	term	“open	strategicautonomy”	to	signify	its	goal	to	address	the	resilience	of	international	supply	chain.Recent	discourse	from	the	Commission	highlights	a	shift	away	from	its	preference	for	projecting	soft	power	towardsstronger	focus	on	defending	the	EU’s	interests.	In	the	words	of	Josep	Borell	at	the	European	Council	on	ForeignRelations:Strategic	autonomy	is	a	way	of	framing	our	choices:	we	must	be	able	to	defend	our	interests,	byourselves	if	necessary.	We	should	look	at	the	world	through	our	own	prism	and	avoid	both	nostalgia	andfatalism.The	new	phraseology	highlights	the	recognition	that	the	EU	should	be	more	strategic	in	addressing	distortive	stateinterventions,	export	restrictions,	and	foreign	investment.	Given	that	trade	is	the	only	area	of	foreign	policy	makingwhere	the	European	Commission	can	lead	the	way	and	can	rely	on	qualified	majority	voting,	this	is	a	natural	placeto	start.	There	is	a	wider	recognition	that	China	relies	on	what	Joseph	S	Nye	sees	as	“sharp	power”	grounded	in“subversion,	bullying	and	pressure,	which	combine	to	promote	self-censorship”	versus	the	attraction	andpersuasion	of	“soft	power”	or	military	“hard	power”.	While	in	2019	the	Commission	and	the	European	ExternalAction	Service	took	a	large	leap	and	declared	China	a	“systemic	rival”,	the	EU	is	still	divided	on	how	to	be	tougherin	strategic	investment,	human	rights,	and	values.	How	far	it	is	willing	to	go	for	an	agreement,	and	what	it	would	beoffering?The	UK’s	position	in	the	North	Atlantic	Trade	TriangleHow	do	these	developments	affect	the	UK’s	external	economic	position?	For	context,	in	2019	the	EU	accounted	for47%	of	the	UK’s	total	trade	(43%	of	exports	and	49%	imports)	while	the	US	accounted	for	a	fifth	of	UK	exports	and13%	of	imports.One	of	the	stumbling	blocks	to	being	a	critical	friend	in	the	North	Atlantic	Triangle	is	the	UK’s	ideological	desire	tobreak	free	from	the	EU,	regardless	of	the	price	that	it	has	to	pay	and	whether	this	is	the	best	way	forward.	The	UKhas	not	clarified	what	its	priorities	in	trade	negotiations	are.	We	had	a	preview	of	what	is	bound	to	happen	in	earlyJuly,	when	the	National	Farmers	Union	gathered	more	than	1,038,900	signatures	for	a	petition	to	maintain	the	UK’shigh	food	standards.	The	US	has	signalled	readiness	to	work	with	the	UK	on	a	swift	agreement,	but	US	businessare	waiting	to	see	the	outcome	of	the	EU-UK	negotiations.	The	US	administration	is	also	keen	to	ensure	full	accessfor	US	agricultural	products.On	the	other	hand,	FTAs	are	not	the	only	game	in	town;	some	of	the	UK’s	priorities	can	be	achieved	outside	them.Moreover,	trade	strategy	should	be	considered	in	light	of	the	broader	national	economic	and	foreign	policyobjectives,	with	the	clear	understanding	that	the	UK	will	need	to	prioritise	across	different	objectives	and	tools.	Thedecisions	the	UK	makes	about	things	like	domestic	regulation,	geographic	indications,	and	the	precautionaryapproach	will	have	an	impact	on	the	trade	agreements	it	can	make	with	the	EU	and	the	US.One	of	the	UK’s	ambitions	post-Brexit	is	to	“advance	trade	for	the	modern	era”,	focusing	on	services,	environmentand	digital,	with	an	emphasis	on	the	UK’s	desire	for	leadership.	This	signals	possible	areas	of	cooperation	in	theNorth	Atlantic	Triangle,	where	the	UK	can	possibly	identify	opportunities	such	as	ecommerce	and	progressdiscussions	on	the	green	and	circular	economy.	While	divergence	remains	on	internet	taxes	and	data	privacy,	thereis	a	possibility	for	a	low-ambition	agreement,	particularly	in	the	absence	of	a	wider	WTO	agreement.However,	a	lot	of	internal	obstacles	persist.	Both	the	discarded	Chequers	plan	and	Boris	Johnson’s	win	in	the	‘redwall’	highlight	that	the	UK	government	will	have	to	deliver	for	both	manufacturing	and	services,	as	well	as	producersand	consumers,	across	the	regions	of	the	UK.	The	COVID-19	pandemic	has	made	the	climate	even	more	difficult.As	Swati	Dhingra	and	Josh	De	Lyon	highlighted	in	a	recent	blogpost,	businesses	paint	a	bleak	picture	for	therecovery	in	economic	activity	and	jobs.Research	shows	that	even	if	the	UK	pursues	a	policy	of	seeking	new	trade	agreements,	the	UK	will	incursubstantial	losses	from	increased	trade	barriers	with	the	EU.	Therefore,	agreement	with	its	largest	trade	andinvestment	partner	is	absolutely	crucial.LSE Brexit: LSE Continental Breakfast 17: The North Atlantic Trade Triangle Page 3 of 4		Date originally posted: 2020-07-16Permalink: https://blogs.lse.ac.uk/brexit/2020/07/16/lse-continental-breakfast-17-the-north-atlantic-trade-triangle/Blog homepage: https://blogs.lse.ac.uk/brexit/What’s	next	for	the	North	Atlantic	Trade	Triangle?While	another	TTIP-style	agreement	might	not	be	on	the	table,	there	is	scope	for	smaller	negotiations	to	take	placeto	sustain	the	dialogue	between	the	EU	and	the	US	and	avoid	further	escalation.The	UK	will	have	to	be	pragmatic	towards	both	the	EU	and	the	US	and	put	ideology	aside.	The	United	States-Mexico-Canada	Agreement	(USMCA)	negotiations	provide	a	good	example	for	the	UK	negotiators:	it	is	likely	thatthe	UK	will	have	to	follow	the	US	template	in	multiple	chapters	and	part	of	the	success	will	be	the	optics	of	thenegotiations,	i.e.	making	sure	that	it	is	a	win	for	any	US	administration.This	post	represents	the	views	of	the	author	and	not	those	of	the	Brexit	blog,	nor	LSE.	A	longer	version	of	this	write-up	is	available	here.LSE Brexit: LSE Continental Breakfast 17: The North Atlantic Trade Triangle Page 4 of 4		Date originally posted: 2020-07-16Permalink: https://blogs.lse.ac.uk/brexit/2020/07/16/lse-continental-breakfast-17-the-north-atlantic-trade-triangle/Blog homepage: https://blogs.lse.ac.uk/brexit/

LSE continental breakfast 17: the North Atlantic Trade Triangle

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LSE continental breakfast 17: the North Atlantic Trade Triangle

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