snapshots

U.S., Europe: A Truce in the U.S.-EU Trade Battle

4 MINS READJul 25, 2018 | 22:09 GMT
The Big Picture

As Stratfor pointed out in its 2018 Third-Quarter Forecast, the European Union would consider modest measures to try to appease trade demands by the United States. And European Commission President Jean-Claude Juncker's trip to Washington in hopes of getting U.S. President Donald Trump to stop his trade assault on the European Union offered a confirmation of that forecast. The offer of future talks to reduce trade barriers seems to have worked for now. But as Trump focuses on trade deficits the European Union will remain in his crosshairs.

For now the United States has called off the dogs on trade with the European Union. Despite the cease-fire in the skirmishes between the two, however, the future of their trade relationship remains uncertain. During a joint press conference after a meeting at the White House on July 25, European Commission President Jean-Claude Juncker and U.S. President Donald Trump announced that they had reached an initial "deal," essentially a promise to begin negotiations over various trade issues. But little in the way of clarity on concrete actions was offered.

The centerpiece of the agreement was an announcement that the United States and European Union would work toward a deal that would reduce subsidies, tariffs and non-tariff barriers on certain industrial goods and would consider reform of the World Trade Organization. The European Union also agreed to consider importing more U.S. liquid natural gas and soybeans, although whether EU companies actually follow through on this promise remains an open question. The two sides also agreed to try to resolve both the tariffs that the United States slapped on European steel and aluminum and the retaliatory tariffs the European Union levied on U.S. goods. The leaders agreed that no new tariffs would be put into place by either side, but, as both Juncker and Trump emphasized, that agreement would only hold so long as neither side pulls out of trade talks. That gives Trump room to threaten to walk away from negotiations if they are not progressing quickly enough.

What is not clear, however, is whether an agreement was struck regarding future tariffs on vehicles, a crucial issue for manufacturers on both sides. In the lead-up to the joint statement, U.S. and EU negotiators had haggled over the exact language that would be used in talking about the auto tariffs. Trump said that the two agreed to work toward removing non-tariff barriers, tariffs and subsidies on all non-auto industrial goods, a statement that did not rule out action on auto tariffs. It's possible that no agreement was reached on that point and that both sides effectively agreed to continue discussing the tariff issue. But Trump's phrasing leaves open the possibility that the United States might use auto tariffs to crack down on the European Union in the future — although if it exercised that option, trade talks would stop in their tracks.

It is also not clear whether the bare bones of the agreement Trump and Juncker announced could evolve into a larger trade deal. The idea of reducing trade barriers appears to be a stripped-down version of the Transatlantic Trade and Investment Partnership, which underwent more than a dozen rounds of negotiations before talks fell apart after 2016. During those talks, however, both sides largely agreed to cut all tariffs on industrial goods. The more complicated issues of non-tariff barriers and non-industrial goods created the complications that sunk that deal, so the groundwork for such an agreement may have already been laid. A second option could be for the United States and European Union to reduce tariffs unilaterally outside of the framework of an actual free trade agreement. Nonetheless, with the auto sector largely ignored for now, and challenges for the United States in passing even a small trade deal — which would need to go through the "fast-track" trade approval process that would last months — trade tension between the United States and European Union may eventually resurface. And as has occurred with following other vague agreements on trade, like the broad April 2017 agreement with China, when it comes to the details, talks can quickly fall apart.

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