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Jul 30, 2018 | 08:30 GMT

9 mins read

Truce Aside, U.S.-EU Trade Relations Are In for a Bumpy Ride

Protesters use an inflatable Trojan horse outside European Union headquarters on Sept. 20, 2016, to express their disagreement with the planned Transatlantic Trade and Investment Partnership.
(JOHN THYS/AFP/Getty Images)
Highlights
  • Although the European Union and the United States agreed to negotiate a trade deal that includes only manufactured goods, Washington has already put agricultural products on the table and will likely keep them there as talks continue.
  • France, Italy and other protectionist governments on the Continent will resist U.S. – and likely German – calls for U.S.-EU trade talks to include agricultural products.
  • European leaders are already saying that talks will eventually need to include the auto sector and address U.S. "Buy American" laws.
  • American demands on agriculture and vehicle protectionism, however, could derail the prospects of a deal, making the future of U.S.-EU trade relations potentially stormy.

Although U.S. President Donald Trump and European Commission President Jean-Claude Juncker agreed to a trade truce and talks on July 25, it took less than 36 hours for significant divergences to emerge on where negotiations between the United States and the European Union may go from here. The differences do not bode well for the truce's longevity as talks are likely to eventually include stickier issues that have prevented a trans-Atlantic trade deal for years.

The Big Picture

The United States and the European Union have agreed to reduce trade tensions and begin free trade talks, but the two sides are already diverging on what they want trade negotiations to include. Although a truce has been established, the future of U.S.-EU trade relations will be choppy and fragile.

The U.S. Puts Agriculture on the Table

U.S. officials already have put greater access to EU agricultural markets on the table as an eventual demand despite Trump and Juncker only agreeing to reduce trade barriers on non-auto industrial goods. On July 26, U.S. Trade Representative Robert Lighthizer explicitly said it was the United States' "view that we are negotiating about agriculture." European officials were quick to deny that a deal had been reached to include agricultural markets, but the United States is likely to demand agriculture's inclusion eventually.

While the Trump administration has focused on reducing trade deficits and protecting U.S. manufacturers from imports that undercut them, access to global agricultural markets is a perennial U.S. objective in trade talks. After all, the United States is the world's largest agricultural exporter. Although the initial U.S.-EU deal focused on industrial goods, the United States may be opening additional floodgates for imports given the competitiveness of European industrial exports. Indeed, Lighthizer said that in his view zero tariffs on European automakers "would greatly favor the European Union." The United States may want access to EU agricultural markets in exchange. French President Emmanuel Macron, however, said on July 26 that agricultural products should be excluded from trade talks.

Although the agreement reached between Trump and Juncker explicitly did not include agriculture, Juncker's statements after their meeting highlight how the deal on tariffs may have been a face-saving one by both the United States and the European Union. Juncker is not in charge of EU trade policy and he could not agree to possibly broaden trade talks to include agriculture because the EU member states had not given him a mandate to do so.

Access to global agricultural markets is a perennial U.S. objective in trade talks. After all, the United States is the world's largest agricultural exporter.

Even if the United States pressed Juncker to mention agriculture in his announcement with Trump, he could not agree to do so given his constraints and the way the European Union works. This reason probably explains the vague inclusion in the two leaders' statements about the European Union promising to buy more U.S. soybeans. Adding soybeans to their statements would give Trump something positive to point to for his supporters in the farm belt and send a message that the United States wants the European Union to reduce agricultural barriers and buy more U.S. agricultural products in general as a part of trade talks. Juncker did not rule out agriculture as an addition to trade talks — he said the working group the United States and European Union agreed to establish would decide which goods to include in any potential trade agreement.

The United States isn't alone in trying to broaden the deal's scope. Juncker said he expected that trade talks eventually would include the phasing out of auto tariffs. Eliminating auto tariffs seems difficult to achieve without major European concessions on agriculture given the comments by Lighthizer — who would be the lead U.S. negotiator in formal trade talks — that reducing auto tariffs would benefit the European Union. French Finance Minister Bruno Le Maire also said Paris would demand changes to U.S. public procurement and "Buy American" rules before it could approve any trade deal.

Are Renewed Trans-Atlantic Partnership Talks Inevitable?

Trade deals that cover only a handful of goods are tricky to negotiate and it may soon become clear that despite the narrowly defined initial agreement between the United States and European Union, more comprehensive trade negotiations are inevitable. Effectively, these may lead to a resumption of stalled Transatlantic Trade and Investment Partnership (TTIP) talks even if they go by another name. TTIP negotiations have been frozen since October 2016. Unlike the Trans-Pacific Partnership, Trump never formally withdrew the United States from TTIP and Trump administration officials have consistently said they may be open to resuming the talks, albeit with slightly different priorities than the Obama administration had. EU officials, however, have quickly said the trade deal they plan to negotiate is not "TTIP 2.0."

Regardless, by law the United States eventually may have to broaden the agreement. So-called fast track authority delegated by Congress empowers U.S. presidents to negotiate trade deals. The authority, however, comes with legal strings attached. Congress has set guidelines, for example, on issues that should be included in a trade deal. The guidelines include more comprehensive measures, like investment protection measures. It is possible the White House will try to avoid some of the congressional requirements by just submitting a deal and threatening to place tariffs on the European Union if Congress does not approve it.

President Trump never formally withdrew the United States from the stalled Transatlantic Trade and Investment Partnership talks.

Although TTIP talks were not close to being finalized when they ground to a halt two years ago, the United States and European Union made significant progress between 2013 and 2016. The European Union offered access on 97 percent of goods and both sides agreed to reduce tariffs on almost every single industrial product. The European Union also offered significant access to its agricultural markets. Final talks over the remaining 3 percent of goods were never finished, but tariffs were not the main sticking points; rather, the talks stalled over issues of non-trade barriers and investment rules. The European Union, for example, was demanding the United States waive its Buy American rules — a demand France has already made once again. The two sides also differed on the way investment protection was included in the deal. The United States backed a modified version of the investment-state dispute settlement mechanism that it has included in many of its trade deals, while the European Union had hoped to set up an investment court.

These thorny issues remain unresolved and had already resurfaced less than 36 hours after Trump and Juncker met. If U.S.-EU trade talks progress that far, other trade negotiations by the Trump administration could indicate what other U.S. demands might look like. In its talks with Mexico and Canada to rewrite the North American Free Trade Agreement, the United States put rules of origin for the auto sector at the forefront, at one point demanding higher U.S. content for vehicles to be eligible for NAFTA tariff-free access. The United States, if it agrees to include autos at all, is likely to make a similar or stronger demand of the Europeans. The United States has also demanded higher requirements on wages. Wages are relatively low in several member states of the European Union — particularly in Eastern Europe — which allows EU industrial powerhouses like Germany to take advantage of cheap labor for labor-intensive parts. In its other trade talks, the United States has demanded sunset clauses that could reopen negotiations every five years.

Familiar European Battle Lines

U.S.-EU talks could put Germany and France at odds with each other. Berlin has long pushed for a trade deal with the United States that would allow it to have easier access to the world's largest single importer of industrial goods and it, along with the United Kingdom, has championed this position. France, on the other hand, has balked at Buy American requirements and making concessions on agriculture, and wants the United States to remove steel and aluminum tariffs before trade talks can begin. These old battle lines between France and Germany were never resolved in TTIP talks and look to be no easier to resolve now if talks become more comprehensive.

The challenges to a larger deal do not stop with France and Germany. A trade deal with the United States would need the rest of the European Union to support it, and member states like Italy have nationalist governments that are against trade deals. The Italian government is threatening not to ratify the EU-Canada free trade agreement because, Rome argues, it fails to protect Italian farmers and the geographic indicators that distinguish Italian products from similar ones produced elsewhere. It is hard to see the current Italian government supporting a trade deal with the United States that covers agriculture.

A narrow trade deal may still be possible between the United States and the European Union, but the conflicting imperatives of the parties involved make it unlikely. Auto rules were never finalized in previous TTIP talks because the United States sought access to Europe's agricultural markets in exchange for auto sector concessions. And with the United States already balking at including the auto sector in new talks with Europe, it is possible the Trump administration will use autos as a way to gain concessions on agriculture. Nonetheless, while the United States and European Union agreed to a trade truce, the truce is not well defined and already both sides disagree on the framework of what talks eventually will include. While the United States has backed off on its threat of auto tariff for now, talks could easily break down, quickly putting auto tariffs back in play.

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