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Jan 18, 2019 | 21:33 GMT

5 mins read

U.S., EU: Trade Negotiations Are Headed for High Hurdles

(Stratfor)
The Big Picture

The United States has repeatedly threatened to place significant tariffs on cars made in the European Union in an effort to drive Brussels to the negotiating table. In July 2018, that strategy paid off when the two sides agreed to enter talks on a free trade agreement for non-auto industrial goods. However, now that the two sides have published their demands and objectives for talks, it's clear that Brussels and Washington disagree significantly over which topics to negotiate on.

What Happened

The battle lines have been drawn now that the United States and the European Union have outlined their priorities for future trade talks. On Jan. 11, the Office of the U.S. Trade Representative notified Congress of the Trump administration's negotiating objectives. The goals included two crucial takeaways: The United States is looking to reduce barriers to trade with the European Union, including tariffs, but the objectives make no mention of auto tariffs, marking a departure from previous negotiations.

Following her visit to Washington, EU Trade Commissioner Cecilia Malmstrom announced the European Commission's proposed negotiating directives for trade, which must now be presented to the EU member states for approval. The commission is proposing two separate mandates: one to negotiate a trade agreement which reduces tariffs on industrial goods but ignores agriculture, as well as a second mandate to focus on harmonizing regulations between the two sides.

The United States and the European Union do not agree on what the scope of their trade talks should be, and the two sides have significantly different goals regarding the agricultural and auto sectors. If they cannot come to a compromise and agree on common goals for the talks, then Washington may follow through on its threats to place additional tariffs on EU vehicles and auto parts.

Why It Matters

As elections approach in 2020, U.S. President Donald Trump needs more trade wins for farmers, who have borne the brunt of retaliations to Trump's onslaught of tariffs. It is difficult to imagine a world in which the United States does not prioritize agriculture in its trade deals, and agreements that ignore the sector are unlikely to pass through Congress. However, relaxing tariffs on agriculture is a sensitive issue in the European Union. France, in particular, has strongly opposed negotiating on such tariffs, and it currently appears that the European Commission has no intention of even asking for permission to negotiate on agriculture.

Negotiations on the auto sector are, similarly, a controversial topic. Trump has made protecting the U.S. auto sector a clear part of his trade strategy, a fact that was on display during negotiations for the United States-Mexico-Canada Agreement. In an effort to slowly draw auto production back to the United States from Mexico, Washington was able to successfully negotiate for a deal that would only apply to a car if 40-45 percent of its content was made by workers in Canada, Mexico or the United States who earn more than $15 an hour.

Trump previously used tariff exemptions as a negotiating tactic with Mexico and Canada by ending their exceptions from steel and aluminum tariffs.

The auto sector is not currently on the table for negotiations with the European Union, but the United States may not even want the sector included in a formal trade agreement. Rather, Washington may be hoping to negotiate some form of side deal with the bloc or its members which would place quotas on the number of cars that can be exported to the United States. The European Union has, for now, included the auto sector in its objectives, but its promise to take potential U.S. sensitivities into account could indicate that Brussels is open to a deal which includes industrial goods but excludes automobiles.

What to Watch For

The United States and the European Union have clear disagreements on which sectors or tariffs their talks should focus on, making the path ahead fraught with challenges. In the meantime, though, there is likely some room for negotiation over non-tariff barriers and regulatory issues. Such negotiations would easily fall under the second mandate Malmstrom has proposed, and U.S. Trade Representative Robert Lighthizer has backed the idea of pursuing agreements on such matters before moving on to more challenging talks toward a free trade agreement.

The European Union hopes that progress on smaller issues will prevent the United States from rushing to place tariffs on the bloc's auto sector, but Brussels could be set up for disappointment. For the United States to apply such measures, the Commerce Department must present the findings of its investigation into whether auto imports harm U.S. national security no later than Feb. 17. If the report recommends tariffs and Trump accepts the recommendation, the president will have to continuously exempt the European Union from such measures. In such a scenario, Trump could use the threat of auto tariffs to push his own agenda in negotiations, if and when talks toward a free trade agreement begin to languish. Trump could, for example, attempt to force agriculture into negotiations or push for a more comprehensive free trade agreement — or even a narrower one.

Trump previously used tariff exemptions as a negotiating tactic with Mexico and Canada by ending their exceptions from steel and aluminum tariffs. However, those tariffs have remained in place even after Washington secured a deal with its North American allies, and the European Union is leery of suffering a similar fate with auto tariffs. Brussels has stated that steel and aluminum tariffs must be removed before an industrial free trade agreement can be negotiated, and has promised to withdraw from talks if auto tariffs are put into place. If the United States is looking to raise auto tariffs regardless of whether the European Union agrees to a free trade agreement, then the bloc has little incentive to negotiate toward such a deal.

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