Relaunching Transatlantic Trade Relations in Early Biden Presidency?
Sylvia Chen, Trade Policy Writer and Consultant based in Berlin.
“America is back. The transatlantic alliance is back,” remarked President Joe Biden shortly after he took office. After inheriting the legacy of the Trump administration’s unilateral trade policy that led to transatlantic tensions, President Biden wants to re-engage the United States’ key allies, particularly the European Union, and re-commit to multilateralism. In mid-June this year, President Biden traveled to Brussels during his first overseas trip to participate in a US-EU Summit. Ahead of the Summit, the United States and the European Union took significant steps, including temporary suspensions of several tariff actions, to alleviate transatlantic trade tensions. During the Summit, both parties formulated a joint intent to grow the EU-US trade and investment relationship as well as to uphold and reform the rules-based multilateral trading system. Auspiciously, the European Union and the United States agreed to a five-year truce to the seventeen-year-long Airbus-Boeing WTO dispute immediately after the Summit. These gestures signaled both sides’ attempts to repair the trade rift; however, resetting and rebuilding the transatlantic trade partnership requires more than temporary solutions. Is the transatlantic alliance actually back? The temporary ceasefire and gestures, in my opinion, are not enough to ease the skepticism in the EU after the previous four years of uncertainty and tension. More concrete and meaningful steps are required from both sides to repair the rift and reset as well as rebuild transatlantic trade relations.
Large Civil Aircraft, aka the Airbus-Boeing, WTO Disputes
Following the EU-US Summit in June, both sides agreed to suspend the application of countermeasures in the form of tariffs for five years and reached a cooperative framework on the Airbus-Boeing WTO disputes. As a part of the cooperative framework, both sides intend to provide large civil aircraft producers financing on market terms and refrain from funding and other specific support that would harm the other side. Furthermore, both sides agreed to collaborate on jointly analyzing and addressing non-market practices of third parties that may harm their respective large civil aircraft sectors. As both sides previously came to an understanding, the temporary solution not only relieves some of the pressing irritants but also indicates a desire to cooperate on tackling challenges posed by China’s “distortive trade practices.”
Although the temporary truce provides an opportunity for the EU and the US to cooperate on a shared challenge in the industry – China – the failure to secure a permanent resolution indicates that the transatlantic alliance is fragile. “Should EU support cross the red line, and U.S. producers are not able to compete fairly and on a level playing field, the United States retains the flexibility to reactivate the tariffs that are being suspended,” USTR Katherine Tai told reporters. Indeed, there is a lack of trust in the underlying subsidies issue, specifically on the transparency of payments to the producers and the permissible types of subsidies. The Airbus-Boeing problem is now on ice for another five years. However, going forward, a permanent deal with a detailed framework on the subsidies and transparent financing and funding is needed to truly secure the transatlantic trade partnership.
Section 232 “National Security” Tariffs on Steel and Aluminum
A month ahead of the US-EU Summit, the EU announced that it would temporarily hold off executing the planned escalation of retaliatory tariffs on American goods, paving the way to a joint solution. Both sides recognized that third parties primarily drive the market distortions. They agreed to engage in discussions before the end of 2021 to address excess capacity and to hold countries like China that support trade-distorting policies to account. The Summit did not yield a fruitful result, but both sides agreed to “engage in discussions to allow the resolution of existing differences on measures regarding steel and aluminum before the end of the year” and “to ensure the long-term viability of our steel and aluminum industries, and to address excess capacity.”
Removing the Section 232 tariffs on steel and aluminum from the EU would present an opportunity to advance transatlantic trade relations and provide a building block for both sides to work together to address China’s unfair trade practices. President Biden, however, faces a dilemma – the steelworkers union and manufacturing association urged the President to keep the tariffs in place because − as they argued − the tariffs allowed a revival in the industry and boosted employment. Moreover, the current administration focuses on a worker-centric trade policy. The Democrats are keen on obtaining support from the major steel trade groups and unions for the midterm election in 2022. Removing the Section 232 tariffs on steel aluminum from the EU could be an unpopular move politically. Until the US and EU can work together on the root cause of the issue – China’s trade-distorting policies – the current US administration can only resort to a superficial solution to satisfy a key part of the electorate. Therefore, there is an essential need for the US, the EU, and Japan to return to the trilateral dialogue to address industrial subsidies and state-owned enterprises (SOEs). Amid post-pandemic economic recovery, the trilateral dialogue can also ensure that subsidies in the form of economic stimulus do not infringe upon other trading partners’ rights and are in accordance with the multilateral trade rules.
Section 301 Tariffs on the Digital Services Taxes
Both the United States and the European Union have taken several temporary actions, paving the path to a more amicable negotiating environment on digital services taxes (DST). On June 2, 2021, the Office of the United States Trade Representative (USTR) announced a 180-day suspension of the tariffs under the Section 301 action on the DST of some EU Member States to allow time for a multilateral solution and also terminated the Section 301 DST investigation of the European Union. Meanwhile, the EU has postponed its digital tax proposal, which was planned for July.
On the DST issue, the United States has signaled its preference for a negotiated, multilateral outcome. Nevertheless, it has preserved the future use of Section 301 tariffs as a unilateral trade defense instrument, which the Trump administration had revived after decades of dormancy. Without definitely removing the threat of Section 301 tariffs on DST, it will continue to serve as an irritant in trade relations between the United States and the European Union member states. A few days after the USTR announcement, the United States urged European countries to eliminate their digital services taxes during the G7 meeting of finance ministers. Still, France, Italy, and the United Kingdom have resisted abandoning those taxes until the international tax agreement on the global minimum tax rate is finished and in place — a process that could take up to four years.
Meanwhile, the United States is already facing resistance to the global tax deal at home. This suggests that the DST would remain in place, and the US’s Section 301 action will linger. At the same time, the EU, moving towards an open strategic autonomy, is planning an anti-coercion instrument designed to counter practices, including extra, discriminatory tariffs, by non-EU countries which seek to coerce EU authorities. Although it is not clear whether the envisaged instrument will be used to counter the United States’ unilateral tariff actions, i.e., Section 232 or Section 301 tariffs, this shows that the EU is also prepared to employ unilateral actions to defend its trade interests. While both the EU and the US have expressed their commitment to a multilateral solution, both sides have emerged from the past four years with a pragmatic approach to their respective geoeconomics interests. That is, multilateralism is no longer the pinnacle option for resolving trade conflicts. Rather, it is a tool to be used among unilateral actions or bilateral agreements if and when the transatlantic alliance regresses.
Conclusion
Although the new administration in the US has provided an opportunity for the EU and the US to repair and reset their trade relations, both sides have opted for short-term solutions instead of agreeing to permanent resolutions. This highlights the fragility of the transatlantic truce and the lack of trust on how either side would execute their trade policy in the post-pandemic environment. In addition to the issues discussed above, the US and the EU harbor divergent views on other matters, for example, on the WTO TRIPs waiver for COVID-19 vaccines.
As both sides continue to relaunch and repair their alliance, setbacks are inevitable. Incremental gains, such as finding common solutions to the issues mentioned above and continuing the discussion on eliminating tariffs on industrial goods, would allow the momentum for the renewal to grow. Let’s not forget that the transatlantic trade relations are built on a long, successful history of transatlantic cooperation: for example, the General Agreement on Tariffs and Trade (later the WTO), the International Monetary Fund (traditionally headed by Europe), and the World Bank (led by the US). If both sides can seize the renewed momentum with the Biden presidency, they both will be able to tackle common challenges, protect shared values, and achieve common goals.
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