Opening up the Atlantic

Brittany Davis // 17 April 2019

This week, the European Council approved mandates for the European Commission to open negotiations with the United States on two trade agreements.  First, an “agreement limited to the elimination of tariffs for industrial goods only, excluding agricultural products”, and second “an agreement on conformity assessments”. The latter removes certain non-tariff barriers, by making it easier for companies to prove their products meet requirements both in the EU and the US.

Although the mandate only covers two areas of trade, it has the potential to increase the flow of goods and services between the two blocs, which is already worth over $1.1 trillion per year. Even the removal of tariffs on industrial goods alone would increase US exports to the EU by 13%, and EU exports to the US by 10%. Removal of tariffs also means that consumers can purchase more high-quality goods at lower prices, which encourages economic growth, efficiency, and innovation in both countries by moving jobs and resources to more productive industries.

The EU and the US have the largest bilateral trade and investment relationship in the world, which creates around one half of world GDP and one third of total trade world-wide. The EU was not unanimous in its desire to re-open negotiations – France voted against the negotiations in protest to the US pulling out of the Paris Agreement, and Belgium abstained from the vote. This doesn’t prevent negotiations from occurring, but it means that France could unilaterally block the trade agreement that comes from the negotiations.

Trump’s favorite complaints around free trade include the trade deficit, trade wars, and loss of jobs overseas. He has rallied his government and his voter base around his ‘America First’ ideology, which promotes mercantilism – the idea that imports are bad, exports are good. Mercantilism is also based on the idea that trade is zero sum, which is not the case.  Although free trade can cause a loss of jobs in certain sectors, it creates jobs in others in a positive-sum process. Free trade also creates new jobs which are usually higher paying than those that were lost. Trump also makes frequent reference to the loss of jobs in the U.S., which is a mistake that many opponents of free trade make – in particular blaming the loss of jobs and business closures from foreign trade as consequences of foreign trade when in fact it is due in large part to automation.

The second agreement on conformity assessment could have a large impact on enhancing free trade, as many of the costs associated with imports and exports are significant non-tariff barriers. The conformity assessment makes it so that agencies in either country can certify that the goods meet foreign regulations, which eliminates a lot of the preventative costs associated with importing and exporting goods.

The EU has signaled its interest in an agreement by the end of 2019, particularly wishing to avoid tariffs on EU –particularly German— automakers – specifically. The EU is also keen for the U.S. to remove the steel and aluminum tariffs that are currently in place, threatening to “suspend negotiations unilaterally if the U.S. were to impose further trade restrictions against European products”. Trump has not shown the same enthusiasm, stating that the U.S. was on the ‘losing end’ of the trade relationship with Europe: “They barely take our agricultural products and yet they can sell Mercedes-Benz and they can sell everything they want in our country. It’s not fair”. Trump is also threatening tariffs on aircraft subsidies on top of the metal tariffs that are already in place.

So where does this leave the negotiations? There is a strong chance that the talks could be dead on arrival over the topic of agriculture: the EU says that agriculture is off the table, however the US demands it be a topic of negotiation. This has never been agreed on as part of the negotiations. The summit between European Commission President Jean-Claude Juncker and Trump in June of 2018 only mentioned removing tariffs and barriers on “non-auto industrial goods” – not agriculture. In spite of the limited scope of the negotiations, they are a good start in addressing two of the major barriers to free trade between the blocs in the largest bilateral trade relationship in the world.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).