The European Commission President Jean-Claude Juncker and US President Donald Trump issued a joint press statement on trade on July 25, 2018 on the former’s visit to the White House. The announcement signals the willingness of both sides to work on free trade between the EU and the US. Together with the statement by US officials on the progress of NAFTA talks with Mexico sans Canadian participation and the stepped-up threat to increase tariffs from 10 percent to 25 percent on USD 200 billion in exports from China to the US, the Juncker-Trump agreement is perceived by some analysts to be a game-changer signaling that the US is forming a new US-centric world trade order on a bilateral basis excluding its perceived adversaries such as China.
A closer look at the agreement seems to suggest that the deal is more a ceasefire on an automobile trade war rather than a grand strategy for a new world trade order. Based on the press statements, Juncker and Trump agreed on five things:
1. “No further tariffs” during negotiations between the US and the EU.
2. The US and the EU will reassess existing tariffs on aluminium and steel.
3. The EU will increase its purchases of US soybeans “almost immediately.”
4. The EU will work toward increasing its purchase of US liquified natural gas (LNG).
5. Both sides will work toward “zero tariffs, zero non-tariff barriers, and zero subsidies on non- automobile industrial goods.”
Reading the fine print of the agreement revealed that the agreement is ambiguous on implementation. There are no quantifying numbers nor dates on increasing purchase of soybeans or liquefied natural gas (LNG). The most significant missing element is the core issue at hand: how will they resolve the automobile dispute? The follow-up comment by Commerce Secretary Wilbur Ross that the US investigation of national security risks from imports of motor vehicles and parts will continue unabated adds to the scepticism of many observers on the significance of the Juncker-Trump joint statement.
Some aspects of the deal will be relatively easy to implement, and others will not. Both soybeans and LNG are bulky commodities and their trade is subject to market fluctuations and transportation costs. It is easy for Europe to buy more US soybeans today as China — the traditional biggest US soybean buyer — has shifted to purchasing Brazilian soybeans and made US soybeans cheaper for other buyers. However, the European food labeling requirement for genetically engineered (GMO) food products will act as a deterrent on using US soybeans in European food products. GMO soybeans are grown extensively in the US, and there is additional cost involved in separating GMO from non-GMO soybeans. Confining US soybeans to animal feed usage limits its potential growth.
Constraints also exist for LNG exports. For countries with access to the pipeline network in Europe, buying pipeline gas from Russia is cheaper than importing LNG as it does not entail the expensive gasification and re-gasification processes. LNG imports from the US are economically viable for them only in the winter when the pipeline transmission and gas storage facilities cannot cope with the heightened demand. Imported LNG is a financially viable year-round gas source just for areas without access to the pipeline network.
While some growth in US soybean and LNG exports to Europe seems likely at the moment, most of this would have happened without the deal. The long-term potential for US soybean and LNG exports to boost US-Europe trade is doubtful.
The current US negotiation position which emphasizes a cut in the trade deficit within a specific time frame and qualitative behaviorial changes — including ending the theft of Intellectual Property Rights and the forcible transfer of technology to joint ventures — make negotiations challenging to start.
Lowering non-automobile industrial tariffs toward zero could prove challenging. The WTO tariff on manufacturing products averages 2.4 percent and 2.6 percent in the US and the EU, respectively. Based on the WTO’s Most-Favored-Nation rules, it will be hard to negotiate a strictly bilateral agreement because of the “free-rider” problem. If the US and the EU lower their barriers to each other, they must also drop their tariffs vis-à-vis all other WTO members, but without getting any reciprocal concessions. The free rider dilemma will be a lose-lose situation for the US and the EU. The only way to turn the situation around is for both the EU and the US to get out of the WTO, a case that President Trump had mentioned earlier, but which the EU is unlikely to oblige at this stage.
The Juncker-Trump trade agreement lowers the near-term risk of an automobile trade war, but the deal is more symbolic than substantive. On the one hand, the Juncker-Trump announcement means that the US is willing to accept a modest concession from the opposing party to reach a trade agreement in principle, but whether the deal can resolve the automobile dispute is still uncertain. On the other hand, it could also suggest that the US has realized that it is at a negotiating disadvantage when it simultaneously goes into a trade war with all of its major trading partners, hence it is willing to negotiate a ceasefire on the “western front” and shift all its attention to the “eastern front” and concentrate on China.
On the side of the EU, the promise not to introduce tariffs while talks are ongoing is an achievement in itself. The move lowers the threat of a trade war in which nobody wins, and the US focus on China will likely put the EU out of the scrutiny of an erratic President Trump. The global trade share on the goods of the EU-28 is 15 percent, as against 12 percent each for the US and China. A final swing of the EU-28 toward either the US or China can tip the scale of world trade rule setting in favor of either the US or China. At the moment, the interest of the EU-28 is best served by a global trade order anchored on multilateralism but which also preserves access to their biggest export market, the US. The EU is likely a bystander in the current US-China trade spat.
The US focus on China could mean heightened rhetoric about the US threat to Chinese exports down the road. The US escalation of its proposed tariffs on USD 200 billion in imports from 10 percent to 25 percent smells of a trade war threat and the Chinese response that it must retaliate “to defend the nation’s dignity’ had made restarting meaningful talks at this stage not easy.
The current US negotiation position which emphasizes a cut in the trade deficit within a specific time frame and qualitative behaviorial changes — including ending the theft of Intellectual Property Rights and the forcible transfer of technology to joint ventures — make negotiations challenging to start. There are also the economic rationale behind international trade and the fact that the US runs a persistent annual trade deficit on goods of USD 800 billion reflecting its poor export competitive position. Also, agreeing on behaviorial issues is always difficult in any trade negotiation.
The US must put forward a workable plan with tangible negotiation points and which deemphasizes behavior to jumpstart the trade negotiation. A business group made up of the CEOs of 200 of America’s largest companies, the Business Roundtable, is urging the Trump administration to stop insisting that Beijing reduce its trade gap with the US and focus instead on pursuing changes to Chinese tariffs, investments, and regulations.
Until President Trump is willing to back such a position, it is likely that any deescalation of the trade war threat between the US and China could happen only when there are visible signs of economic and/or political pain.