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The Troubled Transatlantic Relationship
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The Troubled Transatlantic Relationship

An Opinion Piece by the NFTC's Vanessa Sciarra

February 7, 2020

The Troubled Transatlantic Relationship

By Vanessa Sciarra
With news about the U.S. China trade relationship and USMCA dominating the headlines, it is easy to forget the significance of other trade relationships to the U.S. economy. It may come as a surprise but, by most economic measures, the U.S. trade and investment relationship with the European Union (the EU) is our most important relationship in the world, despite the absence of a negotiated trade agreement governing the relationship.

In 2018, the last year for which comprehensive data is available, Europeans bought vastly more American services than customers in our USMCA partner countries and more products and services than Chinese customers. While the EU sells us more products than we sell to them, many of those European products are critical inputs to the U.S. manufacturing sector, particularly in the automotive and chemical industries, allowing our exports in those areas to be some of the most dynamic in the world.

Europe is by far our largest source of foreign direct investment (FDI), making up 60% of all FDI in the United States in 2018. And what these aggregate numbers don't show is how European investment has been targeted to help grow some of the most productive American manufacturing sectors.

The size of our economic relationship, along with our shared cultural values, regulatory framework and our strong belief in the ruled-based trading system should make our relationship the easiest in the world. The relationship has instead been fraught with challenges and, like many of our other trading relationships across the world, ruled by frequent contentious disputes resulting in the use of unilateral tools such as tariffs. This has often colored perceptions in Washington about our relationship and about whether Europe treats us fairly on trade and other regulatory matters. In fact, President Trump has made the argument that Europe is "worse than China" as a trading partner.

Let's be clear! There is little validity to this overall assessment. While there are concerns regarding some of Europe's practices, it is crucially important to remember the larger picture. Our companies can and do thrive in the European market. Our FDI in Europe is welcome and protected by a strong legal system. U.S. companies operate wholly-owned subsidiaries throughout the EU and do not face governmental pressures to engage in forced technology transfer with European governments.And all types of U.S. intellectual property enjoy strong protection across EU countries.

Most importantly, the EU and the U.S. have traditionally been able to work closely together as leaders at the WTO, the OECD and in other institutions to build an international rule of law that favors market-oriented economies. We may have strong differences over the specifics of such rules but we have a shared belief that they are better for the world than other models. It would be a profound mistake to let a finite, albeit important, set of differences overshadow our national interest in strengthening shared objectives and mutual trust.

Prospects for an EU Trade Deal

2020 will be a pivotal year for this relationship. Although we expect there to be major sources of friction, there is also hope that a trade deal, even on a limited scope, could be negotiated in the coming months. Phil Hogan, the new European Trade Commissioner, made his second visit to Washington this week and has plans to return next month and both sides have stated that they hope to quickly re-set" the transatlantic trade agenda. However, the path to a deal with the EU is long and the list of irritants is full of both holdover items from the past and new issues that are creating additional tensions.

Chief among the holdover items from the past is the Boeing Airbus WTO dispute, which is headed for further tariff escalation this year. While the EU and the U.S. issued (with Japan) a strongly-worded Trilateral Process document urging reform of subsidies disciplines in the WTO context, it is clear that a key driver of the WTO stalemate, including most significantly at the Appellate Body, is the philosophical divide between EU and U.S. views over the role that the WTO and its dispute resolution system should play in the future.

And there are new issues that could slow down the process. The U.S. has already strongly objected to growing interest among EU member states to enact digital services taxes (DSTs). The EU plans to adopt a new unilateral trade enforcement mechanism and proposals to implement a carbon border adjustment mechanism are also cause for concern. On the U.S. side, the Trump Administration's thinly-veiled "national security" tariffs imposed on steel and aluminum imports have greatly hurt EU exporters, and the continued threat of similar "national security" tariffs on autos and auto parts looms large over all bilateral discussions.

As with any trade negotiation, the list of issues is long but it is imperative for the U.S. and EU negotiators to keep the larger context in mind. The EU is a key U.S. ally with respect to a myriad of global conflicts and we have always had a strong relationship in areas of security and intelligence-sharing. A U.S.- EU trade agreement would be a worthy achievement.As important, a strong U.S. EU relationship will be crucial in getting the Chinese to implement structural changes related to their most problematic practices and to recognize the importance of playing by international rules.

-- Vanessa Sciarra, Vice President for Legal Affairs and Trade & Investment Policy, NFTC