US trade representative (USTR) Robert Lighthizer and EU Commissioner for Trade Cecilia Malmström are meeting this week in Brussels for the second time to advance talks on a potential trade deal. Based on the past 18 months of an evolving Trump trade policy, what can Europe expect from this dialogue?
Despite the often intemperate and erratic rhetoric of the US president, it is important to note that neither Trump nor his senior trade advisors, including the most consistent hardliner Peter Navarro, have ever ruled out some sort of a trade deal with Europe. The Trump-Juncker understanding reached in July reflects not only this openness, but a growing recognition in the United States, including at the White House, that the most important goal of US trade policy is meeting the challenge of Chinese mercantilism. Already, starting in December of 2017, US, EU and Japanese trade ministers opened a dialogue to craft a unified approach to China’s systematic flouting of its World Trade Organization (WTO) obligations and to develop new disciplines to cover the behavior of Chinese state-owned enterprises (SOEs) and its opaque and frequently illicit tactics to acquire Western technology. This trilateral dialogue is a good starting point for more constructive transatlantic cooperation.
The trilateral process will necessarily include serious reform of the rules of the WTO, which Lighthizer has long called for. A July 5, 2018 European Commission white paper on WTO modernization is a good contribution to the discussion and could also help set a positive tone for the larger scope of US-EU trade talks.
Advancing beyond a positive tone at the start will require substantial work on both sides of the Atlantic. What the US side will emphasize is gradually emerging from US negotiations with Mexico and Canada, Korea, Japan and even with China. These talks reveal core concerns. USTR Lighthizer is clearly the most trusted of the President’s trade team. He has long championed not only WTO reform and taking on the threat of China, but has shared the President’s focus on reviving the US manufacturing sector. Actions on steel, aluminum, autos (and likely uranium in the near future) are the leading edge of this policy. The new rules of origin agreed with Mexico on automobile and parts trade embody the policy, going so far as to require that 40-45% of content be produced with labor rates of at least $16 per hour, far above normal factory wages in Mexico. The policy mix extends to finding means to incentivize or favor production in the United States. Lower corporate taxes and the switch to a territorial tax regime are part of this strategy, as is the use of the “bully pulpit” by Trump to convince Foxconn to build a new multibillion facility in Trump territory in the Midwest. Lighthizer’s push for severe limits on the use of the investor state dispute settlement (ISDS) system in the Mexican agreement is relevant as the USTR believes such a tool is largely an insurance policy for US firms to invest abroad.
The revival of quotas (used selectively in the 1980s by the Reagan administration for countering growing Japanese penetration of US industrial markets) on steel, aluminum and, apparently, on autos from Mexico is yet another tool to incentivize domestic production.
The Trump team has of course breathed new life into Section 232 of the 1962 Trade Act that employs national security concerns to justify tariffs and quotas. Closely related to this tool is the increased use of the power to limit foreign direct investments on national security grounds, especially for the acquisition of sensitive technology by the Chinese. Some of these actions, such as blocking Chinese purchase of telecommunications technology or sale of Chinese technology in this sector by state-connected firms, or the potential limits on uranium imports, are certainly legitimate. However, there is little reason to argue that steel, and even more so autos, meet the requirements of national security protection.