The EU-US trade agreement, agreed two weeks ago in Turnberry, Scotland, continues to attract both attention and criticism. As a reminder, this “political framework” commits the two sides to change their tariff regimes, launches a dialogue on standards and safety for industrial and agricultural products, hints at working together to roll back global steel over capacity and includes an EU promise – very carefully worded – to buy more US weapons and fossil fuels, and invest at least US$600bn in US manufacturing in the next years. It is not legally binding on either party.
Despite the brave face put on it by President von der Leyen – “strong if not perfect” is how she described it in a series of op-eds over the weekend – most commentators rightly regard the deal as deeply flawed and a reflection of Europe’s waning international influence. Mario Draghi is the latest to say as much. You can always tell if a deal is shoddy if the words ‘fair’ or ‘balanced’ appear in the title. Both do.
The framework is decidedly not a trade agreement of the kind we are used to. It is a statement of intentions, a commitment to try to do certain things – invest more, buy more if the private sector chooses. Among its few hard commitments are the US imposition of a 15% standard tariff on EU exports; and the EU’s ‘reciprocal’ commitment to remove duties on all industrial goods and offer preferences to the US on a wide range of agricultural products, including sensitive ones like pigmeat and dairy.
The EU has been criticised for giving preferences to US agriculture alone. To do so is illegal under the World Trade Organisation’s laws that the EU has always defended. Article 1 of the General Agreement on Tariffs and Trade (GATT) – the Most Favoured Nation (MFN) clause – states that any tariff concession offered to one country must be extended unconditionally to all other WTO members. One cannot extend trade concessions to just one country, outside of a Free Trade Agreement. The rule was designed specifically to prevent the kind of unilateral bullying that the EU was subject to in recent weeks.
I Want It All
It was unclear until now if the EU’s commitment to remove duties on all industrial goods – representing 95% of trade with the US – would be preferential or MFN. However, this writer got confirmation from a senior Commission trade official over the weekend that the tariff removal will also be for the benefit of the US alone. My ex-colleague said to me: “It’s only for the US, forget MFN….just unbelievable!”
If this is the case, then what we are seeing is the most serious and sweeping demolition of Article 1 of the GATT since 1950. It’s worse than we thought. Presumably, the US were insistent that the tariff concessions from the EU would benefit US exporters only, and not, say, competing Chinese car producers who still have to pay the EU’s 10% tariff, or Indian chemical producers still paying 6%.
Don’t Let Me Down
One can expect that when all this gets confirmed in writing, China, India, Brazil and other countries – who will now be disadvantaged on the EU market because US goods will pay lower duties than they do – will call out the hypocrisy of the EU. Trade wonks are watching fascinated to see in which WTO committee the EU notifies its commitment.
Perhaps not many people care very much any more about international law, but this breach is serious and carries long-term consequences for the EU’s reputation as a supporter of multilateralism, as Mario Draghi has said.
California Dreaming
Some clever Commission lawyers may argue that the tariff cuts are simply the first down payment in a longer process leading to a full-fat Free Trade Agreement between the two giants, and thus allowable under the relevant GATT rules.
Very few will believe this. First, there is zero sign that the US is interested in a truly reciprocal agreement that would see the removal of its tariffs. Second, there remains the bitter experience of the Transatlantic Trade and Investment Partnership (TTIP) negotiations which demonstrated the inability of Mars and Venus to find common ground. And third, because the massive increase of tariffs on the US side is patently inconsistent with the requirement in WTO that FTAs must liberalise “substantially all trade”. The argument won’t pass the red-face test.
Don’t Leave Me This Way
In all likelihood, the EU will be in no hurry to ink a bilateral, legally binding agreement with the US. First, because it cannot bind its private sector to invest in an increasingly hostile US investment climate or buy more fossil fuels that make a mockery of the green transition.
But second, because a binding deal would require consent from the European Parliament, which is gearing up for a fight over the Turnberry deal. Voices in the Parliament are unhappy about the way they risk being side-stepped (because, depending on the legal basis chosen, the EU’s unilateral tariff commitments may only need Council, and not Parliament approval); while the farming community in Europe – which has sway over the members of Parliament, including those in the EPP – are suspicious of the framework deal in substance, especially the promise to revisit EU agricultural standards and let in US pork. They want a say.
MEPs are also scrutinising the agreement carefully for any sign that the EU might relax its digital regulations for the benefit of US big data companies, as called for by President Trump on his social media site Truth Social this week. Equally unacceptable from the EP standpoint. Not to mention a promised agreement to negotiate rules of origin, presumably skewed so as to reduce Chinese input into European exports. So, one can predict considerable friction in the months ahead as the different bits of the Turnberry framework start to be implemented.
So what lies ahead? Basically two possibilities. The first being that the EU and the US haltingly implement Turnberry to massive opposition and running up against enormous technical and legal challenges. The implementation process will outlive the Trump presidency and the EU will hope that a more benevolent regime will wind back much of the WTO-illegal tariff commitments taken and not insist on EU alignment to US standards.
Or, the EU belatedly realises that its future lies in reducing dependence on the US economy – as China, Canada and India have already realised – and diversifies for its own good. This should be combined with agreement with like-minded countries – the members of the CPTPP, EFTA, Mercosur and others, to remain faithful to their WTO commitments, to coordinate their response to US unilateral pressure – including through well-coordinated retaliation to hurt the US as much as possible, and to regard a US attack on any of them, if in breach of WTO, as an attack on them all.
Is it too late? The EU has covered itself in shame in its capitulation at Turnberry. Most commentators have given up on Europe. To paraphrase Churchill, this is not the end of the beginning but the beginning of the end – of the common commercial policy, of the EU’s credibility as the bulwark of multilateralism and of its capacity for global leadership. The Brussels effect just went into reverse. Can it be put back into gear is the question for the next year. We should not lose hope…yet.
To read the Insight as it was originally published by the Friends of Europe, click here.