© REUTERS/Leah Millis

In May, US President Donald Trump withdrew from the Iran nuclear deal. Now Europeans are waiting for another blow from Washington: the beginning of a transatlantic trade war. On March 23, Trump announced sweeping tariffs on steel and aluminum imports based on national security concerns. Though this decision was mainly directed against China, long-term allies such as Canada and EU member states are also affected. The temporary exemption that the US granted the EU will expire on June 1, and the tariffs will kick in then unless the Trump administration changes its mind.

Troublingly for Europe, the United States only wants to exempt Europe permanently from the steel tariffs if the EU offers significant market access concessions, for example lowering its tariffs on US cars. In addition, Trump has threatened to impose tariffs up to 25 percent on imported cars, based again on the same national security provision used for the metal tariffs, Section 232 of the Trade Act of 1962. If Trump decides to impose these tariffs, it could start a spiral of protectionism.

What are the chances of defusing trade tensions? A compromise on steel is possible. If the US sets a steel quota of 100 percent of last year’s steel and aluminum exports from Europe, EU countries probably would not be willing to retaliate. But if the quota is lower, retaliation is more likely. However, for car tariffs, there is no easy solution in sight. Nor is there any agreement on how to move forward in the future. It would make economic sense in the long run to start talks about an EU-US trade deal (previously known as TTIP), negotiated on the basis of an equal partnership. But for this, Germany and France need to find a common ground. At the moment, intra-European disputes look set to weaken the EU’s position as a global player in world trade.

Using the EU’s Economic Power

So far, Europeans have reacted the wrong way to the American threats. The European Commission is responsible for the Common Commercial Policy, one of the EU’s most integrated policy areas. But instead of going through the Commission and forming a unified position vis-à-vis the US, the two largest EU member-states, Germany and France, have rushed ahead on their own.

For example, the German economy minister, Peter Altmaier (pictured), has proposed talks with the US about a “TTIP light”, which would only deal with industrial market access. He wants talks with the Trump administration to be positive and constructive in order to alleviate the tensions in the transatlantic trade relationship. Through this offer Germany also wants to protect its fabled car industry which has caught Trump’s attention.

Meanwhile French President Emmanuel Macron has made a great show of his close personal relationship with his American counterpart. However, with regard to trade, France is taking a much less conciliatory tone than Germany. France supports the European Commission’s view, namely that there is no reason to negotiate under (an unjustified) threat. Cracks in Franco-German cooperation are also appearing with regard to a potential transatlantic trade deal. Macron has said that such a agreement with the US must also include non-tariff barriers as well as agriculture and public procurement. And he has suggested that the EU should only negotiate trade deals with partners who support the Paris Agreement on Climate Change, though he would likely be willing to make concessions in this regard.

The divergent positions of Germany and France weaken the European position, and help the US to divide the individual European member-states. It sent the wrong signal when German Chancellor Angela Merkel and President Macron made individual visits to Washington in April to discuss trade as the US president has difficulties understanding and accepting the concept of the EU.

Still, Donald Trump knows that a unified EU strengthens the European position, which is why he is trying to drive a wedge between European powers. During Macron’s visit he said that “trade with France is complicated because we have the European Union. I would rather deal just with France. The Union is very tough for us. They have trade barriers that are unacceptable.” Trump’s lack of knowledge on the subject notwithstanding, the point of the EU is that its members act together on trade: The EU must use the unified power of all its member states (including Germany and France) to deal on equal terms with the US.

Acknowledging Imbalances

A compromise in trade is an important test for Franco-German cooperation. Paris and Berlin should prove that they take common European interests seriously in the medium- and long-term. In other words, they must be willing to accept that national interests need to temporarily take a back seat. A common European position in trade sends a strong signal, particularly in times where the centrifugal forces in the EU are increasing. Without a common understanding between the two largest member-states, the success of the supranational European common commercial policy would be threatened.

There are three key elements to what should be a common Franco-German strategy.

First, Paris and Berlin should keep in mind that the US remains the most important trade and investment partner for the EU and vice versa, harsh rhetoric and political chaos in Washington nonwithstanding. Therefore, the economic rationale for a transatlantic trade deal has not changed. Both sides would benefit from a reduction of trade and investment barriers. France and Germany should not approach the Trump administration on their own; rather, they should convince the Commission that talks about a comprehensive free trade agreement are important in the long-term.

Paris should move closer to the German position, showing greater readiness to open talks between the EU and the US. Here, the good relationship between Macron and Trump can be used to promote European interests. Macron may not have convinced Trump to stick to the agreement on Iran’s nuclear program, but their apparent friendship is still a basis for future talks. At the same time, Berlin should accept that the agreement needs to be comprehensive and not just focused on good market access for industrial goods, German ones in particular.

Admittedly, the difficult TTIP talks will hardly have any chance of success under President Trump and his protectionist trade policy. However, it is still worthwhile to review the agreements reached in previous negotiating rounds, and to look where negotiations could continue in the long run. To this end, the Transatlantic Economic Council (TEC), which was founded in 2007, should be used intensively to talk on a working level about regulatory cooperation.

Second, Europe must commit itself to defining new rules in international trade and solving existing problems on a multilateral level. The American concerns about Chinese subsidies for key industries and theft of foreign intellectual property are not imaginary; indeed, Europe shares many of them.

However, the introduction of punitive tariffs is the wrong way to move forward. For example, the problem of (largely Chinese) steel overcapacity should not be solved bilaterally, but on a multilateral level in the context of the G20/OECD Global Forum on Steel Excess Capacity. German and France should work with the White House to ensure US cooperation in these forums.

Third, there should be a discussion about international trade imbalances. Germany should take seriously the American and European—and particularly French—criticism of its huge export surplus. Trump’s claim that trade deficits are a sign of unfairness lacks any economic credibility. But it is true that Germany does not comply with European rules stating that a member-state’s trade surplus may not exceed 6 per cent of GDP. The typical German response—that its surplus is a sign of competitiveness—is no longer sufficient. Germany should strengthen its internal demand through increased investment in infrastructure and digital networks, thus reducing its surplus. If the new German government is still committed to restrained spending and no budget deficits whatsoever, the least it could do is to show more openness for dialogue. This would be an important gesture of goodwill with regard to Paris, Brussels, and Washington.

If Germany and France incorporate these three elements in their trade strategy, the EU will be less divided and better able to reach a deal with the difficult partner in the White House.

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© REUTERS/Fabian Bimmer

In his State of the European Union address on September 13, EU Commission President Jean-Claude Juncker called strengthening European trade his top priority. Following his speech, the Commission presented a package of new trade measures called “A Balanced and Progressive Trade Policy to Harness Globalization.” The proposal lays forth a comprehensive negotiating agenda for the EU on a multilateral and bilateral level.

The EU depends on open markets and a rules-based international trading system. According to the World Trade Organization, the EU is the second largest exporter and importer of merchandize goods worldwide (excluding intra-EU trade), accounting for 15.4 percent of global merchandize exports and 14.8 percent of merchandize imports in 2016. Regarding commercial services, the EU is the number one exporter and importer, with approximately 25 and 21 percent respectively.

The EU is not only a global player in trade but also the world’s biggest investor. According to Eurostat, in 2015 the EU accounted for 48 percent of global foreign direct investment stocks (outward FDI) totaling €6.89 trillion. It was also a major recipient of FDI, drawing in upwards of €5.74 trillion that same year.

So Juncker’s emphasis on open markets makes a lot of sense – even more so considering that the open, rules-based trading system is under attack. Protectionism has been on the rise since the global financial crisis erupted in 2008. From October 2009 until May 2017, according to the WTO, the number of new trade-restrictive measures skyrocketed from 140 to 1,392.

Through May 2010, G20 countries had implemented 73 protectionist measures; by May 2017 that number had skyrocketed to 723. The G20 is struggling to find common ground on the future of the multilateral trading order, open markets, and the fight against protectionism. US President Donald Trump’s “America first” policy has left a void of uncertainty on the global stage. The EU could fill that void, but it will only succeed by doing the requisite homework. Only an internally strong and unified EU can be a strong actor globally.

In Search of New Partners

The EU’s efforts to pursue deep and competitive free trade agreements (FTA) with various partners are not new. The European Commission unveiled its “Global Europe: Competing in the World” strategy already in 2006. However, the EU’s most recent blueprint, a 2015 package called Trade for All, is a marked shift from its predecessors. The strategy was clearly inspired by the popular backlash against the perceived pitfalls of globalization; it aims to align the benefits of free trade with safeguards to protect norms and regulations as well as underlying values. Trade for All is intended to be a holistic free trade concept benefiting a whole range of actors, from producers to consumers, workers, citizens, and small- and medium-sized companies.

The EU sees free trade deals as a complement to the multilateral trading system and the WTO, not an alternative. FTAs can provide access to new markets but they also shape globalization by introducing new rules and regulations to meet current needs in trade. It would be a mistake, however, to think that FTAs are an easy route – the EU-India negotiations launched in 2007 are a case in point.

In the last four years, the Transatlantic Trade and Investment Partnership (TTIP) emerged as the EU’s top priority. Negotiations began with great enthusiasm in the summer of 2013. But by January 2017, when President Barack Obama’s second term drew to a close, the deal was still far from finished. In fact, TTIP had run aground well before President Trump moved into the White House. Negotiations stalled last year because the partners could not find common ground over a wide range of issues, including investment protection, government procurement, and trade in services. While TTIP has faced stark opposition in many EU member states and in Germany in particular, the Trump administration has not rejected the agreement outright. In late May 2017, a few days after his first visit to the EU, US Commerce Secretary Wilbur Ross said he was open to talks about TTIP. However, given President Trump’s “America first” agenda, the EU says it needs more time to assess the transatlantic agreement’s future.

While TTIP is still in a deep freeze, the EU has been busy negotiating other trade deals. Last month, the majority of the Comprehensive Economic and Trade Agreement (CETA) with Canada entered into force. The European Parliament ratified the treaty in February 2017, but the chapter on investment protection still needs to be approved by more than 40 national and regional parliaments. Nonetheless, even provisional application is a huge success for the EU, especially considering the major protests that erupted around TTIP and CETA.

Next Stops Asia and Latin America

Following the successful (partial) ratification of CETA, the EU is now looking further afield, aiming to improve market access and deepen economic ties with fast-growing Asia and Latin America. In its communication about a “balanced and progressive” trade policy, the European Commission has emphasized that it wants to pursue deeper economic ties with the Asia-Pacific region, and to expand the alliance of partners committed to progressive rules for global trade.

The EU is negotiating a free trade agreement with Japan, its second largest trading partner in Asia. Just prior to the G20 summit in Hamburg earlier this year, the EU and Japan reached an agreement in principle on the main elements of the EU-Japan Economic Partnership Agreement. They signed a symbolic framework that is supposed to pave the way for a more comprehensive accord at the end of this year. However, many difficult issues remain. Among them is the EU’s new permanent Investment Court system that is to resolve disputes between investors and member states. Japan opposes such a court.

The EU is also negotiating with India (launched in 2007) and several ASEAN countries like Malaysia (launched in 2010), Thailand (launched in 2013, stopped due to military takeover in 2014), Philippines (launched in 2015), and Indonesia (launched in 2016). The agreements with Singapore and Vietnam were signed in October 2014 and December 2016 respectively and are awaiting ratification in the EU.

The other potential growth region is Latin America. In May 2016, the EU and Mexico started negotiations to modernize their trade agreement that has been in place since 1997. In addition, negotiations between the EU and the four founding members of Mercosur (Argentina, Brazil, Paraguay, and Uruguay) relaunched in 2010 gained fresh momentum in May 2016 after four years of stagnation.

Moreover, in his speech, Juncker announced new negotiations with Australia and New Zealand, as well, to be concluded as an EU-only agreement by 2019. The EU is aiming to wrap up negotiations with Japan, Mexico, and Mercosur by the end of this year.

The Right Strategy

All of these efforts raise the question: Is this the right strategy? Large parts of the European public were highly skeptical of the negotiations on CETA and TTIP. A poll by the Pew Research Center from June 2017 revealed that a majority of Greeks (63 percent), French (56 percent), and Hungarians (55 percent) as well as about half of Poles, Spanish, and Italians wanted their national governments to negotiate trade deals instead of the EU. Only Germans (60 percent) wanted the EU to retain trade agreement authority. The survey highlights a deep distrust in the European Commission’s negotiating capacity and strategy.

Nonetheless, the answer is yes. The EU must try to fill the void and negotiate FTAs with strategic countries and regions. Trade and investment mean jobs and growth in the EU. Exports provide jobs for 31 million Europeans; in other words, one in seven jobs in the EU depends on exports – jobs that pay on average better than other sectors. Ensuring market access abroad is key to prosperity in Europe. Even so, the EU needs to carry out internal reforms and pursue both bilateral and multilateral initiatives:

Forging consensus among EU members: The European Commission represents 28 member countries in negotiating trade policy, and it is precisely that large, unified common market that makes the bloc attractive on the global stage. At the same time, the interests and sensitivities of each and every member country must be taken into account during negotiations, and this is not always easy. Still, the answer cannot be the lowest common denominator. In October 2017, French President Emmanuel Macron threw a wrench into the EU-Mercosur talks because of concerns over beef and ethanol market access to Europe. The EU’s trade policy is clearly at a crossroads: Either it risks being held hostage by competing interests or it can prosper and shape globalization in the absence of US leadership in trade. Germany and France in particular share a responsibility for forging consensus among all EU member countries. They should not fall for the concept of reciprocity, as has become a central part of Washington’s new trade strategy. It is a dangerous idea and should not be adopted by the EU as reciprocity underestimates the importance of imports for the competitiveness of a country.

Making trade work for all: Despite the overall benefits of trade flows, not everybody has reaped the promised rewards of globalization. A growing part of Western societies feel left behind. The EU needs to address that discontent, not by abandoning trade deals but by engaging the public. This should be done through more transparency about the goals and limitations of trade negotiations; engaging advisory councils that include all relevant stakeholders; and conducting thorough studies on the winners and losers of a trade deal, along with possible social measures to counteract imbalances. At the same time, EU member states need to ensure that the benefits of trade are widely shared.

Fighting for an effective WTO: Its economic and political weight lends the EU a special responsibility for the world trade order. The WTO is still the most important guardian of rules-based world trade, but the organization is facing severe challenges. Its rules need to be updated and its dispute settlement procedure protected against political influence. The upcoming ministerial conference (MC11) should be used to agree on roadmaps for discussing important issues such as digital trade and investment facilitation within the WTO. The EU can play the important role of facilitator in this regard.

FTAs as stepping stones, not stumbling blocks: FTAs are not without risk for the multilateral trading order. They may remove barriers to trade and investment among members, but they contradict a central WTO principle by granting partners certain benefits that are denied to others. Accordingly, they are permitted only as an intermediate step in the multilateral liberalization process and are subject to (albeit rather vague) rules. The EU therefore needs to take extra care that its FTAs are compatible with the WTO and ensure that any new rules do not exacerbate global regulatory chaos or discriminate against non-members.

Choose your partners wisely: President Trump has pulled the US out of the Transpacific Partnership agreement (TPP), but the other eleven countries in the Pacific Rim are pushing ahead with the agreement, including Japan, Mexico, Australia, and New Zealand. In addition, there has been an increasing number of bilateral deals in the Asia Pacific region (e.g. Australia-China). The EU needs to stay in the game to remain competitive, but its negotiation capacities are not endless (especially with Brexit weighing on Brussels). The EU should therefore clearly prioritize its negotiations with strategic partners such as Japan, Mexico, and Mercosur. TTIP should not be abandoned, but before reopening negotiations, the EU has to ensure that talks have a realistic chance of succeeding.

Update trade rules for the 21st century: The EU needs to modernize existing trade rules to reflect current realities. Trade has changed (e.g. global value chains) and new rules are crucial to adapting to these changes. European FTAs should therefore integrate new rules on issues like small- and medium-sized businesses, digital trade, energy, competition and state-owned enterprises as well as investment facilitation. This will be no easy task, in particular with partners like India. However, “old school” FTAs would not be worth the paper they are written on. Then again, investment protection and investor-state dispute settlement may be best negotiated in separate (investment) agreements – which was the norm before the EU’s Lisbon Treaty came into force – as they fall into the shared competence of the EU and its members. Thus the ratification of trade agreements would become much easier.

Fostering open markets and sustainable trade: The EU is right to promote its values and standards through trade agreements in order to shape globalization. This means maintaining high environmental, social, and labor standards. The Commission has recently drafted a paper on the effective implementation and enforcement of sustainable development in its FTAs; the hope is to engage with EU members, but also the wider public. At the same time, these accords cannot be a panacea for the world’s problems. They are first and foremost agreements on how to govern trade. Therefore, they should not substitute existing labor and environmental accords and organizations but work in harmony with them.

In short, the EU has right strategy, but it needs to do its homework.

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© REUTERS/Fabian Bimmer

For all of Donald Trump’s tough talk on security – after a meeting with German Chancellor Angela Merkel last week, he once again mentioned the “vast sums” Germany owes the US for its defense – it is trade where he threatens to upend the international order most dramatically. Trump represents a true break with the past; while previous presidents, Republican and Democrat, have at least paid lip service to the benefits of free trade, Trump is a true mercantilist. Trade is a zero-sum game: Exports are good, imports are bad. Production at home is good, production abroad is bad. Trade deficits are bad, surpluses good; the large surpluses of individual countries, however, are not a sign of competitiveness or supply and demand structures, but of unfair competition – of currency manipulation, subsidies, or dumping. Trade with Germany, for example, would only be “fair” if Germans bought as many American cars as US citizens bought German cars.

And Trump, who ran his campaign based on an “America first” rhetoric, has already begun carrying out his pledges to undo America’s trade ties. The new president wants to bring back well-paid manufacturing jobs to the United States and increase employment – never mind that structural factors, not trade, are responsible for most job losses. He also wants to eliminate the US trade deficit. On his first day in office, Trump formally withdrew from the TPP, and in his trade policy objectives for 2017 he stressed that he wants to strengthen US sovereignty over trade law, implying that the decisions of the WTO dispute settlement system would no longer be implemented.

Trump caters to those who feel left behind. Overall, the US economy is doing well: GDP grew slowly but steadily in 2015 and 2016, and unemployment has fallen to below 5 percent. However, not everyone has benefited to the same extent from the economic recovery since the crisis. Real wages have barely increased in the United States for years, and many middle-class citizens believe that their financial situation has not improved. Moreover, 47 percent of respondents in a 2016 Pew survey believed that overall, free trade agreements (FTA) had damaged the country; among Trump supporters, that figure was even as high as 68 percent. Many feel disconnected with the political elite. Voting for Trump was a vote against the establishment. The presidential elections revealed a deeply divided country. Trump ran his campaign on the basis of identity politics and he is running his presidency on it as well. His slogan “Making America great again” means different things to different people, but it certainly reassures a particular racial and cultural US identity.

It is unlikely that Trump’s plans will do anything to bring manufacturing jobs back to the US – and indeed if manufacturing does return, it will be new, digitalized manufacturing. But his policies could have dramatic consequences for the rest of the world.

Reigning in the President?

Will Trump be able to implement his plans? The US constitution gives Congress power over trade. However, Congress has delegated some of its competency to the president over time. The acts implementing various bilateral and multilateral trade agreements dictate that tariffs will be lowered or phased out through presidential proclamations. Trump could withdraw these and thus roll back previous tariff reductions. Other laws strengthen the president’s powers further: The Trade Expansion Act of 1962, for example, allows the president to introduce tariffs or quotas when imports threaten national security. Section 122 of the Trade Act of 1974 enables the president to implement tariffs of up to 15 percent and/or quotas for up to 150 days if the US has a significant balance of payments deficit with a trading partner. Section 301 allows him or her to introduce retaliatory measures, such as tariffs and quotas, if a trading partner denies the US rights under a free trade agreement or acts in an unreasonable or discriminatory way. Trump explicitly stated in his trade policy agenda for 2017 that he would strictly enforce all US trade laws.

Most experts agree that the president could also unilaterally withdraw from NAFTA. Whether or not the Trump administration needs congressional approval to renegotiate the trade pact with Mexico and Canada depends on what the new agreement would look like. If it required changes to federal statutes, congressional approval would likely be necessary.

And Congress itself is not immune to protectionism fever. Most feared by US trading partners is the border adjustment tax (BAT), an element of a tax reform blueprint introduced by the Republican members of the House Ways and Means Committee in June 2016. Under the proposal, a company’s cash flow would be taxed based on where the company’s goods and services are sold, regardless of where production, management, or income is located. In contrast to import-related costs, export-related costs would be deductible, thus encouraging exports and domestic production while discouraging imports. If implemented this would severely disrupt global and regional value chains. While Republican Speaker of the House Paul Ryan is promoting the proposal, leading Republicans in the Senate are skeptical.

Some of Trumps proposals also resonate well with House and Senate Democrats. Many of them cheered the idea of renegotiating NAFTA. Together with labor unions they have called for stronger labor and environmental standards and an exclusion of investor-state dispute settlement (ISDS), among other elements. Trump could also find allies among Democrats for his plans to go after (alleged) currency manipulators. Senate Minority Leader Chuck Schumer, for example, has repeatedly proposed classifying currency manipulation as an illegal subsidy to allow retaliatory measures.

In the business community, Trump’s trade policy proposals resonate well in industries that struggle to keep up with global competition, such as steel. They have been lobbying for stronger anti-dumping measures for years and seek more protection from foreign competition they claim is unfair. In early February, 25 US companies, including large exporters, launched the “American Made Coalition”, which supports the BAT proposal. General Electric, Boeing, Dow Chemical, Eli Lilly, Pfizer, and Oracle are among its most prominent members. However, Trump also faces stiff opposition. “Americans for Affordable Products”, to which many retailers belong, are lobbying against the BAT. Many companies in Silicon Valley depend heavily on international trade, such as Apple, which produces its iPhone mostly outside of the US. Aside from outsiders like Peter Thiel, Silicon Valley is deeply critical of Trump. So are business leaders in Texas, who have criticized Trump’s threats to end NAFTA or impose tariffs on Mexican imports. Members of Congress will listen to these voices as well.

Hard Times Ahead

What does this mean for Germany? In 2015, the US overtook France as the number one destination for German merchandise exports. Regarding merchandise imports, the US was Germany’s fourth most important trading partner in 2015. German and US companies are also important investors in each other’s markets – in fact, the US is the top destination for German foreign direct investment (FDI). In 2014, about 28 percent of German outward FDI stock was in the US. According to the Bundesbank, there were 4,725 German companies with direct and indirect investments in the US in 2014.

Some of Trump’s proposals, such as lower corporate taxes and investments in infrastructure, could benefit German companies with American subsidiaries. A precondition to participating in a possible infrastructure boom is, however, that government procurement will not be closed through “Buy American” clauses. If the White House slapped tariffs on products from Mexico, this would also hurt German companies. Many German automakers and their suppliers have subsidiaries in Mexico. They export not only cars to the US, but also intermediate goods. A BAT would also be a severe hit to the German export industry. Trump’s opportunities to go after Germany for currency manipulation are, however, limited. The US administration could not impose any trade policy measures against Germany alone, but would have to target the EU as a whole – and it would be hard to prove that the EU is manipulating the euro. But he might make this an issue in the G20, testing the resilience of a governance forum that is needed now more than ever.

Many of Trump’s proposals will also not be compatible with WTO rules. And here lies one of the greatest risks of Trump’s trade policy: Germany depends on open and rules-based trade, and the WTO is still the most important guardian of this, even if there has been little progress regarding further trade liberalization. If Trump adheres to his promises and starts to disregard the decisions of the WTO’s dispute panels, or even worse withdraws from the WTO altogether, this would throw the multilateral trading system in disarray.

Making Trade Great Again

The US is not the only country where anti-globalization sentiment is on the rise. In fact, many countries are resorting to protectionist measures. Since the financial and economic crisis of 2008, the number of protectionist measures has increased every year.

To counter Trump’s protectionist noises, the international community needs to send a strong signal supporting open markets – most importantly in the G20 that Germany is chairing this year. The signs are not promising. At their meeting in Baden-Baden, G20 finance ministers did not repeat their 2016 pledge to “resist all forms of protectionism” in the face of American opposition. Nonetheless, the G20 members need to take their previous commitments not to implement new protectionist barriers seriously, and roll back those which they introduced in the past years. They should also agree on strengthening the WTO’s monitoring capacities, giving it more leeway to classify protectionist measures and to calculate their effect on growth and employment. This will be no easy task, as there is considerable disagreement over what constitutes protectionism.

At home, G20 members need to better explain the benefits of trade. But they also have to address those who feel – and are – left behind and redouble their efforts to improve education and lifelong learning to help people seize new opportunities. Social protection systems to ensure a safety net for people who have lost employment, active labor market policies to support people getting back to work, and a strong social partnership can all help to make economic growth more inclusive. None of this needs to be disruptive to trade. The Trade Adjustment Assistance has never really worked in the US – but it could be a basis for an improved adjustment mechanism in the future.

The European Union also needs to speak out more forcefully for trade. The passage of the FTA with Canada – CETA – in the European Parliament is a good sign. But EU members have to put more effort into overcoming internal blockages to allow the EU to be an assertive actor in global trade. And EU members should speak with one voice vis-á-vis the Trump administration. This is even more important as Trump tries to divide the EU by exploring the possibility of bilateral trade deals with individual countries – which is not even possible under the EU’s common commercial policy.

What’s clear is this: if policy-makers do not address anti-globalization sentiment at home with concrete actions, trade as a basis for prosperity and development might become a thing of the past.

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© REUTERS/Mike Segar

The populist campaign that propelled Donald Trump to a shocking victory was as heavy on bluster as it was weak on detail and consistency – but if he did maintain one theme, it was his stance as an anti-immigration and anti-trade man of the people. His “America first” rhetoric resonated with many Americans on a number of different levels, tapping into cultural insecurity, economic malaise, fear of terrorism, and, of course, xenophobia. Indeed, the real genius of Trump’s campaign may have been his unequivocal break from the internationalist/globalist bipartisan consensus that free trade is a cornerstone of the “economic foundations of peace,” in the words of President Franklin D. Roosevelt.

Trump will now need to show that he is following up on his promise to “get a better deal for our workers.” Indeed, CNN has reported on a memo from Trump’s transition team that sketches out his administration’s trade policy agenda for the first 200 days. Though this is just preliminary, we should expect him to act on his trade and economic promises. What can he do, and what does this mean for the American and European economies?

The unsettling fact is that Trump will have the legal authority to make some dramatic systemic changes on day one. The separation of powers and tenuous party discipline in US politics constrain a president’s power domestically, but not when it comes to trade policy. According to the constitution, Congress has the power to regulate commerce between states and with other countries; however, through a number of different statutes Congress has handed this power over to the executive branch. The president can unilaterally stop all forms of commerce between the United States and another nation, seize or freeze foreign assets, impose tariffs, etc. So Trump can, in fact, withdraw the US from existing trade agreements or levy tariffs on China immediately. Congress could revoke these powers, but this would likely take time.

However, there are risks involved with using the full extent of executive powers against Congressional will. Trump will govern with a Republican majority in both the House of Representatives and the Senate, which means he will easily be able to push through policies that have wide GOP support (tax cuts and lower regulations, for example). Radical trade re-negotiations or tariffs, however, would likely provoke resistance from most Congressional Republicans, who could then decide to oppose Trump on those initiatives where he does need Congress. So what will happen? What if the next president…

…implements tax cuts and infrastructure spending?

Trump won the election with the pledge to support the US economy. During his campaign, he promised a fiscal stimulus of $1 trillion in infrastructure spending over ten years. In addition, he wants to cut corporate taxes from 35 to 15 percent. To do this, the Trump administration will need to convince the fiscal hawks in the Republican Party, but he seems likely to get his way.

In the US, this kind of fiscal stimulus coupled with tax cuts will lead – at least in the short-term – to higher economic growth. However, even though Trump vowed to finance these measures through private funds and by taxing profits repatriated by American companies, they will inevitably lead to higher budget deficits and higher debt in the long term. Olivier Blanchard, previous IMF Chief Economist, predicted: “If deficits take place, they will lead to higher spending and higher growth for some time. And with the US economy already operating close to potential, deficits will lead to higher inflation.”

What will these changes mean for Europe? Higher growth in the US is good for the world economy. The Chinese economy has lost its steam, and the outlooks for Europe, Latin America, and elsewhere are uncertain at best. Due to the interconnectedness of the world economy, all regions would profit from higher US growth and increased demand. The EU-US trade and investment relationship is the largest in the world, so increased US demand would give a boost to the slow-growing EU economies.

However, the positive impact would depend on the extent to which the US enacts the restrictive trade measures which Trump proposed at the same time.

… kills TPP?

Trump has a mercantilist view of world trade. Trade is a zero-sum game where countries with a trade surplus win and countries with a trade deficit (such as the US) lose. This attitude means that Trump will want to re-negotiate or stop existing and future free trade agreements.

The first casualty of Trump’s new trade policy will be the Trans-Pacific Partnership (TPP) – the President-elect has already announced he will withdraw from the pact. TTP was negotiated during the Obama administration together with eleven other Pacific Rim countries including Japan. It was one of Obama’s top priorities in Asia – for economic as well as for geostrategic reasons.

Trump denounced this agreement during his campaign as a “total disaster” which would let China come in “through the back door.” TPP is already signed and awaits ratification by Congress. However, Senator Jeff Sessions, a close Trump adviser and nominee for attorney general, earlier warned that “there will be blood all over the floor if somebody tries to move [TPP] through the Congress any time soon.”

Thus TPP is almost certainly dead. What will be the consequences?

Without TPP, the US will lose market access in the region, which will play into the hands of China. China is currently negotiating the “Regional Comprehensive Economic Partnership” (RCEP) with the ten ASEAN countries, as well as Japan, South Korea, India, Australia, and New Zealand. TPP was always seen as the rival US agreement. Without TPP, China will have much more influence and a competitive advantage in the fast growing Asia Pacific region. In addition, the US will no longer be able to establish new trade rules – such as investment protection, labor and environmental standards, standards for SOEs, and anti-corruption measures, which were all part of TPP. These will now be set by China.

Europe is not a party to TPP. It will now continue to focus on free trade agreements with ASEAN countries and Japan. If the EU succeeds, it will have a comparative advantage vis-à-vis US competitors. This is particularly important in relation to Japan, the third largest economy in the world. However, European trade policy also faces many obstacles at the moment.

… halts TTIP negotiations?

The second major trade agreement that is now on the verge of collapse is the Transatlantic Trade and Investment Partnership (TTIP), which has been in negotiations since 2013. TTIP was supposed to be another trade legacy of President Obama’s. In contrast to TPP, TTIP did not feature in Donald Trump’s presidential campaign. With the existing high European standards, it would have been difficult for Trump to blame the EU for US job losses. But given his tough stance on trade negotiations and his demand to balance trade and eliminate trade deficits (the US had a trade deficit with the EU of $103 billion in 2015, and with Germany of $77 billion), the outlook for the transatlantic negotiations remains bleak.

Even without Trump’s skeptical approach to trade, TTIP was already in troubled waters. Growing protests in the EU and the US combined with a lack of progress in the negotiations in politically sensitive areas such as investment protection (ISDS) or government procurement had led to a virtual stalemate before the elections. After the election, EU Trade Commissioner Cecilia Malmström remarked: “For quite some time, TTIP will probably be in the freezer. What will happen when it’s defrosted, I think we’ll just have to wait and see.”

The withdrawal from TPP and TTIP means that Washington will no longer want to play a leading role in shaping globalization. Both agreements were meant to be ambitious and comprehensive, including high-level rules in new areas. This development will now end. In addition, the US will not be able to reap the benefits from increased market access to Europe or the Asia Pacific.

For Europe, TTIP was particularly important: First, it was seen as a way to increase growth. But second, it was seen as an opportunity to shape global trade rules together with the US. These goals now have to be abandoned in the transatlantic context. Though Europe is still very actively negotiating agreements, examples with Singapore and Canada (CETA) show that EU trade policy is far from perfect. It needs to undergo reforms so that the EU can remain a relevant player in international trade. Given the various other challenges the EU is currently facing, it seems unlikely that this will happen any time soon.

But Trump’s election had a positive trade aspect for at least one European country: the UK. Trump stressed that he was willing to negotiate an agreement with the UK after the country formally withdraws from the European Union.

…withdraws from NAFTA?

The North American Free Trade Agreement (NAFTA) was a central target during the campaign. NAFTA, which Trump has called “one of the worst things that ever happened to the manufacturing industry,” was a convenient political target because it was signed by his opponent’s husband, President Bill Clinton (though launched and basically concluded by the George H.W. Bush administration) and because it provided an economic bookend to his promise to build a wall on the border to Mexico. Trump could unilaterally withdraw from NAFTA with six months’ written notice to the other parties. However, this would revert tariffs between the US, Mexico, and Canada to the WTO MFN default, which for most products lie below 4 percent, far from the 35 percent levels Trump has floated.

If he imposed higher tariffs against Mexico, it could trigger retaliation. Mexico could go to the WTO and impose counter-tariffs – which would quickly hurt major US industries, whose supply chains are partly in Mexico, and US consumers as well.

Trump could instead decide to renegotiate NAFTA; indeed, this is what he promised in his “7-point plan”. For this he would need the cooperation of Mexico and Canada and the approval of Congress. If Mexico and Canada wanted to play along and offer Trump’s negotiators some quick concessions, he might be able to come away with a symbolic victory at little cost to anyone – but Mexico and Canada could just as well call his bluff.

Trump’s long-term goal would seem to be to get US industry to bring those parts of its production currently in Mexico back to the US – one of his targets was Ford Motor Company, which is building a large car factory in Mexico. But such shifts take time, and would also hurt the competitiveness of the entire industry.

It is very likely that Trump will attempt a “quick” renegotiation of NAFTA. A small addendum to the existing NAFTA that he could claim as a victory would probably be the best case scenario for Trump, and that would likely be enough to pacify the majority of his voters. He would also get Congressional support for this. If the other North American countries do not play along, it is certainly possible that he would withdraw the United States from NAFTA entirely. This alone would not trigger a trade war, but it would dampen the American economy and is unlikely to bring any jobs back to the United States. The extreme version of 35 percent tariffs or import taxes seems unlikely. Trump has international business interests, so one would think he would understand the consequences of and avoid a trade war – and he would likely lose the support of Congress.

A minor renegotiation of NAFTA would not affect Europe or the global economy directly. A US withdrawal from NAFTA and reversion to standard (WTO) tariffs would have some effect, depending on how quickly and significantly it affected the US economy. In addition, without NAFTA, EU investment in Mexico (or Canada) would lose the preferential access to the US market. This would significantly hurt EU business.

…imposes sanctions against China?

China loomed large in Trump’s election campaign as an “enemy” that has “destroyed entire industries.” Trump accuses China of having “spied on our businesses, stolen our technology…and manipulated and devalued their currency” to hurt US exports and boost Chinese imports. He therefore promised – once he was president – to direct the US Treasury to declare China a “currency manipulator” within the first 100 days and impose punitive import tariffs of up to 45 percent on imported goods from China to level the playing field. If these policies are not successful, Trump threatened to leave the World Trade Organization (WTO).

The accusation of currency manipulation is a bit outdated. The US Treasury in its latest “Semiannual Report on International Economic and Exchange Rate Policies” to Congress from October 2016 put China on a monitoring list for large trade and current account surpluses, but stressed that China actually sold foreign currency assets from August 2015 to August 2016 to prevent rapid Renminbi depreciation.

It’s not clear what Trump will actually do once in office. Declaring China a currency manipulator would have few actual consequences other than potentially opening the door for negotiations. But China could see this as a provocation, which could lead to rising bilateral tensions and even to a serious trade war – with both applying targeted or blanket tariffs against each other.

Shortly after the election, Trump advisers played down the prospect of a trade war with America’s biggest trading partner. According to Wilbur Ross, a New York investor and leading contender for Trump’s commerce secretary, there will be no trade wars. Instead, Ross stressed that the threat of a 45 percent punitive tariff should be regarded as a negotiating tactic. While actual numbers will probably fall short of a blanket 45 percent, we should expect Trump to make some kind of stance against China. He will probably try to label China a “currency manipulator”. In addition, he will probably act on Chinese steel dumping, which has also been an issue for the Obama administration and for Europe. In addition, he will pursue some high-profile WTO cases against China. If a battle of escalating tariffs or other trade barriers ensues between the United States and China, the highly specialized supply chains of US multinational companies in China would suffer, as would American exports. Given the size and importance of the US and Chinese economies, the consequences would ripple far and wide.

The possible effects for Europe range between negative and disastrous. If Europe’s first and second external trade partners start warring, the continent will certainly get caught in the crossfire. It is hard to imagine that the Trump Administration would undertake the more dramatic options above, which would be certain to draw harsh retaliatory measures. However, this year has brought a number of events that conservative observers would have thought nearly impossible one year ago. It is a very real question whether the Trump administration will choose mostly symbolic and perhaps temporary trade-restricting actions or more significant measures with dramatic and widespread consequences. The prospects of such a scenario would be bleak, with estimates of a 5 percent job loss, reaching 7 percent in some areas. If the US withdrew from the WTO, the global economy could quickly revert to the beggar-thy-neighbor domino protectionism that brought down the global economy in the 1920s.

Moreover, there is a broader reason to be worried. Whatever the final measures and percentages are, Trump’s view of trade policy is a departure from US policy since the 1940s. US presidents, right and left, have believed that liberalized trade is good for global stability and economic growth and, thus good for the US economy. Trump clearly takes a narrower trade-balance view: America only wins from global trade if it comes out on top in the balance. This is the essence of Trump’s “America First” mindset, and if it spreads beyond this administration then the main support for the foundations of the global economic system will quickly erode.

Europe needs to be prepared to deal with a Trump administration. This means first and foremost that European unity is required so that Trump sees Europe as a strong partner with which to make “deals.” Apart from the “new” reality in the transatlantic relationship, Europe may be forced to quickly grow into the role of supporting the global economic system – together with Asia.

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REUTERS/Fabrizio Bensch

How does this affect Europe? In the EU, we often forget that our most important trading partner, the United States, is a Pacific country as well as a Transatlantic one, with strong ties to Asia. US President Barack Obama’s so called “pivot to Asia” was complemented by a strong Asian trade strategy. With the Trans-Pacific Partnership (TPP), the US and eleven countries in the Pacific Rim are currently negotiating a comprehensive, mega-regional trade agreement encompassing about 40 percent of global GDP and 26 percent of global trade. Obama wants to conclude said deal in 2015.

Contrasted with America’s ambitious Asian trade agenda, the EU’s trade strategy towards Asia is miniscule. The EU currently is negotiating with Japan. But it has failed to reach a regional deal with the ten ASEAN countries. A bilateral deal with Singapore was finished in 2014, but still needs to be ratified along with an agreement with Vietnam (concluded in August 2015); bilateral deals with Thailand and Malaysia are currently in progress, while talks with India have stalled. Any present agreements are small in comparison to TPP or the Regional Comprehensive Economic Partnership (RCEP), which, unlike TPP, includes China (and not the US) and is scheduled to be completed by the end of 2015; the RCEP will account for 49 percent of the world’s population and 30 percent of world GDP, and make up 29 per cent of world trade.

Rather than strengthening its trade ties to Asia, Europe has focused its efforts on the Atlantic. The Transatlantic Trade and Investment Partnership (TTIP) with the US is the largest and most important trade agreement currently in the works for the EU. Together, the EU and US represent the largest economic market, covering around 45 percent of global GDP and 44 percent of global trade in goods and services.

Trade and growth dynamics in Asia far exceed the Transatlantic and European economic outlook. Nevertheless, TTIP could serve as a stepping stone for a strategic European trade policy, one that preserves European influence in global trade; without it, Europe is at risk of falling behind and being eclipsed by growing economies elsewhere.
Setting Standards

TTIP is of course important for generating growth. But more importantly, it could help determine where future global standards are set – in the EU and US, or in Asia. The EU needs the US as a partner to create new regulations and promote high global standards. If both regions are able to agree on common standards, they have a first-mover advantage that other countries and regions will have to follow, as was the case when the EU and US agreed on common standards in e-mobility.

To that end, TTIP negotiations cover many new areas beyond WTO rules, including rules in the area of sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT), as well as new areas such as sustainable development, competition, trade facilitation, energy, raw materials, and small and medium enterprises (SME).

In an article titled “A Comeback Strategy for Europe”, former Swedish PM and foreign minister Carl Bildt and former EU High Representative Javier Solana summed this up: “If the TTIP stalls or collapses, while the TPP moves forward and succeeds, the global balance will tip strongly in Asia’s favor – and Europe will have few options, if any, for regaining its economic and geopolitical influence”. The EU and US are still the world’s dominant trading partners. Without this strategic agreement, the EU will jeopardize its competitive position in the world.

Why TTIP is Lagging

If the strategic advantages of TTIP seem to be so clear, particularly for the EU – why are the negotiations taking so long as TPP progresses so quickly?

First of all, TPP is a high priority for President Obama. He wants TPP as a legacy of his presidency. Asia is seen as a “fresh” and growing region, especially in comparison to “Old Europe”, with her slow growth and aging population. TTIP is still important for the US, but it is definitely not the highest priority in Washington right now. And even though the July 2015 TPP meeting in Hawaii ended without an agreement (due to differences in automobile regulations, dairy market access, and patent and regulatory data protections for biological drugs), progress was made. A second meeting of the TPP partners to conclude a final deal is planned for this fall.

TTIP was supposed to be finalized by the end of 2015 too, but progress has been slow – which is due more in part to TTIP’s complexities rather than a lack of ambition. The US and the EU already have deep, long-standing economic, trade, and investment relationships, thus the negotiation issues at the heart of TTIP are far more delicate than other agreements for younger relationships. Both parties underestimated this. TTIP mainly covers non-tariff trade barriers which also impact health, consumer, and food safety standards as well as environmental and labor concerns. All of these are politically sensitive issues, many remain unresolved, and big political decisions still must be made regarding investor-state dispute settlement (ISDS), genetically modified organisms (GMOs), and public procurement on all state levels, just to name a few.

In July 2015, the EU and the US concluded the tenth negotiating round in Brussels. These were the first deliberations since important legislation had been passed by both sides: in June, the US Congress passed the Trade Promotion Authority (TPA), and in July, the European Parliament adopted a TTIP resolution and signed a series of recommendations. The endorsement by the European Parliament and the US Congress was an important step forward, as both parliaments will have to ratify the final treaty, a point EU chief trade negotiator Ignacio Garcia Bercero stressed, when he said that negotiators were working “with strong political wind in our sails.” During the negociations, both sides were able to accelerate their talks on services market access, a major issue in TTIP where both the EU and US stand to gain quite a bit. Chief US trade delegate Dan Mullaney emphasized that this was “a welcome step forward.” Despite these positive developments, it remains unclear whether TTIP will be concluded before President Obama leaves office in 2017. At the G7 summit in June in Elmau, G7 leaders called on both TTIP parties to “immediately accelerate” their work and to deliver an outline of a possible agreement at the end of 2015.

German Hostility

Despite Germany’s strong export focus, a large part of the German public sees TTIP as a threat to its values and way of life and has become increasingly hostile to the project. Concerns center on the overall transparency of the negotiations, as well as fears of lower food safety and environmental standards. Many also fear that the investor-state dispute settlement (ISDS) process will serve as a way for US corporations to circumvent democratic procedures and the “right to regulate”, allowing them to lower standards through a backdoor. The anti-TTIP movement, which consists of a large group of NGOs and trade unions at its core, has called for a nationwide “Stop TTIP/CETA” demonstration in October.

To counter the growing tide of public distrust, it is not enough for German business leaders to repeatedly point out the technical advantages of increased market access, mutual recognition, and common regulatory processes. Instead, Chancellor Merkel must make a specific economic and also (geo)political case for TTIP and push for genuine progress in the negotiations. To alleviate the fears of the opposition, it is important to have transparency with as many TTIP position papers and documents as possible. Furthermore, the European Commission and the German government should make a convincing and detailed case, outlining where concessions and liberalizations are possible and what is non-negotiable.

Present trade agreements (e.g. the EU-US veterinary equivalency agreement from 1999 or the FTA with South Korea or Canada) could serve as good examples. Regarding ISDS, there is a broad consensus on the EU side that the existing provisions need to be reformed. The proposal made by German Vice Chancellor Sigmar Gabriel to reform the present system of ISDS and eventually establish an international investment court is a step in the right direction.

Germany is the largest national economy in Europe and is one of the world’s leading exporters. Because of its size and economic performance, it has a strong influence on the TTIP negotiations and the final agreement. TTIP needs support from the German population, which has become complacent with its status quo economic performance and competitiveness.

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