There’s no time to spare in mending fences across the Atlantic

By Jill Hurley, Director, Global Trade Consulting

Those who remember the early days of personal computing are likely to recall the widely used mantra in response to what one should do if a computer is frozen or acting erratically – if in doubt, reboot.

That’s the approach Europe’s policymakers are hoping to take to reset relations with Washington heading into a New Year with a new administration. In early December, the European Commission released a report to EU member governments, noting the parties “must work closely together on solving bilateral trade irritants.” The language was vague and overly diplomatic, but the sentiment was clear – it’s time to set aside grievances and band together to restore some semblance of global order.

Passive Aggression

For the past four years, Brussels and Washington have been embroiled in an ongoing tit-for-tat trade dispute that has seen both sides impose tariffs on the other’s imports. It began with tariffs on European steel and aluminum and has morphed into trade barriers on consumer goods and aircraft over a longstanding dispute regarding subsidies to aerospace giants Boeing and Airbus, and more recently a row over tech taxes. While both parties have publicly displayed a willingness to keep open the channels of communication on trade matters, the disputes have remained simmering behind the scenes as the two sides have come to loggerheads over climate change policies, multilateralism and the role of the World Trade Organization and NATO funding.

There’s good reason to approach the mending of fences with a sense of urgency, and a good chance president-elect Joe Biden will do so, particularly given the interconnectedness of Washington’s trade and geopolitical goals in the Far East.

Breaking Down Barriers

Washington’s goal in imposing tariffs was to create better balance in bilateral trade relations and/or create the conditions to enhance its position in trade negotiations. Neither of these have materialized as intended. The U.S. trade deficit with the EU has ballooned from $146 billion in 2016 to $178 billion in 2019, a 22% increase in just three years even as new trade barriers between the parties were erected each year. Meanwhile, there are no viable prospects for free trade talks between Washington and Brussels anytime soon. The Transatlantic Trade & Investment Partnership (TTIP), a free trade deal negotiated with Brussels during the Obama administration, was never concluded and the Trump administration had no interest in pursuing a trade deal with a multilateral institution, preferring bilateral trade arrangements. EU officials and president-elect Biden have publicly suggested that resurrecting TTIP talks is neither likely nor desirable at this time.

In short, little is being gained from maintaining an air of animosity across the Atlantic. However, much stands to be lost if a mutual understanding isn’t reached.

The China factor

U.S. businesses have been struggling to regain their lost share of exports due to the U.S.-China trade war, which blocked many U.S. producers out of China between 2018 and 2019. While the Phase 1 deal between Washington and Beijing was purportedly going to see China purchase $200 billion in U.S. goods between over 2020 and 2021, the pace of those purchases is far behind schedule and many economists and policy observers are sceptical Beijing will be able live up to its commitments given the state of its economy.

U.S. firms were hoping Europe would be an alternative market for U.S. exports – and to some extent it has been – but the tariff wars are generating investor uncertainty that has medium-term implications. A 2019 HSBC survey showed 39% of U.S. firms had plans to expand in Europe over the following three-to-five-year period, versus only 18% that planned to target Asia. Instead, China has surpassed the U.S. as the EU’s biggest trading partner even though EU exports to the U.S. in the first nine months of 2020 were double the value of exports that went to China. In addition, European firms are investing heavily in China, far more heavily than U.S. firms, with FDI flows from Europe to China totalling almost triple those of the U.S. in 2017, the same year U.S. FDI into the EU hit a historically high level. In short, U.S. investment in Europe is going up while exports to Europe are going down. Meanwhile European investment in China is going up while exports to China have plateaued. This is partially explained by the fact that China’s economy was the first to recover from the pandemic, which drives greater demand for European goods. At the same time, it has the potential to be a harbinger for a longer-term shift in Europe’s trade dynamics.

This puts Europe at a crossroads. While the continent has been historically aligned to U.S. interests, China’s economic influence is pulling Europe eastward. This should be troubling to officials in Washington, not only because of the deteriorating trade relationship, but also because it has broader policy implications. If the trade war lingers, there’s less likelihood Europe will join the U.S. in blocking the use of 5G technology produced in China from being used in European networks. There’s also less likelihood of Brussels joining forces with Washington to take China to task on its transgressions in trade policy, but also social and political policies.

Tech Taxes

The most immediate hurdle for the parties to overcome has nothing to do with steel, aluminum or aircraft and everything to do with how Europe intends to tax American tech giants. France has already announced it is moving forward with a digital services tax on the revenue generated within the country by major tech companies such as Google, Apple, Amazon and Facebook. The taxes are a means of addressing the growing contingent of commerce moving online, creating revenue for companies located outside the country that pay no corporate tax. The result is a depletion of public coffers at a time when fiscal spending is at historically high levels in response to the COVID-19 pandemic.

Washington has responded with a 25% tariff on French imports valued at $1.3 billion annually, noting France’s digital services tax unfairly targets U.S. companies. But the scope of the issue is much larger as a number of other European nations intend to follow France’s lead and Brussels is looking to impose an EU-wide digital services tax. Whether a Biden administration would cancel the tariffs or double down on them remains to be seen, but the former scenario could be a first step toward détente while the latter could further deepen the existing animosity at a pivotal moment.

Timing will be critical. If things remain unchanged between the U.S. and EU in a year’s time and relations between Beijing and Washington continue to deteriorate, U.S. firms could find themselves up against a swelling number of trade barriers across both the Pacific and the Atlantic, leaving them with fewer market opportunities in the wake of the most dramatic economic downturn in more than a decade.

Jill Hurley brings a wealth of expertise in the development and implementation of import/export compliance programs, compliance audits, export licensing requirements, supply-chain security, the preparation, submission and oversight of penalty mitigation projects and assistance with U.S. trade remedies, such as anti-dumping and countervailing duties, and intellectual property orders.