June 13, 2018
For months, European leaders have had a certain way of approaching negotiations with the United States on big-picture matters like trade, the Iran nuclear deal, and the future of NATO. In discussions with the Trump administration, European heads of state such as French President Emmanuel Macron have opted for a two-pronged approach: flatter and cozy up to Trump personally, while continuing to preach the importance of multilateralism, free trade, human rights, and democratic values.
Clearly, this isn’t working. As US trade disputes with China and others intensify over the coming months, the European Union will need a new strategy for negotiating a successful trading relationship with the United States. This strategy can no longer focus on managing Trump’s personality, nor on stressing the values that have defined the transatlantic relationship in the past. Rather, it must be rooted in the acknowledgment of two central facts about each side’s core interests and vulnerabilities.
First, European leaders must come to terms with the bloc’s unique vulnerability in the case of a global trade war. Unlike the United States, whose economy is relatively insulated from the global marketplace, the European Union’s economy is highly export-dependent with an otherwise fragile growth outlook. If disputes with the United States get ugly, both sides will suffer – but Europe’s economy will take a significantly larger hit than the United States’. The United States is the number one destination for EU exports. The European Union’s positive trade balance with the United States has doubled since 2007, meaning that exports to the United States have been a significant source of EU economic growth over the last decade – growth that has been otherwise hard to come by. Moreover, those exports are relatively concentrated in a few major categories – primarily automobiles, chemicals, and agricultural goods – making them easy targets for a new round of tariffs. The European Union can feel free to threaten tariffs on all-American goods like bourbon, motorcycles, and peanut butter. But it should remember that in an iterative tit-for-tat retaliation, Europe will ultimately run out of tariff “ammunition” first. The European Union simply cannot afford a trade war with the United States.
Second, the European Union must acknowledge why the United States apparently wants to dismantle the global trading system that it has underwritten for the last three quarters of a century. The bottom line is that – justifiably or not – the United States under the Trump administration has decided that the status quo on international trade no longer works in America’s interest. During the Cold War, the United States tolerated the buildup of massive trade deficits and an associated expansion of the national debt because it benefited from the resulting global proliferation of its liberal, capitalist values. Now, as China and other emerging powers appear to be violating the spirit of that model – enjoying the growth-enhancing benefits of free trade while (often illegally) avoiding the costs and becoming even less democratic – the United States is effectively opting to pull the rug out from under the system and see where things fall. Whether the Trump administration will thereby manage to contain a rising China is an open question. But successful damage control in handling the transatlantic trade relationship requires that European leaders understand this underlying goal.
Thus, to avoid a trade war with the United States, the European Union would do well to advertise how it can help the United States contain China’s trade and geopolitical ambitions in a way that aligns with its own economic interests. European industry must contend with the disruptive consequences of Chinese overcapacity in steel, aluminum, coal, cement, and chemicals just as the US manufacturing base does. Given deeper foreign direct investment (FDI) links between the European Union and China than between China and the United States, European multinationals operating in China suffer even more from the consequences of intellectual property violations and forced technology transfer than American firms do. The sectors China is targeting as part of its Made in China 2025 initiative – including aerospace, medicine, information technology, railways, and agriculture – will negatively affect vital industries in both the European Union and the United States. Trump’s instincts may push him to ‘go it alone’ in combatting China on these fronts. European leaders should persuade him that the United States will have greater success if they join forces and put pressure on China together.
The benefits of an interest-oriented strategy for negotiating a new transatlantic trade relationship go beyond the immediate goal of avoiding a catastrophic trade war. The EU economy and European multinationals may benefit from righting global trade imbalances, especially those stemming from China’s distortionary size. The EU may build a stronger negotiating hand on other fronts where the European Union and the United States will differ over the coming years. So far, Europe’s leaders have only begrudgingly acknowledged the end of a values-based transatlantic relationship. They should consider the opportunities hiding behind this paradigm shift.
Elizabeth Rust is a Europe Fellow at Young Professionals in Foreign Policy (YPFP). She serves as an economic consultant with Keybridge LLC, advising industry associations and corporate strategy clients on global macroeconomic and political trends, with a focus on advanced economies. Rust holds a Master’s degree in international economics and European studies from Johns Hopkins University (SAIS) and a Bachelor’s degree, magna cum laude, from Cornell University.
Photo Credit: The White House via Wikimedia CommonsAuthor : YPFP