What Should Europe Expect from American Trade Policy After the Election?

Yves here. This Bruegel article describes possible changes in US trade policy under a Biden Administration. Despite campaign messaging that Team Biden will attempt to turn the clock back to 2016 (or earlier), this article makes clear why that can’t really happen. There are new facts on the ground and not just ones created by Trump.

Another issue that this article politely underplays is how our internal fractures are hurting our credibility abroad. Again, it’s convenient to blame this on Trump, but it’s probably more accurate to see him as an accelerant. For instance, Matt Taibbi has described how the media embraced narrowcasting and stoking rage and fear among target audiences as effective strategies to win loyalty. Trump is a perfect product.

It’s also rich to see the authors finger-shake at Trump for practicing managed trade, since as Bill Greider pointed out, pretty much every country except the US engages in managed trade (and the US does it more by default than by design, for instance, with aggressive intellectual property protections for Hollywood and software). It’s more accurate to say that Trump does managed trade badly.

By Uri Dadush, Non-Resident Fellow at Bruegel and Guntram B. Wolff, Director of Bruegel. Originally published at Bruegel

The European Union-United States trade and investment relationship remains the world’s most intensive even after Brexit. Trade between the US and the EU (minus the United Kingdom) totalled around $1 trillionin 2018, about a third larger than US ties with China. EU27/US bilateral FDI stocks surpassed $4.5 trillion, dwarfing those with China. Despite the frequently differing positions of EU members on trade policy, the EU-US relationship stood the test of time and continued to deepen. But, over the last four years, President Trump’s strictly transactional approach to trade policy, with an obsessive emphasis on reducing bilateral deficits, has amounted essentially to managed trade and is diametrically opposed to the principle of non-discrimination enshrined in multilateral trade disciplines, which Americans and Europeans worked together to establish.

This is not just political opportunism, but reflects the President’s deep convictions and those of his advisors. Trump’s re-election would almost certainly reinforce the trends he established. Trump’s challenger Joe Biden is well ahead in the polls but is not certain to prevail even if Trump’s campaign is now hobbled by his COVID-19 infection. All of America’s trading partners face the question of what the change in American leadership, if it occurs, would bring.

The history of the Obama-Biden administration, and Biden’s long Senate track record of supporting major trade legislation, including NAFTA, the Uruguay Round and Permanent Normal Trade Relations with China, might suggest a return to a more traditional approach in trade policy, but that expectation – if taken literally – is unrealistic. Trade policy does not exist in a vacuum, and much has changed inside and outside the United States in the last four years. We would point to three major shifts a Biden Presidency would have to confront, and which have important implications for the US relationship with the EU:

  • Across the US political spectrum, China is seen as a formidable geopolitical and technological adversary. This is not new, but under Trump, relations with China have deteriorated to a cold-war level.
  • The sharp secular rise in income inequality within the United States and the intensification of identity politics, driven by race, religion and socio-economic background, have resulted in unprecedented polarisation of US politics. Trump has added fuel to this previously smouldering fire.
  • The economic devastation caused by COVID-19 which, among other consequences, has made the inequality and racial divisions far worse.

As might be expected, each of these issues figures prominently in Biden’s campaign manifesto. From the perspective of the European Union and its trade relationship with the United States, the three shifts mean that a Biden presidency would:

  • Prioritise above all else the fixing of domestic problems, rather than trade relations (at least initially), perhaps lasting until the mid-term elections in November 2022. This would echo Obama/Biden’s first term, during which dealing with the fall-out from the Great Recession was the top priority. Taking a lesson from the 1930s, Obama/Biden resisted a relapse into protectionism, but they also placed new trade deals on the back-burner initially.
  • Continue to support ‘Buy American’ policies (a relatively mild manifestation of protectionism which is widely practiced in various forms worldwide) and be less inclined to negotiate new trade agreements. When negotiating them, a Biden Administration will insist on rigorous safeguards, most importantly on those that ‘protect’ US workers.
  • View trade relations through a prism of geopolitical and technological rivalry with China rather than – as was evident during the Cold War – the security umbrella of the North-Atlantic Alliance, which placed Europe higher on the list of priorities.

Comparing scenarios under a Trump or Biden victory, it is useful to consider the US-EU trade relationship in terms of, first the bilateral relationship; second, the US and EU relationships with China and third, multilateral cooperation – specifically, what to do about the crisis affecting the World Trade Organisation.

The Bilateral Relationship

Under a second Trump term, the present sceptical, even hostile, policy towards the EU is likely to intensify. Though Trump has essentially failed to achieve his stated goals in trade (the trade deficit remains, manufacturing jobs have continued to decline and China’s stance on structural reforms has hardly budged), our assumption is that during a second term, free from electoral concerns, he will double down on his approach. Present areas of trade tension, which include aluminium and steel tariffs, data privacy, digital taxes and the secular dispute over Airbus and Boeing subsidies, could escalate into a full-blown trade war that would include tariffs on European cars and a direct challenge to the Common Agricultural Policy.

There is little doubt that a Biden Presidency would mark a toning down of EU-US tensions and a return to civility. Attitudes across the Atlantic will converge again in important areas such as climate change. Surprisingly, voters who identify as Democrats are far more likely than Republican voters to support open trade, even though that is not the case in the US Congress. Although Biden appeals to many in the rust belt and has supported steel tariffs in the past, the present tariffs on steel and aluminium, based on Section 232 (national security), are hardly compatible with rebuilding alliances. A way will be found to eliminate them or replace them with other mechanisms. The threat of auto tariffs, which are widely opposed anyway, is certain to fade. Biden, of Irish ancestry, has said that a trade deal with the UK should be conditional on preserving peace on the island of Ireland in line with the Good Friday Agreement. This is generally seen as requiring a continued open border between Northern Ireland and the Republic of Ireland, in keeping with the UK’s withdrawal agreement from the EU.

However, any return to negotiations on a comprehensive deal, such as the Transatlantic Trade and Investment Partnership, is highly unlikely. But, late in the Biden term, and as the healing from the COVID-19 crisis occurs, there will be opportunities for partial single or multiple issue-based deals. Assuming the differing positions of EU countries can be reconciled, win-win areas could include negotiations on services, medical goods and environmental products. Divisions over digital taxes and data privacy may be narrowed. Importantly, Biden’s deeply held concern about climate change offers an opening for negotiations which include trade, such as coordinating a position on the thorny issue of carbon border adjustments.

However, in those negotiations, the United States is likely to be even more demanding and less flexible than, say, under Obama or George W. Bush on account of the domestic and international changes we have outlined, especially the mounting rivalry with China which will persist as the main point of reference in geopolitics.

China

Both Biden and Trump have seen it as in their electoral interest to stir up the growing China phobia of the US body politic. It is not clear, however, whether that necessarily points to an escalation of the China-US trade war post-election. Trump often boasts of his success (doubtful in our view) in the Phase 1 trade deal with China, and of his intention to strike a more comprehensive and better Phase 2 deal if re-elected. His passion for the “deal of the century”, the masterstroke that resolves the toughest problem, may well motivate him to work hard towards putting the relationship with China onto a more productive basis. However, Trump’s next deal with China, if it materialises, is sure to continue his managed trade, America First approach, further undermining the multilateral trading system and creating new concerns about discrimination against European firms.

There is little doubt that, while also being hard on China, Biden will be eager to return to something resembling normal trade relations, albeit in a progressive and negotiated fashion. Voters who identify as Democrats are less likely than Republicans to be hostile to China. Normalisation would entail eventually removing punitive tariffs on 65% of US imports from China (or close to $400 billion of Chinese goods), in exchange for China doing the same on about 57% of their imports from the US and some acceleration of China’s structural reforms. Biden may well decide that the United States should rejoin the Trans-Pacific Partnership (now the CPTPP, consisting of Japan and ten other Pacific nations). The original intent of the TPP, which was negotiated during the Obama-Biden second term, was to ‘contain’ China and, while the TPP included some novel features such as disciplines on state-owned enterprises and e-commerce, the agreement actually required little new trade liberalisation in the United States, and was estimated to have no impact on US employment. These factors would make it easier for Biden to rejoin.

Unlike Trump’s essentially adversarial approach towards Europe, working together with allies to pressure China on reforms will be central to Biden’s Presidency and would represent an opportunity for the EU. On matters relating to human rights abuses and Chinese tech companies building communication networks, most Americans support a tough line, irrespective of whether they are Republicans or Democrats.

The EU’s challenge will therefore be to reconcile its fundamental interest in a vibrant trade and investment relationship with both superpowers with American demands motivated by US geopolitical and security concerns. That challenge, complicated by the different stances that EU countries take towards China, will remain no matter who is elected in the US.

The WTO

The crisis in the WTO long precedes Trump and is unlikely to be resolved in the foreseeable future whoever is elected US president. Trump and US Trade Representative Robert Lighthizer have been eager to throw away the WTO rule book (whatever Lighthizer might say to the contrary), attempting to neuter the organisation and its dispute settlement arm. In a second Trump term, the United States will probably reinforce its challenge to the WTO by demanding unilateral tariff concessions from other members, including the EU. Such a demand is sure to be rejected, paving the political path towards US tariff increases across the board.

Biden, by contrast, is likely to revert to a more traditional negotiating stance, to strengthen the rules-based system and preserve the WTO acquis, and – where possible and without setting high expectations – to make progress on reforming it. Specifically, under Biden, the US will likely make concrete recommendations to reform the working of the Appellate Body and, in exchange, allow renewal of its judges. The US is also likely to resume a push for plurilateral deals which, if critical mass is achieved, may be extended on a most-favoured nation basis to all WTO members, even those that do not undertake commitments under the deal. Biden’s inclination to work within the WTO (a stance that enjoys bipartisan support in the Congress) may enable collaboration with both the EU and China.

In conclusion, under Biden the EU’s dilemma in managing its trade relationships with two adversarial geopolitical players will remain. The tendency to decouple from China on technology may persist, at least until major advances in structural reforms in China become evident – which appear unlikely in the foreseeable future. A Biden presidency would also entail a less adversarial approach towards the EU. However, negotiation space and political attention in the US is unlikely to be available for a move towards a comprehensive trade negotiation such as a revamped TTIP, even if the EU were ready for that (which is doubtful).

As the United States adopts a potentially more cooperative and constructive stance on many of the difficult issues that mar trade relations with Europe, from sanitary standards to subsidies, data privacy, carbon border adjustments and taxes on e-commerce,  developing a common EU position will be a top priority. Failure on the EU’s part to rise to that challenge is bound to relegate trade relations with Europe even lower in the Biden Administration’s priorities.

We thank without implicating them Maria Demertzis, André Sapir, William Reinsch and Susan Schwab for useful comments. Marta Dominguez provided research assistance.

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6 comments

  1. Sound of the Suburbs

    If only the Americans had understood free trade, they would have seen China’s rise and its own decline.
    There was always going to be massive off-shoring due to the high cost of living in the US.

    How did the UK prepare to compete in a free trade world in the 19th century?
    They had an empire to get in cheap raw materials; there were no regulations and no taxes on employees.
    It was all about the cost of living, and they needed to get that down so they could pay internationally competitive wages.
    UK labour would cost the same as labour anywhere else in the world.
    Disposable income = wages – (taxes + the cost of living)
    Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.

    Ricardo supported the Repeal of the Corn Laws to get the price of bread down.
    They housed workers in slums to get housing costs down.
    Employers could then pay internationally competitive wages and were ready to compete in a free trade world.

    Let’s look at the US cost of living.
    The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living
    No wonder US firms off-shore to maximise profit.
    Those jobs ain’t coming back Mr. Trump.
    What sort of employer would be mad enough to pay the US cost of living in wages?
    There are loads of better alternatives.
    US firms couldn’t wait to get out of the US to places where they could make more profit.
    They then imported back into the US, to add to the trade deficit Trump keeps worrying about.

    Let’s look at China.
    Maximising profit is all about reducing costs.
    China had coal fired power stations to provide cheap energy.
    China had lax regulations reducing environmental and health and safety costs.
    China had a low cost of living so employers could pay low wages.
    China had low taxes and a minimal welfare state.
    China had all the advantages in an open globalised world.
    It did have, but now China has become more expensive and developed Eastern economies are off-shoring to places like Vietnam, Bangladesh and the Philippines.
    The West was never going to do well.

    Everyone pays their own way.
    Employees get their money from wages.
    The employer pays the way for all their employees in wages.
    Off-shore from the US, ASAP.

    China became a superpower and US influence in the world declined.

    Why do American firms like Mexico?
    They can pay wages there, people couldn’t live on in the US.
    They can cut costs by pumping pollutants straight into the environment, as well as exposing workers to hazardous chemicals.
    The exploited women of Mexico speak up:
    https://thoughtmaybe.com/maquilapolis-city-of-factories/
    Companies found that women were less likely to kick up a fuss about poor pay and conditions and so made better employees.

    Reply
    1. Sound of the Suburbs

      The UK knew what to do for free trade in the 19th century because they used classical economics.
      The US didn’t know what to do for free trade in the 20th century because they used neoclassical economics.

      The classical economists could observe the world of small state, unregulated capitalism in the world around them.
      Today’s economists worked up from micro foundations and got very confused.

      How different is classical economics?
      Ricardo was part of the new capitalist class, and the old landowning class were a huge problem with their rents that had to be paid both directly and through wages.
      “The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist
      What does our man on free trade, Ricardo, mean?
      Disposable income = wages – (taxes + the cost of living)
      Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
      Employees get less disposable income after the landlords rent has gone.
      Employers have to cover the landlord’s rents in wages reducing profit.
      Ricardo is just talking about housing costs, employees all rented in those days.
      Low housing costs work best for employers and employees.

      In Ricardo’s world there were three classes.
      He was in the capitalist class.
      The more he paid in labour costs (wages) the lower his profits would be.
      He was paying the cost of living for his workers through wages, and the higher that was, the higher labour costs would be.
      The more he paid in rents to the old landowning class, the less there would be for him to keep for himself.

      From Ricardo:
      The labourers had before 25
      The landlords 25
      And the capitalists 50
      ……….. 100

      He looked at how the pie got divided between the three groups.
      The capitalist system actually contains a welfare state to maintain an old money, idle rich in luxury and leisure.
      In the UK we still have an aristocracy, so it is hard to forget.

      There were three groups in the capitalist system in Ricardo’s world (and there still are).
      Workers / Employees
      Capitalists / Employers
      Rentiers / Landowners / Landlords / other skimmers, who are just skimming out of the system, not contributing to its success
      The unproductive group exists at the top of society, not the bottom.
      Later on we did bolt on a benefit system to help others that were struggling lower down the scale.

      Reply
      1. Hayek's Heelbiter

        Buying a flat in London.
        No MLS. Each estate agent zealously guards its book and must be contracted individually. (Foxton’s tried the English exclusivity system in Manhattan with their high end properties. Big Fail.)

        You might OWN your property, but the leaseholder owns the land upon which it is built, and when the lease expires, the LEASEHOLDER owns the land and all the property on it (with improvements).

        Four families own most of the leaseholds in London.

        http://www.flat-living.co.uk/advice/556-who-owns-leasehold-london

        The 6th Duke of Westminster is London’s wealthiest landlord. He and his family own around 300 acres of land, including some of London’s most exclusive addresses.

        And according to Professor Mark Robinson, an archaeologist from the Oxford University Museum of Natural History:

        “The genetic make-up we see [of Great Britain today] is really one of perhaps 1400 years ago.”

        The longer I live here, the more I realize that even though the UK might look like America and speak English, essentially it’s a feudal society with electricity (even down to the fact that the landlords out earn the capitalists).

        Reply
    2. PlutoniumKun

      Priorities in trade policy are often the clearest expression of changing power dynamics within a country. The opening up of the US to China could only have been achieved in a world with weakened trade unions. In the 19th Century, the UK’s opening up to cheap corn from the US was fundamental to undermining the power of the landowning aristocracy in favour of the newer capitalist class. The peasant class was collateral damage (especially in Ireland and Scotland).

      In many ways trade policy is a ‘force multiplier’ within any domestic political conflict – the losing side of the argument finds that trade policy enforced by the dominant interest then causes further damage – this is I think a fundamental reason why labour has been so comprehensively routed by capital interests over the past 3-4 decades in the US.

      Reply
      1. Sound of the Suburbs

        The US has geared things for the 1%, and against the US itself.
        The UK realised that to prosper itself, the group to sacrifice was the rentiers.

        The Berlin Wall had fallen and a uni-polar world was born.
        The US reigned supreme.
        China was insignificant and Russia was moving towards the West with Gorbachev.

        How different things look today.

        Reply
  2. Susan the other

    Back in the 60s we didn’t know “how to stop” the economy of the USSR. Khrushchev stated “we will bury you” and told us all that the USSR could move much faster and more efficiently because it was a command economy and was not waiting around for private interests to gear up. Private interests are always only interested in private profit. In fact it was the USA that was forced to change and we used the MIC to do it. It was the only part of the economy we could “command”. Hence the booming economy of the cold war was micro managed to compete with the commies. And it was full-on competition in high tech. Funny. It was not free enterprise, old fashioned capitalist can-do at all, whatsoever. So now here we are again. With China who has another command economy. And we seem to have tapped out our old act. Militarism is not something we can milk forever, especially since the planet is so polluted and endangered. Actual competition between countries on a level playing field will never happen if it is arbitraged for profits by exploiting the environment and labor. It will always have to be tweaked. Which is just another reason to pull back aggressive international trade and focus more on domestic self-sufficiency and the environment. We don’t have to be isolationists. We do have to get our domestic act together. So does China for that matter. And I see no reason to clutch our pearls over it. Let it settle into what is possible and good for the planet. Clearly we shouldn’t waste our investment. At this point we should give the military a new green mandate and just accept the fact that things change. I’m so sick of beating all the dead horses.

    Reply

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