Transatlantic relations and the international trading system

Steve Woolcock, London School of Economics and visiting researcher at the Institute of International Trade, Adelaide University November 2018

The North Atlantic has been of vital importance to the US and EU and pivotal in establishing the rules-based trading system centred on the General Agreement on Tariffs and Trade (GATT) and then the World Trade Organisation (WTO).  US hegemony supported the creation of the post 1945 multilateral trading system and the US promoted European integration.  In time US hegemony gave way to cooperation with other major liberal economies, and an OECD hegemony developed rules for trade and investment and thus the international public good that is the open, liberal trading system.  Emerging economies such as the Newly Industrializing Countries (NICs) of Asia then supported these rules because open trade was in their vital national interest.  The 2000s brought a structural shift in the balance of the world economy in which the OECD, with the North Atlantic economy at its core, was no longer large enough by itself.  Transatlantic cooperation remained necessary but not sufficient.

Today there are more doubts that transatlantic cooperation is in the mutual interest of the US and EU than at any time since the creation of the GATT.  First, the US Administration is pursuing a purely value-claiming (“I win you lose”) trade strategy vis–a– vis the EU (and other countries) when the norm has been value creating or “win-win”.  Second, US policy decisions to use national security to justify trade protection and to block appointments to the WTO Appellate Body that enforces the rules, are arrows at the heart of the WTO and thus the multilateral trading system.  Third, recent policy statements appear to reverse nearly 80 years of US policy by actively challenging the idea of European integration.  The EU’s response has been to retaliate against US value-claiming but within WTO rules and to play for time.  In July 2018 US President Trump and the President of the European Commission, Junker, shook hands and agreed to find a way to work together, but what are the longer term prospects?

In this assessment we cannot rely much on our existing theoretical understandings of the political economy of US trade policy. This has been based on competing interests, how these are balanced in Congress and an established world view of key decision makers that US leadership of the international trading system is in the US national interest.  So what can we learn from past experience?

The unilateralism of the current US administration is not unprecedented. In 1971 the “Nixon shock” ended the US Dollar-gold convertibility and thus the Bretton Woods system of monetary cooperation; at least formally.  At the same time the US imposed a 10% tariff to gain leverage in order to force others, primarily Germany and Japan at that time, to adjust their trade and balance of payments surpluses.   During the 1980s the US Congress threatened “fair trade” legislation with which the US would decide unilaterally what was “fair” (the so-called Gephardt amendment).  The Reagan Administration’s way of exercising leverage was to seek voluntary export restraints (VERs), primarily from Japan. This was combined with a channeling of protectionist pressures into multilateral efforts to define fairness in the shape of the Uruguay Round of the GATT (negotiated between 1986 and 1994).  The US has also considered using national security to justify protection, but other presidents have held back from doing so, because of the view that this would damage the GATT/WTO.  What differs today is that tariffs are being imposed selectively in clear breach of the most favoured nation principle of the WTO and President Trump is leading the charge for protection rather than seeking to contain it.

In terms of easing transatlantic trade there have been continuous problems and tensions, but cooperation has prevailed because of the overwhelming economic benefits for bilateral trade and investment.   In 1990, at the end of the Cold War, when some in Europe feared the US would become progressively disengaged from Europe, there was agreement on the Transatlantic Declaration.  In 1994 concern about US unilateralism following the mid term elections again led the EU to confirm continued cooperation.  This led to the New Transatlantic Agenda and a Joint Action Plan on regulatory cooperation.  In 1998 there was the Transatlantic Economic Partnership to promote regulatory cooperation.  In 2002 there was agreement on a Positive Economic Agenda in order to focus on positive cooperation rather than the trade disputes, such as those over US protection of its steel industry and EU restrictions on imports of US beef reared with growth hormones or other genetically modified products.  There were various Roadmaps on regulation and a Financial Market Regulatory Dialogue. Finally, there was the Transatlantic Trade and Investment Partnership (TTIP), which included, in particular, measures to address regulatory differences or divergence.  

These initiatives maintained dialogue but had little substantive impact in terms of agreed rules required to facilitate trade and investment when there are divergent national regulatory policies or practices.  There were a number of reasons for this.  US Administrations tended to have short-term (political) objectives, when cooperation on rules generally requires a measure of consensus that is only possible with patience and time.  In the earlier initiatives the US Congress was not ready to cede the regulatory sovereignty necessary for effective regulatory cooperation, and in the 2010s it was joined by the European Parliament and some Member States.  There are deep-seated differences between US and EU trade-related rules.  In the US standards and thus regulation are shaped by competition and thus individual companies or groups of companies, whereas in the EU they are shaped more by agreement on common rules on the balance between commercial and public interests. US regulatory norms have been science-based, while those of the EU included more scope for the application of the precautionary principle.  These underlying differences remain and have if anything accentuated. Under President Trump the US response to “globalisation” has been to retreat to national solution and less international cooperation;  the EU policy response has been to seek to “master” globalization and thus more international cooperation.

What about the international rules-based trading system?  Past cooperation across the Atlantic has been valued because shared leadership enabled the US and the EU to shape the international rules for trade and investment.  In the absence of progress at the multilateral level, one of the aims of TTIP was to shape international trade rules.  Other so-called mega trade agreements, such as the Transpacific Partnership (TPP) and plurilateral agreements among like-minded countries were to fill the vacuum.  But there now appears to be more competition than cooperation.  The US has withdrawn from TPP and opted to negotiate bilateral trade agreements.  The EU is moving ahead with preferential trade and investment agreements, with Canada, Japan, Australia, New Zealand and other emerging Asian economies such as Indonesia.  This looks more like competition than cooperation.

Rather than strengthen a rules-based trade and investment order the Trump Administration appears to want to return to a more power-based system in which threats of market closure are used to get concessions; an approach that favours bilateral negotiations to maximize leverage.  The Trump Administration wants to use discretionary US “fair” trade measures to ensure a “balance of benefits” an approach that favours taking back from the WTO.  For its part the EU is locked into a rules-based order.  Collective decision- making means there is no support for unilateral threats to close the EU market.  Cooperation within the EU is based on rules that limit discretionary intervention to support narrow national interests. 

There appears therefore to be a clear divergence between the US power-based and EU rules-based approaches to international trade. Other countries, such as Australia, will need to decide which is in their long-term interest.