31 July 2018

U.S. and Europe Outline Deal to Ease Trade Feud

Richard M. Rossow

It Will Take Four to Tango

The United States and India will engage in our first “2+2 Dialogue” on September 6 in New Delhi, bringing together the heads of our respective defense and foreign ministries. This is the “successor” to the U.S.-India Strategic and Commercial Dialogue (S&CD). The S&CD met twice—in 2015 and 2016—never quite hitting its stride in terms of deepening our partnership on either the strategic or commercial relationship. The timing is critical; bilateral relations are in a trough, largely due to a range of trade concerns. The July 6 2+2 Dialogue must focus on three objectives:

Determine specific, tangible ways to reinforce our emerging security partnership; 
Prevent trade concerns from derailing our security ties; and 
De-escalate the risk that U.S. sanctions against Russia and Iran pose to our growing ties with India. 
Former Secretary of State Rex Tillerson painted an aspirational vision of our emerging Indo-Pacific partnership at his October 18, 2017 speech at CSIS, stating:

“The U.S. and India, with our shared goals of peace, security, freedom of navigation, and a free and open architecture, must serve as the Eastern and Western beacons of the Indo-Pacific, as the port and starboard lights between which the region can reach its greatest and best potential.”

The United States and its partners are consistently challenged by an increasingly aggressive Chinese military in East and Southeast Asia. These challenges are quickly expanding into the Indian Ocean Region (IOR). Apart from India’s ongoing land boundary disputes with China, the Peoples Liberation Army - Navy (PLA-Navy) has steadily increased its level of activity in the IOR, and China is financing key port developments in the region. The reasons for deepening our partnership are strengthening.

The United States and India have intensified security cooperation in recent years. Notable milestones include renewing and expanding our 10-year Defense Framework Agreement (2015); Signing the “Joint Strategic Vision for the Asia Pacific and Indian Ocean Region” (2015); launching a series of programs under the Defense Technology and Trade Initiative (DTTI) (2015); including Japan in the annual Malabar naval exercise (2015); completing the Logistics Exchange Memorandum of Agreement (2016); and lifting U.S. export controls on maritime surveillance drones (2017). Other similar agreements are on the table, such as signing two other pending “enabling agreements,” expanding military exercises, concluding agreements related to our aircraft carrier and jet engine working groups, pre-approving the export of additional advanced military technologies, and more.

Why the New Format? 

The U.S.-India Strategic and Commercial Dialogue never quite fulfilled its promise as a tool to deepen U.S.-India ties. At the time, the U.S. Department of Defense had a far higher degree of senior-level engagement with India on strategic affairs. Despite some notable small-scale successes, the two sides were unable to craft a vision for high-level economic cooperation. Discussions were still focused on attempts to resolve a range of smaller commercial disputes, instead of setting a course and vision for something larger.

Switching to this new 2+2 format will help both sides ensure that the defense and foreign policy arms of our respective governments are acting in greater consonance. America’s nascent “Free and Open Indo-Pacific” construct will have elements of diplomacy and military power. Having a regular minister-level engagement will force both sides to initiate a higher-degree of joint planning than if such a dialogue did not exist. This dialogue should expedite approvals for technology release in the United States, advance joint diplomatic coordination across the region, and reduce opportunities for miscommunications between our defense and foreign ministries that could otherwise slow progress in the relationship.

The relatively positive state of our security relationship must be the ballast that sees us through the current tumult in our economic relationship. There is blame to be cast on both sides for the declining ties. India’s tariff increases announced on February 1 were quietly the first tangible protectionist step between the two sides. More recently, the United States has turned aggressor, leveling trade actions that specifically target India, as well as other actions with broader application that also hit India. Now India is counteracting with U.S.-specific tariffs of its own. U.S. sanctions programs against Russia and Iran include provisions that extend to countries with strategic economic engagement with these two nations. India has both; Russia continues to be a major weapons supplier, while Iran is a key oil supplier. Congress has widened the potential application of waivers on Russian sanctions, so the pathway to clearing this hurdle seems to have improved in recent days.


No matter who is in a bilateral meeting, outcomes are a mixture of interests, capabilities, and energy. We can certainly lament the continued lack of a shared vision for the direction of our commercial partnership. But even with a ministerial-level “Strategic and Commercial Dialogue,” our nations were not able to bridge our many differences. The 2+2 Dialogue on September 6 is a crucial opportunity to put our relationship on a more positive track. As the more aggressive of the two, the onus is on the United States to offer a path to de-escalation. 

WASHINGTON — The United States and the European Union stepped back from the brink of a trade war on Wednesday, after President Trump said the Europeans agreed to work toward lower tariffs and other trade barriers, and to buy billions of dollars of American soybeans and natural gas.

The surprise announcement, made by Mr. Trump and the president of the European Commission, Jean-Claude Juncker, defused, for the moment, a trade battle that began with Mr. Trump’s tariffs on steel and aluminum exports and threatened to escalate to automobiles.

“We’re starting the negotiation right now, but we know very much where it’s going,” Mr. Trump said, standing next to Mr. Juncker at a hastily scheduled appearance in the White House Rose Garden.

Mr. Juncker said, “I had the intention to make a deal today, and we have made a deal today.”

The two sides, he said, had agreed to hold off on further tariffs, and work toward dropping the existing ones on steel and aluminum, while they tried to work out a deal to eliminate tariffs, nontariff barriers and subsidies on industrial goods, excluding autos.

It was hard to say, given Mr. Trump’s bluster and unpredictable negotiating style, if the agreement was a genuine truce or merely a lull in a conflict that could flare up again. Twice, Mr. Trump’s aides have negotiated potential deals with China, only to have him reject them and impose further tariffs. Cutting these trade barriers to zero would be an extraordinarily complex political challenge on both sides of the Atlantic.

And Mr. Trump stepped back from punitive tariff threats for some relatively minor European concessions: the purchase of soybeans to make up for a steep falloff of buying by China, and the promise to purchase liquefied natural gas once the United States builds more export terminals, which are far away. For weeks, the president has portrayed the European Union as fleecing America with unfair trade, but he put away his saber as farm state Republicans were begging for relief.

“I think it’s helpful that they made some progress today with the European Union, and I think we really emphasized that we need to keep the momentum up and get the deals as soon as we can,” said Senator John Hoeven, Republican of North Dakota, who was at the White House for the announcement.

Europe’s pledge to buy more natural gas gives Mr. Trump a talking point with Russia, after he vowed to compete for orders in Europe, where Russia is the largest supplier. The lack of natural gas terminals, though, means that this windfall is years in the future.

Still, Mr. Trump called it “a new phase in the relationship between the United States and the European Union,” a striking change in tone from his recent trip to Europe, when he referred to the European Union as a “foe” and criticized its most important member, Germany, for its dependence on Russian gas.

The two leaders made the announcement before more than a dozen Republican lawmakers, who had expressed growing alarm at the president’s protectionist actions, which they said were harming farmers. Republicans said they were summoned to the White House believing they were there to negotiate. Then they were ushered into the Rose Garden for the announcement.

“We arrived there and then we became eye candy on the set,” said Senator Pat Roberts, Republican of Kansas, who was singled out by the president for his farm advocacy.

For his part, Mr. Trump had expressed irritation with the Republican resistance, saying it was hobbling him in his negotiations.

“When you have people snipping at your heels during a negotiation,” he said on Twitter, “it will only take longer to make a deal, and the deal will never be as good as it could have been with unity. Negotiations are going really well, be cool. The end result will be worth it!”

The Trump administration has already imposed billions of dollars of tariffs on the European Union for what it has labeled unfair trade practices, raising costs for companies and consumers and roiling a traditionally close alliance. Mr. Trump’s threat to go after automobiles particularly rattled the Germans, who export millions of BMWs and Mercedes-Benzes to the United States but also produce millions at American factories.

Mr. Juncker was dispatched to Washington this week along with other European officials as part of a last-ditch effort to halt those tariffs. A former prime minister of Luxembourg known for his informal manner and occasional gaffes, Mr. Juncker has forged a good rapport with Mr. Trump, and the two men appeared at ease on Wednesday.

“Disaster avoided,” said Bart Oosterveld, the director of the global business and economics program at the Atlantic Council. “Earlier today, our highest hopes were for a truce, and this is kind of like a truce.”

Fred Bergsten, senior fellow and director emeritus of the Peterson Institute for International Economics, said an agreement with Europe would allow Mr. Trump to focus on China. But he said that the deal seemed to have an “eerie similarity” to one with China this year, shortly before Treasury Secretary Steven Mnuchin announced that the trade war was “on hold.”

“We have seen something like this movie on the other major trade front only a couple of months ago, and I would just hope that it would not play out in the same way, which at the moment seems to be a stalemate with China,” Mr. Bergsten said.

But Republicans were happy to declare victory.

“There’s an emotional uplift, because this is the first big breakthrough,” said Representative K. Michael Conaway, Republican of Texas and the chairman of the House Agriculture Committee, who was at the event. He added that it “demonstrates the president believes he’s on the right track, and it’s hard to argue that he’s not.”

Mr. Trump did not promise to remove the tariffs on shipments of steel and aluminum coming from Europe, and the Europeans did not promise to lift their retaliatory tariffs. But he said that the tariff issues would “get resolved as part of what we’re doing.”

In May, the United States began levying tariffs on roughly $7.7 billion of steel and aluminum exported from the European Union, which goaded the Europeans into imposing taxes of their own on $3.3 billion of American products and challenging the United States at the World Trade Organization.

Mr. Juncker had called the American tariffs and the cycle of retaliation they had invoked “basically a stupid process,” saying the Europeans would now be forced to respond in kind.

“We will now impose tariffs on motorcycles, Harley-Davidson, on bluejeans, Levi’s, on bourbon. We can also do stupid,” he added.

Mr. Trump had threatened to substantially escalate this conflict with another round of tariffs, this time on the automobile industry. European countries, especially Germany, are major exporters to the United States, though they also produce many cars domestically. The United States imported $183.8 billion of cars, sport utility vehicles and minivans last year, $46.6 billion of them from the European Union.

At a hearing in Washington last week, representatives from car companies and foreign governments gave testimony on the proposed tariffs that was almost uniformly negative, punctuated by concerns about rising prices for consumers, shrinking profits for companies and decreased access to markets abroad.

The European Union believes “that this current investigation lacks legitimacy and factual basis and would lead the United States into a breach of international law,” David O’Sullivan, the European Union ambassador to the United States, said at the hearing.

European officials have said they are drawing up a list of additional levies on roughly $20 billion of American products, including food, machinery and high-tech goods, in case the car tariffs go into effect.

But they worry that the tit-for-tat trade actions are merely locking Europe and the United States into a destructive cycle of relations that will leave consumers and companies on both sides of the Atlantic worse off.

Mr. Trump has denounced the European Union for charging a 10 percent tariff on imported cars, running a trade surplus with the United States and maintaining barriers to American farm products, saying this month that the Europeans were “possibly as bad as China” when it comes to trade.

Economists have challenged these claims. They counter that average tariffs across both nations are extremely low, and that the United States trade deficit is more a function of broader economic factors, like the American savings rate, than any specific tariffs. Even in the realm of automobiles, the United States charges only a 2.5 percent tariff on imported cars, but it has a 25 percent tariff on foreign trucks and maintains higher levies on many other products.

“Tariffs are low throughout the industrialized world,” said Justin Wolfers, an economist at the University of Michigan. “Basically, if you said there’s no more tariffs to reduce, you would barely be wrong.”

In a briefing Tuesday, a senior European official said that Mr. Juncker was prepared to discuss two options to revive the trading relationship — either an agreement that would involve many of the world’s biggest auto exporters slashing car tariffs together, or a trade deal between Europe and the United States that would be limited to certain products.

The European Union has struggled to figure out what exactly the United States would like to gain through talks, and whether the Trump administration is negotiating in good faith, the senior official said.

White House officials have described their tariffs as a negotiating tool to secure better trade agreements. But meanwhile, the Trump administration has shelved previous talks with Europe over a broader trade agreement, called the Trans-Atlantic Trade and Investment Partnership.

If the issue is lowering tariffs, the European Union has proposals ready to reduce them, negotiators say. But they worry that the president’s real preoccupation is the United States trade deficit, an issue both government officials and economists say Europe is largely powerless to alter.

On Wednesday, the president continued to refer to the trade deficit as a scorecard for failed negotiations, a practice economists have condemned.

“Every time I see a weak politician asking to stop Trade talks or the use of Tariffs to counter unfair Tariffs, I wonder, what can they be thinking?” he wrote on Twitter.

“Are we just going to continue and let our farmers and country get ripped off? Lost $817 Billion on Trade last year,” the president added, incorrectly citing the 2017 U.S. deficit in goods, which was $810 billion. “No weakness!”

No comments: