Talking trade: US and EU ‘mini-deal’ opens door to future accords

December 2020 | FEATURE | GLOBAL TRADE

Financier Worldwide Magazine

December 2020 Issue

In the context of protectionism and the often fractious relationship between the US and the European Union (EU), the recent news that the two powers had agreed a package of tariff reductions – dubbed a ‘mini-deal by some commentators – is significant, potentially opening the door to further trade deals on a much larger scale.

The deal is of further significance in that it is the first US-EU negotiated reduction in duties in more than 20 years, a rapprochement of sorts that will increase market access for hundreds of millions of dollars in US and EU exports.

Under the terms of the agreement, the EU will eliminate tariffs on imports of US live and frozen lobster products. US exports of these products to the EU were over $111m in 2017. The EU will eliminate these tariffs by invoking a most favoured nation (MFN) clause. Furthermore, the EU tariffs will be eliminated for a period of five years and the European Commission (EC) will promptly initiate procedures aimed at making the tariff changes permanent.

For its part, the US will reduce by 50 percent its tariff rates on certain products exported by the EU worth an average annual trade value of $160m, including certain prepared meals, certain crystal glassware, surface preparations, propellant powders, cigarette lighters and lighter parts. The US tariff reductions will also have MFN status.

“As part of improving US-EU relations, this mutually beneficial agreement will bring positive results to the economies of both the US and the EU,” stated Robert Lighthizer, US trade representative, and Phil Hogan, EU trade commissioner. “We intend for this package of tariff reductions to mark just the beginning of a process that will lead to additional agreements that create more free, fair, and reciprocal transatlantic trade.”

In the view of Stephen Olson, a research fellow at the Hinrich Foundation, the agreement between the US and the EU, although clearly a modest step, in the midst of rising levels of protectionism witnessed in recent years should be regarded as good news. “Encouragingly, the tariff reductions will be implemented on an MFN basis, making them compliant with global trade rules,” says Mr Olson. “Overall, while the deal is a relatively small one, significantly, the agreement eases US-EU trade tensions, as well as opening the door to further trade agreements between both sides of the Atlantic.”

Realities

While undeniably welcome, according to Mr Olson, the tariff reductions should be understood in the context of the following three important realities.

First, mini tariff ‘deals’ such as this, which covers less than $200m in trade out of an over $800bn trade relationship, are no substitute for a broader trade and investment liberalisation agenda.

“The recent news that the two powers had agreed a package of tariff reductions – dubbed a ‘mini-deal by some commentators – is significant, potentially opening the door to further trade deals on a much larger scale.”

Second, lobster tariff reductions will only help the US industry recover ground that was lost as a result of trade war tariffs and ambitious liberalisation pursued by others. “The Canada-EU Comprehensive Economic and Trade Agreement (CETA) eliminated tariffs on Canadian lobster exports to the EU and allowed Canada to substantially displace US exports to the EU,” explains Mr Olson. In addition, in 2018, China assessed 25 percent tariffs on US lobsters as part of trade war tariffs, which removed the US from a lucrative export market.

Third, lobsters and crystal glassware are not the main stumbling blocks in US-EU trade relations. “In fact, the focus on lobster appears to have strong domestic US political overtones,” says Mr Olson. “The state of Maine, where Republican senator Susan Collins faces a tough re-election battle and needs a boost, accounts for about 80 percent of the US lobster industry.”

Aspiration

An often fractured relationship but demonstrably redemptible, the US-EU trade dynamic has been given a much-needed shot in the arm by the tariff reductions agreement – a potentially significant bright spot amid a burgeoning list of trade disputes between the two powers.

“The far more nettlesome issues besetting the US-EU trade relationship are digital taxes, the 16-year Airbus-Boeing subsidies dispute, and the dubious US tariffs on steel and aluminium,” explains Mr Olson. “The hope of course is that the tariff cuts will foster goodwill and build positive momentum toward resolving these other issues, and perhaps even a broader trade deal.

“But positive ‘carry over’ from one set of trade issues to another is not always automatic,” he continues. “Given the deep economic synergies, comparable levels of development, high levels of trade and investment, and broad philosophical alignment, a comprehensive free trade agreement between the US and EU – which breaks new ground in digital trade, subsidies and standards – is glaringly overdue.”

So, while the impact of the ‘mini-deal’ on US-EU trade and trade liberalisation is fairly negligible at this stage, the aspiration going forward is that the agreement will, in time, lead to somewhat more substantial US-EU trade accords.

Fraser Tennant