How the EU can master Lart du deal
WASHINGTON — Everything suggests that the upcoming visit to Washington by European Commission President Jean-Claude Juncker and European Commissioner for Trade Cecilia Malmström will echo the historian Robert Kagans famous 2003 quip: “Americans Are from Mars, Europeans Are from Venus.”
For once, that could be good thing. With U.S. President Donald Trump seemingly set on slapping tariffs of up to 25 percent on European car imports, the Continents leaders should resist the temptation to respond in kind and escalate the conflict.
If the EU is to stop the world from returning to an era of warring trade blocs, it needs to meet Trumps fire and fury not with retaliatory measures but with liberal leadership by example.
The threat of escalation works when policymakers are rational. But Juncker and Malmström cant count on a rational response from the U.S. president. Whereas the EU is all about process, rules and mutually beneficial compromises, Trump is driven by a zero-sum view of the world and a desire to dominate the media cycle — regardless of practical effects of his policies.
He also harbors a strong disdain for the EU, rooted in a lack of understanding of why European nations decided to forego disruptive nationalism in favor of cooperation after World War II.
Not only would eliminating the car import duty be beneficial to European consumers, it would also take the wind out of Trumps sails.
The U.S. president will be oblivious to the fact that the EU is Americas most important export market. Nor can he be expected to know that while the U.S. does indeed have a bilateral deficit in trade in goods with the EU, it has also run a current account surplus with the bloc every year since 2009. That is due to trade in services and to income generated by U.S. investment in the Old World.
Rather than regurgitating those truths to Trump, while mulling how best to retaliate when his tariffs arrive, Juncker and Malmström should preempt him — by proposing to scrap the EUs 10 percent import duty on cars and to revise downward the heavy tariff rates imposed on agricultural products, which average 11 percent.
Not only would eliminating the car import duty be beneficial to European consumers, it would also take the wind out of Trumps sails. The support for his plans in Congress and even within his administration is already weak. Unilateral liberalization by the EU would enable him to claim victory without doing anything.
Thered be little cost to European firms or consumers. Indeed, the overall effect of scrapping the tariff would be modest.
U.S. President Donald Trump | Pool photo by Olivier Douliery/Getty Images
European consumers are not keen to buy American cars. And, even more importantly, large non-tariff barriers between the EU and the U.S. would remain in place, because of the different automobile safety and environmental regulations on the two sides of the Atlantic.
In normal situations, tariffs can be used as leverage in trade negotiations. But that becomes tenuous precisely in the case of economic sectors where regulatory compliance is a larger barrier to trade than, say, a 10 percent tariff.
In a case cited by the Alliance of Automobile Manufacturers, for instance, a U.S. company that sought to export a popular model of light truck to Europe had to create 100 new parts, spend an additional $42 million on design and development and perform rigorous tests on 33 different vehicle systems. This would come “without any performance differences in terms of safety or emissions.”
Such costs are not necessarily evidence of protectionism; they are simply the outcome of different regulatory frameworks. That is why mutual recognition arrangements are rare in heavily (and diversely) regulated fields, and those covering cars are virtually unknown “except the partial one on automotive components between the EU and Australia,” according to the OECD.
Juncker and Malmström must also remember that the diplomatic landscape in which their meeting with Trump will take place is not a normal one.
Their primary aim cannot be to bring the U.S. back to the table to discuss a free-trade deal or to otherwise deepen the 1998 mutual recognition agreement between the two economic powerhouses.
The biggest economic threat to the EU is not Trump himself, but the risk that his economic nationalism will outlive his administration.
It can only be to try to prevent Trumps publicity stunts from ripping apart the transatlantic marketplace. Accomplishing that alone would exceed the benefits of any concessions the EU could expect to receive in exchange for dropping its automobile tariffs in trade negotiations with any other country in the world.
True, Trump is a bully, and bullies should not be appeased. But the biggest economic threat to the EU is not Trump himself, but the risk that his economic nationalism will outlive his administration.
The best way to ensure that doesnt happen is to lead by example and reveal the flaws in the underlying zero-sum logic behind Trumps trade policies.
Dalibor Rohac is a research fellow at the American Enterprise Institute in Washington DC. Follow him on Twitter: @DaliborRohac.