John Bruton

Opinions & Ideas

Category: European Union and the United States.

TRUMP’S TARIFFS

In the increasingly likely event that President Trump follows up on his steel tariffs by imposing similar tariffs on  European car imports, on so called “security grounds”, we can expect a full scale trade war to erupt, with no end in sight.

This will have disproportionate consequences for Ireland. A recent paper by the Brussels based think tank, Bruegel, estimated that 7.8% of the aggregate value added of the Irish economy comes from final products sold into the US market. This is far more than for any other EU country, and is twice the comparable figure for dependence on US sales for Germany, Netherlands and Spain, and three times that for France and Italy.

A disruption of trade links with the US, combined with the effects of a hard Brexit, could do deep damage to this country, socially and politically, as well as economically. Indeed Trumps actions change the entire context of Brexit.

The language used by President Trump about Prime Minister Trudeau after the G7 meeting was shocking. He treated the Canadian Prime Minister as if he was a domestic political opponent, not the Prime Minister of a friendly country, whose citizens have given their lives in common cause with the United States in two world wars. It contrasted starkly with the emollient language he used about the North Korean leader.

Berating allies, and flattering enemies is a low risk approach, in the short term. It is dramatic, and gets attention in ways that diplomacy never can.

The drama seems to be working well in the US Primaries, where President Trump’s allies are doing well. But trust in the United States is being undermined, and the prosperity of the developed world is being put at risk. The damage may long outlast the Trump Presidency.

The US has had trade disputes with allies before, but they have never before been supplemented by personalised attacks on foreign leaders.

The imposition by President Trump of steel tariffs, on security grounds, on the EU, Canada, and Mexico, suggests that the President believes he could not rely on these countries to continue supplying steel to the US in war time.  There is no basis in reality for such a contention, especially as regards Mexico and Canada which are beside the US.

The EU will retaliate by imposing selective tariffs on US goods, though only on half the scale of the US steel tariffs. It will also take a case against the US before a WTO (World Trade Organisation) panel. Canada and Mexico will do likewise. Given the way President Trump reacted to a difference of opinion about a mere communiqué from a G7 meeting, one can expect his language to escalate when the EU, Canadian, and Mexican tariffs begin to bite.

It could be argued that the EU, Canada and Mexico should not bother retaliating, because the US steel tariffs will do the most damage to US manufacturing industry and make it less competitive, but that is a difficult concept to communicate. So also is the argument that the US trade deficit is not due to unfair trade by others, but to the fact that Americans borrow and spend too much abroad, and are encouraged to do so by the lax fiscal and debt accumulation policies of successive US Administrations.

President Trump is now contemplating imposing tariffs on cars coming from the EU, Canada and Mexico on the same “security grounds”. He has initiated a legal process leading to that. On the narrow issue of cars, there is a difference between the rate of EU and US tariffs. The US tariff is 2%, whereas the EU tariff is 10%. That, of course, means that US consumers have cheaper cars and wider choice.

The EU could reduce its tariff on US manufactured cars to 2%, but, under the Most Favoured Nation (MFN) principle by which the World Trade Organisation  (WTO) works, that would mean that the EU would also then have to reduce its tariff on cars to 2% for all WTO members, including Japan and China.

The tragedy is that President Trump’s initiative is driven by electoral politics, not by economic reality.

He is breaking up the rules based international trading system, which the US itself established in the aftermath of the Second World War, which is operated by the WTO.

The US has a poor record in implementing WTO decisions on disputes, partly because this requires action by Congress, and the Administration can claim not to control Congress. In contrast, China has a good record so far in implementing WTO decisions.

Even under President Obama, the US was failing to appoint US judges to sit on the WTO disputes resolution panels, thereby undermining the WTO disputes resolution system. This is despite the fact that the US has won 87% of the cases it has taken to WTO panels. The disputes settlement mechanism was one of the great achievement of the late Peter Sutherland as head of the WTO.

The US sometimes feels it can get along fine without the rest of the world. Given its vast area and resources, it is understandable how it might come to think like that. For much of the nineteenth century, it acted on that basis. That illusion finally ended at Pearl Harbour in 1941.

Isolationism is no longer an option for the US. China is rising in global importance. Its economy is already as big as that of the US. It is attempting to build a global infrastructural and technological system centred on China, not the US. That is the rationale of the “one Belt One Road” initiative and of China’s plan to be the industry leader in the technologies of the future like solar power, electric cars and gene editing.

A wise US leader would be seeking to compete with China, by building closer economic ties with its allies, rather than using them as punch bags, in a political show designed to win votes in the Mid Term Congressional Elections.

The G7 spectacle should prompt deep reflection on this side of the Atlantic. A looming trade war makes Brexit less attractive for both the UK, AND the EU. Both need to take time out to think. It is a pity that the time limits in the Brexit process do not allow both sides to take the time to develop a wider strategic view of their mutual interests before Brexit takes place. This needs to be  reconsidered in light of the prospect of a bitter trade war with the US and the rest of the developed world.

Such a strategic review cannot be completed by next October. An extension of the Article 50 time limit for the Brexit negotiation makes far more sense this week, even than it did a month ago. Time limits create tension, whereas it is reflection we need now.

A TRANSATLANTIC TRADE AND INVESTMENT DEAL COULD GIVE THE WORLD ECONOMY A BADLY NEEDED CONFIDENCE BOOST

I had a meeting this week in Dublin with the members of the Transatlantic Legislators Dialogue (TLD).

This body brings together members of the United States House of Representatives, and members of the European Parliament for regular discussions. In many respects, these are the two most powerful legislative bodies in the world. So their  cooperation is  a vital global interest.

When I was EU Ambassador in Washington, I had a great deal of involvement with TLD and attended many of their meetings.
One of the big topics for the TLD was the possibility of a comprehensive Trade and investment Partnership (TTIP) being negotiated between the European Union and the United States.

If such a deal could be agreed it would cover over half of all the economic activity in the world. It would be a boost to the economy because it would remove barriers and inefficiencies that prevent Europeans and Americans realising their full economic potential. 

Even without an agreement, investment across the Atlantic supports 7 million jobs. For example, 70% of all foreign investment in the US comes from Europe, and US firms have more investment in Ireland that they have in China! Californian firms export twice as much to Europe as they do to China.
Among the barriers that might be swept away by a TTIP  are 
+ Tariffs on good exports, that average 3%.  Eliminating these tariffs could boost exports in both directions by 7%
+ Unnecessarily complex and duplicative customs formalities
+ Restrictions on European involvement in the provision of passenger air transport inside the United States, which means Americans pay unduly high air fares
+ Similar restrictions on European involvement in Shipping between US ports, which add to the price of goods
+ Restrictions on the provisions of services in one another’s markets in fields like insurance, education, computer services and logistics
+ Restrictions on the supply of goods and services to governments on both sides of the Atlantic, which mean that taxpayers pay more taxes  than they would if their governments could buy from the least expensive supplier regardless of nationality
+ Insufficient cooperation in combating counterfeiting, and theft of copyright and  of intellectual property
+ Non tariff barriers, and duplication of tests, that arise from having different standards, and different testing procedures, for electrical goods, pharmaceuticals, chemicals and other products
+ Restrictions on the sale of food products across the Atlantic, because of protective tariffs, and differently applied food safety standards

All these restrictions involve  potential misallocation of resources, and  waste or sub optimal use of time, talent, and material. Removing these restrictions could add 70 billion euros to the world economy.

The negotiation of this agreement will not be easy.

It would have been better if a new comprehensive global trade and investment deal could have been made through the World Trade Organisation (WTO), because it would have been open to every country in the world, and the WTO has a well established system for settling disputes. A transatlantic deal may lack that.

But the WTO talks collapsed so this is the best available option.

It is also urgent for Europe because the United States is negotiating a trans Pacific deal, which might diminish Europe’s relative position.
Among the leading figures who took part in the meeting were US Congress members,Mario Diaz Balart, Henry Cuellar, Michael Turner and Bill Keating.

On the European side, the delegation was led by Christian Ehler MEP and Elmar Brok MEP. Also included were former Commissiomer, Danuta Huebner MEP, Sarah Ludford MEP and Sean Kelly MEP.

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