The EU should at least consider Trump’s demand to scrap non-tariff barriers

By
Pieter Cleppe
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Last week, U.S. President Donald Trump made his long-awaited tariff announcement. Markets crashed as a result, as the measures went further than expected.  Trump’s new tariffs are even more severe than the ones introduced by the infamous Smoot-Hawley legislation of 1930. At the time, a global escalation of tariffs caused an aggravation of the Great Depression. If implemented, the US effective tariff rate will be 24-27%, Fitch estimates, which was the level just before the first World War.

 

Asian countries in particular being heavily affected. Imports from China will now be taxed at 34%, on top of existing customs tariffs, Vietnam 46% and Taiwan 32%. For Thailand, it means a cost of 1 percent of the GDP. The question is whether the US will strengthen its own position in relation to China in this way.

A last-ditch offer by the European Union of “zero-for-zero” tariffs on cars and industrial goods was dismissed by Trump, who stated the EU should commit to buying $350 billion of American energy, so to obtain relief:

“We have a deficit with the European Union of $350 billion and it’s gonna disappear fast. (…) One of the ways that that can disappear easily and quickly is they’re gonna have to buy our energy from us … they can buy it, we can knock off $350 billion in one week. They have to buy and commit to buy a like amount of energy.”

Last week, Trump already slammed the EU: “The European Union, they are very tough… very friendly. But they are letting us down. It is so sad to see. It is pathetic.”

On a sideline here, it is also noteworthy that the EU’s additional tariff rate of 20% is twice as high as the customs tariff for the United Kingdom. This represents the first major “Brexit dividend.”

“Reciprocity”

Trump justifies his measures by stating that trade partners levy much higher tariffs than the US and he only wants “reciprocity”. That is partly true. Although there is discussion about whether the EU or the US is the most protectionist, it is a fact that Europe imposes much higher tariffs than the US on agricultural goods and cars.

A problem is however the way Trump calculates the tariffs of trading partners. According to financial commentator James Surowiecki, “for every country, they just took our trade deficit with that country and divided it by the country’s exports to us,”, adding: “What extraordinary nonsense this is.” Also the Swiss government – known for its diplomatic approach – described the calculation as “incomprehensible”.

Broadly, three different strategies to respond to Trump are being adopted by trading partners of the United States.

China, Canada, and the European Union opt for measured retaliation. China did announce extra tariffs on US imports, but is not yet devaluing its currency, like in 2018, during the previous tussle with Trump.

As part of retaliating for the US tariffs on steel and aluminium, the EU Commission is proposing to impose tariffs of up to 25 percent on a broad range of exports from the U.S. The first tariffs would only enter into force from 16 May, enabling some time for negotiation. When it comes to retaliating to the more recently announced US “Liberation Day” tariffs, the EU has however not yet come out fully with its bazooka, also due to differences between member states, as Italy and France are wary, fearing U.S. retaliation. With its “Anti-Coercion Instrument” (ACI) the EU Commission could hit U.S. service industries such as tech and banking. That may include even a threat of piracy, as the EU could “fail to fulfil international obligations regarding intellectual property rights”, thereby cancelling patents on series and films, for example, whereby it would be allowed in the EU to distribute Netflix productions with impunity.

A second strategy is followed by India, the UK, Japan, South Korea, Argentina, and Mexico. They prefer a more measured course, prioritizing talks, deals, and concessions.

A third cluster of countries—Taiwan, Japan, South Korea is mostly focused on cushioning economic pain rather than solely relying on retaliation or negotiation, something which also China is doing.

‘Non-tariff barriers’

When it comes to offering things to placate Trump, there is much low-hanging fruit for the EU. The obvious first step should be to simply scrap all kinds of new protectionism that the EU has already decided on but has not yet fully implemented.

In the first place, this of course means scrapping the EU’s new climate tariff CBAM, the so-called ‘Climate Border Adjustment Mechanism’, which would allow the EU to tax selected imports from countries that do not want to follow the expensive European climate policy. This means that European consumers pay twice: for the extra costs of the EU climate policy and for the more expensive imports. The CBAM also introduces a great deal of extra bureaucracy. Its abolition should be a no-brainer, but yet it is not even being discussed. USTR, the American government’s foreign trade agency, has effectively already listed CBAM as one of the measures it wants to see scrapped, so the EU better gets up to speed about this.

On top of that, there are many new so-called ‘non-tariff barriers’ planned by the EU that could be listed for abolition in the Berlaymont building as an offer to win Trump over. According to European Parliament member Bernd Lange (Germany/S&D), chairman of the European Parliament’s trade commission, Trump is mainly aiming for the abolition of European regulation rather than the reduction of customs tariffs.

“[In this report,] you find 30 pages about the EU,” Lange has said, citing a report from the US Trade Representative, claiming that this is “more or less a comprehensive overview of our legislation. This is an indication that the president Trump is not looking on tariffs.”

Lange, a socialist, does not even want to negotiate about this, but that is short-sighted. Many of the rules that annoy the US are not even in effect yet. They are also controversial in Europe. Scrapping those rules is hardly a major concession. Here, we are talking about all kinds of new bureaucratic obligations to do business with the EU. One example is the CSDDD, a new regulatory package that requires companies to investigate whether their business partners in the supply chain respect all kinds of social and ecological standards.

Another example is the EU’s new deforestation directive. This provoked so much protest from both European trade partners and European industry that the EU decided at the end of last year to postpone the cumbersome new regulations for one year.

The intention of the rules is to ensure that no products that cause deforestation are imported into the EU. Malaysia was the first country to complain about this, as it would hit its own palm oil industry hard. The country feels it is unfair that it is being confronted with the new, heavy bureaucracy, despite the fact that it has managed to significantly reduce deforestation in the palm oil sector, according to NGOs. This is partly thanks to its strict national control standard, the MSPO. A new version of this standard will be even stricter than the EU’s standard, but the EU nevertheless refuses to label it equivalent. This is in contrast to the United Kingdom, for example, which, partly as a result of this, has gained access to the major CPTPP trade agreement.

USTR has listed EUDR along with CBAM as one of the EU measures that should be abolished, stating:

“The EU’s Deforestation-free Supply Chain Regulation (EUDR) aims to prohibit imports of seven products—including cattle, cocoa, rubber, and wood—unless exporters meet various burdensome compliance requirements, including due diligence and geolocation data. It is estimated the EUDR will potentially impact $8.6 billion worth of annual U.S. agricultural and industrial exports.”

Navarro

Also Trump Trade Advisor Peter Navarro has stressed that the United States really wants its trading partners to scrap non-tariff barriers. He said:

“Let’s take Vietnam. When they come to us and say we’ll go to zero tariffs, that means nothing to us because it’s the nontariff cheating that matters.”

The EU looks unlikely to give in to this, for now, but it should reflect about that. In the U.S., recently, there has been an outcry against the new avalanche of European regulations that is coming for trade between the US and Europe. The American paper industry has asked Trump to force the EU to declare America ‘deforestation-free’. Republican Congressman Andy Barr warned the EU about its “regulation factory” at the end of last year, stating: “An America first agenda will animate ferocious opposition to a European Union that attempts to impose their costly, burdensome regulations on American firms.”

Also, Howard Lutnick, the US Commerce Secretary, has threatened to use “trade instruments” in retaliation against European regulations that hinder American companies.

The European countries and the EU would do best to let cooler heads prevail. Yes, Donald Trump is giving protectionism a major boost worldwide, but what is less well known is that the EU has also played a harmful role here in recent years. Ironically, the EU can now partly make up for this, thanks to Trump.

https://twitter.com/DanielJHannan/status/1909373475640254857

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