U.S.-EU talks struggle, threatening a new front in trade war

Although President Donald Trump held fire earlier in May on auto tariffs that have the potential to further roil Europe’s struggling economy, a succession of domestic dilemmas on both sides of the Atlantic threaten to frustrate efforts at a trade pact before they have even begun.

Ten months after Trump and European Commission President Jean-Claude Juncker struck a Rose Garden truce meant to clear the way for negotiations to reduce tariffs on industrial goods and eliminate regulatory hurdles, those talks are showing few signs of going anywhere meaningful.

European officials have blamed a Trump administration that has had little time for dealing with a bureaucracy in Brussels already held in low regard by many in the U.S. president’s orbit. Distracting Trump has been a breakdown in talks with China and a need for a quick deal with Japan to assuage American agricultural interests.

“I don’t think the U.S. is ready to start on the tariff negotiations,” Cecilia Malmstrom, the EU’s trade commissioner, told reporters in Paris earlier in May after meeting with U.S. Trade Representative Robert Lighthizer.

Yet it is the growing polarization in Europe evident in the recent elections that saw a fragmentation of the mainstream center-right and center-left parties that some in Washington see as a sign of the bigger structural obstacles to a deal.

With the Brexit process thrown into turmoil after British Prime Minister Theresa May announced her resignation in May, eastern nations testing the limits of "illiberal" democratic reforms, an assertive Russia threatening pillars of European Union security and an increasingly fragile economic backdrop, the 28-nation bloc faces plenty of its own distractions.

“You’re seeing an EU that is fighting fires on so many fronts that I just don’t think they are going to be confident and able to negotiate that deal with the U.S.," said Heather Conley, head of the Europe program at the Center for Strategic and International Studies.

Tariff threat looms

The 180-day deadline that Trump set for a negotiation with the EU and Japan over reducing their exports of cars and parts to the U.S. holds to the president’s pattern of steadily increasing pressure on trading partners to cut a deal more to his liking. As he made clear during his recent trip to Japan, Trump is eager to see at least some rapid deals going into his 2020 re-election run.

With Japan he may have some luck. People close to those talks see the very real possibility of a deal being struck by the end of the year with negotiations due to accelerate after Upper House elections in Japan in July.

For Europe, though, the signs are more ominous.

The auto deadline will hit just as a new European Commission, the bloc’s executive arm, is due to take over from the Juncker-led one that has governed for the past five years.

No cars, agriculture

Moreover Germany and France, the EU’s two dominant powers, appear to have increasingly clashing conceptions of the economic direction they want to take Europe in.

France’s Emmanuel Macron led some EU member states in resisting U.S. efforts to include agriculture in any transatlantic discussions, something the EU insists Trump gave away last July as part of the Rose Garden truce.

Though many in Washington, including Senate Finance Committee Chairman Chuck Grassley, have said any deal that didn’t include agriculture wouldn’t get through Congress.

Germany, which exported €27.2bn ($30bn) of cars and car parts in 2018, is more concerned about Trump’s threat of automobile tariffs than protecting European agricultural interests. The home of Mercedes-Benz, Audi, BMW and Porsche generated a surplus of €22bn in automotive trade with U.S. last year.

Recent rounds of bilateral talks have yielded little progress and U.S. officials have resisted even broaching the subject of autos, according to people close to the negotiations.

European officials last year proposed a plan to reduce auto tariffs on both sides of the Atlantic to zero, a concession already made to Japan as part of an EU-Japan trade pact that went into effect earlier this year. But that was rejected by Trump, according to people close to the negotiations.

EU eyes retaliation

In talks in Washington and Paris this month the two sides again made little progress. As if to highlight the distance between the two sides, U.S. officials during the Washington meetings at one point brought out a binder containing a 150-page text negotiated with China and showed it off, according to people familiar with the events.

That leaves the most likely paths either for more muddling through or for a sharp escalation.

EU officials have made clear any auto tariffs would be met with retaliation, as were steel and aluminum duties introduced on similar national security grounds last year. The EU said in January that it would hit €20bn euros of U.S. products should Trump impose auto tariffs.

With the current European Commission entering a lame duck phase, the global auto sector facing falling sales in markets such as the U.S. and China, and fears of a slowdown in the world economy looming large, muddling through may be the most likely option, said Conley, who oversaw relations with the EU at the State Department during the administration of George W. Bush.

U.S. auto tariffs also would bite at home where they are opposed by General Motors and Ford Motor and that may be a cost Trump is unwilling to bear going into the 2020 election with key states such as South Carolina home to major European automakers like BMW and Volvo Cars.

Tariffs would "rebound very painfully on American workers and the American economy as much as the European economy," Conley said. "It’s a choice. But it certainly could be a painful one."