international analysis and commentary

The Atlantic needs an economic deal

From Aspenia international 2-2023

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The path towards a new transatlantic trade and investment partnership is strewn with obstacles, showing how hard it is to get the United States and the European Union onto the same page. Today, with globalization in crisis, objectives are changing – especially as the focus shifts towards security issues and relations with China. A better definition of common standards might bring the two areas into alignment: to be sure, it would be a useful first step in defining a Euro-American strategy that is ready to meet the challenges of a new world order.

The Pacific and Atlantic Oceans

 

When the United States-European Union High Level Working Group on Jobs and Growth released its final report on February 11, 2013, the conclusion was that a comprehensive transatlantic agreement on market access, regulatory convergence, and global trade challenges offered the best prospects for generating new business and employment while at the same time strengthening “the extraordinarily close strategic partnership between the United States and Europe.” The goal was to create the standards that would shape the world economy in ways that would benefit industry on both sides of the Atlantic while at the same time promoting common values with respect to labor, human rights, and environmental protection. That Transatlantic Trade and Investment Partnership (TTIP) never did come into being. The negotiations proved controversial both in Europe and in the United States and so the deal was never completed.[i] Transatlantic trade and investment continued, of course, as did the strategic partnership between the US and the EU, but the efforts to promote comprehensive regulatory convergence and to write the rules that would shape the world economy stalled.

Today the goals are different. The May 31, 2023 joint statement of the EU-US Trade and Technology Council (TTC) highlights the importance of using the strategic partnership between the United States and the European Union to address global challenges. Some of these challenges relate to very specific geopolitical objectives, like supporting Ukraine in its defence against Russian aggression through the joint application and enforcement of sanctions – including secondary sanctions against third parties. Others relate to more general considerations like setting the standards for critical and emerging technologies, ensuring the security of supply for critical raw materials, using trade to promote effective climate action, pushing back against “non-market policies and practices and economic coercion,” creating the infrastructure of “secure and trustworthy connectivity around the world,” promoting human rights, and leading the fight against “foreign information manipulation and interference and disinformation.”

 

FOCUS ON CHINA. The TTIP agenda that emerged from the High-Level Working Group in 2013 and the agenda announced by the TTC in 2023 each focused on many of the same geostrategic considerations as far as China is concerned. In both cases, the objective was to integrate China into the world economy in a manner that is consistent with the existing rules-based multilateral system for liberalized market interaction, without undermining competitiveness or global leadership on either side of the Atlantic.

What has changed over time is the context. China has become stronger and more assertive. Russia has become more aggressive. Other regional powers like Brazil, India, South Africa, and Turkey have begun to exercise greater autonomy. Politics within the United States and Europe has become more polarized and tumultuous. And other factors – like the pace of technological innovation and the imperative to address climate change – have become more pressing.

 

Read also: The US-China economic link: high level diplomacy and structural problems

 

This change in context explains why the new transatlantic trade and investment partnership is more focused, and more limited. The same commitment to protecting shared values remains, and yet security has grown to predominate in the discussion of industrial competitiveness. That narrower focus is also why this new transatlantic partnership is more likely to be a success. The security imperative – whether relating to the need for climate action, the threat of military conflict, or the use of non-market measures to distort competition – makes for a more urgently compelling argument.

Success would have important consequences for how the new transatlantic trade and investment partnership shapes the world economy. The original goal of TTIP was to set the standards that would unite the global economy. The new partnership between the United States and Europe – for justifiable reasons – may wind up writing the standards that divide the world economy into rival camps.

 

FOCUS ON SECURITY. This new focus on security comes across very clearly in European Commission President Ursula von der Leyen’s speeches on the need for a new European approach to China. Her speech on March 30, 2023 makes the shift explicit: she posited that in China “the security imperative now trumps the logic of free markets and open trade,” and she set a four point agenda for Europe’s response that presages many of those policies agreed in the TTC declaration. After visiting China, von der Leyen reasserted those arguments in a speech on April 18 to the European Parliament. On both occasions, von der Leyen insisted that the goal is to “de-risk” and not to “de-couple”, but she also set out a combination of instruments and practices that would insulate and strengthen the European economy.

US National Security Advisor Jake Sullivan reiterated von der Leyen’s comments in a speech he gave at the Brookings institution on April 27. Citing von der Leyen’s speech, Sullivan made it clear that the Biden administration intends to pursue “de-risking and diversifying, not decoupling.” Sullivan also pointed to the joint declaration von der Leyen issued with President Biden on March 10, stressing that the shared goal is to ensure that European and American supply chains are “resilient, secure, and reflective of our fundamental values.”

The logic behind this new approach is that globalization is no longer a positive sum game. Different regions see different reasons behind this development: voices in Europe and in the United States complain that non-market economies in Asia and elsewhere do not abide by the rules that underpin the international economic system; they worry about the way supply chains run through specific countries; and they note the near monopoly that China and a handful of other countries have on the production and refinement of the minerals and other resources needed for effective climate action. Many voices outside Europe point to the fact that much of the carbon dioxide in the atmosphere was generated by American and European industry; they point to the imbalances in the function of global capital markets; and they highlight the uneven distribution of costs associated with adapting to climate change.

 

Read also: The potential role of the US-EU Trade and Technology Council in a rapidly changing global economic order

 

This disagreement has brought the functioning of the international system into question in ways that undermine its legitimacy and so create conflict over how basic institutions function and whether they should be replaced. Such conflict undermines the efficiency of the whole arrangement and highlights the zero-sum nature of any necessary reform, because for one group of countries to secure their preferred arrangement, another group is going to have to adjust. Meanwhile, efforts to secure advantages through the creation of “facts on the ground” – securing and sequestering key technologies or resources, re-engineering supply lines, and relocating investments – only worsen the functioning of the global economy from an “efficiency” perspective. This creates space for further conflict, which in turn underscores the importance of security.

 

LEGITIMACY AND LIMITATIONS. The lack of security is not limited to national governments or big industries. Sullivan finished the sentence about ensuring that supply chains are “reflective of our fundamental values” with the parenthesis: “including labor”. A major part of this conflict in interpretations over the worsening of the global economy originates from the reality that the old model of globalization was never a positive-sum game from all perspectives. The growth in trade of goods, services, and capital across countries raised living standards and lifted hundreds of millions out of poverty, and yet the distribution of these gains was never as fast or as easily attributable as the adjustment costs imposed on workers who suddenly lost their factory jobs, farmers who suddenly faced lower prices for their crops, and cities that suddenly had to accommodate waves of urban immigration.

On the contrary, the groups that seemed to benefit most quickly and most consistently were those who owned the companies engaged in the trade of goods, services, and capital – together with those entrepreneurs who realized how to profit from a globalized economy or who created products and services that the newly globalized world most wanted. Moreover, this discrepancy was not limited to appearance. The rich did get richer, even if some members of the wealthier classes saw their relative status change abruptly to accommodate those who made the most of the new situation. In turn, this inequality in perception and reality chipped away at the consensus around the benefits of globalization both within and across countries. Governments might try to negotiate omnibus trade liberalization rounds with ambitious beyond-the-border agendas, but popular support for such arrangements has become increasingly limited and open hostility increasingly apparent. The evidence for this state of affairs could be seen already in the failure of the Doha Round of Trade and Development Talks that took place within the World Trade Organization in the early 2000s.[ii] The failure of TTIP only added further evidence.

The allusion to TTIP is useful to highlight that Sullivan’s parenthesis about labor is also important to understand the limits on transatlantic cooperation. Indeed, in a speech on America’s place in the world, given shortly after his inauguration, President Biden explained: “Every action we take in our conduct abroad, we must take with American working-class families in mind.” Such a foreign policy for the middle class can only work if it takes into account the institutions and attitudes that shape the welfare of Americans. Those institutions are very different from the welfare states found in Europe – just as the federal arrangement of the United States is very different from the mixed intergovernmental and supranational structure of the European Union.

 

Read also: A different kind of Transatlantic Trade and Investment Partnership

 

Those differences between the US and the EU make it very difficult – if not politically impossible – to craft foreign or economic policy instruments that will not be perceived differently on either side of the Atlantic. The Inflation Reduction Act is a good illustration. The IRA is only possible in the United States because of the way it structures incentives through the federal tax system and because of the way it ties subsidies to “buy local” provisions. But such an arrangement is much harder to sell in the European Union: Europeans do not see it as an acceptable policy for a US administration to pursue nor as a template for how the EU might achieve the same objectives. Moreover, finding some way to create a convergence of views or instruments across the Atlantic also remains distinctly unlikely. There are simply too many structural differences in the way that American and European markets are put together to make them converge on a common set of institutions and standards. As a result, politicians and policy-makers on both sides of the Atlantic have a hard sell ahead: they will have to invest time in explaining to workers and voters how the transatlantic partnership offers more advantages than disadvantages. Furthermore, inevitably, we will all simply have to agree to disagree at times.

 

SOLIDARITY, SUCCESS, IMPLICATIONS. Difficulties in finding convergence does not have to spell the end of transatlantic cooperation. What it means is that cooperation is more likely to be case-by-case. Here you can see the similarities between the old TTIP and the new transatlantic partnership in the specific areas of agreement sketched in the TTC joint statement. The commitment to a “risk-based approach to artificial intelligence” in the development of common standards is one illustration. The development of common standards for manufacturing processes that involve 3-D printing is another. So are the standards for charging heavy-duty vehicles. These may not sound like dramatic breakthroughs – and they may still be works in progress – but they do establish a record for concrete collaboration that helps to build momentum.

More important, this work on standardization dovetails closely with the strategy to strengthen sanctions enforcement while at the same time making supply chains more resilient – two themes that feature prominently in the TTC joint statement. As Agathe Demarais explains in her 2022 book, Backfire, the design of many industrial sanctions hangs on their connection to intellectual property that can be traced through the production process. This is how the Biden administration is able to have such a powerful influence on the trade in microchips, for example, or why the decision to avoid using Huawei 5G technology has such sweeping implications for trade with China. This connection is important because sanctions play such a vital role in the new geopolitical context – binding the United States and the European Union together both in action and in industrial capacity.

If the joint EU-US strategy is a success, however, this could have significant implications for the structure of the world economy. This is the point Demarais makes at the end of her book. Arguably it has been evident for many years now.[iii] The creation of rival standards – reinforced by sanctions – in the short term, will have longer-term consequences in the design and compatibility of global value chains. Moreover, as the differences in standards develop alongside the use of different critical raw materials for key components, tit-for-tat responses by the Russians, the Chinese, or others to the American or European use of sanctions will tend to reinforce that creation of rival standards. This process will not show up immediately in the data for trade and investment, but it will show up eventually and with increasing momentum as the different parts of the world economy drift further apart.[iv] De-risking and diversification are not decoupling. But the longer-term impact may be difficult to distinguish for either side of the Atlantic.

 

 


*This article has been published on Aspenia 2-2023

 

 


Footnotes:

[i] See Alasdair R. Young, The New Politics of Trade: Lessons from TTIP, Agenda Publishing, 2017.

[ii] See Erik Jones, “Europe’s market liberalization is a bad model for a global trade agenda,” Journal of European Public Policy, vol. 13, issue 6, 2006.

[iii] See, for example, Erik Jones and Andrew Whitworth, “The unintended consequences of European sanctions on Russia,” Survival, vol. 56, issue 5, 2014.

[iv] See Erik Jones, “The choice for sanctions,” Survival, vol. 65, issue 3, 2023.