international analysis and commentary

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

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In an important speech on April 13, 2022, US Treasury Secretary Janet Yellen admitted that “the war between Russia and Ukraine has redrawn the contours of the world economic outlook.” The Russian aggression caps a long period of deterioration in the effectiveness of and confidence in the global post-World War II economic order. Spurred by such developments as the rise of China as a mercantilist power, COVID-related supply chains interruptions, natural disasters, and the rise “techno nationalism” or “competitive autarchy” policies, this decline is compounded by the waning ability of the World Trade Organization (WTO) to mediate disputes and develop new rules for the modern economy.

 

In light of the post-war order’s decreasing sustainability, it is worthwhile for its transatlantic architects to leverage their rediscovered sense of common purpose in responding to Russia’s invasion of Ukraine to address the question of constructing a revised economic system: one that is better suited to the new realities of a multipolar world characterized by geostrategic competition. As such, the recently formed US-EU Trade and Technology Council (TTC) presents a unique opportunity for the type of increased economic cooperation necessary to initiating such a process. Transatlantic leaders have already committed to serious work in the TTC, and initial success in finding solutions to discrete problems should pave the way to larger-scale future ambitions.

 

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The traditional proposal to address structural issues in the global economic order is to call for repairing the flaws and dysfunctions of the WTO. In the past few years, a tripartite US-EU-Japan coalition has explicitly worked towards such ends, and provides a good precedent for extending cooperation from the transatlantic to a wider geographic and economic sphere of like-minded countries. However, no side appears ready to invest the political capital to fix both functional problems, like the flawed dispute settlement regime, and such long standing bilateral differences as those involving agricultural and regulatory policies. Even if the three actors were to redouble resolve for WTO reform, the paralysis of the institution due to North-South differences and the role of outliers like China, India and South Africa in achieving consensus makes such efforts unlikely to succeed.

Another impediment to a WTO (or global as opposed to regional or bilateral) approach to reform lies in the responses on both sides of the Atlantic, and in Japan and India as well, to supply chain disruptions and Chinese mercantilism. Responding to these vulnerabilities, there has been a revival of interest in industrial policies to support vulnerable industries like semiconductors, battery technologies, vaccine production and industries of the future such as cloud services and renewable energy technologies. The proliferation of ideas, and increasingly financial commitments, for reshoring industries or setting up new ones in the interests of resilience and national or economic security makes any attempt to modernize WTO rules to address Chinese subsidies for its own national champions highly problematic.

In light of these structural impediments to the reform of the current system, envisioning options to advance a multilateral economic order that privileges ties and economic exchange between aligned countries that share a plurality of interests and values is worth pursuing. Such a new trade architecture would be organized and advantage countries that, as characterized by Yellen in her speech, “we know we can count on.” It would also importantly provide the benefit of mitigating strategic economic vulnerability to autocratic and revisionist powers such as Russia and China. As such, the recently-established TTC can and should become the privileged forum for advancing such ambitions. The decisions taken at the Council’s second meeting mid- May in France, as elaborated in the 50-page joint statement, provide an encouraging first step in this direction. Points 14-17 of the statement explicitly outline an ambition for coordinated economic actions between “trustworthy and reliable partners” to parry attempts by “autocratic countries” to “undermine the security of other nations.”

The TTC has already played a central role in coordinating economic efforts against Russia since the outbreak of the war in Ukraine. In particular, the TTC working group on export controls has been “indispensable” in forging a joint approach to sanctions on Russia. Export controls on defense-related and dual-use technologies are having a major impact on Russia’s ability to wage war and keep its economy from collapse. Sanctions on sectors like aircraft could not be effective unless the United States and the EU, the technology leaders in this sector, developed an agreed-on set of tactics. The TTC is also continually analyzing current and potential sanctions to weaken Russian resolve and ability to keep its war machine functional all while minimizing negative US-EU impact. Beyond the sanctions regime, the TTC has also announced coordination strategies to mitigate supply chain vulnerabilities resulting from dependence on Russian sources, as well as coordination in developing investment screening mechanisms applicable to Russia and Belarus.

However, if the conclusions of the TTC’s second meeting illustrate joint US-EU willingness to collaborate to curtail Russia, the decisions relating to the other main “autocratic country” and geostrategic rival, China, are more modest. This restraint is in contradiction with the fact that a large proportion of the topics of cooperation emerged as a direct response to Chinese economic actions, spanning topics ranging from semiconductors, solar energy, rare earth magnets (REMs), electric vehicles, artificial intelligence, technology acquisition and investments in dual-use technologies. Mere collaborative ambitions on these areas where Chinese practices are a challenge to the West and its allies do represent an inflection point that can be built upon, but the ambitions elaborated thus-far do not go far enough to counter concerns of strategic economic vulnerability.

For example, despite convergence on key areas related to national security and climate change, TTC commitments on collaboration regarding REMs and semiconductors is limited to pledges on avoiding subsidy wars. Ideally, the TTC would go further and act as a damper for unbridled “techno nationalism” that is clearly a growing reality, with efforts on both sides of the Atlantic to build vertically integrated domestic supply chains in technically complex sectors like semiconductors and quantum computing. In the former, both the United States (design, software, and some fabrication) and the EU (advanced production equipment) have strengths that are costly and difficult to duplicate. The TTC could therefore play a valuable role in any number of industries—pharmaceuticals, avionics, artificial intelligence, rare earths and advanced batteries—where some international division of labor amongst “reliable allies,” as Yellen argued, would encourage economic efficiency and reduce the dangers of competitive nationalism.

Discussions on two other sectors important to the 21st century economy where China currently has growing dominance—green technology and telecommunications—did not yield strong deliverables in the TTC joint statement. In the two sectors, China has established dominant global positions by deploying its usual arsenal of subsidies, technology appropriation, massive government support for research and production, favorable financing for exporters and third-country infrastructure projects, as well as protection of its huge domestic market to build scale efficiencies and capture global market share. In both cases, early US and EU technology leadership has been eroded by Chinese mercantilism whose effects could be mitigated through cooperation.

On telecommunications, the US and EU made a broad commitment to reinforcing security, diversity, interoperability and resilience across the supply chain. This includes information sharing of best practices, creating a common vision roadmap on challenges and needs of future generations of telecommunications and initiating transatlantic public financing for information and communication projects in third countries. These initiatives are positive but fall short. In the telecommunications industry, US equipment makers were basically driven out of business by subsidized Chinese competitors. Europe has built viable competitors in Nokia and Ericsson but has managed to maintain its global market share with difficulty. Nonetheless the European telecommunications giants have been aided by Western sanctions on Chinese firms. Both the United States and the EU remain competitive in developing mobile services, which provide the majority of sector profits. Facilitating cooperation in developing these services, while protecting Western populations from the dangers of the Chinese system as 5G and successive generations are put in service, would be beneficial to protecting sensitive communications networks. This is especially true as Chinese mobile services were in part explicitly designed for surveillance and the gathering of big data. Some discussion on the promise and development of the new software and cloud-based systems using the Open Radio Access Network (Open RAN) technologies could solidify transatlantic leadership in this sensitive and economically crucial sector of the modern economy.

On green technology, the opportunity to fully counter supply chain vulnerabilities with China needs further development. The EU is a leader in wind technology, with the United States not far behind, but is steadily losing market share to much cheaper Chinese competitors. This process mirrors that of a few years earlier for the solar panel industry. As advanced economies transition to a less carbon intensive energy system, strengthening the competitive position of transatlantic firms will be important to both job creation and manufacturing leadership. The TTC’s second meeting did constructively establish cooperative efforts to bolster transatlantic solar manufacturing and minimize protective measures between the US and the EU on the subject. However, direct coordination on export controls against existential mercantilist Chinese manufacturing in green industry is missing. Sanctioning the Chinese exploitation of domestic labor for manufacturing and of child labor in third countries for mining minerals required for batteries, as well as solar cells, and deploying antidumping measures on some coordinated basis could help reverse the erosion of all transatlantic green industries.

A common denominator for utilizing the potential of the TTC across all sectors is the importance of working collaboratively on the standards that define the operating systems for all modern technology-based systems. In this area, the TTC’s advancements are promising, with the creation of the EU-US Strategic Standardization Information (SSI) mechanism “to enable information-sharing on international standards development.” It is of growing urgency since China has set a national goal of playing a larger and more dominant role in setting global standards, especially in crucial sectors like quantum computing, communications, and the energy grids of the future.

China is increasingly employing substantial investments in research to innovate and secure patent protection for cutting edge technologies. However, research has shown that in both the telecommunications and wind energy fields, its numerical dominance in patents is not reflected in the quality of these patents. This can be measured by their use in terms of citations in scientific and engineering journals and in adoption of “standard essential patents.” Nonetheless, the Chinese ambition to win acceptance of new standards by flooding the international standards making bodies with their own private firms and public officials has had some impact on those bodies. The TTC should further consider how best to preserve the private sector-led and quality-driven traditional standards making procedures to counter Chinese tactics. On both sides of the Atlantic, some consideration of assisting private sector participation in the meetings of standards bodies, which require substantial investments of time and financial support, and of public sector oversight, would help maintain a level playing field.

 

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In summary, the TTC can in the near term serve as something of a buffer against a drift toward competitive industrial policies and contribute to a more efficient utilization of economic resources in the transatlantic sphere. On a more geopolitical level, the TTC can help coordinate, and thus make more effective, the deployment of economic sanctions on outliers like Russia. In the longer term, the TTC could become an essential organization in elaborating countermeasures to Chinese mercantilism and its undermining of global economic, human rights, and WHO transparency and cooperation rules. Europe has not fully agreed to such a broad agenda, but China’s support for Russian aggression appears to have opened a window to more reflection on the value of this sort of cooperation.

Furthermore, the TTC has vested interest in demonstrating its effectiveness as a vehicle for strategic economic cooperation against China in an era of growing geopolitical competition. Demonstratable added value in an area of increasing strategic priority is the best way to ensure that reinforced transatlantic collaboration will continue and maintain political support regardless of changes in the US administration.

 

 


*An earlier version of this article appeared on May 10, 2022 and published by the American Institute for Contemporary German Studies.