NEGOTIATION OF DIFFERENT MINDS

On October 24, Ottawa will host ministers from 13 countries and the EU to discuss the future of the World Trade Organization (WTO). According to the Canadian Minister of International Trade Diversification, Jim Carr, this meeting will gather "only like-minded people" who "believe that a rules-based system is in the interests of the international community." In addition to the EU and Canada, Australia, Brazil, Chile, Japan, Kenya, South Korea, Mexico, New Zealand, Norway, Singapore and Switzerland will also take part in the discussions.

The US delegation was not invited intentionally. According to Jim Carr, the group of invited countries wants to convince Washington of the future benefits of the WTO, but for now the best way forward is without the US. China and Russia have not been invited either.

Poison Pill

Remarkably, in the same month when Ottawa had to conclude a new agreement with the US and Mexico (USMCA), Washington is sent an explicit message implying that its actions have nothing to do with fair trade and internationally recognised rules.

Being heavily dependent on exports to the US, Mexico and Canada could not resist the pressure of the American administration, which threatened them with high import duties and a complete withdrawal from the old NAFTA agreement effective since 1994.

According to the Trump administration, the USMCA provisions, which have been included in the document as a legal precedent, will serve as a template for agreements with other countries. In particular, one of the articles stipulates sanctions for "currency manipulation" meaning a deliberate lowering of currency rates to stimulate exports. Previously, this was not the case in international trade agreements. Although Canada and Mexico do not have a record of currency manipulations, the US has repeatedly accused Japan of adjusting the yen rate and even tried to sue it, albeit unsuccessfully.

The US Secretary of Commerce Wilbur Ross called one of the provisions of the trilateral pact a "poison pill" for those who try to enter a free trade deal with a "non-market country". A clear reference to China. In such a case, the deal may be annulled.

So far, the Trump administration has updated versions of free trade agreements only with countries heavily dependent on the US – South Korea (signed September 25), as well as with Mexico and Canada (October 1). Preparations are underway for negotiations with Japan and Europe.

The end of the tariff war

In July, President Donald Trump and the EC President Jean-Claude Juncker promised each other to refrain from continuing the tariff war and work on abandoning trade barriers. As an intermediate step, the EU has managed to hold off the US tariffs on cars and their spare parts in exchange for increased tariffs on soybeans and the construction of terminals for the import of American liquefied natural gas (LNG). Some people call this achievement "the art of the no-deal", as the EU offered what it was already going to do. And in exchange, the U.S. agreed not to do what it hasn’t done yet.

The agreements reached in July also cover the tariffs for non-automotive industrial products, services, pharmaceutical, chemical and medical products, soybeans, and the WTO reform. In addition, the working group should identify short-term trade facilitation measures and evaluate existing tariffs between the EU and the US.

The agreement of the two presidents was solemnly called a breakthrough in bilateral relations but the course of events showed that not everything is as simple as it seemed to the US administration.

First, the Congress, which is responsible for regulating trade with foreign countries, has not delegated to the president the right to hold talks on new deals but the revision of NAFTA. The US Trade Representative Robert Lighthizer has recently begun discussions with the Congress on future trade negotiations with the EU.

It seems that the Congress will agree to this process only if the US has a full-scale free trade deal including provisions on liberal prices for goods and services, protection of intellectual property and investments, regulation or mutual recognition of standards, etc.

But Europe will not agree. It blocked the Transatlantic Trade and Investment Partnership (TTIP) in 2016 and is not going to revive it yet. As the French President Emmanuel Macron said, "a good commercial dialogue can only be made under a balanced and reciprocal relationship, not under threat, at all circumstances. I am not in favour of starting to negotiate a broad trade agreement such as TTIP now because it's not allowed by the context."

European leaders, who have already faced serious opposition within the EU regarding the transatlantic partnership, thus insist on a trade deal of a lesser scale focused on trade tariffs. For European citizens, TTIP is an American Trojan horse, which undermines European food and environmental standards.

Secondly, Europe openly declares that the pressure tactics of the Trump administration used to review the North American Free Trade Agreement will not help in negotiations with Europe with a market as big as the American one, and fairly independent on the US exports unlike Mexico and Canada.

EU GDP is quite comparable with the US – $17.7 trillion vs. $19.4 trillion. The total turnover of Washington and Brussels in 2017 reached $726 billion, which is only 16.9% of the total EU turnover. For comparison, Canada meets 74% of its exports needs from the US.

Meanwhile, despite Trump's attempts to reduce the foreign trade deficit, the negative US trade balance with the EU is growing. Until August 2018, the EU exports to the US increased by 5% compared to the same period last year and reached $267 billion, while imports from the US decreased by $690 million ($176 billion). By the end of 2018, the US trade deficit with the EU will most likely exceed the $150-billion difference observed last year.

Finally, the European Commission does not yet have a mandate from the European Council to conduct negotiations, albeit the delegates continue discussing the issues related to the upcoming treaty with the US representatives.

According to the EU Commissioner for Trade Cecilia Malmström, the establishment of an EU-US working group does not mean the start of negotiations on the new trade deal.

The first meeting of working groups held in September did not bring any clarity to the question. The second meeting is scheduled for November 2018. Perhaps Trump will insist on holding it before the congressional elections scheduled for November 6. After all, he needs results. At least some...

Are all remedies good?

There are concerns that the US president will exert pressure on Europe if he considers that negotiations are not progressing as fast as he wants. Despite firm positions of the EU leaders, they do not have enough tools for reciprocal pressure on the Trump administration. But there are economic tools such as the introduction of tariffs on European cars or other goods.

Political tools are also available. The US has many faithful allies, such as the Baltic states, Poland, and Romania, who can jointly try to influence the countries of Western Europe to agree to the terms of Washington.

Trump can also attempt to upset his European partners by bribing one of them, for example, an avid supporter of European integration, the French President Emmanuel Macron. According to the Washington Post, the US president offered him to leave the EU promising a bilateral trade deal on better terms than that of the EU. It is likely that similar proposals were received by the leaders of other EU countries.

Fragile world

All these scenarios are possible but so far, as experts note, the US has been able to achieve only small symbolic victories. For example, during July-September 2018, Europe doubled the supply of soybeans from the US. But the price of soybeans has plummeted to a five-year low due to a trade war with China, so buying the American one was profitable. On the other hand, the annual demand for soybeans in Europe (15 million tons) cannot replace the demand of the Chinese market (115 million tons).

Europe also slightly increased purchases of American LNG but this volume does not even make 1% of Europe's annual demand.

This month, the Europeans also promised to double the import of American beef without hormones. But the situation looks pretty comical too. Back in 2009, the EU set a tough quota for beef imports at 45 thousand tons per year. In the same year, this quota was filled completely (100%) by shipments from the United States. However, over the years, the US share has declined and now reaches only 30% due to competitors from Australia, Uruguay, and Argentina. By increasing purchases in the US, Europeans will reduce imports from other countries without harming themselves.

Normally, agreements like the one discussed between the US and the EU take years to negotiate and extra years to feel the outcome. As put by the German newspaper Die Welt, given the chaotic decision-making in Washington, it is not yet clear how long the peace concluded between Donald Trump and Jean-Claude Juncker will last.