The risk is that Brussels uses the excuse of a deal with the United States to prevent a tariff war to slip in deregulation by the back door.
Corporate Europe Observatory (CEO) is a research and campaign group working to expose and challenge the privileged access and influence enjoyed by corporations and their lobby groups in EU policy making.
Cross-posted from Corporate Europe Observatory
There is a panic in Brussels. US President Trump has opened a trade war against 60 trading partners, and while China is hit the hardest, the EU is a favourite target too. With a current 10 per cent tariff, and threats of 20 per cent or more of punitive tariffs that will hurt the economy, EU governments and parliamentarians are scrambling to mitigate the damage as best they can. On 9 April, Trump put the highest tariffs on hold for three months, expecting his targeted governments to come to him with offers. He claims to be thrilled with the effect, famously boasting that in response, countries are “kissing my ass”.
While the EU does not appear to be kissing ass just yet, there are signs that capitulations could happen down the road. So, what would it take to appease Trump?
The EU’s initial offer was to introduce zero tariffs on industrial products, including cars, but that seemed to have no appeal for the President. He has set the goal much higher. Trump’s demand is that trade relations must be rearranged so that industrial manufacturing returns to the US, and US goods and services enjoy optimal conditions on the world market. And crucially, Trump wants much more than low tariffs from the EU. He wants his trade war threats to bully the EU into line. He and his administration have their eyes on EU regulation of Big Tech, chemical regulations, forever chemicals (PFAS), food standards, GMO regulation, public procurement, and much more. This means that for the EU to appease Trump, it would have to enact great damage. And there is another factor complicating the situation: Europe’s own vested interests.
The weird algebra
Listening to Trump, it often sounds as if it is a simple game of tariffs. Universal astonishment greeted his chart outlining the tariffs on goods from the 60 countries his administration has targeted for a trade war. There is a clear mismatch between the tariffs the EU imposes on US goods and the vastly disproportionate punitive tariffs Trump proposes. For example, tariffs between the US and the EU have long been very low, between 1 and 3 percent, so when Trump’s chart shows a whopping 39 percent as his countermove to supposedly ‘make things right’ for the US, something in the math is off.
The calculations certainly sparked wonder and amusement in many corners of the world because they don’t seem to make any sense. Comedian John Oliver, who hosts US TV show ‘Last Week Tonight’ on HBO, said on 7 April that the logic used was the equivalent of dividing your phone number by the age of your dog. So is there any method in the madness? Trump and his team have taken the trade deficit in goods, which is 39 percent in the EU’s case, and divided it by two to arrive at the countervailing duty (or ‘punitive tariff’). This certainly gives a misleading picture of the situation, since their calculations entirely ignore that US has a large surplus in trade in services. And actually, a trade deficit is not a problem per se. One economist noted, he had a permanent trade deficit with his barber. But leave that aside for now. Trump’s guideline is a deficit in goods trade, and he wants to correct that by attacking what he sees as the cause of the misery, unfair trade conditions, by imposing – or threatening to impose – a fine.
The root of evil: regulation
In the end, according to Trump, the reason for doling out this punishment is not so much tariffs on US goods – which as we have already pointed out, are pretty low – but rather “non-tariff trade barriers”, ie other problems in the EU’s rules assumed to have effects on trade. That is why Trump’s trade adviser Peter Navarro’s response to the EU’s offer of zero tariffs on industrial goods was cool: “I would say to the EU when you make those announcements, would you be very careful to tell us you’re going to lower your non tariff barriers?”
For Trump, high punitive tariffs are a response to a long list of EU rules of domestic origin, ie internal regulation not directed at trade but with implications for trade, that may make life a bit more difficult for US companies. In recent years, one sector that ranks above all others in that regard. Over the past decade, a trans-Atlantic tug-of-war has developed over the US tech giants, their controversial business models and their market dominance. The EU has sought to introduce taxation, regulation of content on the platforms, and measures to prevent abuse of market dominance and provide better opportunities for competitors and start-ups.
Big Tech and the trade war
Successive US governments have been very unhappy with this, while tech oligarchs have appeared even closer than usual to the current President. So it is not surprising that the EU’s regulation of tech companies played an important role in the prelude to the trade war. Since the adoption of EU rules on content moderation, ie rules against the spread of fake news and hate speech, among other things (Digital Services Act, DSA), and rules against market dominance (Digital Markets Act, DMA), as well as the introduction of taxes on large platforms by individual member states, the conflict has intensified. On 21 February this year, Trump issued a memo titled ‘Defending American Companies and Innovators from Overseas Extortion and Unfair Fines and Penalties’, in which he opposed any measure that could “limit American companies’ global competitiveness”.
In the EU, it aroused particular interest that the memo was flanked by a specific salvo against the DMA and the DSA. “Regulations that dictate how American companies interact with consumers in the European Union, like the Digital Markets Act and the Digital Services Act, will face scrutiny from the Administration,” it said. This sparked a dispute across the Atlantic in the weeks that followed. On the one hand, EU Commissioners have repeatedly said that they are not targeting US companies with EU tech laws in hand, for example as outlined in a letter from Commissioners Ribera and Virkkunen. The DMA, for instance, is intended to prevent abuse of market dominance. On the other side of the argument Andrew Ferguson, Chair of the US Trade Commission and one of the highest-ranking trade officials, said on 2 April that he was “very suspicious of laws that seem to be written to go against American companies”.
Both sides are right. The DMA does not discriminate against US companies. It just so happens that US Big Tech companies dominate the market. The DMA has evolved in a context in which the EU is trying to address competition to stimulate the emergence of a strong European digital sector. So, while the EU Commission has a habit of giving the green light to almost any mergers and acquisitions between large companies – almost regardless of how much market dominance they gain – its approach is somewhat more critical when it comes to US Big Tech. Here, the European Commission is in a more protective mode to nurture the European tech sector.
Protection of environment and public health
As with Big Tech, it is various types of regulation that are fuelling Trump’s trade war against the EU – not tariffs on goods. And while the attempts to get the EU to comply are taking very different forms under Trump than under previous US administrations, the goals are no different – apart from the goal of reindustrializing the US, ‘reshoring industry’. In fact, the US wish-list may have been updated in recent years, particularly in the tech area, but other than that, the demands are similar to those raised by previous administrations and US business groups over the last couple of decades. This time, though, the methods are different.
The tariff and “non-tariff barriers” that individual countries must remove to achieve “fair and free trade” in Trump’s sense are identified in the annual report from the US Trade Representative (USTR), published on 31 March this year. It is the 30-page chapter on the EU in this report that tells us what kind of concessions could appease Trump, and tariffs take up a mere third of a page and concern only marginal issues. The other 29 pages point out qualms the US have with a wide range of changes to EU legislation – and in some cases, bills that have not yet been passed.
As you would expect, it contains several pages of attacks on the DSA and DMA, but there is much, much more. A few examples:
- The ban on highly climate-damaging F-gases is considered a trade barrier.
- A proposal from four member states (Germany, France, Denmark, Sweden) and Norway, for a comprehensive ban on PFAS (forever chemicals) is criticized.
- The EUs criteria for ‘sustainable’ biofuels and biomass are considered restrictive (although they have been heavily criticized in the EU itself for the opposite reason).
- Rules on pesticide residues in food are considered too restrictive.
- Although glyphosate was recently approved by the EU Commission for 10 years, a number of member states have maintained bans on private use. The USTR considers this to be a trade barrier.
In addition to complaints about the EU, the USTR’s report also contains complaints about individual member states in areas like public procurement and services. To name but few examples: Denmark and Portugal are criticised for restricting foreign ownership of energy infrastructure, there is criticism of laws requiring streaming platforms to produce or show a certain percentage of local content or to pay a special tax, and some are targeted for not allowing the cultivation of certain GMO crops.
The chlorinated chickens march again
In other words, the USTR has presented a powerful collection of asks. Rules that have been adopted in recent years are receiving particular attention, as well as rules that could become reality, such as a PFAS ban. Trump also reasserts some old classics from EU-US trade disputes past, for example over beef and poultry. The first is an objection over EU restrictions on importing beef with hormone residues – a dispute that has been going on between the EU and the US for as long as the EU has existed. The US is in a big bind in this area. As US Commerce Secretary Lutnick put it on 3 April: “The European Union won’t take chicken from America. They won’t take lobsters from America. They hate our beef because our beef is beautiful and theirs is weak.”
Their complaint about poultry is about chlorinated chickens – chickens cleansed with a chlorine-containing substance banned for that purpose in the EU. When negotiations between the EU and the US on a major trade agreement, called the Transatlantic Trade and Investment Partnership (TTIP), ended in failure ten years ago, it was due to, among other things, European aversion to US standards in the food and environmental areas. The chlorinated chickens became one of the great symbols of the differences that were never reconciled. TTIP was defeated by public pressure in the course of two to three years of massive campaigning. Now the chicken are back on the table, because Trump wants to see them in European refrigerated meat counters. His Commerce Secretary Lutnick makes no secret that tariffs are not the priority for the United States – but food standards are, among other things.
The EU’s choice
In the end, there is a lot of money at stake. According to EU Trade Commissioner Maroš Šefčovič, a full €549 billion worth of exports will be affected. Also, the Trump administration has initiated investigations into options for ‘reshoring’ production of eg. pharmaceuticals and semiconductors to replace imports from Europe.
As such, the case is clear enough for the EU. If Trump is not appeased and persuaded to end high tariffs, it could be expensive for the EU. But to accommodate the President would be expensive too. To avoid a trade war, or simply avoiding high permanent tariffs, the EU would have to weaken or strike important parts of its regulatory framework, as it stands. The EU may see the whole affair as an opportunity to step into a role as the leader of free trade, boosting its networks and the supply chains of European companies. But in the short and medium term, the trade war is a real headache the EU’s trade officials and European companies need to address. But it will be politically difficult to succumb to Trump’s demands. Environmental and climate policy would take a hit, just as the ambition to strengthen European tech sector would suffer defeat if the regulations that the US dislikes were to be removed.
On the other hand, the EU also has a tradition of being extremely accommodating towards the US. For many years the European Commission made concessions to the US in the area of data privacy, so much so that this was declared illegal by the European Court of Justice in 2015. And when the TTIP negotiations were launched in 2013, the EU Commission lifted a ban on beef cleansed with lactic acid as a confidence-building move towards the US. These are but two examples from a long list, such concessions are not rare.
This is due, among other things, to the fact that European corporations and governments often see an interest in the EU bowing to the Americans.
Exploiting Trump’s trade war
Take for example, the talks with the US about increasing the amount of natural gas bought in the US. To appease Trump, the EU has floated the idea to buy US$350 billion worth of gas. But there is a problem: European rules dictate certain standards around methane gas emissions to protect the climate – standards that could hamper gas import from the US. The obvious solution, then, according to top lobbyists in Europe for the fossil fuels industry, is to slash “climate bureaucracy”. That message is not lost on trade negotiators, nor on governments, who seem to be considering that option seriously.
Furthermore, in the area of taxation, the US is fighting new global rules to ensure corporations pay a minimum 15 per cent in taxes, and the EU is going soft on the matter, seriously considering a tweak of an agreement reached at the Organisation for Economic Cooperation and Development (OECD) that took ages to make. But here too, there are signs that the EU could budge and help carve out an exception for the US – even if it may be damaging to some European corporations that will face tax competition. According to minutes from a Council meeting on the matter, limitations to the undertaxed profits rule are being considered, citing that this would encourage “diplomatic cooperation with the US” and provide “US based multinational enterprises operating in the EU” with “tax certainty”, if the attempt to tax big companies was held back. This approach is appealing to some governments, not least Ireland, which has a low taxation policy as a cornerstone in its attempt to attract and keep US corporations based in the country, in particular Big Tech.
Don’t feel reassured
This pattern could develop further. When the US pushes against a PFAS ban, it is an echo from the campaigns waged by – among others – the chemical industry, US and European alike. And when they attack the data protection regulations (GDPR), they join the choir of large business organizations in the EU that see data protection as an obstacle to the development of the digital sector. In fact, the trade conflict with Trump reaches the EU at a time when the European Commission is developing a comprehensive programme for deregulation in the EU, which include for instance, weakening of data protection under the GDPR.
Trump’s trade war represents a broad based attack on EU regulation, much of which can be recognized from TTIP and other former arenas. On earlier occasions these kind of attacks have been deflected, not least due to massive campaigning by civil society organisations that in the end persuaded politicians to listen. Today, the outcome could be different. The biggest risk is where Trump’s demands resonate with European-based corporations, and they are likely to ask the Commission to “kiss his ass”. And as for politicians in eg the European Parliament, most will be inclined to support them.
When addressing Trump, the Commission will surely do its best to defend ‘European interests’. The question is whose ‘European interests’ will they be?
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