Economy, Finance and Markets

Lamy: „If a US-EU trade agreement is concluded, it will be very limited“

Conversation with the former WTO Director General

Listen to the conversation here

On February 27, Andrea Rexer, Handelsblatt, spoke to the former WTO Director General for Atlantik-Brücke’s Transatlantic Call. The following transcript has been edited and shortened for better readability.

Mr. Lamy, last July President Trump and the President of the EU Commission Juncker agreed to restart negotiations regarding a free trade agreement. US trade representative Robert Lighthizer still has the trade promotion authority. The most urgent question right now is: Will the EU Commission really receive a mandate?

My own guess, is that yes, the EU Commission will get a mandate from the member states, although with a number of conditions where some member states will express sensitivities in some areas. I think this is doable, which does not mean that anything like what was projected to be this big, transatlantic trade partnership a few years ago will be revived. I believe if anything is concluded in the coming years, it will be a more limited agreement. There is limited remaining protection for producers in areas like cars, trucks or agriculture for the Europeans or textile for the US. But that’s only 20 percent of the problem we have to solve if we want to further level the playing field. The 80 percent that remain are in areas which protect consumers. And this is where there are serious transatlantic differences , the leveling of which would be very positive for more open and more efficient transatlantic trade relations.

You said that some areas are very controversial and complex. In the last round of the negotiations, one of the most difficult areas has proven to be agriculture. Do you think agriculture might be the predetermined breaking point within these trade talks?

I think the Europeans do not want agriculture to be part of this negotiation. This is what was explicitly agreed between the President of the EU Commission Jean-Claude Juncker and Donald Trump last July. It seems, however, that in the meantime the US administration has changed its mind. In agriculture, we have to distinguish between producers protection, such as tariffs on sugar in the case of the US, or poultry and beef in the case of Europe, and regulations about sanitary and phyto-sanitary food quality, the biggest issue seen from the US side. The impression on the US-side that the EU is surrounded by regulatory fences, which are there to protect producers, is only partially true. The reality is that EU-consumers and US-consumers have different preferences. We have seen that with diesel cars. The EU was reasonably tolerant, and the US had a big problem. It may be the other way around in other areas. The environment is another issue. Seen from Europe, trade growth should protect the environment to some extent, whereas from the US side, and notably for the Trump administration, this is not an issue.

As the US has a comparative advantage in the agricultural field, a free trade agreement might only work if the EU is willing to discuss a partial opening of the common agricultural policy. But as you said, Mr. Lamy, France has repeatedly stopped any discussions around this. How do you think the EU or Germany can persuade France to agree to negotiations including agriculture?

France is not the only problem when it comes to agriculture. And I’m not saying this because I happen to be French. Ireland for instance is against any sort of opening that would impact its beef production. If you look at agriculture on both sides, there is a big difference between the US and the EU. Both support agriculture heavily, either with tariffs or with subsidies. The problem here is that tariffs are something you can negotiate bilaterally, whereas subsidies are not something you can discuss bilaterally. You don’t have a multilateral chicken and a bilateral chicken, you have a chicken, which you subsidize. And this makes things extremely complex. The US are the ones that blocked the DOHA round negotiations in 2008 because of agriculture. They did not want to reduce the amount of subsidization which they give to their farmers. On top of that, there is also quite a bit of difference in the fact that the US export mostly farm commodities like beef, soy, corn or wheat, whereas the EU exports more agro food products such as ham, cheese, wine or spirit. Of course the value-content of what you export is quite different in both cases.

Another sensitive field, at least for Germany, is import tariffs on cars. Do you think that official negotiations are the only realistic way to solve this conflict?

Frankly speaking, it is not a conflict and the German government has been quite right to explain that large parts of German cars in the hands of US consumers are produced in the US. Also, the pretension by Trump that European car imports are a threat to US national security does not make any sense. But, knowing Mr. Trump, he believes that he has leverage here, and that threatening to put tariffs on cars will bring the Europeans into a worse negotiation position. I think this will not work. If he puts tariffs on car exports from Europe, Europe will retaliate and seriously hurt some very specific US export interests exactly the same way as China did when Trump raised tariffs on Chinese exports. The real solutions would be a zero for zero for cars, SUV’s, trucks and car parts. We often talk about German cars, as if the whole market and the whole trade was about Mercedes or BMW. The reality is, however, that a large part of the transatlantic market is about car parts and also SUV’s, which are heavily protected in the US. The reality is that the reason why the US exports very few cars to Europe has nothing to do with protection but with consumers preferences.

Another question where France and Germany are not exactly on the same line is the timing. When do you think the EU will receive a mandate? The French want to postpone it until after the European elections and the German car industry is very interested to start the talks right away to get the tariff topic of the table as soon as possible.

I don’t know. And I can see why Trump has chosen cars, a product where he has a bigger leverage on Germany. He divides Germany and France given their export interests on the US market, which is a clever tactic short term, but which I think long term will not pay out. Whether there will be or will not be a mandate before the European elections I don’t know. Since the French clearly object giving a mandate right now, it will probably drag on for some time. I personally believe it will not be very good to let these two be divided by a clever tactic by an unclever US president.

Let’s talk about the China and US talks. The political and economic conflict between US and China seems likely to continue even if Trump and Xi reach a deal in the coming months. How do you expect this conflict to affect transatlantic relations?

The US-China trade relationship is part of a much more complex, much bigger geopolitical rivalry which is here to stay for the decades to come. Whatever US administration we have in the next 20 or 30 years, there will be an issue with China, simply because China is getting bigger and the US are getting relatively smaller. On top of that, very hard technological competition, notably in artificial intelligence, is on the rise between the US and China. The transatlantic relation is traditionally more stable. However, Trump has a very specific sort of anti-European bias. Europeans have an interest in the US and China moderating their present aggressiveness.

The US-China trade relationship is part of a much bigger geopolitical rivalry which is here to stay for the decades to come. Pascal Lamy

As a European, I prefer a China which is more open than a China which is closing under a very aggressive US push. What would probably happen is some sort of disconnection between the US and China. A partial disconnection, notably in the area of technology, will probably offer opportunities both to Europe and to other Asian countries. This is the big picture, but again, the level of importance, the size of the challenge and the dangers are very different whether you look at the US and China or at the US and Europe, the latter two still having an architecture of security with NATO. NATO may not be as solid as it was, but it still makes a major difference.

Let me end with a question regarding the WTO itself. Do you think it is possible to actually reform it and which specific element would be your ideal WTO reform?

I think the WTO is in need of reform, I’ve said that for a long time. Although the WTO rulebook remains valid in many areas, I think Trump is right on one thing, which is that the WTO disciplines are not fit for today’s world, especially given the huge size of China. One area where the WTO rulebook needs reform is the agreement on subsidization, especially to cope with the Chinese state sector, which is basically about subsidizing production. So, the one major area where the WTO needs reform, it’s not the only one, is re-levelling the playing field with China. This is something the US and China cannot do bilaterally. If China subsidizes its industry or its services, it doesn’t subsidize bilaterally. This is why this is an issue not for a US-China deal, but for a structural, multilateral and global negotiation around the WTO table.

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