The reigning administration has influenced the U.S. trade policies since 1989. The U.S. government, through Congress, has the constitutional mandate to control tariffs and foreign commerce as stipulated in article 1, section 8 of the U.S. constitution. The U.S. government negotiates with the European Union (E.U.) through the U.S. Trade Representative (USTR) and involves an interdisciplinary process incorporating private and public inputs. The U.S. government seeks to improve its economic growth by reducing investment barriers and fostering non-discriminatory global trading policies. This research paper will focus on the U.S. trade policies towards the E.U. since 1989 and the economic consequences. In addition, the paper will focus on different administrations’ trade policies, focusing on the Trump administration’s reciprocity policies and their ripple effects on the E.U. countries.
The paper will first analyze the tools of Trade the U.S. government utilizes to implement its trade policies. The tools of trade are used to either encourage or discourage trade negotiations with other economic bloc partners such as the E.U. The second part of the paper will analyze the history of U.S. trade policies and the role of Congress in trade negotiations. The U.S. Congress has explicit powers stipulated in the U.S. constitution to control trade. In addition, the U.S. president also has powers to influence the trade pacts through presidential declarations such as executive orders. The third part will focus on the overview of the U.S. and E.U. trade relationship regarding exports and imports.
The U.S. and E.U. trade investments control the transatlantic economy since they are the largest investors. The fourth section will look at the U.S. trade policies towards the E.U., particularly focusing on the Trump administration since it has overseen the implementation of most trade changes. The analysis will focus on trade agreements such as the proposed Transatlantic Trade and Investment Partnership and its elements. In addition, the paper will major on the Trump administration’s reciprocity trade policies due to their major consequences (Demertzis & Fredriksson, 2018). The last section will analyze the consequences of the U.S. trade policies in the E.U. countries and focus on the countries most affected by the change in trade policies.
Analysis of U.S. Trade Policies Since 1989 Towards the European Union
International Trade involves the exchange of domestic products exports for imports of foreign products and services. The U.S. trade policy since 1989 towards the European Union (E.U.) has been marked by revitalized trade negotiations. During this era, the U.S. has committed to several agreements focusing on sensitive trade areas, such as establishing the World Trade Organization (WTO). The economic impact of the revitalized trade negotiations was improved globalized trade in terms of exports, imports and the Gross Domestic Product (GDP). The thesis of this research paper will focus on the analysis of the U.S. trade policies since 1989 towards the E.U. and their consequences. The paper will first focus on the primary tendencies in developing trade policies and the history of U.S. tools of trade. The second part of the paper will focus on the consequences of the trade policies to the E.U. in terms of trade improvements and GDP. Finally, the main focus of the effects of the trade policies will consider the Trump administration’s reciprocity terms of trade and its consequences to the E.U. countries.
Tools of Trade Policies
Governments utilize four tools of trade to encourage or discourage international trade. These include; export taxes, export subsidies, import taxes and import subsidies. However, the U.S. government does not use two of these policies; the export taxes and the import subsidies. According to the U.S. constitution, export taxes are expressively prohibited under article 1, section 9, which limits the powers of Congress, and the Legislative Branch. The law states,’ no tax or duty shall be laid on articles exported from any state’. No country employs import subsidies, and the U.S. is no exception. In addition, the U.S. government budgetary constraints do not allow for the utilization of export subsidies on a large scale. Import tariffs constitute the primary focus of U.S. trade policy. The imposition of import tariffs serves the government with three main objectives; revenue, restriction and reciprocity. First, the government levies import tariffs to raise revenue for the federal government. The government also imposes taxes to restrict imports and protect domestic firms from foreign competition. In addition, the government achieves reciprocity through trade agreements that reduce trade blockades.
History of U.S. Trade Policies
Trade policy strategies have always been a perennial issue in the American political debate since the 19th century. As in today, the main contentious issue in the 19th century was the imposition of tariffs. The northern states sought government protection on competing imports by imposing high tariffs, while the southern states proposed open trade policies to promote exports. The trend culminated in the enactment of the restrictive Smooth Hawley Tariff Act of 1930, which imposed high tariffs on imports. In 1934, Congress enacted the Reciprocal Trade Agreement Act, which stated that the U.S would lower its tariffs where the trade partners also reduced theirs.
In addition, the law granted the president powers to implement trade policies once they were negotiated. The introduction of the presidential proclamation reduced congressional action towards the negotiation regarding trade policies. After the second world war, the U.S. started negotiating with world trading nations to lower trade barriers by creating the General Agreement on Tariffs and Trade (GATT). The negotiations lowered U.S. import tariff rates from 60% in 1930 to 5.7% in 1980 (Delimatsis, 2016). These trade agreements were critical to the broader U.S. foreign policy at the height of the cold war since they opened the U.S. and foreign markets to a greater degree. Moreover, these trade agreements ushered in the era of free trade agreements that commenced in the 80s.
Overview of U.S. and E.U. Trade Relationship
The U.S and E.U. have the most integrated economic relationship globally as the U.S. is E.U.’s largest trade and investment partner. According to a WTO report in 2019, the joint share of the U.S. and E.U. amounted to 43.3% of the world’s exports and 47.2% of the world’s imports. This transatlantic relationship defines the world economy since the end of the second world war. In 2020, E.U. companies exported goods worth two billion euros. In addition, more than 164,000 EU firms export to the U.S. market, with 93,000 being small enterprises.
In terms of investment, the total U.S. investment in the E.U. is three times more than its investment in Asia, while the total E.U. investment in the U.S. is approximately eight times more than in China and India. Together, the two economies control half of the world GDP since most countries have either economy as the largest trade and investment partners. In addition, the Common Commercial Policy (CCP) allows the E.U. to leverage its products to foreign markets through trade negotiations such as the World Trade Organization (WTO). The World Trade Organization (WTO) reduces trade uncertainty through its rules-based trade order, supporting investments and enacted trade agreements.
Analysis Of Trade Flows Between the United States and The European Union
The origin of the US-EU trade relations traces back to the trade consensus between the two countries after the second world war. However, the growth of trade and investments also coincided with the increase in the number of disputes. As a result, numerous attempts to ratify the trade relations in a transatlantic treaty such as the Transatlantic Free Trade since the 90s have been futile. Two main stages characterize the trade agreements between the U.S. and E.U. since the mid-90s. The first stage appears between 1995 to 2008 and featured a stabilized economic bloc with increased imports and exports. Between 1995 to 2008, U.S. exports to the E.U. increased from $114 billion to $276 billion. At the same time, the value of imports increased from $133 billion to $373 billion (Chase, Sparding, & Mukai, 2018). The increase in imports compared to exports led to the trade deficits, which amounted to $19 billion in 1995.
The period between 1995 to 2008 saw various U.S. governments prefer bilateralism over multilateralism, regional and bilateral agreements. The trade liberalization during this period led to an increase in trade between the U.S. and the E.U. without numerous disputes regarding tariffs. After the recession that happened in 2008, the U.S. government under the Obama administration sought to trade agreements with other countries to recover from the impact of the global recession. The Obama administration focused on globalization through numerous trade agreements, such as the North American Free Trade Agreement (NAFTA). However, the administration’s trade policies moved away from unilateralism to address the changing economic landscape.
The multilateral trade policy focused on the strategy, Buy American thus, the U.S. government launched a series of disputes towards the E.U. for its unfair trade practices towards U.S. products, such as discrimination against U.S. beef imports. As a result, the U.S. government reinstated industry-supported tariffs to cushion American products from discrimination. In 2007, the Transatlantic Economic Council was established to advance the transatlantic economic partnership. The two principals head the partnership; the U.S. deputy National Security Advisor for International Economic Affairs and the E.U.’s commissioner for trade. The parties meet annually, but there are no immediate results for the council activities.
The pursuit of a trade agreement to eliminate trade barriers between the two economic blocs led to the start of negotiations in 2013. The negotiations launched the Transatlantic Trade and Investment Partnership (TTIP) in June that year. The primary objectives of the agreement included eliminating custom duties in bilateral trade, opening access to internal product and service market, lowering procedural costa, and reducing investment barriers (Chase, Sparding, & Mukai, 2018). These objectives were emphasized to deal with the cost of technical barriers to trade (TBTs) and other regulatory barriers in the markets. There was optimism the agreement would constitute the most comprehensive free trade consensus in history. The lack of progress in the WTO negotiations on trade liberalization and trade slowdown since 2012 pushed the two economic blocs to negotiate the agreement. However, negotiations were halted without tangible results in 2016 after 15 rounds of negotiations.
The Trump administration came to power in 2017 and changed the U.S. trade policies. The Trump administration believed that previous administrations had enacted trade policies that had led to the country’s trade partners taking advantage of its foreign trade policy (Woolcock, 2019). Since 1993, the U.S. government has favored maintaining a status quo in terms of free trade and reduced trade barriers. Thus, the Trump administration is the first government to increase import tariffs and import restrictions. In addition, the previous administrations enacted free trade agreements that have led to trade deficits; thus, there was a need to change the country’s trade policy. The Trump administration perceived this trade deficit as detrimental to the U.S. producers, thus changed the trade policy to achieve reciprocity (Hartley, van Santen, & Kirchherr, 2020). To bring reciprocity, the administration implemented various trade regulations such as halting its association with the WTO dispute settlement, adopting a national security provision to break WTO tariff commitment for steel, aluminum and autos. The effects of the change in trade policies on the US-EU trade partnership would be massive in many ways.
According to the Trump administration, unfair trade deals are the primary cause of the U.S. trade deficit. This is contrary to the economic principle that the trade deficit is caused by the difference in domestic and foreign savings in times of flexible exchange rates. The Trump administration focused on rebalancing the trade agreements with its trade partners through the imposition of import tariffs. These unilateral measures have serious impacts on the European Union and could result in the spread of protectionism. The main trade policy would incorporate economic nationalism to achieve reciprocity in the trading system. The main decisions embroiled in the trade policy included restricting U.S. government procurement contracts to Buy American, Hire American and increased use of the trade defense incorporating anti-dumping and countervailing duties (Fidler, 2017). The U.S. trade policy constitutes an increased protectionist attitude in terms of tariffs since it is the most protectionist country within the G20 countries.
In 2017, the U.S. government launched investigations to determine whether imported steel and aluminum threatened national security. The investigations launched under section 232 of the Trade Expansion Act of 1962 were a means to implement the Trump administration’s assertive trade policy. The steel industry had lobbied the government to improve its economic situation. The steel industry was unhappy with the previous attempt to get relief through section 201 safeguards implemented under the Bush administration. A challenge mounted through the WTO discontinued the safeguards, thus exposing the steel industry. The investigations led to a 25% increase in tariffs on selected steel products and a 10% tariff increase in aluminum products, covering $46 billion in imports.
The E.U. announced retaliatory measures to safeguard its interests, such as submitting a formal WTO dispute and imposing a 25% tariff on $3,4 billion of U.S. exports. This led to the temporary exemption of the new tariffs, which ended in 2018. Following the end of the exemption, the U.S. also filed a WTO dispute against the E.U. In 2018, the U.S. government launched another national security investigation of automobiles and automotive parts, threatening to impose a 25% import tariff on European car manufacturers. However, the two economic blocs announced a truce involving zero tariffs, subsidies, and non-tariff barriers on non-auto industrial goods. However, this agreement did not resolve the steel and aluminum debacle but revealed the intention to liberalize Trade between the E.U. and U.S.
Consequences of Rising Trade Barriers
The first consequence concerns the supply chain and E.U. country’s ability to exploit economies of scale since the imposition of tariffs will hamper E.U. firms’ production. The U.S. administration’s defiance of the rules agreed upon by the WTO threatens the legitimacy and validity of the appellant organization. The U.S. and E.U. trade war would lead to catastrophic consequences and disrupt the normal flow of goods globally. The European Union losses would constitute a 4.2% fall of the GDP, whereas the U.S. would constitute a 3.5% decrease. The E.U. countries that would suffer the highest decline would be Ireland, United Kingdom, Germany, Spain, France and Italy (Demertzis & Fredriksson, 2018). There would also be the disruption of the functioning of the economy, which could pose a much larger threat.
The increase in tariffs could result in reduced productivity due to inefficient allocation of factors of production, an increase in the cost of capital due to increased borrowers risk and uncertainty in the business environment leading to reduced investments. The major harm would come from the automotive sector, which could experience a $21 billion decline in exports. The least harmful effects include the imposition of tariffs on steel and aluminum products. Germany is the largest trading partner in the U.S. within the E.U. and would suffer the most significant damage to its GDP in terms of the value of exports. Germany holds 50% of the total E.U. automotive exports; thus, the tariffs would result in a 9.04% decrease in German exports to the U.S. The major results of the increase in aluminum tariffs would occur in France and Germany since they are the major producers.
The U.S. trade policies towards the European Union (E.U.) have changed during different administrations. The U.S. government uses different tools of trade to stimulate trade, with import tariffs the main option. The history of U.S. and E.U. trade relations can be traced back to the aftermath of the second world war. The U.S. trade policy has changed from unilateralism towards bilateral trade agreements and, lastly, reciprocity. The most crucial trade policy towards the U.S. is the reciprocity policy which introduced import tariffs on E.U. products such as autos, steel and aluminum. The imposition of the tariffs led to a decrease in GDP, which affected most E.U. countries.