Trade distortion and protectionism
US-EU trade: A step in the right direction?
Published 25 August 2020 | 3 minute read
The US and EU have agreed to reduce tariffs for the first time in 20+ years. Given the rising levels of protectionism, this should be regarded as good news. This article explores the impact on US EU trade and for trade liberalization at large of this mini US-EU trade deal.
Given the rising levels of protectionism witnessed in recent years, the announcement made over the weekend that the US and EU had agreed to a modest package of tariff reductions should be regarded as good news.
According to their joint statement, the EU will eliminate tariffs on imports of US live and frozen lobster products. US exports of these products to the EU were over US$111 million in 2017. The United States will reduce by 50% its tariff rates on certain products exported by the EU worth an average annual trade value of US$160 million, including certain prepared meals, certain crystal glassware, surface preparations, propellant powders, cigarette lighters and lighter parts.
These are the first tariffs cuts between the US and EU in more than 20 years. Encouragingly, the tariff reductions will be implemented on an MFN (most favored nation) basis, making them compliant with global trade rules.
While all this is undeniably welcome, the tariff reductions should be understood in the context of three important realities:
1. Mini tariff “deals” are not a substitute for a broader trade and investment liberalization agenda.
Mini tariff “deals” such as this – covering less than US$200 million in trade out of an over US$800 billion trade relationship – are not a substitute for a broader trade and investment liberalization agenda.
Given the deep economic synergies, comparable levels of development, high levels of trade and investment, and broad philosophical alignment, a comprehensive free trade agreement between the US and EU – which breaks new ground in digital trade, subsidies, and standards – is glaringly overdue. A limited tariff cutting package is an exceedingly modest step.
2. Lobster tariff reductions will only help recover lost ground
Lobster tariff reductions will only help the US industry recover ground that was lost as a result of trade war tariffs and ambitious liberalization pursued by others.
The Canada-EU Comprehensive Economic and Trade Agreement (CETA), which came into provisional effect in 2017, eliminated tariffs on Canadian lobster exports to the EU and allowed Canada to substantially displace US exports to the EU.
A second hammer blow was delivered in 2018 when China assessed 25% tariffs on US lobsters as part of the back and forth trade war tariffs. This closed the door to an additional lucrative export market. The EU tariff reductions were needed just to give the reeling US lobster industry a chance to recover previously lost export revenues and get back to square one.
3. Lobsters and crystal glassware are not the main stumbling blocks in the US-EU trade relations.
In fact, the focus on lobster appears to have strong domestic US political overtones. The state of Maine, where Republican Senator Susan Collins faces a tough reelection battle and needs a boost, accounts for about 80% of the US lobster industry.
Instead, the far more nettlesome issues besetting the US-EU trade relationship are digital taxes, the 16-year Airbus-Boeing subsidies dispute, and the dubious US tariffs on steel and aluminum. The hope of course is that the just announced tariff cuts will foster goodwill and build positive momentum towards resolving these other issues, and perhaps even a broader trade deal. But positive “carry over” from one set of trade issues to another is not always automatic.
The tariff reductions between the US the EU are good news. But all the real work still remains.
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