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US-EU trade talks: Under the spectre of coronavirus pandemic

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Global Risk Insights | 3 March 2020

US-EU trade talks: Under the spectre of coronavirus pandemic

Attempts by EU and U.S. officials to come to an interim ‘mini’ agreement on modest issues by March 18th (before retaliatory tariffs against on agricultural products are imposed by the U.S. over the Airbus/Boeing dispute) have been met with scepticism among European lawmakers.

They consider U.S. demands that the EU make additional concessions to the United States as being disingenuous in light of the Trump administration’s raft of existing unilateral tariffs. Nevertheless, the hope was that the unmatched economic expansion of the United States (the longest in history), stretching back to 2009, would temper the Trump administration’s tone and ambitions for any future trade deal with the EU, as the business relationship was generally positive between the two blocs, aside from the long-term spat over aircraft subsidies and continued struggles over agricultural issues. Former EU Commission President Jean Claude Juncker’s personal diplomacy had already won the EU a trade war respite back in 2018.

Circumstances, however, have changed. The arrival of the coronavirus on the world stage has thrown a wrench into the global economy and led to the U.S. stock markets worst week since the 2008 recession, with over $3 trillion in asset values being wiped out in the selloff. While health officials have so far stopped just short of calling the spread of the coronavirus a ‘pandemic’, the U.S. Center For Disease Control has already noted that it is essentially a question of time before this tipping point is reached.

Secondary impacts of the world economic shock

The shutdown of much of China’s production capacity as they struggled to limit the spread of the coronavirus was already a blow to the world economic system, but one that observers hoped would be contained and limited in scope. The spread of the virus to the U.S. and Europe, however, brought with it a significant economic impact, of which the market drops are just the first stages of a wide-ranging shock. Retail spending, travel, tourism and production may all drop dramatically in both regions if the virus is not contained – in part due to government attempts to control the spread of the virus, but also due to communities isolating themselves out of fear.

The immediate target – election year in the United States

The economic downturn could not come at a worse time for the Trump administration, which has touted the current President’s record on the economy as his major strength. The collapse of the markets and potential long-term slowdown which a widespread pandemic would bring to the economy will damage his chances for re-election. Aware of this concern, the President has already suggested that potential pandemic is a ‘hoax’ perpetrated by the Democratic Party to topple him and mislead the voters.

In the weeks to come, however, the administration will be hard-pressed to minimize the fallout from the health scare. The United States Trade Representative’s office briefed this week that the President’s trade agenda has resulted in a ‘blue-collar boom’ and that

“President Trump will continue to rebalance America’s trade relationships to benefit American workers, aggressively enforce U.S. trade laws, and take prompt action in response to unfair trade practices by other nations.”

Although China was the most immediate bugbear to tackle over trade issues for the Trump administration, Europe has always been on the list of top targets, and a weakening U.S. economy may very well spur the Trump administration to take the ‘trade war’ banner up again to score points with voters who cast a suspicious eye on globalism. Trump has already singled out the German automobile manufacturing segment as a target for tariffs which would also help to support the stumbling U.S. car companies such as Ford and GM.

The EU fighting to grow its own innovation

Faced with a trade conflict, the European Union is by no means defenceless. The recent imposition of a ‘tech tax’ on U.S. companies such as Amazon, Facebook and Google shows that the member states (especially France) are more than willing to stand up to the U.S. over trade issues. Phil Hogan, the new EU Trade Commissioner stated bluntly that ‘We have to stand up for our rights more assertively and aggressively’ in the face of belligerent trade partners. The EU has also indicated that it may be inclined to engage in more protectionist actions if pushed by the United States.

The idea of establishing a ‘Fortress Europe’ to fight off competition from the U.S. and China, as well as to foster European innovation, will gain traction quickly if the U.S. raises tariffs against European exports. The EU has already used the bludgeon of its competition law and Commissioner Margrethe Vestager to great effect on the U.S. already and has rejiggered her position last year to focus more on monitoring and regulating the American tech industry.

How businesses can seek a safe harbour in turbulent times

The term ‘decoupling’, which has been used to discuss how U.S. and EU firms will need to wean themselves off their reliance on Chinese production facilities, may soon be used to describe the direction of the Transatlantic economy as well. Part of it is pure trade policy; if the U.S. continues to push the EU on issues where it has no real political flexibility, the only result will be separation. For example, EU legislation on privacy issues or competition law is not likely to change course – they will deviate away from U.S. business norms and as a matter, of course, there will be continued points of friction, witnessed on Huawei, the ‘tech tax’ and application of the GDPR to U.S. firms activities around the world.

The global slowdown caused by the coronavirus will speed up this decoupling and isolationist tendencies, as firms realize how fragile their distant production facilities are to the vagaries of political risk and global health crises or ‘global catastrophic biological risks’ which WHO experts have warned may be seen on a more regular basis in the coming decades. Obviously, global business cannot hide and wait for risk to pass. It has to adapt to the market (and political) forces it faces. For companies that operate in the U.S. and Europe, it is possible that they will have to split their production and business structures to operate as relatively independent and self-sustaining units in both regions while trade tension and isolation drift impacts the Transatlantic relationship.


 source: Global Risk Insights