Free Trade Is the Proper Response to US Protectionism

Six weeks after President Trump’s “Liberation Day”, in which he imposed “reciprocal tariffs” on the world, United States (US) trade policy remains predatory, volatile, and unpredictable.

Some partner countries stand ready to negotiate but so far only a few have received positive signals from the US. Rather, the US views these “negotiations” as trading partners providing a series of concessions, leading to further concessions. The Chinese government, which experienced this cycle under Trump 1, has taken up the fight with counter-tariffs and the control of commodities exports thereby putting the US Government under pressure, although this has not caused the US Government to rethink their strategy. Rather, the recently announced United Kingdom-US agreement confirms the US approach remains firmly in place.

While the European Commission has been cautious and nuanced in its response, it now professes to take bold action. Trade is important for Europe and many of its partners to maintain supply chains and protect jobs. Many countries would suffer from the announced, but postponed, individual tariffs, but even the generally imposed 10 per cent tariffs are a serious blow. The same holds for other alienated friends of the US, such as Australia.

Rightly, the European Union (EU), and Australia have concluded free trade agreements (FTAs) with many partners and are accelerating negotiations with others. The Asia-Pacific region is a key focus for both, albeit bilateral agreements with, particularly, developing Asian economies have been difficult for the EU to conclude owing to differences over traditional market access issues, as well as more difficult regulatory incompatibilities.

The EU-Australia FTA is on hold largely owing to different positions with respect to agricultural goods. Australia and the EU should conclude their planned FTA as soon as possible. One option would be to focus on those elements of the negotiated FTA which are uncritical to meet this deadline and agree on a quick restart of the negotiations about the complicated and controversial matters.

Crucially, their differences must not stand in the way of a larger objective, namely, to start an initiative that reduces trade barriers between many countries and at the same time sends a strong response to US tariff hikes. In addition, we suggest that this FTA works like an open club, implying to invite their partners in the Asia Pacific region that are interested in an EU-East Asia FTA.

Specifically, to counter US protectionism and the gathering US-China (and beyond) trade war, the EU, Australia, and like-minded Asia Pacific trading partners that are members of the Comprehensive and Progressive Transpacific Partnership (CPTPP) should immediately call for a Summit. The meeting can be short, with a view to developing a cohesive strategic response to US protectionism along the following lines:

• The partners should not negotiate endlessly; details do not matter. Rather they should agree on free trade quickly and allow every country a fixed number of exceptions, e.g. in agriculture or security, but also agree on giving up these restrictions later.
• Australia and the EU should not invite a US representative for the first round. But they should leave the door open for the US. It is too early to judge Elon Musk’s new ‘initiative’ to revitalise the failed Transatlantic Trade and Investment Partnership, expressed in an online meeting with Italian politicians. The same holds for positive signals after Chancellor Merz’s first phone call in office with President Trump. Nevertheless, the signal to the US should be that Europe and Australia are always willing to talk so long as mutual trade openness is on the table.
• In this context, the EU and Australia might consider to, inter alia, threaten to retaliate and/or bring cases in the World Trade Organization (WTO) against countries that negotiate deals with the US and don’t offer liberalisation benefits to all WTO members, i.e. those countries that violate the Most Favoured Nation (MFN) and non-discrimination principles. China has already threatened this, and in principle they are right to do so although it would be better for all to take cases to the WTO.
• In any case, all trading partners in this new club should communicate clearly to the US that they do not wish to negotiate individual FTAs or ‘deals’ but are interested in a plurilateral, if not multilateral, outcome. The more countries that participate, the higher is the chance to bring reason back into US trade policy.
• This brings us to China, which, prior to President Trump’s trade policies had become a strategic and trade rival, as well as partner, for the EU and Australia. Thus, all partner countries should resist accepting US demands to isolate China, for example by accepting to enforce “China rule of origin“ obligations meant to excise Chinese goods from supply chains, as proposed by Washington. Nevertheless, despite its similar interests regarding relations with the US, China is not a natural partner for this club as it uses coercive trade measures.
• It would be wise to leave the door open to include African, Latin American Central and South Asian nations disappointed by Chinese, Russian and American behaviour that would like to join, provided they sign up to the free trade foundations and commitment to preserve and extend trading rules. The same should hold for EU neighbourhood countries, specifically Ukraine.
• If applicable, it makes sense to move the scene one level up to use this initiative as a leverage for a new WTO-agreement. Moreover, the EU and Australia should invite the WTO’s Director General Ngozi Okonjo-Iweala to the table from Day 1.

In conclusion, if the EU and Australia manage to arrange a fast FTA, even an “FTA light”, such an FTA secures trade gains between its members. It may additionally serve as response to irresponsible US trade policy by signalling that other trading partners are available beyond the US. Widening the circle to include the 7 other members of the CPTPP that already have FTAs with the US as well as the remaining 3, would create a formidable group of like-minded countries interested in preserving a rules-based trading system with, or without, the US.  From this the seeds of a new rules-based trading order may yield productive fruit.