What does the future hold for US trade policy?

Last year was a difficult year for free trade and the international rules-based system. No doubt the US played an important role in this: It threatened old trade partners like Canada and the EU with new tariffs and damaged its reputation as a leader in trade policy, both bilaterally and multilaterally. This blog gives an overview of the 2018 US trade year and the expectations for 2019.

The US threats on bilateral trade relationships

In 2018, President Trump weakened some of the bilateral trade relationships that the US had with its oldest and largest trading partners: the EU, Mexico, Canada, China and Japan. In March 2018, the US increased tariffs on steel and aluminum imported from all countries.  Trump justified those measures by claiming national security exceptions in order to protect the US economy. The real motivation was rather that he believed the tariff hikes could reduce the US trade deficit and create jobs for the American steel and aluminum industries.

In response to the US tariffs, the EU, Canada, Mexico and China implemented retaliatory measures as they deemed that the US measures are illegal.

Furthermore, the US continues to threaten to increase tariffs on European cars to force the EU to remove import duties and other barriers to its imports from the US. This measure has not yet been formally announced. However, the EU spokesman Margaritis Schinas stated on February 18 that “the European Commission would react in a swift and adequate manner” if the US increases tariffs on European autos and Member States have already discussed a plan for retaliation.

The US threats on the multilateral trading system

The US not only threatened its bilateral partnerships, it also created tensions at the multilateral level and put the integrity of the World Trade Organization (WTO) at stake. At the WTO, President Trump is blocking the appointment of new members of the Appellate Body, a move that is at risk of paralyzing the WTO’s dispute settlement mechanism. The US claims that they are treated unfairly compared to other WTO Members in terms of procedure and rulings. The Appellate Body is now composed of three members out of seven, which puts additional pressure on the remaining members to deal with appeals. Unless the WTO Members address the US concerns, President Trump threatens to pull out of the WTO. This deep crisis is still ongoing and WTO Members are trying to find a solution to improve or reform the current system. However, it is unclear if these efforts will be successful as the US remains dismissive of proposals to remedy the dispute-settlement mechanism.

2019 – a follow-up on the midterm elections?

The result of the 2018 midterm elections raised a lot of questions for the future of US politics in general, but also for trade policy.

The Republicans kept control of the Senate while the Democrats conquered the House of Representatives, and the split Congress will for sure undermine President Trump and his ability to pass key bills. The House majority can now contest any legislation and the whole saga over the funding of the wall, leading to government shutdown between December 2018 and January 2019 (the longest shutdown in American history) is a signal that the Democrats will frustrate Trump’s policy agenda.

There also consequences for trade policy. For example, the new North American trade agreement – the US-Mexico-Canada Agreement (USMCA) – will not replace the current trade agreement between the US, Mexico, and Canada (NAFTA) without the approval of Congress. Key House Democrats have already objected to some parts of the deal, and they may refuse to approve it. The same goes for the future trade relationship with Japan, the European Union or the United Kingdom. As a result, the Trump administration will have to spend a great amount of time negotiating with Congress if it wants to pursue new deals.

However, tariffs can be different: Congress does not have a big role to play if the President decides to act on the basis of national security.

A revival of EU-US trade negotiations in 2019?

2019 could see the revival of EU-US trade negotiations. Since July 2018, the US and the EU have started talking again in an attempt to avoid any further protectionist measures on EU goods. In January 2019, Commissioner Malmström and her US counterpart, US Trade Representative Lighthizer, met in Washington to discuss future trade talks. Those negotiations should start by the end of February, pending the approval by the EU Member States and the US Congress.

However, the likelihood of a new Free Trade Agreement to get done is still questionable. First, the failure of the TTIP negotiations are in fresh memory and, second, the tariff increases on EU goods haven’t created a good atmosphere for negotiations. Tensions have already begun to appear. The scope of the future agreement is a controversial issue on both sides. The US has outlined access to Europe’s agricultural market to be a top priority for negotiating a Free Trade Agreement. However, Commissioner Malmström has made it clear that the negotiations will not contain any agricultural goods. She has proposed to focus exclusively on industrial goods in order to avoid making negotiations unwieldy and taking them down the same path as TTIP.

Thus, 2019 is going to be an interesting year for trade policy. President Trump will need significant support in both houses in order to pass trade deals. Congress could bring a new dynamic for trade relationships by having a say on the scope of the deals the White House could conclude. However, a lot of questions and uncertainty still remain about what next steps the US is going to take on trade.