McLARTY TRADE UPDATE: US negotiating objectives in talks with the EU

January 17, 2019

KEY POINTS:

On January 11, USTR published a summary of US negotiating objectives in trade talks with the EU, paving the way for formal talks to begin as early as February 10.
The document, largely mirroring USTR’s objectives for the US-Japan Trade Agreement negotiations and the NAFTA renegotiation, covers a wide range of disciplines and maintains a focus on early harvest and phased negotiations.
Among other goals, the US hopes to gain increased market access for its agricultural products by reducing or eliminating EU tariffs. EU officials have been adamant in their refusal to include agriculture in trade talks with the US.
USTR also hopes to increase access to EU government procurement while preserving and strengthening Washington’s “Buy America” practices.
The objectives do not include any specific language concerning the auto sector, though the EU has expressed readiness to phase out all auto tariffs.

On Friday, January 11, the Office of the US Trade Representative (USTR) published a summary of its negotiating objectives for United States-European Union trade negotiations, covering a wide range of issues including services, digital trade, and agriculture. According to TPA rules, formal negotiations can begin on February 10, though EU member states must first approve the European Commission’s negotiating mandate. On January 15, the Commission endorsed two draft mandates for talks with the US – one on an agreement on industrial tariffs and another on conformity assessment – but fell short of officially adopting them. Once adopted, the mandates will be sent to member states for their approval.

The USTR document is broad and looks similar to both the July 2017 NAFTA renegotiation objectives and the December 2018 negotiating objectives for the United States-Japan Trade Agreement (USJTA). In fact, the table of contents is essentially identical to USJTA, with the exception of separate headings for subsidies and rules of origin included in the EU objectives. The comprehensive scope of the objectives, as well as the inclusion of agriculture, will present problems for the EU side, especially with European Parliament elections due in late May and a new Commission to be selected in Fall 2019. Further, as with USJTA objectives, the document does not mention the US 232 steel and aluminum tariffs currently enforced on the EU, or the pending 232 auto investigation, both of great concern to the Europeans.

Also similar to USJTA, the negotiating objectives reflect the administration’s desire to “address both tariff and non-tariff barriers.” While committing to conclude the negotiations with “timely and substantive” results, USTR indicated it “may” seek negotiations with the EU in stages, based on consultations with Congress.

US NEGOTIATING PRIORITIES

Given the overlap between the US-Japan Trade Agreement objectives and US-EU negotiation goals, we provide a quick comparison and highlight key differences of note.

Agriculture

USTR’s inclusion of agriculture in its negotiating objectives ensures that trade talks between the US and the EU will be contentious – and may be derailed before they even begin. USTR’s demands to dismantle non-tariff barriers to US farm exports brings up memories of clashes between the two sides over chlorine-washed chicken, which helped derail previous transatlantic talks. EU Trade Commissioner Cecilia Malmström and other European officials have consistently stated that agricultural issues, apart from soybeans, will not be included in a potential trade agreement. On the US side, during a Trade Policy Staff Committee (TPSC) public hearing on December 14, US agricultural groups reiterated to USTR that talks must open the EU market to more US farm goods.

Now that agriculture has been included in the US objectives, it remains to be seen whether this makes the EU reluctant to engage in talks with the US, particularly against the backdrop of the looming 232 auto investigation. Responding to the USTR objectives, a Commission spokesperson said that the July 2018 joint statement by Presidents Trump and Juncker “is very clear that agriculture is not part of the negotiations… As explained by Commissioner Malmström we are not going to discuss agriculture, as we are also not discussing other issues such as public procurement or geographical indications.”

The agriculture negotiating objectives are more extensive than those in NAFTA, but almost identical to USJTA, with the exception that the latter includes more on the elimination of “unfair or trade distorting activities of state trading enterprises or state-owned enterprises (SOEs)…” As with USJTA, the EU objectives seek “comprehensive market access by reducing or eliminating tariffs.”

Sanitary and Phytosanitary Measures (SPS)

The SPS section in the EU objectives has a stronger focus on the need for science as a basis for any restrictions. This clearly sets the stage for a battle over GMOs – another traditional area of disagreement between the US and EU. The language includes obtaining a commitment that the EU “will not foreclose export opportunities to the [US] with respect to third-country export markets, including by requiring third countries to align with nonscience based restrictions and requirements or to adopt SPS measures that are not based on ascertainable risk.”

Auto Sector

The EU objectives make no mention of autos, unlike the USJTA objectives, which listed “motor vehicles” among the key industrial goods sectors in which it wished to “secure commitments with respect to greater regulatory compatibility.” The USJTA objectives also stated as one of its goals to “Secure additional provisions as necessary to obtain fair and more equitable trade in the motor vehicle sector…” Autos and auto parts make up a significant portion of the trade deficit with the EU, as Trump has often stated, but while the EU has expressed a willingness to work towards removing all trade barriers in the sector, the US side is reluctant to do so for fear that it would result in an even bigger deficit in trade.

For many sections, including Rules of Origin, Currency, Pharmaceuticals/Medial Devices, Labor, Investment, and Dispute Settlement, the EU objectives are identical to those laid out in the USJTA objectives.

Rules of Origin

The Rules of Origin (RoO) section is relevant as it contains the NAFTA/USJTA objective of ensuring that RoO “incentivize production in the Parties, specifically in the US.” Though the RoO wording is essentially identical in the EU and USJTA objectives, it is included in a section together with Customs and Trade Facilitation in USJTA, while RoO is a separate section in the EU objectives.

Currency

The US auto industry and labor unions have long argued for an enforceable currency provision in the text of trade agreements. Like Japan, the EU will likely object to such a provision, as it insists it does not manipulate exchange rates.

Pharmaceuticals/Medical Devices

The Procedural Fairness for Pharmaceuticals and Medical Devices objectives are almost identical to NAFTA and USJTA. The US wants pharmaceutical and medical device procurement decisions to reward innovation and be predictable/transparent, and pharma/med devices has been cited as an area where the US and EU might be able to negotiate a small regulatory accord.

Technical Barriers to Trade (TBT) and Good Regulatory Practices (GRP)

The TBT and GRP goals are almost identical to USJTA, with a clause added in the TBT section to “Obtain commitments that the EU will not foreclose export opportunities to the [US] with respect to third-country export markets, including by requiring third countries to withdraw or limit the use of any relevant standard, guide, or recommendation developed in accordance with the TBT Committee Decision.” This is likely included because of the EU’s protection of geographical indications in other recent trade deals, such as the EU-Canada CETA and the EU-Japan EPA.

Investment

This section was notable for its brevity, as with USJTA. While the NAFTA renegotiation objectives covered almost an entire page, the Japan and EU documents included only two broad goals. There was no mention of Investor State Dispute Settlement (ISDS), highlighting the administration’s lack of interest in providing protections for American companies that invest outside the US. In recent trade negotiations, the EU has bifurcated agreements into an FTA and an investment protection agreement, due to EU vs. member states’ competences. Thus, the EU is not likely to object to the lack of ISDS.

Digital Trade

The digital trade section is identical to USJTA, but the last two objectives are especially problematic vis-a-vis the EU – more so than with Japan. Though some EU member states flirt with data localization, the objectives of preventing governments from mandating the disclosure of algorithms and limiting liability of online platforms for third-party content will run counter to some elements of current EU legislative proposals.

Intellectual Property (IPR)

The IPR section is much briefer than in USJTA. Still, the EU objectives pose a challenge, especially the point on preventing “the undermining of market access for US products through the improper use of a country’s system for protecting or recognizing geographical indications.”

General Provisions

This section mirrors the USJTA objectives, with the exception of a set of points related to Israel under the EU objectives, including discouraging “politically motivated actions to boycott, divest from, and sanction Israel.” We are not sure as to how this would play out in actual negotiations.

Dispute Settlement

The Dispute Settlement objectives are identical to those in USJTA, including calling for “mechanisms for ensuring that the parties retain control of disputes and can address situations when a panel has clearly erred in its assessment of the facts or the obligations that apply.” This suggests the US could disregard dispute settlement panel decisions with which it disagrees.

WHAT TO WATCH

It remains unclear whether talks with the EU will be a single undertaking or a staged negotiation. The EU has indicated its preference for a quicker, limited deal on industrial goods, with upcoming European Parliament elections, among other factors. However, USTR’s negotiating objectives, including agriculture, seem to point to prolonged and likely contentious talks, given the EU’s public refusal to include agriculture. The draft EU negotiating mandates are set to be published in the coming days, and EU officials have again confirmed they would not include agriculture.

The pending 232 auto investigation is another major issue to watch. The US Commerce report is due no later than February 17, after which Trump will have 90 days to decide whether to accept or reject the determination, as well as any subsequent steps. Malmström made it clear during her trip to Washington last week that the EU expects to be excluded from any potential auto tariffs, and many EU officials have pointed to the “no harm” clause in the July 2018 US-EU agreement between Trump and Juncker, which states that while negotiations are ongoing, neither party will “go against the spirit of [the] agreement, unless either party terminates the negotiations.” Malmström has also said that the EU would not be willing to accept limitations to auto exports to the US as a tradeoff to avoiding potential tariffs on its autos.