Ukraine, Trump, NATO and a Different Take on a Marshall Plan

Editor's note: Just prior to the NATO Summit, Kristina Zelenyuk, a reporter for Segodnya, a Russian-language newspaper in Kiev, sat down with GMF Senior Fellow Peter Chase to talk about trade and economic issues in the context of the Summit and the meeting between Presidents Trump and Putin in Helsinki, as well as overall economic relations between the United States, Europe, Russia and Ukraine. The interview appeared in Segodnya on July 11, 2018; the following version has been translated from Russian and lightly edited.

My very first question will be about the upcoming NATO Summit. It is already known that Trump will raise the issue of defense spending. Recent research shows that only four countries spend two percent of their GDP on defense. What do you expect from Trump? Can he surprise us?

Of course, he can. I know that the NATO partners want to put on a great show of unity. What Mr. Trump wants to do is a different question. He’s been quite clear in his recent statements that he still feels that NATO is another example of how rest of the world has taken advantage of America. I think he is wrong. But that’s what he seems to think.

According to U.S. Ambassador to NATO Ms. Hutchison, trade issues that are sensitive for both the EU and U.S. won't be discussed at the NATO Summit. But personally I don't believe it. We've heard President Trump's statements in Montana where he said that America has a great trade deficit with EU but at the same time the U.S. has to pay for the EU's security. 

I’m almost positive Trump will raise this topic because while some people would like to separate the trade and foreign policy issues, I don’t think Mr. Trump does. I think he sees these things as very much related. The fact that Germany does not spend enough on defense has allowed them to do better in terms of economics and that, to Mr. Trump, is taking advantage of the USA. It’s hard for me to imagine that he will keep these two things separate. It was pretty clear at the G7 Summit.

Are the U.S. steps in today's so called trade war fair? I mean why didn't Obama worry about the deficit the way Trump does? 

Because the trade deficit is not a measure of fairness and Mr. Obama knows that. There are a lot of things to complain about in terms of the EU and EU economic policy. But I think what Mr. Obama and his administration really tried to do was an ambitious trade agreement between USA and Europe which would have addressed any remaining barriers between us. The thing that Mr. Trump doesn’t understand when it comes to Europe is that the USA and Europe don’t have a trading relationship – they have an investment relationship. They are two very large economies, they are the same size. U.S. companies have about 2,7 trillion dollars invested in Europe and European companies have about 2,5 trillion dollars invested in the U.S. We do a trillion dollars of trade a year. But no other relationship has this amount of investment on both sides.

So the trade that we do between us is largely within the companies that are invested on both sides of the Atlantic; almost half of our trade is intra-firm. It’s an entirely different trade paradigm than the U.S. has even with Canada; certainly with Japan or China we don’t have the same type of relationship. Mr. Obama and most people in his government were aware of that difference and they saw that the trade deficit as what it is, which is an accounting issue. If you have a trade deficit with a country, it means that a lot of that country's money is going to the USA. That’s not necessarily a bad thing. But that is not how Mr. Trump sees it. He has a view that “for 75 years America's leaders have let the rest of the world take an advantage of us” because we were undertaking a responsibility for keeping Europe and Asia out of war. And he thinks that we should no longer take that responsibility, or he thinks it should be more balanced. In a way he is right – things have changed since 1950 and there could be a better balance in the relationship. But the way he is going about it is wrong; alienating our allies makes no sense. Mr. Obama’s approach was the right one, which is actually to do an agreement between U.S. and EU. But that is not how Mr. Trump operates. 

On which additional European goods can the United States introduce duties? And where can this trade war can lead? Can it get worse?

Yes, it can get worse. The U.S. can always introduce additional tariffs. Whether or not it can do so legally without violating our obligations under international treaties is a different question. I personally believe that the tariffs on steel and aluminum are inconsistent with WTO obligations. I believe if Mr. Trump does the same thing with autos and auto parts, which he seems to be intent on doing, that would be inconsistent with our legal obligations. And I think the Europeans are right to say that they can’t let someone break a promise without consequences. So yes, it can get worse.

We also remember popular Trump tweets about German car exports to the U.S., on which he threatened to impose a 20 percent duty. Is it real?

Mr. Trump can do it under U.S. law. But as I said the U.S. will break its international obligations under the WTO if it does so. It’s not in the U.S. interest that everyone starts ignoring their international obligations, including us. There is a certain rational for better balancing, for Europe taking more responsibility for itself. And also there is a legitimate argument that we’ve had with Germany for a long time that the amount of consumption in Germany is not high enough, that its economy is out of balance, because domestic demand is too low and they should do more for that. But that’s not a reason to go running around putting additional tariffs on cars.

For sure almost all EU allies are worried about the upcoming Trump-Putin Summit. They think Trump might sacrifice NATO values for a big deal with Putin. It is interesting that such a concern was expressed, among other things, by German politicians. And as we know Berlin continues to build Nord Stream. Don't you find it strange?

The U.S. government has long raised concerns about Nord Stream 2. Part of it’s been economics; part of it’s been about dealing with Russia following Crimea and the war in Ukraine. But even before Crimea we (the USA) had problems with Nord Stream 2; the conflict just made all of those concerns much worse. Those German politicians (you refer to) that still support doing Nord Stream 2 seem to be related to the SPD. You know there’s been a lot of a talk about their relationship with (former SPD leader) Mr. Schroder and his relationship with Gazprom.

Even under Mr. Obama the U.S. government opposed  Nord Stream 2. And we opposed it largely because of the impact on the Ukraine and Poland. The assessment of the U.S. government at that time was that for Russia and Gazprom, the purpose of Nord Stream 2 was primarily to get away from having to pay for transit through Ukraine. It’s interesting to me that Mr. Trump continues beating up on Germans about Nord Stream 2. But I think he misses a point there. As far as I know Nord Stream 2 is not being financed by the German government. It might be, there might be some (government) financing, but it is mostly a commercial project. It seems to have more to do with SPD politics. I don’t think it has anything to do with a German government decision.

The Germans can and should spend more money on their military if they think there is a reason for it. They have the money, with a very low national debt and a balanced budget – they could do that. But I think more important would be spending on internal infrastructure, to open up the services sector which is still very closed, to allow more internal consumption. Those things would be much better and have more impact on the trading relationship than just having Germany increase its military spending.

But I wonder whether Mr. Trump sees a need to defend against Russia. I’m not entirely certainly he sees that need. And if he doesn’t see that need why he is concerned about Gazprom and Nord Stream 2? It seems to me a little bit inconsistent but actually many things he does look inconsistent. 

The same thing with French President Macron. As for me he changed his mind about Russia as he clearly demonstrated during his visit to St. Petersburg at the economic forum in May. He brought a huge delegation of French businessmen with him and was talking about trade growth with Russia. Does this go against the sanctions?

Because of Crimea, because of what happened in Ukraine, the U.S. and Europe have both taken sanctions against Russia. But the sanctions have been targeted on certain individuals and businesses. Companies should be adhering to the sanctions, to the law. But when something isn’t prohibited by the sanctions, it is allowed. We are not saying that no one should do any business with Russia. In that sense, if someone is doing something that is legal, even if a lot of people would say it’s wrong – it is ok. To the extent that it is contrary to and violates the sanctions – that’s a different problem. For Mr. Macron to go and talk with Mr. Putin, for Mr. Trump to go and talk with Mr. Putin – there's nothing per se wrong with that. We are not trying to isolate Russia – yet. 

When everyone agreed to the Minsk accords, the idea was that Russia would respect them. But it hasn’t yet. Just two weeks ago the Europeans extended the sanctions related to that. But I have to say that the sanctions are supposed to be tailored and it’s not a complete embargo. If you do business outside the sanctions, that is theoretically is ok. But may not be totally smart, given the business climate there. Personally, I suspect that anyone doing business with Russia is putting a very high risk premium on their transactions. So they do things that allow them to get money out quickly. That means that all the deals in Russia are more expensive than they would be if Russia hadn't created the crises that gave rise to the sanctions.

Can the issue of defense spending become dramatic in finalizing the NATO Summit communique? I mean could Trump  refuse to sign it as he did with the G7 Summit?

Of course he can. It would be a fairly significant decision. The communique has been written in a way that the other NATO partners think takes into consideration what the U.S. government wants. Now whether or not the U.S. negotiators got Mr. Trump's full approval isn't known. Even if they did, who knows whether or not his mind will change? It’s quite possible.

As you know EU-Ukraine Summit was held yesterday. It concluded with the final declaration in which the EU recognized Ukraine's European aspirations and granted for Ukraine a new micro-financial package for 1 billion euros. But in terms of Ukraine it is a very small amount. Can we expect ever to receive a “Marshall Plan for Ukraine”? Many EU countries are against it as they are against Ukraine's membership in the EU.

I first came to Brussels in 1992 and in the time I was here, until 1996, there was a lot of European and for that matter American financial assistance to Ukraine. There is no question in my mind that for Europe as well as for the U.S. having Ukraine growing, become prosperous, stable and more democratic – all these things are very much in the interest of Europe and the U.S. I think the European leadership understands that. But that doesn’t necessarily transform into a “Marshall Plan.” It’s important to realize that the best opportunity for Ukraine to grow, to prosper and to be democratic comes from within the Ukraine. Access to the European market – that helps a lot. But the question of good governance, recognizing property rights, having a good judiciary system and the rule of law – all those things are necessary for Ukraine to reach its ambitions. And that is more important by far than being a member of the EU…

I was in the State Department during the Orange Revolution in Ukraine. And there was a feeling that a lot of the potential that came from that was squandered because the Ukrainian leadership wasn’t doing what it had to do for Ukraine. Rather than focusing on “Marshall Plan for Ukraine” from Europe, rather than focusing on membership in the EU, Ukraine would be so much better served if its Government realized that there is a lot of potential within Ukraine even in the current circumstances. The important thing for the government to do is to create a legal framework to let people build on this potential. I actually think a “Marshall Plan for Ukraine” wouldn’t be very good for Ukraine. I don’t think you need money. I think you need to "marshal" the money and talent you have within Ukraine. So it’s not a “Marshall Plan” from the outside that's important. It’s the “Marshall Plan” within the Ukraine that needs to be unleashed.