A New Transatlantic Economic Governance Architecture

The EU and the United States have attempted to put their economic relationship back on track after a series of disruptions—the Trump administration’s tariffs, the COVID-19 pandemic, the war in Ukraine, and climate change—broke the free-trade consensus of the previous decades. Soon after US President Joe Biden’s inauguration, the allies launched a new Trade and Technology Council (TTC) as part of this effort. Now, three years and five council meetings later, the transatlantic community has made tremendous progress on a new international economic framework. But it faces headwinds that threaten to tear apart the still fragile agenda.

Notably, the transatlantic partners found new ways to confront the dual challenges of the People’s Republic of China and climate change. On the former, Europe joined the United States in imposing export controls on semiconductors. Brussels is now considering imposing tariffs on Chinese electric vehicles (EVs) and anti-dumping measures on Chinese wind turbines and imported plastics. Regarding climate change, the United States enacted the bold Inflation Reduction Act (IRA), enabling the country to meet its carbon targets, while Europe moved ahead with its Carbon Border Adjustment Mechanism (CBAM). They are now working together to solve cleantech supply chain challenges.

These steps are important in and of themselves but also provide a foundation for transatlantic leadership at a moment when, as US National Security Advisor Jake Sullivan observed, countries are “competing vigorously to shape the future of the international system”. Their progress sets the stage for the United States and Europe to build support for a more inclusive and transparent international system, as an alternative to the closed version preferred by authoritarians.

However, Europe and the United States remain mired in internecine disputes. Long-standing disagreements over steel and international taxes fester as new quarrels about digital markets and clean energy policies arise. Now, domestic nationalist forces threaten to pull them further apart via Europe’s “digital sovereignty” agenda and former President Donald Trump’s promise to impose 10% across-the-board tariffs if he is reelected. Retreating to protectionist corners would be a self-inflected wound to the transatlantic community’s global leadership.

As election season heats up, the allies should move quickly to solidify their progress. Transatlantic agreements to combat climate change and foster digital trade that are open to other countries would lay the foundation for a new economic multilateralism of global pacts among countries that respect the rule of law.

The Globalization Backlash

The key pillars of the multilateral economic governance system—including the World Trade Organization (WTO) trading system, export controls based on the Wassenaar Arrangement, international tax rules preventing double taxation, and international financial institutions such as the World Bank and the International Monetary Fund—failed to keep up with the changing geopolitical realities of the late 20th century.

Political opposition to the globalization of that era grew in the United States as the “China shock” (and a lack of social services in response to it) hurt communities hit by deindustrialization. By the time of the 2016 US election, a new anti-trade consensus had formed. Both major-party presidential candidates rejected the trade deals negotiated by the then-incumbent Obama administration.

The Trump administration subsequently declared a “trade war” against China, walked away from the Trans Pacific Partnership, and insisted on renegotiating the North American Free Trade Agreement. Europe was also a victim of the new atmosphere in Washington. The United States abandoned the Transatlantic Trade and Investment Partnership, initiated retaliatory measures against European countries that imposed digital taxes on American companies, and imposed high tariffs on European steel and aluminum.

The Biden administration moved quickly to address those issues through the new TTC. It also acted to resolve the 17-year Boeing-Airbus dispute over aircraft subsidies, and collaborate with Europe on sanctions on Russia and export controls on technology sales to China.

However, to the surprise of many in Europe, the United States abandoned the more economist-approved approach that Brussels took on climate—setting a price on carbon—in favor of, largely, domestic subsidies. The Biden administration also kept the Trump tariffs while failing to secure congressional passage of the minimum tax required by the international tax pact. More recently, it walked away from its digital trade negotiating position and the trade component of the Indo-Pacific Economic Framework for Prosperity (IPEF), its own initiative to strengthen economic ties with Asia.

Meanwhile, Europe’s backlash against Big Tech continues, in part through the EU’s new Digital Markets Act, which imposes obligations on American firms. The bloc insists that Europeans’ data may be transferred only to countries whose privacy rules it deems “adequate” through a unilateral evaluation. It has emphasized that message by enacting rules for nonpersonal data that would largely keep that data at home. Its CBAM, which imposes tariffs aligned with the amount of carbon emitted during production and with charges EU producers pay under the bloc’s Emissions Trading System (ETS), will require Europe to determine the extent to which foreign produced products are subject to climate regulations comparable to the EU’s carbon price. Either that or the production of such products must be decarbonized.

Now, as the United States and Europe gear up for elections, protectionist pressure will only increase. Brussels has updated its economic security strategy, while Trump, again a serious contender for the White House, is promising those universal tariffs. Meanwhile, China is shifting its trade from the United States to other Asian countries. For the US and Europe to engage in the contest for a new open international economic system, they will need to resolve disputes in several areas.

Steel and Aluminum … and Carbon

One issue that demands resolution is the long-running discord over metals. The Trump administration imposed 25% tariffs on imports of European steel and 10% tariffs on aluminum, justifying them with national security concerns. The EU retaliated by imposing tariffs on €2.8 billion ($3.4 billion) worth of US goods such as jeans, bourbon, peanut butter, orange juice, and motorcycles. The Biden administration in 2022 agreed to suspend its tariffs in favor of a temporary quota system but only until March 31, 2024, after which the tariffs would resume unless an agreement on steel and aluminum were reached. Without that, the EU would return to “rebalancing tariffs” on US goods. Agreement nevertheless remains elusive as differences over WTO rules and decarbonization persist.

The United States hopes Europe will accede to a new Global Arrangement on Sustainable Steel and Aluminum (GASSA) that would impose a common progressive tariff against third countries based on the amount of carbon used in the production of imports. Washington argues GASSA would make steel producing greener and fight global overcapacity. That position, not coincidentally, provides a rationale for removing the tariffs on European imports while shutting out Chinese products made with far more coal-fired power. Brussels, in turn, wants a global arrangement based on the CBAM.

Europe is right that its approach is more in line with the traditional WTO approach. The ETS places a tax on domestic producers that is like its CBAM tax on foreign producers, whereas the United States would impose a cost only on non-American firms (since the country lacks a domestic carbon tax). Washington justifies its approach by claiming that it follows recent precedents of balancing WTO norms with public policy needs (in this case, climate) under the organization’s general exceptions.

Plugging in EVs

Concerning a newer dispute, Europeans objected to provisions of the IRA that restrict EV subsidies if suppliers are in countries with which Washington does not have a free trade agreement. To resolve the issue, Brussels and Washington are negotiating a critical minerals pact to allow EU companies to sell their EVs in the United States without jeopardizing the tax credits permitted by the IRA. Meanwhile, the US Treasury determined that leased EVs qualify as commercial vehicles, which, under the IRA, do not face the same restrictions.

At the same time, Tesla and Volkswagen have shifted more EV manufacturing to China, the world’s biggest market, in part to circumvent its 25% import tariffs. Vehicles made there are sold domestically and exported. Despite the trend, Germany has thus far avoided the regional deindustrialization and resulting political upheaval that plagued the United States but could see the same dynamic if it is faced with its own “China shock”.

Evading an International Tax Pact

Additional global economic tensions arise from the growth of digital and multinational firms, which has led to tax base erosion. To stem the rise of unilateral national responses to the issue, the Organisation for Economic Co-operation and Development (OECD) negotiated a two-pillar scheme. It alters the taxation of revenue in markets where multinational enterprises earn profits but lack a physical presence, and it introduces a global minimum corporate tax rate of 15%. The EU reached agreement on implementing the minimum tax after overcoming initial vetoes from Hungary and Poland, but the new US minimum tax differs from the negotiated structure. The United States’ delay in signing on to the scheme may open the door to European countries’ reimposing their proposed digital services taxes that were set aside in 2021 when the OECD process was nearing finalization. Were that to happen, it could trigger US retaliation.

Digital Regulation and Data Localization

A final source of potential discord are Europe’s digital regulations and US technology company influence, which create trade tensions even if they are not trade issues per se. Europe is often depicted as a global regulator for the digital sphere, in which its privacy law, the General Data Protection Regulation, has become the default global standard. Brussels is now consolidating its leadership in this area by moving to implement its Digital Services Act, regulating social media after designating “gatekeeper” firms under its antitrust Digital Markets Act, and implementing its Data Act focused on cloud storage. It will enact its AI Act shortly.

These laws set rules of behavior for the European market. But because US technology firms dominate the sector, their actions may have disproportionate impacts that provoke moves to limit data flows, a chronic source of tension in the transatlantic trade relationship. A flare-up could arise at any time.

Toward A Resolution

If Europe and the United States are to win the competition to shape the international trading system, they must cooperate and resolve their differences in a way that creates new multilateral mechanisms open to other countries willing to comply with high standards. This effort must comprise:

• on climate, the creation of “open carbon clubs”, as discussed by GMF’s Jacob Kierkegaard in a policy brief by the Peterson Institute for International Economics, that would impose “common external penalties” for countries with less ambitious climate policies
• on technology supply chains, the creation of a new multilateral mechanism for AI and clean energy supply chains, a Technology Task Force (TTF), that would provide the trusted means for sharing supply chain data, including information on product sustainability and security; cooperating on targeting subsidies; and crafting common responses to global challenges, including export controls. The TTF could also align EU and US standards on clean technology and build support for cooperation in multilateral organizations, including in the International Telecommunication Union’s standard-setting bodies, to prevent approval of cyber-insecure technologies and those that enable surveillance.
• on international tax, the implementation of the OECD agreement on a global minimum corporate tax. This would help end inefficient corporate efforts to exploit the lowest tax rate rather than identify the best place to invest.

An inclusive, transparent, rules-based system for the 21st century is a better bet than erecting national digital and trade barriers for addressing the twin challenges of the PRC and climate change. The TTC still has an opportunity to cement its legacy.