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FAQ: The U.S.-EU plan to reduce tariffs

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On Wednesday afternoon, President Donald Trump and European Commission President Jean-Claude Juncker announced a new transatlantic plan to “make our planet a better, more secure, and more prosperous place” by lowering tariffs, trade barriers, and regulations between the U.S. and the EU. Here’s what you need to know.

What did the two leaders announce?

The U.S. and EU signed a joint statement of intention to pursue four goals:

  1. “First of all, to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. We will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans”;
  2. The EU pledged to “strengthen our strategic cooperation” by opting to “import more liquefied natural gas (LNG) from the United States”;
  3. The two sides announced a new dialogue to “ease trade, reduce bureaucratic obstacles, and slash costs.” Some believe this means the revival of Transatlantic Trade and Investment Partnership (TTIP) negotiations, something hinted at by trade officials on both sides of the Atlantic; and
  4. The U.S. and EU will lobby the World Trade Organization to take action over “unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state-owned enterprises, and overcapacity.” These are common practices of China, which U.S. tariffs intended to combat. However, European officials said the problem could only be tackled through multilateral efforts.

What would a U.S.-EU free trade agreement mean?

“The United States and the European Union together count more than 830 million citizens and more than 50 percent of global GDP,” the joint statement reads. “If we team up, we can make our planet a better, more secure, and more prosperous place.”

The U.S.-EU $1 trillion trade relationship is already the world’s largest. A trade agreement between free, prosperous, democratic nations that increases their economic dynamism would benefit the world economically, philanthropically, and politically.

How does the new statement affect the transatlantic alliance?

Until Wednesday, the U.S. and EU stood on the brink of a trade war. President Trump imposed tariffs on EU steel and aluminum in the name of national security, and Juncker promised to target a comparable amount of U.S. goods. This statement brings both sides back from the ledge.

What short-term benefits can each side expect?

The EU will not have to worry about the U.S. levying a 20 percent tariff on imported automobiles, as President Trump had threatened. All tariffs will likely be removed, as the joint statement promises to “resolve the steel and aluminum tariff issues and retaliatory tariffs.”

The U.S. has opened an immediate market for its soybeans and LNG. At their joint press conference, President Trump said, “The European Union is going to start, almost immediately, to buy a lot of soybeans — they’re a tremendous market.” Trump told a group of Iowa farmers on Thursday afternoon, “You have just gotten yourself one big market. … We just opened up Europe for you farmers. You’re not going to be too angry with Trump, I can tell you.”

Why is President Trump so focused on soybeans?

Exports of soybeans and other crops have fallen dramatically thanks to the trade war. In March, the president imposed tariffs against $34 billion of China’s exports to the U.S. China then applied additional tariffs against $34 billion of U.S. exports – targeting soybeans, beef, pork, and electric cars. The lost trade caused Trump to offer U.S. farmers $12 billion in compensation this week.

Can the EU make up for the farmers’ lost trade with China?

The agreement will scrape back only a fraction of the lost trade. China consumes one-third of the world’s soybeans and purchases 60 percent of global soybean imports.

China imported 95 million tons of soybeans in 2017 – including 33 million tons from U.S. farmers. By means of comparison, all 27 EU member states combined imported a total of 14.5 million tons the same year.

Did the threat of huge tariffs cause the EU to buckle?

Perhaps – but not with soybeans. An analyst at London’s Rabobank, Michael Magdovitz, predicted last month: “If China implements tariffs, we believe the EU will import more U.S. beans than Brazilian origin.”

It’s simple supply-and-demand.

Lost trade with China created a massive surplus supply, which has lowered U.S. prices. Iowa farmers already have 220 million bushels of soybeans – an amount equal to 40 percent of last year’s crop – lying in storage. As a result, U.S. soybean prices have crashed from a March high of $10.83 per bushel to a low of $8.19 on July 13. At the same time, Chinese tariffs shifted its imports away from the U.S. to Brazil, reducing the supply and raising the price of our strongest competitor.

Lower U.S. prices, plus higher competitors’ prices, mean that importing U.S. soybeans serves the EU’s self-interest. The fact that it can aid an ally, and extract concessions at the bargaining table, does not hurt, either.

Will this open the door for the EU to import other U.S. crops?

Officials have given mixed signals about whether the EU is backing away from its restrictive Common Agricultural Policy (CAP), which shields European farmers through a robust system of tariffs, subsidies, and regulations. U.S. Commerce Secretary Wilbur Ross said the final agreement will include “all agricultural products.” But an EU representative said Thursday that “agriculture is not part of the scope of the talks.”

Why is LNG important?

Juncker agreed to build terminals in the United States to import LNG. Trump hopes both to export U.S. surplus energy and to combat growing Russian influence in the region, which is furthered by the building of the Nord Stream 2 pipeline between Russia and Germany. He raised EU dependence on Russian energy as one of two key issues at this month’s NATO summit.

How do EU tariffs compare to those of the U.S.?

“The EU is by no means the paradise for free traders that it likes to think,” said Gabriel Felbermayr, director of the ifo Center for International Economics in Munich. The unweighted average EU customs duty (5.2 percent) is nearly double the U.S. rate (3.5 percent).

Who won politically, Trump or Juncker?

Predictably, both sides have declared victory. President Trump tweeted that he had cemented “a breakthrough … that nobody thought possible.” Meanwhile a conservative European Parliament MP from Germany, Markus Ferber, said, “This is the success of Jean-Claude Juncker and the EU.” He added, “Pressure has a sort of learning effect on Donald Trump. It’s good that there’s now increasing recognition of the fact that the U.S. can only be strong if it has strong partnerships.”

What would a Christian think of these developments?

A Christian would be heartened that Western democracies intend to increase trade in a way that would raise living standards and increase prosperity. Christians would applaud the end of diplomatic hostility between allies. Most of all, Christians should support anything that may lead to lower food costs, which benefit the poor and needy most of all.

(Photo credit: Public domain.)

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Rev. Ben Johnson Rev. Ben Johnson is Senior Editor at the Acton Institute.

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