US-EU trade talks stumble, threatening new trade war front

[BRUSSELS] Even though US President Donald Trump held fire earlier this month on car tariffs that have the potential to further roil Europe's struggling economy, a litany of domestic dilemmas on both sides of the Atlantic threaten to frustrate efforts at a trade pact before they've even begun.

Ten months after Mr Trump and European Commission president Jean-Claude Juncker struck a Rose Garden truce meant to clear the way for negotiations to reduce tariffs on industrial goods and eliminate regulatory hurdles, those talks are showing few signs of going anywhere meaningful.

European officials have blamed a Trump administration that has had little time for dealing with a bureaucracy in Brussels already held in low regard by many in the US president's orbit. Distracting Mr Trump has been a breakdown in talks with China and a need for a quick deal with Japan to assuage American agricultural interests.

"I don't think the US is ready to start on the tariff negotiations," Cecilia Malmstrom, the EU's trade commissioner, told reporters in Paris earlier this month after meeting with US trade representative Robert Lighthizer.

Yet, it is the growing polarisation in Europe evident in the recent elections that saw a fragmentation of the mainstream centrr-right and center-left parties that some in Washington see as a sign of the bigger structural obstacles to a deal.

With the Brexit process thrown into turmoil after Prime Minister Theresa May announced her resignation this month, eastern nations testing the limits of "illiberal'' democratic reforms, an assertive Russia threatening pillars of European Union security and an increasingly fragile economic backdrop, the 28-nation bloc faces plenty of its own distractions.

"You're seeing an EU that is fighting fires on so many fronts that I just don't think they are going to be confident and able to negotiate that deal'' with the US, said Heather Conley, head of the Europe program at the Center for Strategic and International Studies.

Tariff threat looms

The 180-day deadline that Mr Trump set for a negotiation with the EU and Japan over reducing their exports of cars and parts to the US holds to the president's pattern of steadily increasing pressure on trading partners to cut a deal more to his liking. As he made clear during his recent trip to Japan, Trump is eager to see at least some rapid deals going into his 2020 re-election run.

With Japan he may have some luck. People close to those talks see the very real possibility of a deal being struck by the end of the year with negotiations due to accelerate after Upper House elections in Japan in July.

For Europe, though, the signs are more ominous. The car deadline will hit just as a new European Commission, the bloc's executive arm, is due to take over from the Juncker-led one that has governed for the past five years.

No cars, agriculture

Moreover Germany and France, the EU's two dominant powers, appear to have increasingly clashing conceptions of the economic direction they want to take Europe in.

France's Emanuel Macron led some EU member states in resisting US efforts to include agriculture in any transatlantic discussions, something the EU insists Mr Trump gave away last July as part of the Rose Garden truce. Though many in Washington, including Senate Finance Committee Chairman Chuck Grassley, have said any deal that didn't include agriculture wouldn't get through Congress.

Germany, which exported 27.2 billion euros (S$41.8 billion) of cars and car parts in 2018, is more concerned about Trump's threat of car tariffs than protecting European agricultural interests. The home of Mercedes-Benz, BMW and Porsche generated a surplus of 22 billion euros in car trade with US last year.

Recent rounds of bilateral talks have yielded little progress and US officials have resisted even broaching the subject of autos, according to people close to the negotiations.

European officials last year proposed a plan to reduce car tariffs on both sides of the Atlantic to zero, a concession already made to Japan as part of an EU-Japan trade pact that went into effect earlier this year. But that was rejected by Mr Trump, according to people close to the negotiations.

EU eyes retaliation

In talks in Washington and Paris this month the two sides again made little progress. As if to highlight the distance between the two sides, US officials during the Washington meetings at one point brought out a binder containing a 150-page text negotiated with China and showed it off, according to people familiar with the events.

That leaves the most likely paths either for more muddling through or for a sharp escalation.

EU officials have made clear any car tariffs would be met with retaliation, as were steel and aluminium duties introduced on similar national security grounds last year. The EU said in January that it would hit 20 billion euros of US products should Mr Trump impose auto tariffs.

With the current European Commission entering a lame duck phase, the global car sector facing falling sales in markets like the US and China, and fears of a slowdown in the world economy looming large, muddling through may be the most likely option, said Ms Conley, who oversaw relations with the EU at the State Department during the administration of George W Bush.

US car tariffs also would bite at home where they are opposed by General Motors Co and Ford Motor Co and that may be a cost Mr Trump is unwilling to bear going into the 2020 election with key states like South Carolina home to major European carmakers like BMW AG and Volvo AB.

Tariffs would "rebound very painfully on American workers and the American economy as much as the European economy," Ms Conley said. "It's a choice. But it certainly could be a painful one."

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