Transatlantic economic relations under the Biden administration: Be careful what you wish for?

The US and EU are getting back on the same page when it comes to major global economic issues, such as responding to China’s systemic challenge, updating WTO rules, and combatting climate change. But is the EU really prepared to match President Biden's ambitious plans, and take the transatlantic economic relationship to the next level?

As the new United States (US) administration of President Joe Biden nears its 100-day mark, it is clear that not only the tone but also the substance of its approach to the European Union (EU) has turned the page on the aimless provocations of the Trump era. Warm words from the president and his team have already clarified that the EU is no longer the "foe" that Trump claimed it was because of its trade policies. Although the importance of Asian economies in the systemic struggle with China is growing, Europe still has the chance to become the "partner of first resort" for the US, as Biden has previously called it. Especially when it comes to the issues of equity at the heart of the administration’s dual agenda of a "foreign policy for the middle class" and a "worker-centred" trade policy, the transatlantic economic relationship can play a crucial role.

Early diplomatic steps have been encouraging

For starters, there is now considerable convergence between US and EU ambitions in the global economy: responding to China’s state-capitalist economic behaviour; updating the rules of the World Trade Organization (WTO); promoting a digital economy that respects liberal values; and combatting climate change. This shared outlook is confirmed in the December 2020 joint communication from the European Commission and the High Representative for Foreign Affairs and Security Policy laying out areas of cooperation on "A new EU-US agenda for global change", which among other ideas proposes the creation of an EU-US Trade and Technology Council. Already, US Secretary of State Blinken and High Representative Borrell agreed at the end of March to launch a US-EU China Dialogue that will include economic issues. And while there have been bilateral tensions over COVID-19 vaccine supplies, longer term there should be opportunities for cooperation on promoting supply chain resilience for medical goods.

While these steps are encouraging, it is unclear if the EU was fully prepared for the kind of partnership that the administration had in mind. Despite the EU’s earlier supplications to the Trump administration to join forces, the imminent arrival of a progressive and outward-looking White House coincided with the signing of the Comprehensive Agreement on Investment (CAI) between the EU and China in late December. Although Biden’s incoming National Security Advisor made a public offer to coordinate on China, the EU opted not to postpone the signing of the CAI until after Biden’s inauguration three weeks later. Moving ahead on the CAI seemed at odds with the fact that Europeans were finally getting what they wished for with the advent of the new US administration.

To be fair, any EU hesitations about partnership with the Biden administration on China’s economic challenge may reflect a desire to insulate itself from the political risk embedded in current US politics. While it is possible Donald Trump or someone like him could capture the presidency in 2024, a strategy of promoting a tri-polar, US-EU-China world order rather than a coordinated transatlantic strategy risks turning into a self-fulfilling prophecy. With only half-hearted EU support, there is little chance the US will succeed in the trade and technology rivalry with China. That could make the US electorate susceptible to populist critiques that Trump was right not to rely on European allies, helping, in turn, to pave the way for four more years of "America First".

A transatlantic rapprochement on China?

Yet China’s strong retaliatory measures in late March against Members of the European Parliament (MEP) and civil society organisations, which came after the EU sanctioned Chinese human rights violations, may have created a watershed moment. The balance the CAI struck between economic efficiency on the one hand and values and security on the other may begin to look like an anachronism. But if the parliament does end up ratifying the CAI the most productive tack will be to consider its rules on labour, the environment, subsidies, and state-owned enterprises as a starting point for transatlantic cooperation on China. A coordinated US-EU approach that leaves some discretion to either side and puts the promotion of common geo-economic interests in the headline, rather than hostility towards China, seems possible.

While responding to China’s economic behaviour will help create a more level playing field in the global economy and so more equity at home, it will be a long-term task. More immediately, the EU’s Trade Policy Review and Annex from February and the Office of the US Trade Representative’s (USTR) 2021 Trade Policy Agenda issued in March stake out considerable common ground and suggest a path forward on at least two key areas where the US and the EU can work together to promote a fairer, more sustainable, and more stable global economic order: reconciling trade and climate policy and advancing new trade enforcement measures.

President Biden is making climate policy a central focus of his administration’s international diplomacy (returning to the Paris Accords) and its $2 trillion infrastructure proposal, putting the US broadly in line with the EU’s own approach. The two sides will begin to diverge if the EU moves ahead unilaterally this year with a carbon border adjustment mechanism as part of its Green Deal. The mechanism would allow the EU to tax carbon-intensive US exports like steel that are manufactured in politically important Midwestern states. With the USTR for the first time raising the idea of a US carbon border adjustment, there is now an opportunity for a transatlantic ‘green free trade area’ that could be extended to other, like-minded economies – as long as it can be made consistent with multilateral rules.

The Biden administration is committed to reforming the WTO, but it appears to view multilateralism more as a means than an end, and to place as much value on relationships as on institutions. It is noteworthy that the USTR’s trade agenda says the administration will make it a priority to "work with friends and allies on trade enforcement and pursue meaningful change for US workers and businesses in the global trading landscape". This assertion suggests an openness to coordinate on what in the EU are called ‘autonomous measures’ to push back against unfairness in the trading system, whether from China or elsewhere. If so, a relaunch of the trilateral process (US-EU-Japan) focused on measures to counteract the distorting effect of subsidies and state-owned enterprises – which the EU’s trade policy review has endorsed – may be on the horizon.

Bilateral tensions vs. strategic alignment

There are also a number of discrete irritants in US-EU relations that require attention, mostly in the area of digital policy. A replacement for the Privacy Shield governing data flows will be needed after the European Court of Justice struck down the existing measures in July 2020. USTR continues to investigate EU member states for their plans to introduce digital services taxes, although the atmosphere has improved since the US Treasury Department announced it will return, without reservations, to the OECD talks on the issue. The EU’s proposals last year for a Digital Services Act and a Digital Markets Acts, which would place more responsibilities and limits on large Internet platform companies, could lead to a clash—although the political centre of gravity in the US may be moving in the EU direction of greater regulation of these firms.

And while the long-standing Airbus-Boeing subsidies dispute may be headed for a resolution, the Trump-era Section 232 tariffs on steel and aluminium will remain contentious. The US and the EU also need to arrive at a common approach to restarting the WTO’s dispute settlement system through new rules to curb the overreach of its Appellate Body.

Yet so far, the Biden administration’s international economic policy seems focused on the big picture: facing up to China’s systemic challenge, building resilient supply chains, and combatting climate change. Will the EU see its open strategic autonomy strengthened – or challenged – by cooperation on these objectives with the new US administration?

Peter S. Rashish is Director of the Geoeconomics Program at the American Institute for Contemporary German Studies at Johns Hopkins University and a Senior Adviser to the European Policy Centre.

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