CQ WEEKLY – COVER STORY
June 23, 2012 – 12:25 p.m.
Gambling on Success in Europe
By Joseph J. Schatz, CQ Staff
The “freedom fries” in the House cafeteria may be long gone, but it’s still not a great time in American politics to be a Europhile. The continent’s financial woes are a cautionary tale and a partisan talking point on the campaign trail: Republicans claim that the debt crises in Greece and Spain foreshadow the U.S. future under a Democratic president, while Democrats point to Europe’s retreat toward recession as proof that budget austerity has been a failure. And there is broad agreement among economists and trade experts that a euro meltdown, with its impact on U.S. exports and banking interests, might drag the United States into recession and doom
Yet to many American businesses, the financial alarms going off in Europe sound like the clarion call of opportunity.
Even as some government officials and lawmakers say the United States must insulate itself from Europe’s growing sovereign debt and financial problems, many U.S. companies believe that the time is ripe to double down, to deepen ties with Europe and to create a new trading relationship. Some are doing that by investing more in Europe, but major business groups also are pushing officials in Washington and in European capitals to negotiate a broad, trans-Atlantic trade and investment deal that binds America and Europe more tightly.
For U.S.-based retailers, manufacturers, banks and shippers, the effort is the trade-world equivalent of opening the Berlin Wall. They would clear away decades-old regulatory and trade barriers and build upon the already deep relationship with the European Union. Doing so would mean rethinking the countless rules, restrictions, product standards, tariffs and other details that are ingrained in the world’s largest trading relationship and which, business groups say, hold back an enormous potential for growth.
Simply eliminating the remaining tariffs between the regions would affect a broad range of retail goods and industrial products. U.S. manufacturers exported $273 billion in goods to the European Union in 2011 and imported $373 billion. U.S. service companies, meanwhile, reported sales to the EU last year of $190 billion and imports of $150 billion in European-provided services.
Harmonizing regulations would give manufacturers even bigger gains. For example, Ford Motor Co. and its European rivals sell cars on both sides of the Atlantic, and even though the cars are similar in many respects, the manufacturers end up spending money to satisfy differing requirements on such seemingly simple items as windshield-wiper blades, headlights and even the type of crash-test dummies used during the design process.
They maintain that the halting progress of the U.S. economic recovery and Europe’s even deeper fiscal problems make now the right time to liberalize trade connections. Both regions need economic growth, and advocates for freer trade contend that — despite the complicated politics — Europe and the United States both stand to gain.
“Competitive pressures are building, and the need for growth is more critical than ever,” said U.S. Chamber of Commerce president, Thomas J. Donohue, in a recent speech. “We don’t need another amorphous concept with over-ambitious labels that can mean anything to everyone and no mechanism for action. We need specific sets of negotiations with tight timetables and firm deliverables dealing with tariffs, services, regulations, procurement and investment.”
Such a deal would amount to a “shot in arm to both economies,” says Frank Vargo, the National Association of Manufacturers vice president for international economic affairs. U.S. factories will see big gains in efficiency, he says, “if we don’t have to modify stuff for the EU.”
Signs of Change
The business effort has borne fruit. Desperate to boost growth but hamstrung by demands for austerity, European leaders appear more receptive to new terms for trans-Atlantic trade. The administration and the EU are exploring formal negotiations later this year. At last week’s Group of 20 summit in Mexico, President Obama embraced the effort, saying that even as the United States works to complete an ambitious Pacific Rim trade agreement, “we’re also working to expand our trade with Europe.”
Gambling on Success in Europe
Congress won’t have a role to play in an expansion of ties with Europe until an agreement is reached. Still, a bipartisan cohort of the House Ways and Means Committee, including Minnesota Republican
Making a major economic deal would require the administration, Congress and the many European governments to overcome long-running trade and regulatory disputes on a broad range of issues, affecting such industries as steel, poultry, genetically modified food, banking and other services. Although less contentious than, say, the U.S. dispute with China over currency manipulation, many of these issues have proved to be intractable in recent years and costly to both sides.
More broadly, engagement on trade and investment may require American officials to become more involved in Europe’s turbulent economic situation, which includes the growing unrest over austerity measures that has triggered a backlash in Greece and France and the bailout of banks in Spain. Creating closer ties, some fear, would be tantamount to running into a burning building.
Europe may have everyone’s attention, says Heather A. Conley, director of the Europe program at the Center for Strategic and International Studies, but “in a negative way.” CSIS supports a trade deal but doubts that the Obama administration will have the stomach for a tough negotiation.
“Quite frankly, there is less of an appetite right now for doing some big and bold initiatives for Europe,” says Conley, who was deputy assistant secretary of State for European and Eurasian Affairs from 2001 to 2005.
Still, geopolitical realities may also breathe life into the effort.
U.S. companies and government officials see cooperation between the United States and Europe — the two pillars of the post-World War II economic order — as a vital response to China’s aggressive trade practices, and its mercantilist economic world view, in a vastly changed global trading system. “We need a united position on the China challenge,” Vargo says.
That’s one reason that business officials who generally speak with fervor about the opportunities of China, Korea and emerging Asian economies are telling Congress and the administration not to forget Europe, particularly as the administration seeks to shift its foreign policy focus toward the fast-growing Pacific Rim.
Donohue likes to remind people that the United States has more money invested in the country of his ancestry, Ireland, than in Brazil, Russia, India, China and South Africa combined.
“Remember one thing: The U.S.-EU trade deal is the biggest trading arrangement in the world,” says the Brooklyn-born 74-year-old. “When people are running around talking about China, talking about everybody else, don’t lose sight of the fact [that] that’s where it all is.”
U.S. Pushing Action
The financial crises of the past five years — from the collapse of the mortgage market, which helped cause the deepest recession in generations, to the intractable sovereign-debt woes that threaten to fracture Europe’s economic and political union — have challenged and complicated relations among Washington and European leaders.
Gambling on Success in Europe
Those complications have come at a time when relations were supposed to be thawing, as the presidency of George W. Bush gave way to Obama’s more multilateral approach to world affairs.
At first, the Europeans were the ones pushing for increased cooperation, asking the Bush administration to do more to contain the global financial crisis that stemmed from Wall Street and housing market meltdowns in the United States.
Josef Ackermann, the Swiss banker who recently ended a run as chief executive of Deutsche Bank, recalls former Treasury Secretary Henry M. Paulson Jr. attending a Washington meeting of the 400 largest global banks and insurance companies during the height of the 2008 financial crisis. The bankers said, “‘You have to move faster.’ And they felt, ‘no, we have still a few weeks to go,’” Ackermann said at a June 4 roundtable at the Atlantic Council.
During the past four years, the situation has changed dramatically. And although Ackermann counsels patience, he said he is “actually very grateful that the U.S. is pushing Europe very much in acting faster.”
But coordinating U.S. and European banking regulations, including the international reach of the 2010 Dodd-Frank financial overhaul, has proved to be difficult. In the past year, the United States has been an anxious observer when it comes to Europe, watching from afar and applying pressure where it could, as the 17 countries that use the euro as a common currency struggled with the evolving debt crisis, which has roiled world markets and toppled governments across the continent.
When the EU’s 27 economies are counted as a unit, the region’s commercial relationship with the United States is already the biggest in the world, with total trade and investment flows of $1.5 trillion annually. U.S. exports of goods and services to the EU as a whole are as large as those to Canada and China combined. And four EU countries — the United Kingdom, Germany, the Netherlands and France — are individually among the top 10 U.S. export markets.
The U.S. states whose economies rely most on exports to Europe include commodity giants Utah and West Virginia and aircraft and auto-parts exporter South Carolina, according to a Wells Fargo analysis late last year. Exports to Europe haven’t dropped significantly in recent months, but many analysts expect a decline soon, with the United Kingdom in recession, the rest of Europe on the brink and consumer demand waning.
The Federal Reserve has played a behind-the-scenes role in helping the European banking system stay afloat, but conservative lawmakers have warned the administration not to aid Europe financially and have targeted U.S. commitments to the International Monetary Fund. That’s something of a straw man — historically those investments have proved to be very safe — but the political message is clear: The administration will engage more closely with Europe at its peril.
“We are not going to send checks to Europe. We are not going to bail out the European banks,” said Mitt Romney, the presumed Republican presidential nominee, this month.
Seeking an Opening
With the domestic economic recovery slowing, and Congress and the White House unable to tackle Washington’s fiscal problems, European leaders bristle at the notion that the United States has much to offer Europe beyond open trade. “We are not coming here to receive lessons in terms of democracy or in terms of how to manage our economy,” said European Commission President José Manuel Barroso at the G-20 summit.
But American companies are looking past the politics, and they hope the current crisis can serve as an impetus to act on the goal of doing business seamlessly on both sides of the Atlantic while lowering barriers to EU markets with more 500 million consumers.
Cultural ties remain deep, and many large American companies maintain huge operations in Europe, taking advantage of favorable tax polices. Google Inc.’s use of Irish tax laws to limit the Internet company’s tax liabilities, for instance, is sure to crop up in any debate over rewriting the U.S. tax code next year.
Gambling on Success in Europe
U.S. companies invested $215 billion in Europe in 2011, more than half of all U.S. investment abroad. Meanwhile, European investment in the United States totaled $1.7 trillion in 2010, about 72 percent of the total. And the United States is the EU’s third-largest import market, ranking behind China and Russia, according to the statistical agency Eurostat.
Many companies see opportunities in Europe as the U.S. consumer market stumbles. Just this month, Illinois-based Walgreen Co., the country’s largest retail pharmacy, bought European retailer Alliance Boots. The risks in the opportunistic play were evident when Walgreen’s share price dropped 10 percent in two days, in part because investors were concerned about the company’s exposure to Europe’s debt woes.
Walgreen, however, cast the move as a way to diversify profits in a difficult economic climate and to use Alliance Boots to find new customers in Turkey, Egypt and China. “Together we will be ideally positioned to expand our customer offerings in our existing markets and become the health and well-being partner of choice in emerging markets,” said Walgreen chief executive Gregory Wasson.
United Parcel Service Inc. just bought the Netherlands’ TNT Express, expanding into Europe in a big way. And investment banks such as Goldman Sachs see money to be made in Europe’s de-leveraging. Meanwhile, Russia’s state-owned Sberbank is buying up banking operations in Eastern Europe as Western European banks retreat, and China and Dubai also are swooping in, eying opportunities on the continent.
U.S. corporate and government officials have been urging a freer trade arrangement between the United States and Europe since the late 1980s, as the fall of the Berlin Wall and the dissolution of the Soviet Union hastened the integration of Europe, the creation of the European Union and the establishment of a common currency.
NAM’s Vargo, who will retire this summer, recalls that during his days as Commerce deputy assistant secretary, in the 1980s and 1990s, Europeans were always reluctant to negotiate a wide-ranging trade deal. Indeed, U.S. officials often spoke of a “Fortress Europe” mentality on the continent.
“That’s changed remarkably. Now the Europeans are driving this,” Vargo says, “because their economy is in the tank.”
A stronger trade deal is likely to be an easier sale to traditional critics of liberalized trade agreements, as well. Although many trade deals with emerging economies meet resistance from labor and environmental groups, Europe’s labor and environmental protections are generally stronger than those in the United States.
Business advocates won an initial victory late last year, when Obama and European leaders agreed to form a high-level working group to study the trade-investment barriers between the two regions. That task force released an interim report June 20 and is slated to issue a final set of recommendations before year’s end.
“What’s driving this is the fact that U.S. companies have an incredibly large accumulated stock of investment and do huge amounts of trade with the EU, and they’re looking for ways to maximize what they already have there, as well as new opportunities,” says Peter Rashish, vice president for Europe and Eurasia at the Chamber of Commerce.
There could be some big immediate gains for the American economy in liberalized trade. Zeroing out tariffs could increase U.S. GDP by at least $135 billion and perhaps $181 billion over five years, according to a 2011 analysis by the European Center for International Political Economy.
“Tariffs are not that high, but because volume is so much, we pay the Europeans a lot in tariffs,” Vargo says.
Gambling on Success in Europe
Consumers in the United States and Europe trade in similar high-end goods from the same industries. A significant portion of U.S. exports to Europe — a third, according to the European Commission — consists of companies shipping products from the United States to their European facilities or subsidiaries. Those intracompany transfers are a major issue for big manufacturers.
Volvo, the Swedish automaker that Ford sold to China’s Zhejiang Geely Holding Group in 2010, illustrates the degree to which manufacturing is already intertwined. The company does most of its assembling in Europe. But a February study by the German Marshall Fund’s Transatlantic task force says that among the many parts in a Volvo
Shipped separately to a factory, some of those components may be subject to tariffs when they cross national borders but some may not be, creating inefficiencies and hurdles in some markets for industrial-parts makers.
The most immediate goal is to get the EU and the United States to align their standards and regulatory requirements so U.S. companies can be certain that their products can be sold in Europe.
“We need a trade agreement in order to put pressure on the regulators on both sides to harmonize regulations, testing,” Vargo says. “That’s where the big payoff is.”
The big payoff in regulations, of course, is also the biggest hurdle to greater trade harmony. The accusations over aircraft-manufacturing subsidies involving Airbus and Boeing may be the longest-running dispute, but the list includes a decadelong European ban on U.S. poultry imports because American producers were cleaning the chickens with a chlorine wash; restrictions on genetically modified organisms; and other EU barriers to American farm exports and to newer issues involving service sector companies.
Some in the United States wonder whether the Europeans are serious about a broader trade agreement and whether it’s worth the effort to pursue a straightforward pact on tariffs, a more comprehensive regulatory agreement — or nothing at all.
Rather than setting pre-conditions for talks, William Reinsch, president of the National Foreign Trade Council, says the two sides should “start negotiating and then see where that leads without worrying too much about failure.”
Still, that’s difficult, says CSIS’s Conley. “We spent years arguing about poultry-washing. Not to say those aren’t important issues, but we really tend to get stuck bureaucratically,” she says.
No Easy Task
Indeed, while a trade and investment compact would be a great benefit to business, it still would demand heavy political lifting. From 30,000 feet, the EU may resemble a unified market, but as the debt crisis in Greece has shown, the willingness of European governments to act in concert cannot be taken for granted.
Past attempts to negotiate a U.S.-EU deal occurred in a far different world, when emerging markets — and China, in particular — didn’t have the economic clout they do now.
Companies from the United States and the EU are pursuing their own interests and profits in Asia, and Europe has often acted more rapidly to strike agreements that recognize shifting trade patterns and new market opportunities. The EU acted quickly, for instance, to get a new trade pact with South Korea while a U.S.-Korea agreement was stuck in political limbo before finally winning approval late last year.
Gambling on Success in Europe
To some, agreements such as the South Korea trade pact and the administration’s prospective Trans-Pacific Partnership signal the future of world trade, while suggestions of closer trans-Atlantic ties have a whiff of nostalgia about them. Although some European nations remain strong in their own right, the debt crisis may serve as a warning that the continent can’t take trade to a higher level until it answers questions about the financial stability of other countries.
And one industry official worried that the European desire for a deal hasn’t been adequately reciprocated by the White House, saying, “The U.S. seems to feel the future is in Asia.”
Still, foreign policy experts note that the European debt crisis threatens a project, 60 years in the making, of forging a united Europe, a vision aimed at preventing a recurrence of the wars that plagued the continent in the 20th century.
And some worry that an economically hobbled EU will be less able to partner with the United States on security issues. Conley worries that U.S. policy makers aren’t grasping that reality. “My concern is that we’ve really been treating this as an economic crisis,” she says. “It’s a political crisis.”
That may be incentive enough for the EU to start acting collectively on enhancing trade with the United States and for officials in Washington and Europe to send a joint signal to China as Beijing prepares for a leadership transition later this year.
The White House has often tangled with German Chancellor Angela Merkel over the administration’s desire to revive the world economy through stimulus, as opposed to the German-led call for austerity in Europe. But trade is, in many ways, less controversial. And in the view of business officials, getting the two regions on the same page for commerce is particularly important in the aftermath of the Doha round of trade talks, which collapsed last year after a decade of disputes between developed and developing nations.
An early sign of that kind of cooperation may have been apparent in March, when the United States and the EU, as well as Japan, filed complaints at the World Trade Organization over China’s export controls on rare-earth minerals, which are critical to the manufacture of high-tech electronics.
“Don’t forget that even with the rapid rise of new economic powers, the United States and Europe, we still account for 45 percent of the global economy,” the Chamber’s Donohue said in a recent speech. “That’s more than just pocket change.”
FOR FURTHER READING: Europe’s troubles, 2011 CQ Weekly, p. 2260; China lectures United States, p. 2094; U.S.-EU trade discussions, p. 1356.