Co-authored with Robin Baker
Introduction
As we approach the third ministerial meeting of the Trade and Technology Council (TTC), transatlantic relations have never been as fundamental to both sides’ security and long-term strategic goals. Fittingly, we seem to be at the nadir of EU-US commercial relations.
Despite the political capital invested by each side, the TTC has failed to meet the unrealistic expectations of those who chase elusive transatlantic alliances. Instead, several new and seemingly non-negotiable bilateral frictions have piled on top of legacy issues that were inherited from the Trump era and never fully resolved.
In the past six years, heads of governments on both sides may have concluded that a US-EU consensus is not indispensable to resolve most of the first-order global challenges of the day. But this is not necessarily a shortcoming. On the contrary: Europe and the US remain formidable antagonists in their own right. There is no shortage of commercial conflicts between them that spill over to create blockages in forums like the G7, WTO and OECD.
Paradoxically, transatlantic relations also amount to one of the most active working-level partnerships. Reasoanbly intricate problems – like US surveillance on Europe, sanctions, and common countries of concern – have been addressed without being embedded in a comitology of working groups.
This leads us to the dilemma of the TTC endeavour. It is not a trade negotiation that will deliver a predetermined and structured outcome, often by a grand bargain. The format is more akin to the technical dialogue of the Transatlantic Economic Council (TEC) than TTIP – except discussions gravitate towards policies rather than minutiae of technical standards.
As a dialogue – rather than a finite negotiation – the TTC does not need to do much beyond talking to be purposeful. Yet, by institutionalising informal relations and subjecting them to the scrutiny of biannual, high-level summits, the Council has inevitably raised the stakes and diplomatic costs of failure. The involvement of three cabinet-level U.S. secretaries and two E.U. vice presidents is costly and makes it hard to justify as a mere ‘show and tell’ exercise – where counterparts explain their policies – but have no political mandate in changing them.
As we examine the cause of the stalemate in the TTC process, we must be mindful of the very limited policy space available to both sides in fulfilling its purpose. The way forward requires a pragmatic approach to recent conflicts. If issues such as 5G standardisation, export controls, the Inflation Reduction Act (IRA), or recent E.U. digital legislation cannot be resolved – then it may be time to exercise damage control. After all, no diplomatic negotiation ever fails, but merely hibernates as a ‘stocktaking exercise’.
A configuration designed for deadlock
Before excavating the well-publicised bones of contention, it is worth scrutinising the origins and structure of the TTC. Unlike market access negotiations, open-ended policy dialogues are not conducive to decisive action – unless there is a very clear idea about the trade-offs between various committees. Without clearly defined issue-linkages, ten workstreams that range from ‘Climate and Clean-Tech’ to ‘Data Governance and Tech Platforms’ can meander on forever.
Also, one of the most important takeaways from previous negotiations (including TTIP or bilateral talks with the Trump administration) is how the involvement of multiple U.S. agencies does not necessarily create better outcomes. Whereas the Indo-Pacific Economic Framework (IPEF) is led by four different US government agencies, structural ambiguities are arguably more pronounced in the TTC, where competencies widely overlap across different tracks.
Some of the alternative configurations that were also considered when the TTC was first informally proposed by the President von der Leyen’s cabinet could have avoided these problems. In retrospect, focusing strictly on third-country practices under a single lead agency may have avoided familiar negotiating traps. Also, involving a third country into the dialogue could have shifted the focus away from bilateral frictions.
Taking trade issues off the table
Ultimately though, the lack of meaningful outcomes at the TTC can be attributed to the Biden administration’s reluctance to discuss trade. Legacy issues – like the Section 232 tariffs and the Buy America Act – were deemed beyond the remit of the inaugural Council meeting in Pittsburgh, even if the former were partially resolved just one month later following discussions between Presidents.
More recently, the U.S. executive branch has been unwilling to address tax credits promised under the IRA, which President Biden signed into law in August. Under the Act, U.S. consumers are eligible for as much as $7,500 in tax credits on purchases of electric vehicles if battery components are sourced from the U.S. or USMCA partners.
The IRA also promises buyer-side credits for green hydrogen manufactured in the U.S. These preferences are introduced on top of investment and production tax credits and federal funding for hydrogen hubs laid out in a separate, bipartisan Infrastructure Law, which the E.U., Australia and other allies deemed as severely market-distorting.
The IRA introduces avoidable violations of MFN and national principles, crossing another line with the multilateralist EU. But as the IRA is devised by the Congress, it is not conducive for negotiations led by the executive branch. Its contentions cannot be resolved until after its implementation – either via direct negotiations with affected producers or waivers issued by DoT.
However, many EU and Asian stakeholders apply inexorable pressure on their home governments to litigate or retaliate against the IRA or other aspects U.S. industrial policy. The German Federal government singles out the IRA as ‘the overriding political issue and troublemaker for the TTC’. Yet, the Biden administration has once again chosen to deal with the IRA outside the scope of the Council. An external task force has since been launched to ‘promote deeper understanding’ on the ‘opportunities and concerns for E.U. producers.’
Just like the Section 232 tariffs in the past, impediments as sizeable as the IRA can never be truly delinked from intergovernmental negotiations. Brussels may be the demandeur of the TTC process – but it is unlikely to be persuaded to bring its own defensive interests into the discussion if its negotiation objectives are formally delinked at the request of the US.
Some of the most tangible, and equally fixable, irritants on the EU side include the four digital legislations that disproportionately target U.S. platforms – DSA, DMA, DGA and the Data Act – that were pushed through the EU legislative process concurrent with previous TTC summits. Even now, there are new sovereignty provisions being amended in the E.U. Certification Scheme for Cloud Services.
The real question is whether platforms and clouds are sufficiently important stakeholders for the Biden administration to make concessions elsewhere.
China tech threat used as a pretext
As the TTC is primarily designed for dealing with bilateral frictions, it is understandable that very little of the working agenda is immediately ‘operational’ against countries of concern, such as China or Russia. Thus far, TTC coordination against Beijing has been restricted to joint statements on rare earth metals, solar supply chains and non-market practices in the medical devices sector. This kind of coordination would have materialised in any case, not least in broader coalitions including Japan and other Indo-Pacific allies.
Regardless, a bilateral focus has not prevented the U.S. from using the China threat as justification for its own industrial objectives. In the TTC the Biden administration has expended a disproportionate amount of political capital on convincing the E.U. to subsidise and support O-RAN. This alternative 5G product is, somewhat ironically, underpinned by a US-Chinese-led consortium. But without reciprocal concessions, it is unclear as to why the E.U. would violate WTO rules on transparent standard-setting (and undermine two European digital champions in the process) by supporting a U.S.-led alternative that is not yet ready for 5G deployment.
Similarly, the U.S. has failed to convince the E.U. to follow its lead in implementing stricter export controls on wafer fabrication equipment (WFEs). In the past week, the U.S. Commerce Secretary has dispatched one of its undersecretaries to the Netherlands and Japan – the world’s leading specialists in the lithography process – a crucial step in semiconductor fabrication.
U.S. diplomats and lobbyists are keen to ensure that there is some ‘burden-sharing’ amongst allies, i.e., that the Chinese semiconductor market will not be overtaken by third-country competitors. But recent measures by the U.S. on semiconductor-related items are not bans, but export controls similar to those that are already in place in Europe, who has listed lithography equipment as a dual-use item since 2014. Policies are also subject to both treaty commitments and close coordination between the E.U., the U.S. and Japan.
The matter ultimately comes down to trust and industrial competition: Prior to the recent updates, U.S. export controls targeted Dutch lithography equipment but remained laissez-faire on half a dozen equally critical production steps where U.S. firms happened to dominate. In the past two years, U.S. market leaders have uniquely boosted their sales in China by over $5 billion. During the same period, Chinese-state-owned SMIC succeeded in breaking the critical 7nm chip manufacturing barrier, not by using Dutch EUV equipment, but ‘dep and etch’– an alternative method relying on U.S. tools.
Ultimately, the U.S. cannot expect the EU to impose bans which the U.S. itself has not done; Nor can it expect the Netherlands to cede its sovereign decision-making power. Both O-RAN and export controls are just two examples of how successive U.S. administrations have used the China threat as a pretext to neutralise European technology while promoting its own (and often inferior) alternatives. Rightly or wrongly, the U.S. narrative portraying a “common China threat” suffers from severe credibility issues in European capitals as a result.
Thinking short and long-term
In the absence of major bilateral trade-offs, key outcomes from the third TTC summit may underwhelm – but we must also consider the limited policy space available to curb the collateral damage from industrial policies driving all major economies in the current economic cycle.
But those D.C. pundits who hide behind the inane logic that the Biden administration is merely matching Paris, Berlin and Tokyo on subsidies are missing the whole point. They fail to understand that Brussels’ objections are not about the U.S. joining the bandwagon, de facto but the way in which it has done so de jure – in total disregard of the rules and principles that U.S. Democrats once used to champion.
Here is where an enthusiastic but inexperienced team in D.C. may have underestimated the beast that is transatlantic cooperation: By taking trade issues off the TTC table, the Biden administration has not just missed the opportunity to bring Europe’s digital sovereignty issues into the discussion – but created a popular narrative that portrays the U.S. as protectionist and tricked by lobbyists into chasing pipedreams.
The traditional notion of demandeurship does not apply because the lack of meaningful concessions actually plays into the E.U.’s hands. Brussels is quietly pleased with the current impasse and the opportunity to promulgate its regulations in a critical market that has traditionally favoured laissez-faire. If the E.U. and its regulatory approach are winning, why would it change tracks? Hence, the onus is primarily on the U.S. to make the first move within the TTC.
Even without such trade-offs, the TTC has some long-term value. If the TTC instead remains a non-negotiating forum, tangible policy outcomes will be limited to areas where neither side is yet to commit any sins. On the likes of A.I., quantum computing, and 6G, the E.U. and the U.S. are yet to execute any far-reaching policies or develop any standards. Given the absence of any sunk costs, they could still agree on future policies, rules for future engagement, or joint research. And if the E.U. and the U.S. fail to engage seriously on 6G development, we are sure to continue the transatlantic tech war into the next decade, well into the 2030s.
But as it stands, the smattering of TTC headlines – including sanctions on Russia – would have occurred without the TTC. Joint funding to promote ‘trusted vendors’ in Africa and the Caribbean is an eloquent compromise in appeasing D.C. lobbyists’ hunger for their own 5G industry. Similarly, an early warning mechanism on semiconductor supply chains or Megawatt Charging Systems (MCS) for heavy-duty E.V.s, are technical level decisions dressed as strategic initiatives. In this sense, transatlantic cooperation is more perfunctory today than many transatlantic experts would have you believe.
If the U.S. wants to do more, it needs to reset its priorities and understand that negotiating with the E.U. is less like negotiating with like-minded countries in the IPEF and more like finding peace with itself.