Reframing and Energizing Transatlantic Regulatory Cooperation
Peter ChaseSenior Fellow at the German Marshall Fund
Following four years of tumultuous transatlantic trade relations under President Trump, the Biden Administration is taking important, but cautious, steps to improve U.S.-EU economic ties.
These steps, including the creation of the U.S.-EU Trade and Technology Council, bring a new focus to transatlantic regulatory cooperation, in a way that thankfully has not (yet) elicited the uproar over “chlorinated chicken” that spoiled negotiations toward the Transatlantic Trade and Investment Partnership, TTIP.
As welcome and important as the steps are, however, they are too timid. This reflects a misunderstanding of the TTIP debate, and misses a critical opportunity to be both more ambitious on transatlantic trade and more effective in protecting European and American consumers, workers, savers, investors and our environment.
Behind this missed opportunity is a fear of popular opposition to deeper transatlantic regulatory cooperation. This opposition can be addressed, if European and American politicians and policy-makers both listen to their citizens and reframe the debate, as this article attempts to do. It begins by briefly reviewing how Europe and the United States got to where they are; suggests a more efficient way out of the morass; and then focuses in on both the underlying rationale for true transatlantic regulatory cooperation and ways to promote this. Some more general recommendations follow in conclusion.
How Did it Come to This?
The United States and the European Union share a truly unique economic relationship, unique because it is based on investment rather than trade. That American companies have invested more than $2.5 trillion in Europe, and European companies $2.0 trillion in the United States, shows the deep equity each side has in the other. Even the U.S.-Canada relationship cannot compare, for Canada is a much smaller economy: U.S. companies have invested $442.1 billion in Canada, while some $490.8 billion has flowed the other way. Nor does the U.S. or EU relationship with China or Japan come close, as shown in the table below.
Table 1 – Foreign Direct Investment, historical position, billions of dollars, euros
|Country/Country||United States||European Union||Canada||China||Japan|
|U.S. FDI in 2020||$2,515.2||$442.1||$123.9||$131.6|
|EU FDI in 2019||€2,161.5||€399.3||€198.7||€108.2|
This investment-based relationship in turn generates $1 trillion each year in bilateral trade in goods and services between the United States and Europe, much of which is intra-company – engines and other components shared between Ford Spain and Ford Detroit; intellectual property and production process technology shared between J&J/Janssen.
Behind these investments are people – the Americans who work for “European” firms in each of the 50 states, and the Europeans who often run and work for “American” companies in Europe. Indeed, a substantial amount of the investments European and American firms have made “across the pond” is dedicated to collaborative research and development, bringing the best minds in Europe and America together to improve our lives and societies.
The depth of the equity each side of the Atlantic has invested in the other is directly relevant to transatlantic regulatory cooperation: regulatory decisions on one side of the Atlantic affect the other.
When the United States was the world’s undisputed economic power (way back when), decisions made in Washington affected European companies who needed to export to the American market. As one example, for many decades the Federal Aviation Administration took years to certify new Airbus models as airworthy. As the European Union deepened the Single Market and its GDP reached and even exceeded that of the United States, this became more balanced, and indeed seemed to turn the other direction as American companies protested EU chemicals regulation under REACH and privacy regulation under the General Data Protection Regulation (GDPR), leading to talk about a “Brussels Effect.”[/note]Anu Bradford, The Brussels Effect: How the European Union Rules the World (Oxford University Press 2020).[/note]
The focus on bilateral dynamics began to shift, however, as China came on the scene, and began to rival the economic prowess of both the United States and the European Union. This was one reason German Chancellor Merkel called for a transatlantic free trade agreement as early as 2007 (this led to the Transatlantic Economic Council) 1 , and was why Presidents Obama, Barroso and van Rompuy launched the Transatlantic Trade and Investment Partnership (TTIP) negotiations in June, 2013. The three presidents believed that, because the U.S. and EU were so deeply invested in each other, TTIP would make European and American firms and workers more globally competitive by reducing costs to bilateral trade and investment, developing new rules for international economic relations, and facilitating regulatory cooperation as they built a “barrier-free transatlantic marketplace.”
The ambitious effort quickly ran into trouble, however. First, because of missteps in the negotiations, when the U.S. low-balled its initial tariff offer, leading the EU to be recalcitrant in its offer on services. Second, the uproar caused by Edward Snowden’s revelations about National Security Agency access to personal data held by U.S. companies. Third and most critically, the growing concern among Europeans that the United States would use TTIP to weaken EU regulatory protections, whether by directly forcing changes in rules governing such things as GMOs and chlorinated chicken, or indirectly through investor-state dispute settlement (ISDS).
The talks had essentially stalled when Mr. Trump became president in January 2017. He immediately began railing against the EU’s $150 billion trade surplus, and was not about to exempt Europe from the punitive duties he slapped on imports of steel and aluminum under the pretext of national security, despite the NATO relationship. Instead, he ratcheted up the pressure, frequently threatening to use “national security” again to tax Europe’s $60 billion in auto and auto-part exports. So it was little surprise when he acted immediately to levy tariffs on $11 billion of EU imports when the WTO finally ruled EU subsidies of Airbus illegal in October 2019. And of course Trump further discomfited Europe by waging a trade war against China and undermining the WTO’s dispute settlement system. Mr. Trump’s pugilistic approach to trade was motivated by a belief that U.S. presidents since World War II had lowered protections against imports to gain a “putative” geopolitical advantage with foreign countries. Not surprisingly, the targets of Mr. Trump’s trade travesties, including the EU, all immediately fired back.
The Tentative New Start
Mr. Biden became president in January 2021 as the virtual embodiment of America’s post-WWII foreign policy – after all, during half a century of public service he was long on (and chaired) the Senate Foreign Relations Committee as well as having been Mr. Obama’s Vice President. He vowed above all to renew America’s traditional alliances, particularly with Europe. And many on the eastern shore of the Atlantic breathed a sigh of relief.
But while he could have used his executive power to reverse his predecessor’s trade policies, Mr. Biden was aware that over 70 million Americans had voted for Mr. Trump in part because they shared his view that U.S. foreign policy had too often worked to the disadvantage of “normal” Americans. Biden and many on his team also directly experienced European demonstrations against TTIP, and fear Europeans would oppose any effort to restart those talks. A fear shared by European political leaders.
So Biden and his team have moved very cautiously, including with Europe, where the Administration agreed with the EU in March to suspend the Airbus-Boeing tariffs for five years 2 and to work on rules governing subsidies to large civil aircraft 3 ; established the Trade and Technology Council at the U.S.-EU Summit in June; 4 and most recently converted the tariffs on European steel and aluminum into substantial tariff-rate quotas, 5 although without removing the national-security justification of them or the punitive tariffs on imports above the quota. In return, the EU removed the tariffs it had imposed in response to Trump’s moves, withdrew its WTO case against the national security measures, and has stepped up collaboration with Washington on addressing problems both see stemming from China. And the warmer winds from Washington have also allowed the two to manage other differences – mainly emanating from Europe – over such things as data protection and digital services taxes. 6
The Trade and Technology Council is seen as the major forum for promoting this transatlantic trade reconciliation. Commission Executive Vice Presidents for economy and trade and for competition and digital policies, Valdis Dombrovskis and Margrethe Vestager, met their American counterparts (Secretary of State Antony Blinken, Commerce Secretary Gina Raimondo and US Trade Representative Katherine Tai) in Pittsburgh in September and issued a lengthy statement 7 promising much work in ten areas, seven related to technology (including artificial intelligence standards, clean tech, supply chains, 5G and data governance) and three more focused on trade, including ways to fight against Chinese subsidies and improve the functioning of the WTO.
These are all clearly very important efforts, and the annexes accompanying the TTC statement on investment screening, export controls, semiconductors, artificial intelligence and global trade challenges show a good deal of common purpose, especially with respect to China.
The Lack of Ambition
But just as the Biden administration’s efforts on Airbus-Boeing and the steel and aluminum tariffs put off rather than solved the problems, the TTC efforts do not get to the heart of the transatlantic economic divide. Indeed, the TTC won’t even touch the most problematic issues in the relationship, including renewing the “Privacy Shield” arrangement that facilitates the data transfers on which the transatlantic economy depends (declared invalid by the European Court of Justice in July 2020) or deep divisions on food safety. This is in part because political leaders on both sides are reluctant to enunciate a clear vision for transatlantic economic integration, for fear their workers (in the US) or NGOs (in Europe) will once again revolt, as they did over TTIP.
This unfortunately means the TTC and most other U.S.-EU discussions are based mainly on a negative motivation – against China – rather than a positive vision of building the transatlantic economy. 8
On the one hand, this makes some sense: the main lesson from the failure of TTIP is that, in the transatlantic context, trade and regulatory issues must be kept separate. The TTC agenda accomplishes this.
But in failing to reaffirm the value to all our citizens of a barrier-free transatlantic marketplace, and separately announcing efforts to renew FTA negotiations – importantly, without the regulatory cooperation part — the two sides have missed an important opportunity both to promote their competitiveness and to argue the rationale for true transatlantic regulatory cooperation.
Reframing Regulatory Cooperation
Again, regulatory cooperation should not be included in renewed FTA negotiations, which should focus on eliminating tariffs and enhancing trade rules. The reason is simple: the public reaction against TTIP, especially in Europe, underscored how dangerous it can be to put trade negotiations and regulatory cooperation together. Even the appearance that the business interests of trade might undermine the level of protection of consumers, workers, investors and the environment can be inflammatory.
Yet transatlantic regulatory cooperation faces two very real constraints that quite literally would prevent any transatlantic trade agreement from reducing regulatory protections. These constraints were never properly explained to the public; rather, officials merely stated they had no intention of using TTIP to that effect. And such promises, on their own, held no credibility.
The first of these constraints, so grounded in international law and practice that no one ever bothered to discuss it during the TTIP debates, is that every good and service sold in any country must meet that country’s legal requirements, and every foreign investment in a country is subject to its laws. Period. If not, the imported goods or services are illegal and can be confiscated, while the offending foreign investor will be hauled before a court of law — or, in some places, simply thrown in jail or placed before a firing squad. As such, neither the U.S. nor the EU could have agreed in TTIP that products or services that did not meet regulatory standards could be imported.
The second principle is less universal, as it depends on the political system. In some countries, laws may be determined by autocratic fiat. But in a democracy, the laws and regulations governing goods and services placed on the market and the behavior of firms in it reflect the values of the people who elect the politicians who make the laws. For the United States and Europe, democracy is more than just a “shared value;” it is an important transmission belt that expresses the “collective preferences” of our citizens. Politicians in both Europe and the United States would refuse to adopt a trade agreement or a subsequent law that violated those democratically-expressed preferences, which they would face again in the next election.
Similarly, in a democracy, regulators who enforce laws answer to those elected politicians. They cannot themselves change the law, and if voters are harmed because they don’t enforce it, they will feel the full wrath of those politicians. Indeed, publicly accountable regulators can get into very hot water if consumers, savers or investors are harmed even when no law exists or is broken.
Regulators, then, like the politicians who oversee them, are naturally domestically-oriented, and leery of international engagement. Certainly in the United States, regulatory agencies strive to keep a distance from trade negotiators, and indeed Congress has made many key regulators 9 answerable only to it rather than the President and the Executive branch.
Reflecting this reality, international laws governing trade and investment, which were written by the leading democracies, recognize the primacy of domestic collective preferences. But they recognize as well that some boundaries must be placed around these “preferences” to ensure that countries treat each other fairly and in accordance with rules, not just power. These boundaries are straight-forward: regulatory processes need to be transparent; foreign interests should not be discriminated against merely because they’re foreign; and regulation should be grounded in scientific evidence so that all parties can see the potential harms being ruled against.
Some are concerned the requirement for a science-based approach may run against the precautionary principle, 10 where a government may act to protect the environment, consumers or other interests even if the evidence is incomplete or speculative and the costs of regulation high. This concern arises often in the debate about GMOs, where the U.S. government is seen as particularly permissive. But this perception misses two things: The EU permits many GMOs 11 (mainly for import and use) after extensive scientific evaluation. And the United States is a great practitioner of the precautionary principle, 12 which is why it usually takes far longer to approve medicines used regularly in Europe, refuses to accept “suppliers’ declarations of conformity” for what the EU considers “low risk” electrical appliances, and has such a restrictive visa policy.
Rather, the requirement in trade law to use a science-based approach to justify regulation helps ensure that government decisions regulating imported products and services is not arbitrary or capricious. This principle is firmly upheld by many rulings governing the EU Single Market as well as U.S. court decisions.
Regulators, politicians and indeed the public do not always appreciate being bounded by the requirements for transparency, non-discrimination and evidence; not all “collective preferences” pass muster. But neither do they appreciate being subject to arbitrary and capricious behavior from others. So these principles are enshrined in international trade law, and we generally accept the boundaries because they apply equally to all.
Transatlantic Regulatory Cooperation in Practice
Within those boundaries and despite their domestic-orientation, regulators do cooperate internationally. This is especially true between Europe and the United States, where similar levels of development and our democratic systems have long meant we often face similar societal problems. 13 Much of this initially was with the larger member states and through the OECD; it began with the EU only after the Single Market process gave more regulatory authority to Brussels. Indeed, formal U.S.-EU regulatory cooperation started only in 1997 with the first joint statement on principles of good regulation. 14 This expanded rapidly in the early 2000s, and gained profile with the creation of the High-Level Regulatory Cooperation Forum (HLRCF) in 2005, which was in turn swept into the 2007 Transatlantic Economic Council (TEC) process. 15 U.S. regulators were initially leery; they did not like that the U.S. Trade Representative and DG Trade “facilitated” the initial efforts since they did not accept that foreign considerations had anything to do with their work. This was one reason for the move to the HLRCF, which was co-chaired by the U.S. Office of Information and Regulatory Affairs (OIRA) and the Commission’s Secretariat General. The TEC also kept a distance from trade as it was chaired by the President’s Deputy National Security Advisor for International Economic Affairs and the Commissioner for the Internal Market.
The real work, of course, was done by the counterpart U.S. and EU regulators themselves. The discussions were often tedious and frustrating, in part because of a major structural difference between the two sides: U.S. regulators are also accountable for enforcement (and the consequences of when enforcement fails), while the EU generally relies on member state governments for this.
Yet the two sides have been able to record many notable successes, including at the highest level of regulatory cooperation — mutual recognition of the other’s decisions on the safety of a product or service, which allows that product/service to be sold equally in the two markets. The U.S. and EU have done this in a number of areas, including (ironically) where they’ve had major trade disputes: large aircraft air worthiness certification, prudential practices for accounting standards and derivatives, trusted traders and travelers, organic foods labeling, active pharmaceutical ingredient production. The European Commission even twice recognized U.S. data protection practices as equivalent, although the European Court of Justice unwisely ruled invalid the adequacy decisions underlying the Safe Harbor and Privacy Shield arrangements. 16
In each case, the factors driving these agreements had little to do with a desire to promote trade, as such. They were motivated instead by the practical needs of the regulators themselves. U.S. and European regulators are stretched thin – laws and regulatory protections continually grow more stringent and must be enforced on ever-increasing volumes of domestic as well as imported goods and services, even as agency budgets are slashed. Regulators know they need to become more efficient to be effective in carrying out their mandate of protecting their citizens, financial systems and environment. And to do that, they need partners they can trust: counterparts who demand – and enforce — similar levels of protection. 17
Every U.S.-EU regulatory cooperation agreement rests wholly on the trust and confidence between the responsible regulators. That trust and confidence can evaporate in a moment, as happened after the 2008 financial crisis – no politically-accountable regulator will lightly take the chance of being hauled before democratically-accountable legislators because he or she blindly outsourced responsibility to another country’s regulator. But where that trust and confidence is strong, it can even withstand mistakes – as happened with the FAA certification of the Boeing 737 Max.
So transatlantic regulatory cooperation is not and cannot be about “reducing barriers to trade.” It may have that effect, but that is not its purpose. Rather, transatlantic regulatory cooperation exists to promote regulator efficiency and effectiveness. It’s about strengthening regulatory protections, not weakening them.
Energizing Transatlantic Regulatory Cooperation
The Trade and Technology Council agenda does cover some regulatory cooperation: possible equivalence on approvals of “high-risk” applications of AI/machine learning; developing common methods for calculating greenhouse gas emissions embedded in products/manufacturing processes; adopting similar approaches to regulating social media platforms; identifying and controlling the leakage of national security related dual-use technologies. These efforts preceded the TTC, but it gives them a prominence and impetus that should spur results. And it wisely does so in a way that is (now) divorced from traditional trade/market access concerns … although those may well arise again, especially in the digital realm. Even without that as a distraction, the discussions will be lengthy and often tough, as these are relatively new areas where both sides may even lack laws, regulations and enforcement authorities – not a recipe for trust and confidence.
But the TTC agenda, as good as it is, is insufficient. Especially because regulators on both sides have some catching up to do, having been unnaturally restrained by the dynamics of the TTIP negotiations and then sundered as trust and confidence plummeted during the Trump years.
Fortunately, some cooperative activities continued, and some are starting again, albeit often at a low and technical level. Perhaps the single most prominent example is with Covid vaccinations, when the pandemic forced the FDA and the European Medicines Agency to share data, findings and even approvals at an unprecedented level – a level that could not have been achieved had the two agencies not had two decades of gradually increasing cooperation behind them.
It is this sort of effort that the public on both sides of the Atlantic needs, in many more areas. That does not mean these activities should come “under” the TTC; they shouldn’t. Instead, the EU and the United States should, as a first step, dust off the High-Level Regulatory Cooperation Forum under the White House (OIRA and the NSC) and the Commission Secretariat General. This should start with a quick mapping of existing transatlantic regulatory cooperation efforts, including noting where previous efforts have faltered. It should ask all agencies to list and discuss possible areas of further collaboration, and then invite stakeholders to comment on these. This process could help determine priority areas for collaboration, which could in turn be given profile and impetus through a higher-level oversight process. Akin to the TEC, but improved.
Improved in part by the reframing: Not toward reducing “trade barriers.” But to promote regulator efficiency and effectiveness.
Even so, each of the individual regulatory cooperation activities could remove “obstacles” to transatlantic trade and competitiveness – where the regulators themselves have learned through dialogue that the levels of protection they each seek are equivalent, and where they have confidence that the other side can and will enforce the law.
These two concepts – equivalence and enforcement – are critical. The European Union is more accustomed to equivalence; this is the foundation for the Single Market. But across the Atlantic, it can be more difficult, not least as U.S. and EU laws are very different. Yet as demonstrated above, U.S. and European regulators know equivalence when they see it. One of the best examples: following the August 2006 plot to bring explosives onto flights from London to the U.S., 18 U.S. authorities at first banned liquids on all planes and then relented to allowing bottles of three ounces, 19 a common small size in the United States. Europe doesn’t normally use bottle of 88.7 milliliters, however, and complained; very quickly, the U.S. agreed that, for the purpose of this rule, 100ml would equal 3 ounces. Which it doesn’t, but 100ml also would meet the U.S. (very precautionary) regulatory objective as it also was too small for an effective explosive device.
Enforcement, as noted above, is also critical, and is more difficult in Europe. The EU wants all member states treated equally. But in reality, enforcement capabilities vary. Within the EU, this variation is problematic, but the Commission and member state authorities constantly work with counterparts to address problems that arise. For U.S. regulators, however, this is difficult to accept; they may not know each of the EU member state enforcement agencies, and cannot have the necessary trust and confidence in them. The EU need for equal treatment could slow every transatlantic regulatory arrangement, but pragmatically the two sides have often reached an accommodation under which a U.S.-EU agreement applies initially only to the member states that represent a “critical mass” of EU exporters to the United States, with others added as trust and confidence grow. An alternative approach was used in the 2016 U.S.-EU mutual recognition agreement on active pharmaceutical ingredient good manufacturing practices; here, the European Commission over the course of more than a year demonstrated to the FDA that it had a process to ensure effective oversight of pharmaceutical manufacturing in all member states. As the Commission had not conducted such oversight inspections for some years prior to the FDA asking about them, this TTIP-induced process notably strengthened EU regulatory protections.
Despite the reality of a deeply integrated transatlantic economy, based on literally trillions of dollars of investment, the U.S. and EU all too often seem to stumble over their own feet when dealing with bilateral trade issues. But they should not let even the traumatic experience with the TTIP negotiations stop them; in today’s vastly more competitive world, European and U.S. workers cannot afford politicians and policy-makers who are afraid to take ambitious steps.
The transatlantic partners need instead to take a different lesson from TTIP. They need to reaffirm their ambition of a barrier free transatlantic marketplace, but reframe it. Many steps can be taken today in the context of an ambitious EU-U.S. free trade agreement to reduce the costs to integrated transatlantic intra-firm supply chains, independent of the Trade and Technology Council process, and independent of the regulatory cooperation as discussed above.
Launch that, and at the same time encourage EU and U.S. regulators to work together, in their own interest as well as that of their citizens rather than in an FTA context. They can and will, even in the fraught area of non-GMO food safety regulation, where many of the “barriers” reflect more bureaucratic foot-dragging than real concern about food safety. Indeed, constructive progress can also come in the most sensitive area of “genetic modification,” especially if the United States can start by acknowledging that the EU’s rigorous evaluation process is legitimate and that export of seeds is less relevant than the approval of import and use of commodities.
Transatlantic regulatory cooperation has atrophied. This should change. The European Union and the Biden Administration have an opportunity to re-energize it … if they have the wisdom to successfully reframe it as well.
- Joint Statement of the European Union and the United States on the Large Civil Aircraft WTO Disputes (05/03/2021), see : https://trade.ec.europa.eu/doclib/docs/2021/march/tradoc_159458.pdf
- USTR Announces Joint U.S.-E.U. Cooperative Framework for Large Civil Aircraft, see https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/june/ustr-announces-joint-us-eu-cooperative-framework-large-civil-aircraft
- EU-US launch Trade and Technology Council to lead values-based global digital transformation, see https://ec.europa.eu/commission/presscorner/detail/en/IP_21_2990
- Joint US-EU Statement on Trade in Steel And Aluminum, see https://www.whitehouse.gov/briefing-room/statements-releases/2021/10/31/joint-us-eu-statement-on-trade-in-steel-and-aluminum/
- STR Announces, and Immediately Suspends, Tariffs in Section 301 Digital Services Taxes Investigations, see https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/june/ustr-announces-and-immediately-suspends-tariffs-section-301-digital-services-taxes-investigations
- EU-US Trade and Technology Council Inaugural Joint Statement, see https://ec.europa.eu/commission/presscorner/detail/fr/STATEMENT_21_4951
- P. Chase, Enhancing the Transatlantic Trade and Investment Relationship, 3 February 2021, see https://www.wilsoncenter.org/article/enhancing-transatlantic-trade-and-investment-relationship
- All regulatory “Commissions” are independent of the executive branch – the Securities and Exchange Commission (SEC), the Federal Trade Commission (FTC), the Federal Communications Commission (FCC) and the like.
- Communication from the Commission on the precautionary principle, see https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A52000DC0001.
- Of course, this is not just a transatlantic issue – the Organization for Economic Cooperation and Development (OECD) has long facilitated regulatory dialogues and cooperation among its members, and that membership has grown considerably more diverse since Japan became the first non-transatlantic member in 1964. Members outside Europe and North America include Chile (2010), Colombia (2020), Costa Rica (2021), Israel (2010), Japan (1964), Korea (1996), Mexico (1994).
- For details of this history, see Chase and Pelkmans, This Time It’s Different: Turbocharging Transatlantic Regulatory Cooperation in TTIP, Centre for European Policy Studies, June 2015. The Annex provides an exhaustive list of U.S.-EU regulatory cooperation efforts up to the start of the TTIP negotiations.
- P. Chase, Navigating the Transatlantic Data Conundrum, 21 September 2021, see https://cepa.org/navigating-the-transatlantic-data-conundrum/
- This rationale is well-articulated in President Obama’s May 2012 Executive Order on Promoting International Regulatory Cooperation.
- The 2006 transatlantic aircraft plot, see https://en.wikipedia.org/wiki/2006_transatlantic_aircraft_plot.
- Joe Sharkey, Turns Out There’s a Reason for Those 3-Ounce Bottles, NY Times, 11 September 2007, see https://www.nytimes.com/2007/09/11/business/11road.html
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