EU Stakeholder’s informal discussion on Brexit and EU–US

Aspen Institute Central Europe (ACE) organized a closed roundtable discussion on the EU–US relations and the topic of Brexit on April 25, 2017 at Brussels. The session headed by the ACE president Ivan Hodáč aimed to discuss these issues with the V4 MEPs and the European key stakeholders. Find the conclusions below.

Trump’s First 100 Days in Office: In Search for New Narrative in Transatlantic Relations

Invigorated by his contradictory policy statements, the fears of Trump’s presidency leading to the collapse of the US politics have not materialized. Although the impacts of John R. Bolton and Steve Bannon pose dangers to politics as we know it, and that many positions in the White House still remain vacant, the political atmosphere is becoming more predictable. The corrective force comes from Trump’s own ranks of business people and experts, who have the President’s ear such as Wilbur Ross, Robert Lighthizer, Jared Kushner, general James Mattis and Fiona Hill.

Yet, the biggest tensions may be expected in trade policy, also due to Trump’s connections to the heartland industrial companies which are crucial for his re-election efforts. Therefore, it is more important than ever to engage the business community in showing the benefits of transatlantic cooperation. Transatlantic economic agenda could be hampered by the postponement of the TTIP, although some sort of transatlantic digital partnership could bring some progress to it. Security agenda will be driven by the search for a new transatlantic defense bargain.

Trade Policy: Buy American, Hire American

The President’s National Trade Policy Agenda for 2017 reiterated some of Trump’s previous protectionist rhetoric, saying its administration will aggressively defend American sovereignty over trade policy, and that it will resist efforts to advance interpretations that would weaken the rights and benefits of, or increase the obligations under, the various trade agreements to which the United States is a party. The belief that multilateral trading system has harmed the United States may cause real frictions on trade. Although the Agenda does not propose any explicit changes towards protectionism, it implies a more defensive trade policy via:

  • Enforcement-oriented approach by applying anti-dumping and countervailing duty laws
  • Unilateral trade mechanisms, eg. Sections 201 and 301 of the Trade Act, or the 1962 Trade Expansion Act. The latter act was cited in the recently launched national security investigation that could lead to significant tariffs on steel imports. Quoting national security to take trade measures at a time of peace is rather unusual
  • Possibility of renegotiating all current trade agreements (14), though not withdrawing from any, and using all possible leverage to open foreign markets to US goods and services

This trade strategy reflects the goal to induce economic growth, which is bolstered by domestic measures:

  • Tax cuts in adherence to the “Mnuchin Principle” of helping the middle class: getting rid of tax deductions while lowering tax rates or small cuts in the corporate tax rate.
  • Deregulation: in energy (pipeline and drilling approvals, executive orders on landfill, methane emissions for landfills, or power plant emissions, on fuel standards of cars, and on pipelines and so on) and financial services (rolling back of the Dodd-Frank Act; three reviews of banking rules have been already ordered).
  • Infrastructure spending.

All this may lead to some increase in economic growth but one that does not near the 4% that the president has promised.

EU–US Relations

The initially indifferent or negative stance towards the EU, expressed by the wishes of more “Brexits” and “taking back control”, was amended during Vice President Mike Pence’s visit to Europe in February. While not mentioning the EU in his Munich speech, Pence reassured the EU officials of the US commitment to cooperation with the Union. The warming-up of relations towards the EU may have well been prompted by Theresa May’s opinion that further “exits” would not be good for global economy, and Merkel’s repeated stance that the US should engage with the EU not unilaterally with Germany. However, there is less understanding in the White House that the US needs the EU to pursue its interests.

Main themes in the transatlantic relations will revolve around:

  • Post-TTIP: there is a good chance the US administration would like to sign a skimmed-down version of the TTIP, a sector-limited (leaving out e.g. agriculture, public procurement, maritime, airlines, telco) and tariffs-only. But in the EU there seems to be little appetite for a deal which excludes harmonization of regulations.
  • Technological advances (e.g. self-driving cars, smart energy grids, cloud) require new regulations, standards and compliance rules. It is an area where the EU and the US could be writing the standards of the future by means of a transatlantic digital partnership; also because it may be less controversial and easier than harmonizing the existing rules. US has already indicated its philosophical approach to innovation, free and open Internet, and commerce without barriers in its twenty-four principles as stipulated by the United States Trade Representative. Cooperation on data economy, cybersecurity, and intellectual property rights could fill in the narrative gap in transatlantic relations as there has not been much shared opinion on environmental issues and traditional trade so far.
  • US expectations from the EU: (i) enacting on the 2 % GDP and effective spending for defence, (ii) active engagement in the fight against terrorism, and (iii) trade policy cooperation regarding dumping strategies.
  • Given the popular misunderstanding of how much is spent on US foreign aid program, the US may be clearing out of some regions, leaving a vacuum that will be eagerly taken up by other actors, possibly also by the EU.

Russia

Despite, or maybe precisely because of, the ongoing investigations and congressional probes into the Trump campaign and contacts with Russia, there is no big risk in terms of a change in foreign policy. Significant shift and a friendlier position for Russia would invite even more scrutiny. Moreover, the appointment of Fiona Hill (co-author of “Mr. Putin: Operative in the Kremlin”) to the National Security Council staff as deputy assistant to the president and senior director for European and Russian Affairs is a sign of continuity.

Brexit: Current State of Play

The recent political developments on both sides, such as the announcement of snap elections, the leaked dinner talks between PM May and Commission’s President Juncker, have set the heated atmosphere for the negotiations, and show they will be eagerly used for the purpose of domestic politics. Brexit creates a number of questions about legal certainty during and after the transition period, which has a direct impact on citizens and, even more, on businesses. Multinationals are now making their contingency plans for adaptation to the new post-Brexit environment, and all companies with stakes in the UK, including many from the Visegrad Group, are afraid of the uncertainty. However, business community on both sides of the Channel, somewhat surprisingly, does not engage in political debate.

Negotiation Tactics

  • The recent leaks have undermined May’s ambition to keep the contents of the negotiations secret.
  • EU27 member states agreed a tough opening stance on the talks, it is yet to see how May’s cabinet will try to use bilateral leverage.
  • The principle that nothing is agreed until everything is agreed may result in having no deal at all, which in May’s words is preferable to a bad deal.
  • Whereas the EU envisages to have the basic architecture of the Post-Brexit deal debated during the Brexit negotiations, the UK government wants to have it completed alongside. Yet, having an EU – UK deal is more probable around 2021, when the transition period ends. It is too early to speak about the most likely scenario, but a sort of DCFTA, with no single market but security and research cooperation on top of the trade agreements might be the way to go.

Legal Aspects

  • So far it is not clear who will be the arbiter in case of a conflicting legislation after the transition period as the ECJ is not a preferred body for the UK government.
  • There are still diverging opinions on whether 50 TEU is irrevocable.

Main Negotiation Themes

  • Divorce bill: whereas the British government stance is to pay as little as possible, the EU has preliminarily estimated the cost to be around 60 billion euro, which includes the annual contribution of 15 billion and liabilities in other financial instruments including:
    • In long-term projects, such as those under the Horizon 2020, where the UK research entities are in 20% of all research innovation multiannual partnerships. The issue of the British participation in these projects after Brexit may be solved using analogous instruments as in the cases of Switzerland, Canada, or Israel.
    • European Investment Bank, where the UK is a 16% stakeholder. There are many EIB projects in Britain, some with 20- or 30-year contracts; moreover, if the UK leaves, the EIB rating will decline and the cost of funding will increase. Therefore, there may be a strong case for the EIB to change its statute and allow a non-EU country to become a member.
  • There is a strong commitment and goodwill on both sides to solve citizens issues. The UK and the EU citizens may be granted permission to stay in their respective resident countries retaining all rights but questions remain for those with undocumented stay or those still planning to relocate.

The Political and Economic Impact of Brexit

  • The political costs of Brexit resonate strong not only in France but also in Central Europe. Poland and Hungary are mentioning the need to open a debate of institutional reform to reduce Commission powers, and some more eurosceptic powers in Prague speak of “Czexit”. Combined with French and Dutch euroscepticism, the recent Commission’s White Paper on the Future of Europe came across as not ambitious enough and too Commission-centric to embrace these anti-EU trends.
  • There is a certain time-lag for the British financial and market backlash to Brexit, that is one of the reasons why PM May decided for early elections. Brexit itself may hurt service providers more than trade in goods. It is also important to remember that Brexit will economically impact not only the UK’s close neighbors but also all V4 countries.
  • However, for many big multinational companies Brexit is not the hottest issue, while fintech and other technological advances pose a bigger challenge to their business models, employment schemes and by extension, to the regulatory environment.

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