18 July 2018

The Future of the Trans-Atlantic Economic Relationship

While the United States and Europe have generally co-operated on most political and security matters, the two sides have long been competitors on many economic, trade and investment fronts.  Sure, the two sides have worked together to establish international economic standards and they share many of the same goals when it comes to economic growth and development.  Furthermore, they both find their leading economic positions in the world challenged by the rise of China and other emerging markets. 

However, the US and Europe often find themselves as competitors in many economic fields, with divisions between the two sides on issues such as technology, trade and economic standards leading to an increasing number of disputes between them.  Moreover, the divisions between the more free-market United States and the more statist Europe have widened in recent decades.  While the United States touts its higher rates of economic growth and its lead over Europe in terms of wealth, Europe counters by pointing to its lower levels of inequality and poverty.  As these differences persist, and as support for nationalist and protectionist policies grow on both sides of the Atlantic, the competition between the United States and Europe in the economic field is likely to intensify.

For most of the 20th century, the trade and investment relationship between the United States and Europe was the leading driver of growth for the global economy.  However, as the importance of emerging market economies has increased in recent decades, this once-vital relationship has lost some of its luster.  Now, with the rise in protectionist sentiment in many areas of the US and Europe, there are fears that a full-blown Trans-Atlantic trade war is brewing.  For protectionists in the United States, their anger is directed at those European economies that are running large trade surpluses with the US, most notably Germany.  Of course, many European countries have also been frustrated by German economic policy since the introduction of the euro, but this has not stopped the US from seeking to impose trade barriers on imports from across Europe. 

Meanwhile, some sectors of the United States economy would clearly suffer from a trade war with Europe, and Europe has already targeted many of these vulnerable sectors with retaliatory tariffs.  However, Europe is particularly vulnerable in a trade war with the US, as so many of Europe’s most successful economies are dependent upon exports outside of their home region for much of their growth.

For a long time now, Europe has been the leading source of foreign investment into the United States, as well as the second-leading trade partner for the US after North America.  In recent decades, European investment into the United States has soared as European manufacturing and services firms have sought to gain a foothold on the faster-growing US market.  At the same time, US exporters in fast-growing technology and service sectors, as well as the rapidly-expanding US energy sector, have viewed Europe as a large and steady market where they could fill a major need for European consumers and businesses. 

However, as Asia now generates more economic growth than the US and Europe combined, both the US and Europe have turned much of their attention to China and the other large economies in that region.  Meanwhile, US political and economic leaders increasingly view Europe as being hostile to US economic interests, using issues such as European hostility towards the Unites States’ giant technology companies as evidence of Europe’s desire to weaken US economic power.

For Europe, the United States remains a vital export market, and European exporters have struggled to convince Europe’s political leaders to prevent a trade war from breaking out between the two sides.  Despite the growing importance of Asian export markets, the US remains the leading export market for many of Europe’s export-dependent economies.  At the same time, European leaders realize that, in many areas, they still need the support of the United States to maintain a voice in world affairs. 

A number of factors have pulled Europe further away from the US in terms of trade and investment policy in recent years.  For example, the United States’ dominance of many high-tech fields has caused concern in Europe, as evidenced by Europe’s efforts to reduce the level of dominance enjoyed by US-based IT firms through legislation.  Moreover, the United States’ willingness to use its economic power as a weapon against rivals such as Russia and Iran has angered those European countries that have strong trade ties with those sanctioned countries.  Now, European businesses that depend on access to export markets for their future growth see their position being jeopardized by the imposition of trade barriers by Washington. 

Altogether, the strong economic ties that have existed across the Atlantic are clearly fraying as the US and Europe increasingly become economic rivals.  While this does not mean that a strong Trans-Atlantic relationship cannot exist in the future, it does suggest that the two sides will increasingly find themselves competing with one another for trade and investment and will act in their own economic interests going forward.