With or Without Them

The two of us traveled to Brussels and Berlin this month to hear European views on a range of global economic issues, including trade, investment, and the challenges of a rising China. The trip made clear that U.S. allies share some of the concerns animating the Trump administration’s tough stance on China—but also that the administration is at risk of undermining its own objectives by antagonizing the very partners we need to confront these concerns.

Three topics repeatedly came up in our meetings that highlighted the opportunity for allied cooperation. The first was next-generation technologies, as exemplified by the active campaign by Washington to dissuade countries from using Chinese telecommunications company Huawei’s equipment in their 5G wireless networks. There are signs this message is getting some traction in Europe. A senior European Commission official responsible for the European Union’s digital single market acknowledged security concerns associated with Huawei products, while an official in Berlin flagged a prominent article about Huawei in one of Germany’s largest newspapers the day we met as evidence that a heated debate on the topic has begun there. (A recent commentary by our CSIS colleague Jim Lewis explains what is at stake in the 5G issue.)

The second topic was foreign-investment screening and export controls. The main purpose of our visit was to discuss the twin U.S. legislative reforms in these areas and to learn more about a new regulation on foreign-investment screening that EU institutions agreed to this month. Sensitivity to the risks of foreign acquisitions of European assets has spiked in the past couple of years, in particular since a Chinese buyer purchased iconic German robotics company Kuka in 2016. The new EU regulation doesn’t go nearly as far as the Committee on Foreign Investment in the United States (CFIUS), but it encourages EU member states to share information about foreign-investment reviews and enables the European Commission to issue opinions on these transactions. While the authority to block or mitigate a transaction remains at the member-state level, the new regulation demonstrates that Europeans are taking seriously the national security risks posed by foreign investment, a significant shift from just a few years ago.

By their nature, both investment screening and export controls benefit from multilateral coordination. The recent reform to CFIUS under the Foreign Investment Risk Review Modernization Act (FIRRMA) explicitly calls for working with “allies and partners,” to facilitate coordination, strengthen the multilateral export control regime, and facilitate information sharing. The effectiveness of export controls, which were upgraded alongside the CFIUS reform through the Export Control Reform Act, will surely require multilateral cooperation, including when applied to new technologies not currently covered by existing export-control rules. Europe’s willingness to tighten export-control regimes is unclear, but a new debate there about sensitive technologies suggests a possible opening for better transatlantic alignment.

Not surprisingly, trade was the third topic we heard a lot about on our trip. Despite the two sides’ differences, the United States and Europe clearly share many objectives in reforming the multilateral trading system. These include strengthening disciplines on subsidies and state-owned enterprises, eliminating forced technology transfer, and enhancing intellectual property protection. The two also share an interest in reforming the World Trade Organization (WTO), including to ensure that large, sophisticated countries like China cannot hide behind self-designation as “developing” economies, entitling them to benefits that disadvantage truly poor countries. These issues form the core of a promising trilateral trade reform initiative among the trade ministers of the United States, European Union, and Japan that has unfolded over the past 12 months.

Europeans are largely aligned with Washington on the diagnosis of the challenge that China poses in all of these areas. “We agree 99 percent on the analysis of the problem,” said one senior official we met, perhaps exaggerating to emphasize his next point: “But we disagree strongly with the U.S. approach.” Of particular concern are the Trump administration’s broad-based tariffs on Chinese imports and other actions inconsistent with the multilateral, rules-based order. Europeans are also deeply uncomfortable with the perception that Washington is asking third countries to “choose a side,” a notion reinforced by Ambassador John Bolton, the national security adviser, in a speech this month. Another official pointed out to us the risks to Europeans if they do align with the United States against China and then are left holding the bag as Washington and Beijing strike a deal on trade.

The Trump administration’s efforts to persuade allies to take a tough approach to China are further diminished by the policy assaults and public criticisms the administration has lobbed at those same allies. These include imposition of steel and aluminum tariffs on the European Union, Japan, and other allies on questionable national security grounds; and the launch of an investigation by the Commerce Department of imported automobiles and auto parts under the same Section 232 provision, which could result in the imposition of 25 percent tariffs on imported autos and auto parts early next year. Several officials we met with in Europe told us that the European Union would suspend trade talks with the United States and likely retaliate if Washington moves ahead with the auto tariffs.

The repeated barbs launched at allied leaders by President Trump and other senior administration officials have also offended many Europeans. Trump’s tweets against German chancellor Angela Merkel and British prime minister Theresa May were bad enough. But the December 4 speech in Brussels by Secretary of State Mike Pompeo clearly struck a nerve. “I’m so angry about that,” said one senior official we met, citing Pompeo’s attacks on multilateral institutions from the United Nations to the European Union, as well as “bureaucrats here in Brussels.”

The latest blow came in mid-December when U.S. ambassador to the WTO Dennis Shea publicly rejected an EU-sponsored proposal for reform of the WTO dispute-settlement mechanism without suggesting an alternative way forward (leaving some to wonder whether dissolution of the dispute-settlement body is the real U.S. objective). Ambassador Shea’s comments likely elicited the equally harsh response from the EU ambassador to the WTO, who said, “The multilateral trading system is in a deep crisis, and the United States is at its epicenter.”

To be sure, U.S. allies are not perfect. The European Union can be feckless in foreign policy, is currently consumed by the saga of Brexit, and is arguably still too timid on China. Other allies have their faults, too: Japan, for example, could do far more to liberalize and reform its domestic markets and, as we said in a recent report, to synch up its efforts with Washington’s in third countries like Myanmar.

But U.S. interests and values are far more aligned with those of allies like the European Union and Japan than with China’s. Moreover, we need partners to solve the very problems the Trump administration has identified as priorities. The administration may be winning grudging approval from allies for calling out China’s problematic practices, but the gains are smaller and the costs higher than the White House thinks. Rather than antagonizing allies and partners, Washington should be building coalitions with them to take on shared global challenges.

Matthew P. Goodman is senior vice president and holds the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. Stephanie Segal is deputy director of and a senior fellow with the CSIS Simon Chair in Political Economy. 

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Matthew P. Goodman

Matthew P. Goodman

Former Senior Vice President for Economics
Stephanie Segal

Stephanie Segal

Former Senior Fellow, Economics Program