Critical Assess Trade Relations between the US and EU

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Trade is an important aspect of any economy. With the advent of globalisation, many countries have established trade relations with their international partners. Such relations have been found to increase the stakeholders’ profitability based on the diverse products and services they have been able to share.

Although conflicts between different countries have barred them from forming trade ties, it is crucial to note, as the paper presents, that formulation of trade policies can help much in minimising conflicts among nations. The European Union (EU) and the United States in particular are two blocs that have significant trade relations.

According to Pollack, the EU accounted for approximately 23% of the merchandise trade in goods and services in the year 2009 (2010, p. 78). This relationship extends further in the direct investments between the two blocs, with each having companies investing in the other’s territory.

As Pollack observes, “European companies accounted for $1.5trillion, or 63%, of total foreign direct investment in the United States…its companies accounted for $1.7 trillion, or about 50%, of total foreign investment in Europe in 2009” (2010, p. 78). This revelation also means that the companies from both sides of the Atlantic employ millions of workers in the respective countries through their relevant subsidiary companies.

The investment connection between the two is also considered the biggest around the globe. Because of the sheer size, it is also of significant importance in the global economy (Pollack 2010, p. 79).

Due to the above listed characteristic of the transatlantic economy that is created by the trade between the two, it is important to assess the role played in the global economy and the nature of trade relations. Some of the important factors that will be discussed include the potential impacts of the free trade agreement that is likely to arise between the two trade partners.

Topic of the Proposed Research

Based on the importance of the trade relations of the EU and the US on the global economy, it is important that the relationship be critically evaluated. The appropriate topic for this dissertation is, therefore, set as, ‘Critically Assess Trade Relations between the US and EU.’

Objectives and Aims of the Proposed Research

The main aim of the research is to critically examine the bilateral trade relations between the EU and the United States and the significance of the relations to the global economy. This approach will be crucial in outlining the different policy frameworks that exist between the two, the alterations in the relations that are likely to occur in the future, and the potential impact that this link may have on the overall global trade.

The research will therefore be important in establishing the favourable policies between the two partners and those that pose a challenge to their trade. It will also outline some of the problems that the EU and the US trade relations faced. In order to realise the aim of the study, some the following objectives will be important:

To establish the nature of the trade relations between the EU and the US.
To establish the challenges faced by the bilateral trade agreements between the EU and the US.
To assess some of the proposed measures to further develop the trade relations between the EU and the US.
To find out the existing policies that govern the bilateral trade relations between the US and the EU.

Importance of the proposed research

Research on trade links between the US and the EU is pivotal in the field of economics and international relations. Before making a critical argument of the relations between the EU and the US, it is important to consider some of the reasons why this critique should be made together with its significance to the current economic crises.

The EU and the US are some of the biggest economies in the world, with the transatlantic trade between the two contributing to more than one eighth of the world’s trade (Giovanni 2007, p. 72). With the adoption of common trade policies by the EU member states and the formation of a common currency, the trade relations between the bloc and the US are increasingly becoming more important.

For centuries, the two have relied on each other for the performance of their respective economies, with the domestic affairs being crucial to the partners in the maintenance of economic stability.

This strategy has led to a situation where the economic performance of the two and the global economy are tagged on the performance of the Trans Atlantic trade.

A case in point is the global crisis that originated from the United States and proceeded to affect both the EU member states economies as well as other economies in the world (Ranjit 2005, p. 45). It is therefore important that the balance of trade and the relations between these two trade partners be studied in details (Schimmelfenng, & Sedelmeier 2004, p. 669).

With the EU being the second biggest market for the US’ merchandise after Canada, and the largest destination of service export, the stability of the US economy is heavily depended on the bloc. This argument means that it is vital to study the relations to predict the outcomes of a potential shift in market for the EU (Klaus 2005, p. 126).

The transatlantic trade between the two parties is also currently under threat from other emerging markets such as China and the Indian Subcontinent, with the latter increasing in influence for the EU at the expense of the US (Gill, & Murphy 2008, p. 54). This study will, therefore explore some of the threats that the trade faces in an attempt to provide some of the possible recommendations and solutions.

Another relevance of the study is the exposure that it will provide on the dynamics of international trade. This case will contribute towards the understanding of the concept. One of the key factors to consider in a trade relationship between two countries is the sustainability of their interactions in this avenue as Gill and Murphy (2008) point out.

It will therefore be necessary to consider this factor in the study. The evaluation of the sustainability of the north Atlantic trade relationship between the EU and the US will therefore enable researchers to establish policies that are contributory to the harmony while at the same time spelling out those that are detrimental to the survival of the trade ties.

Summary and Outline of the Proposed Research Topic

The economic and trade ties between the US and the EU have been in existence since the year 1953 with these being preceded by diplomatic relations in the same year (CRS Report RS20571, 2002). The culmination of the largest economic and military cooperation in the world is central when it comes to predicting the trend of US-EU the economic and trade relations.

Over the years, the balance of trade between the two has been dictated by the US. However, the EU has witnessed significant economic growth over the last number of years thus leading to the emergence of trade conflicts between the two partners (Scott, & Bergstrand 2004, p. 53).

Of significance in the trade conflicts has been the policy adopted unilaterally by either of them with the EU being the major culprit in this case. Significant and timely resolutions have however been reached in the past majorly due to the overreliance of these partners on each other for market. The disputes however contribute to about 2% loss of trade between the two (Podsakoff 2004, p. 17).

It is worth noting that the transatlantic trade between the two contributes to 33% of the world’s goods trade and 42% of the trade in services, with the figures representing over 60% of the global GDP (CRS Report RS20571, 2002). The policies adopted by the EU and the countermeasures put in place by the US to maintain and ensure sustainability of the transatlantic trade are important to consider in this paper.

Description of Chapters in the Proposed Research

The proposed research will comprise four main chapters. The first chapter will comprise the introduction, which will present the purpose of study, research methods, relevant research questions, the aims and objectives, and a discussion on the overall research composition.

In the second chapter, the theory of regional trade integration will be scrutinised, as well as trade integrations from the perspectives of export and import treaties coupled with the implications of the treaties to parties forming the bilateral trade relationships.

Chapter 3 will encompass the applications of the theory developed to the EU and the US trade relationships. In this section, the departure of alignment of the US-EU trade relationship from the theoretical constructs will be analysed together with the identification of the possible solutions to the stalemates.

The last chapter (chapter 4) will have the conclusions derived from the study. The other components of this chapter will include the key findings and recommendations to the relevant authorities.

Literature Review

The trade relations between the US and the EU have attracted a lot of attention over the past few decades mainly because of the rapid economic growth of the EU. Various authors have written to express themselves on their predictions of the economic relations between the EU and the US and specifically on the challenges ahead.

The economic bloc that is the EU has engaged in the past on policies that are more protective for its own local economy, with the reliance on the transatlantic trade with the US being put more under control.

The economic muscle that the union has developed can be attributed to the integrative public policies put in place to a common market (Szmanski, & Smith 2005, p. 52: Global Europe 2006). In the synthesis of a relevant literature review, certain methods were used. The following section, therefore, states some of these methods and the outcomes of each with the advantages and disadvantages of each.

Methods Review

For the achievement of the aims and objectives of this research, the methodology that will be utilised is the descriptive type. The methodology is appropriate for this research based on its intent to describe the trade relationship between the EU and the US. With the descriptive methodology being chosen, the essay will therefore be more of a description of the trade relations and their impacts on the global economy.

The challenges that are likely to develop or are established are resolved. The study will further engage the descriptive research methodology through the special method of using case studies.

In the literature that was reviewed, the transatlantic trade relationship between the US and the EU was recognised as a source of prosperity and security for the two partners. As Abbott states, the relationship that exists between the two trade partners is a historical one with its relevance surpassing any alliance ever formed between nations and regions (2002, p. 251).

It is also recognised that, for this relationship to progress in a stable and beneficial manner, some radical institutional changes are necessary on both sides of the divide (Abbott 2002, p. 257). A significant factor in the trade relations that Abbott addresses in his work is the relevance of the transatlantic trade to the ambitions of the two blocs to be international powerhouses (2002, p. 257).

According to him, the problems in the trade relations between the US and EU are not simply, “America is from Mars, Europe is from Venus” (Abbott 2002, p. 259). The problems are however, because of the ambitious nature of each of the two trade partners.

The rise of the EU as an international power and an economic powerhouse at the expense of the US means that the balance of trade between the two is almost shifting in favour of the bloc (Pollack 2010, p. 78). As Pollack states, the post-cold war era has guaranteed the independence of the European market with the local politicians increasingly being able to manipulate the trade to their advantage (2010, p. 78).

It is noted that, in the year 1995, the EU and the US developed strategic dialogue. This ‘New transatlantic Agenda’ that has been in existence has dictated the interactions to date. There is the need, according to Pollack, to develop a newer version of the same to ensure that the relations are maintained (2010, p. 78).

In the recent past, the amount of international agenda that the EU and the US share has declined significantly with both of them having divergent priorities. The two have however been working more closely in the fight on terrorism and environmental degradation. This case has brought them close in the trade relations (Pollack 2010, p. 78).

The US has been observed to make unilateral decisions in the bilateral relations with Europe, which can be understood in the context that it is a global power with rising influence in all corners of the world (Abbott 2002, p. 262). Despite the observations, the popular support that the US enjoyed in the past century has been declining due to the wars on terrorism and other fronts that it is fighting.

Leaders facing the threat of terrorism in and out of Europe have befriended the US outside of the confines of the EU framework. This revelation means that the attractions are now beyond trade thus making it an intricate relationship (Abbott 2002, p. 259).

The most important actions in the near future for the US is to engage in trust building multilaterally with the existing public diplomacy with the EU extending to include a more defined trade policy (Pollack 2010, p. 82). Razeen suggests that the existing trade alliance between the EU and the US should be reviewed (2007, p. 45).

He states that there should be a balance between the diplomatic, political, and economic relations between the two partners with the intent of creating a feasible partnership (Galt & Phalm 2009).

In the literature reviewed, a major outcome and observation is that the EU is out to establish universal dominance with the intention of making it a key global actor. This ambition has been placed strategically above the economic and political ambitions, with the bloc willing to build a more powerful defence and international relations policy (Gill & Murphy 2008).

In the other literature that was reviewed, of note is that the EU-US trade relations have engendered little, if any, political consequences compared to the trade relations between the US and other countries in the world. This observation has been explained from several perspectives.

The most popular one is that, since the two have near compatible levels of social and economic development, the economic relations have often been balanced (Abbott 2002, p. 274). The member states of the EU compared to other nations in Africa and other continents have wage rates, economic standards, labour, and environmental levels that equal or exceed those in the US (Pollack 2010, p. 83).

This argument means that the relations between them are more balanced and that Europe is protected from the competition that would otherwise be unfair if the member states were in the same level as African nations.

The above observation according to Mitra means that the trade between the EU and the US takes place in a balanced and non-adversarial environment (2002, p. 482). The trade between China and the US differs significantly from that between it and the EU, with the latter being more of intra-industry trade (Lamy 2004, p. 53). The export commodities between the EU and US are almost similar.

They comprise mostly of automobiles, computer systems, and aircrafts. Unlike the trade between the US and China, the EU-US trade has created little concern (Pollack 2010, p. 85).

Furthermore, the trade between the EU and US has largely been affected by the macroeconomic factors including the differences in exchange rates and economic growth rates rather than the structural and trade barriers seen in other trade relations in the world (Abbott 2002, p. 274).

Despite the above-mentioned factors about the trade between the EU and the US, some differences have evolved over the last few decades. As Schott states, some of the issues include differences in the aircraft industries between them, the genetically modified organic food and agriculture, and its (food) treatment in Doha negotiations¹ (1998, p. 452).

The researcher observes that, in the wake of these differences, the players on both sides have participated more in the development of policies aimed at retaliating on each other’s action instead of engaging in the resolution of the conflicts (Schott, 1998, p. 56). If these issues are left unchecked, they may cause significant rift in the trade relations between the US and the EU.

As Abbott states, the US congress has increasingly become the centre of the trade disputes between the US and the EU (2002, p. 274). The institution has also supported the opening of the EU’s markets to agricultural and industrial products from the US.

In the evaluation of the trade disputes that have occurred between Washington and Brussels, one popular question is why the conflicts often present as a challenge to both administrations. One also wonders what can be done to amicably solve the problems as they arise. To answer these problems satisfactorily, one must look into the sources of the trade conflicts between the EU and the US.

Schott explains the sources of conflict in the transatlantic trade as merely originating from the policies that the partners create to promote or protect their domestic commercial interest at the expense of the interests of the partners (1998, p. 56).

The push for governments in the EU and the US to protect their domestic trade comes from a variety of sources including trade organisations, workers, producers, and consumers (Abbott 2002, p. 276). However, in most of the cases for both countries, the protectionist actions are originally from the governments.

Various authors have classified the conflicts between the EU and the US as political, economically generated, or social in origin. Most of the conflicts have a multidimensional origin with all factors being involved in most cases.

The major source of conflict between the EU and the US in their trade relations, according to Schott, is the need for consumer protection as explained above (1998, p. 57). The explanation is that, since there is the need to protect the consumers from exorbitant pricing of commodities, government institutions institute measures and policies aimed at achieving this goal (Schott 1998, p. 56).

In the trade relations between the EU and the US, for example, “both transatlantic trade partners, in support of vested interests and key industries, craft policies that try to open markets for exports but keep markets protected from imports as much as possible” (Schott 1998, p. 63).

Examples of conflicts between the two partners that fit in this category include the disagreements in the fields of agriculture, steel, aerospace, and ‘contingency protection’ whose resolutions are still being sought (Schott 1998, p. 56).

Examples of measures put in place to protect the industries on both sides of the Atlantic include industrial policy, tariffs, and subsidies on the products (Josling, & Tangermann 2003, p. 234). The four are just a few of the conflicts that are predominantly present in this category, with these and others forming the traditional cause of conflict between the trade allies (Josling, & Tangermann 2003, p. 234).

The agricultural sector has been the mainstay of most of the conflicts in the transatlantic trade. The sector has seen a decline in output in the recent past. The numbers of people employed on both sides of the Atlantic and the measures put by each of the countries have had a negative effect on the market of the trade partners on the other side of the ocean (Josling, & Tangermann 2003, p. 237).

The market forces in the industry would have an overall negative effect on consumers and producers in the US and the EU respectively. Therefore, the measures put in place are just protectionist and not malicious in intent (Josling, & Tangermann 2003, p. 239). However, the result of these is a conflict that is damaging to the trade relations.

The Common Agricultural Policy (CAP) set up by the European Union to safeguard the agricultural economy of its member states has largely been criticised by the US for its protectionist nature. It has been the source of the largest conflict between the two in this industry (Pollack 2010, p. 78).

Not only has CAP caused conflict between the EU and the US in their trans-Atlantic trade, but also, as Josling and Tangermann state, it has led to the single largest distortion in international agricultural trade (2003, p. 237).

In the Aerospace industry, there has been a growing discomfort on both sides of the trade divide over the support rendered to the aviation industry in the respective countries, especially to two of the competing leaders in aerospace development (Josling, & Tangermann 2003, p. 238). Other measures that are observed as aiding Airbus include forgiveness of debts and assistance in marketing among other aids (CRS Report RS20571 2002).

They have awarded the company an edge over the companies in the US that are involved in the same industry. In the part of the EU, the counteraccusation that is made is that the US has also assisted Boeing, a similar company in the US, with a number of subsidies.

These include the awarding of “huge indirect governmental subsidies in the form of military and space contracts and government sponsored aerospace research and development” (Josling, & Tangermann 2003, p. 244). The other areas of conflict include the steel industry on both sides of the Atlantic, which have attracted similar conflicts as those seen in the Agriculture and aerospace industries.

These issues are just a few of the areas that the EU and the US have conflicted over the decades. They remain to be seen on the measures put in place to prevent the escalation of the conflicts into trade difficulties.

As stated above, the US and the EU share integrated economies with the performance of each affecting the other. This case was evident in the global financial crisis of 2008. There are similarities in the way the two economies reacted to the crises on both sides of the Atlantic (Hamilton & Quinlan 2013, p. 34).

During the financial crisis, the US had to bail out several banks to prevent their collapse, as it also happened on the opposite side of the Atlantic (Hamilton & Quinlan 2013, p. 34). In the year 2012-2013, the EU-US relationship has been based on several factors, which are central to the relationship.

The collaboration in military activities has been significant through NATO, with some of the traditional European nations joining the security outfit (Hamilton & Quinlan 2013, p. 34).

Other issues of common interest during this period including counterterrorism measures, the influence of Russia on the Eastern European countries, and several developing trade issues such as the Euro zone crisis were of significance during this period (Global Europe 2006).

Review of Research Findings

The interactions between two trade partners are of significant importance to both participants in such an engagement. In the trade relationship between the EU and the US discussed above, the theory of regional trade relationships is of particular relevance.

It states that nations participating in trade should tax trade where it exists to ensure that the international market is adequately covered (Freund, & Ornelas 2010, 143). Nations engaging in international trade often have conflicts on various areas in their interactions because of policies put on the products or services produced by the other nations (Limao 2006, p. 904).

In the case of the EU and the US trade relations, bilateral agreements have largely been beneficial with the sum of the trade being the largest in the world thus contributing significantly to the economic stability of the two partners. However, as it is characteristic of all the engagements anywhere in the world, the relationship is dogged by a variety of challenges that hinder complete realisation of the bilateral goals.

Political pressure is a significant influence of trade in all corners of the globe. As McMillan states, countries with more stable and developed economic and political systems always end up turning the balance of trade to their favour (2004, p. 35). A semblance of this interaction has been observed in the trade interactions between the African nations and the EU or the US (Winters 2002, p. 453).

In these cases, the nations have always had to put a number of measures to restrict the supposed exploitation that the developed nations impose on them. In the case of the interaction between the EU and the US, however, the trade relations are those of two equally developed nations with almost similar political influence world over. This argument means that equilibrium is characteristic in the trade balance.

Another finding from the literature reviewed is that both sides in the trade relations are involved in the development of public policies that are detrimental to the trade of the other. A limiting factor, however, to the effects of these measures include the treaties that have been signed between the US and the EU member states.

Review of Concepts and Theories

In the discussion on the trade relations between the US and the EU, several theories on international trade are evident. In the discussion, a mention has been made of the economic performance of the two detailing how this factor affects their bilateral trade. If two countries work towards achieving an equal economic competitive advantage, dominance problems often arise.

According to Freund, it has been proven that two nations can work towards economic cooperation and benefit mutually from it (2010, p. 321). Some of the measures that he suggests include the use of policies that are agreed upon by the partners, with each willing to suffer an opportunity cost to such an agreement (Devuyst 2002, p. 31).

In the trade relations between the EU and the US, each enjoys a unique advantage over the other’s trade balance, with accusations and counteraccusations being made. The global financial crisis brought to light the interdependence that the economies in the EU and the US have over each other (Pollack 2010, p. 78).

This interdependence further emphasises the theory of regional trade treaties, which purports that the era of regional agreements is still present, and will remain for a significant time in the economic future (Ornelas 2005, p. 1485). Indeed, almost half of the world trade takes place via regional trade agreement policies.

The agreements could either be bilateral meaning that they are made between two nations, or multilateral (Bilzi, Eisner, Aronchik, & Balsanek 2011, p. 3). The realisation that engagement in regional treaties has beneficial trade outcomes for the partners has led to the development of several treaties that bind them.

Following the economic crisis that hit the world economy in the wake of the year 2008, several agreements and treaties were signed between hosts of countries because of the realisation that economic integration is of great significance. The World Trade Organisation, for example, was notified of at least 25 treaties signed between member countries during the season of economic downfall (Pollack 2010, p. 78).

Many scholars have argued over the utility that trade regionalism has over the multilateral trading system (Josling, & Tangermann 2003, p. 234).

Some have expressed the fear that the trade treaties between countries only serve to derail international trade by working against the trade advances in other countries that are not involved in the treaty (Hamilton & Quinlan 2004).

In the case of the trade relations between the EU and the US that are discussed above, the bilateral relations are of great significance to each other’s economic survival hence dispelling the fears of economic downturn.

Scholars have argued about the probability of a trade treaty between two nations or blocs creating unequal balance of trade, with one of the nation experiencing increased wealth at the expense of the other (Bhagwati 2008, p. 56).

In the explanation of the theory and its application in the US-EU trade relations, some scholars have argued that the US has imposed protectionist policies against the EU, with a countermeasure being put into place by the EU (Josling, & Tangermann 2003, p. 234). This case as discussed above only generates further conflicts as each of the party tries to market her products to the trade partner.

Research Design and Methods

The research spells out some of the aims and objectives that are to be achieved. The questions that arise from the aims and objectives needed appropriate research methods for data collection, analysis, and presentation. As Kothari states, success in research is a product of the methodology that should be conducted in the context of established sets of public policies or approaches that are acceptable within a specific discipline (2000, p. 98).

For any method that is utilised in the research, the policies must comprise the most efficient techniques. Several philosophies are also utilised in the research since they apply more in the methodology.

With the different types of methodologies that may be utilised in the research, the study type and the intent of the researcher determine the choice of the research methodology (Yin 2005, p. 48). These types at the disposal of a researcher include the correlation, exploratory, descriptive, and descriptive types (Yin 2005, p. 46).

The research will incorporate the large body of knowledge on international trade relations and specifically those targeting the EU and the US. The best method to carry out the research will be by the utilisation of case study method, with qualitative and quantitative studies on the subject being the main source of the information.

The GATT regional integration rules postulate some of the earliest qualitative findings from research in regional integration (Bagwell, & Staiger 2000, p. 234: Bagwell, & Staiger 2005, p. 479). The rules state that the creation of treaties between nations should not be a reason for the development of trade barriers between them.

The GATT rules are however not representative of the true trade outcomes after treaties. Therefore, there is the need for more research to establish their utility in this area due to their methodological drawbacks.

References

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Bhagwati, J 2008, Termites In The Trading System: How Preferential Agreements Undermine Free Trade, Oxford University Press.

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Footnotes

¹ Doha negotiations refer to the ninth meeting ever to be held since the termination of WWII whose sole agenda is to address the subject of multilateral trade and specifically how to curb trade challenges.

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