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China has declined a US invitation for a meeting in Singapore between Secretary of Defense Lloyd Austin and his Chinese counterpart, Li Shangfu.

Beijing’s foreign ministry on Tuesday blamed the United States for its decision, claiming Washington was “well aware” of the reasons behind the lack of military communication.

“The US side should … immediately correct its wrong practices, show sincerity, and create the necessary atmosphere and conditions for dialogue and communication between the two militaries,” foreign ministry spokesperson Mao Ning told reporters at a briefing.

Pentagon spokesman Brigadier-General Pat Ryder said in a statement on Monday the People’s Republic of China (PRC) “declined our early May invitation” for the two military chiefs to meet in Singapore.

“The PRC’s concerning unwillingness to engage in meaningful military-to-military discussions will not diminish [the defence department’s] commitment to seeking open lines of communication with the People’s Liberation Army,” Ryder added.

Last week, White House spokesman John Kirby said there were discussions under way to initiate talks between Austin and his Chinese counterpart, who was named defence minister in March.

The prospect of a meeting was being closely watched given heightened tensions in the region and the increasingly prickly relationship between Washington and Beijing over issues from Taiwan to trade and human rights.

“At a time of rising US-China tensions, General Li’s refusal to meet his American counterpart will fray regional nerves even further,” Storey told the Reuters news agency.

Austin and Li will both be in Singapore for the Shangri-La Dialogue, an annual security summit which is due to start on Friday. He met Li’s predecessor Wei Fenghe on the sidelines of the event last year.

Chinese officials have yet to confirm the decision, but tensions have soared this year especially over an alleged Chinese spy balloon that was shot down by a US warplane after crossing into US airspace.

Li has also been subject to US sanctions since 2018 over the purchase of combat aircraft and equipment from Russia’s main arms exporter, Rosoboronexport.

Li, who is due to arrive in Singapore on Wednesday, also sits on the Central Military Commission, China’s top defence body that is led by President Xi Jinping.

Citing the defence ministry, China’s state media said he would deliver a speech on China’s new security initiative and hold some bilateral meetings with “relevant” countries.

Austin is travelling first to Japan where he will hold talks with his Japanese counterpart Yasukazu Hamada before visiting US troops stationed in the country.

He will then fly to Singapore where he will address the summit on Saturday morning, and “meet with key leaders to advance US defence partnerships across the region in support of our shared vision for a free and open Indo-Pacific, anchored in ASEAN centrality,” according to the Pentagon, referring to the Association of Southeast Asian Nations, an economic and political coalition of 10 member states in Southeast Asia.

After Singapore, Austin will travel to India and then to France where he will join events commemorating the 79th anniversary of D-Day.

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There are many changes coming to Washington, D.C., now that Republicans have taken control of the U.S. House of Representatives. Uncertainty surrounds President Biden’s ability to pass his economic agenda through a divided Congress and few can predict the path U.S. tax policy will take at home or abroad.

However, despite a bleak outlook for a domestic bipartisan legislative agenda, it is important for U.S. policymakers to realize that the rest of the world continues to legislate. In particular, the European Union will continue to implement tax and trade policies that affect the American economy. Without a legislative response, American consumers and companies may find themselves on the losing end of EU policies.  

It is equally important for U.S. policymakers to understand why the EU has been pursuing seemingly protectionist policies such as the Carbon Border Adjustment Mechanism (CBAM) or Digital Services Taxes (DSTs), and what transatlantic policy outcomes the EU hopes to achieve with their American counterparts. Therefore, to grasp where EU policymakers are coming from, U.S. policymakers should review the theoretical underpinnings of the Transatlantic Trade and Investment Partnership (T-TIP) before racing to a tit-for-tat protectionist response.  

What Was T-TIP?

The Transatlantic Trade and Investment Partnership (T-TIP) was a failed free-trade deal negotiated under the Obama administration between the United States and European Union.

According to the Office of the United States Trade Representative (USTR), T-TIP “would be a cutting-edge agreement aimed at providing greater compatibility and transparency in trade and investment regulation, while maintaining high levels of health, safety, and environmental protection.” It would also “help to promote U.S. international competitiveness, jobs and growth.”

For the European Commission, T-TIP was a tool to boost jobs and investment in the EU by reducing regulatory barriers between allies.

However, for both the U.S. and EU, there was a larger goal for T-TIP. By harmonizing “western” standards across a wide range of industries, the allies would not only ease the compliance burden on companies to boost trade and investment, but also “provide the basis for global standards.”

These standards would then be used to require other geopolitical players, like China or Russia, to abide by western standards or risk losing the ability to trade with economically powerful nations. Especially considering the World Trade Organization’s failures to enforce international trade rules, this strategy was designed to put USTR and the European Commission back in control of rules-based trade enforcement.

Why Did T-TIP Fail?

T-TIP failed for multiple reasons; however, two trends rose to the top during the negotiations and have continued to affect U.S.-EU relations ever since.

For one, the European public became skeptical of the EU’s ability to negotiate a trade deal with the U.S. that maintained what they perceived to be higher EU standards. The public feared a standards “race to the bottom” driven by U.S. companies and lack of government oversight. Therefore, it became difficult for EU policymakers to gather public support for the deal and fueled public mistrust of the American corporate community.

Secondly, President Trump came to power in 2016 and altered the direction of U.S. trade policy. Not only did the U.S. discontinue T-TIP negotiations, but the Trump administration also placed multiple tariffs on the EU. It wasn’t until November of 2021 that steel and aluminum tariffs were rolled back under President Biden.  

EU Trade Strategy Post-T-TIP

Since learning domestic and international lessons from T-TIP’s failure, policymakers in Brussels have adapted their trade (and tax) strategy vis-à-vis the U.S.

The underlying premise remains the same: the EU wants to counter Chinese economic power, and protect European standards, by working with the U.S. to set global standards across industries and relying on access to its powerful economic markets to drive change in other countries.

However, the EU has adapted by realizing that, to gather domestic support for a trade deal with the U.S., the EU needs to enshrine high European standards into EU law first.

Furthermore, it is not obvious that U.S. trade strategy includes working with the EU as it did under the Obama administration. Therefore, the EU has included financial incentives (or penalties) on U.S. companies doing business in the EU with the hope of convincing the U.S. to come back to the trade deal negotiating table.

Until the U.S. returns, the EU will continue to implement European standards across industries into EU law and penalize the U.S. for not conforming. By doing so, the EU thinks it can benefit from the extra revenue from protectionist trade policies while positioning itself as the first mover in global standard-setting. It could also raise the geopolitical profile of the EU through trade and leverage the EU’s Single Market in a way that is familiar to U.S. trade officials of a previous era.

EU Issues for Congress in 2023

There are three main EU tax and trade issues that Congress should keep an eye on in 2023.

One, the EU agreed to implement a CBAM tariff that will apply to U.S. producers importing carbon-intensive goods into the EU. While the tariff won’t begin until 2026, policymakers should continue working on pro-growth solutions for U.S. carbon pricing.

Second, the EU unanimously agreed to implement Pillar Two of the OECD’s global tax deal and set a 15 percent minimum tax in the EU. Most countries expect to have the ability to start taxing companies that are not paying a 15 percent rate by 2024 and this could seriously begin to impact U.S. companies in 2025 when the Undertaxed Profits Rule (UTPR) kicks in. Therefore, Congress needs to devise a strategy to either adopt Pillar Two or another domestic tax regime that avoids a complicated mess for U.S. companies.

Finally, the EU is expecting to introduce legislation to implement Pillar One sometime this year (assuming a final agreement is reached at the OECD). EU officials have made clear that if Pillar One fails in the EU or U.S., DSTs will be back on the table in the EU. Congress should consider what to do in either scenario.

In all these tax policy areas, it is essential for Congress to build a long-term strategy to support U.S. economic growth. Once Congress has a comprehensive strategy, it will be in a much stronger position to negotiate joint tax and trade ideas with the EU.

Risks to the EU Tax and Trade Strategy

While the EU sees financial penalties on U.S. companies as a way to pressure the U.S. government back to the negotiating table, it is important that the EU doesn’t overplay its hand by driving private investment away from the EU in the meantime.

According to Tax Foundation’s International Tax Competitiveness Index, many European tax codes are presently less competitive than the U.S. tax code. This means that there is already a disadvantage to companies investing in the EU relative to the U.S.

Furthermore, while subsidies for American industry certainly do not qualify as principled, pro-growth tax policy, a tipping point was seemingly exposed by the increased European temptation to move production to the U.S. to benefit from the Inflation Reduction Act tax credits.   

On top of that, most of the EU’s recent tax and trade policies are not designed in a principled, pro-growth manner. CBAM, for example, does not give European producers an export rebate for carbon emissions purchased in the EU on products sold in a third country. This makes European products less competitive in foreign markets and may tempt European producers to move production of carbon-intensive goods to less burdensome jurisdictions.

In addition, depending on how EU countries implement Pillar Two, there may be U.S.-EU disputes about taxing rights on American companies in the EU.

Finally, if Pillar One is not implemented, European DSTs will return to punish mostly U.S. tech companies.

All these policies leave room for the EU to lose important private investment due to an already uncompetitive business environment and the possibility of facing punitive trade measures from the U.S. The EU would be wise to realize that European standards only matter to partners who trade with the EU, and partners will only trade or invest in the EU if economic growth is a priority.    

The Future of U.S.-EU Tax and Trade

The EU’s unilateral approach with carbon taxes, faster track on the global minimum tax, and threat of renewed efforts on DSTs means that U.S. policymakers face some hard choices. Policymakers on both sides of the Atlantic should keep in mind pro-growth tax and trade principles that promote a rules-based international order and increase opportunity.

The U.S. still has the chance to work with the EU and be a global leader on standards and free trade. However, it will require policymakers to decide who the real adversary is—the party on the other side of the aisle, the EU, or bad international actors like China and Russia. Only then will policymakers aim for solutions that put pro-growth tax and trade policy over tit-for-tat protectionism.

Source : Tax Foundation

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The EU-US Trade and Technology Council continues to be a valuable initiative for transatlantic cooperation – even if the outcomes of the negotiations will not always make the news

On 5 December, the leadership of the European Commission and US cabinet officials met in Washington, DC for the third ministerial summit of the EU-US Trade and Technology Council (TTC). The TTC initiative, launched in September last year, aims to facilitate continuous transatlantic cooperation on key technology and trade issues. Recently, however, disagreements between the European Union and the United States have overshadowed that cooperation – and threatened to disrupt the summit.

The “Buy American” provisions in the US Inflation Reduction Act (IRA) have frustrated EU leaders, who fear that massive subsidies for American industry will result in companies fleeing Europe. The Biden administration, meanwhile, is dissatisfied with the EU’s hesitance to leverage the TTC more aggressively against China. These disputes, an apparent lack of concrete new outcomes, and the exclusion from TTC negotiations of some of the biggest transatlantic tech and trade issues – such as the IRA or the legal conundrum of transatlantic data flows – have led many observers to conclude that the TTC’s days are numbered.

But, just as the TTC summit in May involved some exaggeration of the initiative’s success stories, the doomsday judgments on the current state of play are also misled. These dire prognoses largely stem from unrealistic expectations, as well as an incomplete understanding of the TTC’s scope and the functioning of the EU – which are closely linked.

Understanding the TTC

The European Commission and the Biden administration established the TTC as a non-binding instrument. In doing so, they took lessons from the failed Transatlantic Trade and Investment Partnership initiative and the damage the Trump era caused to relations between the EU and the US. The TTC’s non-binding setup puts the European Commission in the driving seat, with limited roles for member states and the European Parliament. This simplifies negotiations and facilitates an agile approach to addressing common evolving challenges. However, it also means that the scope and applicability of TTC decisions are inherently limited.

At the inaugural TTC summit, the EU and the US made the modest commitment to “coordinate approaches to key global technology, economic and trade issues … and to base policies on shared democratic values”. Crucially, both sides emphasised that TTC cooperation would not interfere with the regulatory autonomy of the EU and the US. So, grand expectations that the TTC would permit swift regulatory alignment, for example in the governance of digital platforms, were naive at best.

Similarly, the desire in the US to mould the TTC into a geopolitical vehicle aimed at China is mostly incompatible with EU reality. Ursula von der Leyen’s “geopolitical Commission” may, at least partially, share the United States’ ambitions and have a somewhat solidified position on China. But that is not the case for the 27 member states and for the union as a whole. European foreign and security policy continues to be shaped predominantly in EU capitals – not in Brussels – and is often insufficiently aligned between member states.

The issue of export controls in the TTC context illustrates this. At the Paris summit, leaders – and accordingly the media – hailed the coordinated and unprecedented EU and US technology export controls against Russia and Belarus as one of the TTC’s greatest success stories. Certainly, TTC engagement between the European Commission and White House officials played a role in facilitating the swift coordination of those controls. But, in the end, it was member states that negotiated and decided upon the measures in the Foreign Affairs Council, outside the auspices of the TTC. Importantly, it was the imminent security threat of a war in the EU’s neighbourhood that forced member states to swiftly align.

This is fundamentally different from leveraging the TTC to get the EU on board the United States’ new approach to strategic technology export controls against China, through which it aims to limit the country’s military and technology development. Although the EU acknowledged the geostrategic significance of broader allied export controls at the TTC’s inaugural summit, the bloc’s reality means the power to implement such controls largely lies with member states, not the European Commission. And, crucially, threat perception and economic dependencies with regards to China differ between EU member states, as well as between the EU and the US.

It should therefore be no surprise that the US has as yet failed to convince key member states to follow its export control approach against China. And it would be unreasonable to expect the TTC, a commission-led tech and trade initiative, to deliver concrete outcomes on this security policy issue. The TTC’s configuration and the realities of EU foreign policy mean the initiative simply cannot become the immediate geopolitical tool the US envisages.

The value of the TTC

Nevertheless, the TTC can make valuable contributions to nudging the geopolitical needle; it can facilitate coordination, foster mutual understanding, enshrine common policy principles, and aid in the development of compelling narratives – thereby setting the tone and baseline for further actions. But these small steps are difficult to sell as the grand milestones political leaders and the media like to see.

One such small step is this week’s announcement of two TTC initiatives for secure digital infrastructure projects in Jamaica and Kenya. The projects themselves will have limited impact and will hardly be headline grabbing. But they are a clear EU-US response to China’s assertive global infrastructure investments. This new transatlantic cooperation on connectivity investments in third countries, involving a variety of important stakeholders – including development and financing institutions – can have lasting and meaningful effects. Therefore, a proposed memorandum of understanding between the US Development Finance Corporation and the European Investment Bank to increase cooperation in connectivity financing, if followed through, will be of geopolitical significance.

Moreover, although the TTC cannot facilitate full regulatory alignment in technology policy between the EU and US, the initiative can help advance a common understanding on underlying principles – which can have far-reaching effects. The release of a joint roadmap towards common terminologies and metrics to assess the trustworthiness and risk of artificial intelligence (AI) is a case in point. An agreement on a common taxonomy and approach to risk management could pave the way for joint AI standards. This, in turn, would strengthen the positioning of the EU and the US in international standards bodies and help disseminate transatlantic standards across the globe. But, much like a memorandum of understanding on digital development cooperation, a shared repository of metrics to measure AI trustworthiness is unlikely to make the news.

TTC-facilitated convergence in these and other areas may fall short of full regulatory alignment, but it can advance common principles and reduce barriers to trade and research cooperation – with small steps working towards broader, long-term goals.

Room for improvement

This is not to say that the TTC has been an all-out success. Indeed, it is frustrating to see transatlantic friction result in the neglect of some areas in which more cooperation is urgently needed. For example, if the EU and the US do not find a way to collaborate more closely on 6G development, there is a real risk that China’s Huawei will dominate global markets. The issue featured prominently in previous summits, but it now appears to have been pushed down the TTC agenda. This is likely because the US administration, under pressure from US industry lobbyists, continues to pursue premature promises of Open RAN as a way of diversifying the market in favour of new American competitors. But this comes at the cost of cooperation with the EU in building Western 6G technology champions that can compete against Chinese giants.

Such disagreements, alongside the tensions over “Buy America” and the EU’s geopolitical immaturity, endanger continued TTC cooperation. Yet, the initiative has not exacerbated these issues; instead, it provides additional incentives to resolve them. It is vital for EU and US officials – despite misconceptions about and frustration with the TTC – to defend and push the initiative, which remains a valuable vehicle to achieve positive long-term impact.

It seems a reminder is necessary that the TTC is primarily a mechanism “to coordinate approaches to key global technology, economic and trade issues … and to base policies on shared democratic values”. The TTC will not resolve all transatlantic trade and tech issues. The EU will not become a US-like geostrategic force overnight. The US will not become an EU-like digital regulation frontrunner any time soon. And TTC summits will not always create big (positive) headlines. Once that is clear on both sides of the Atlantic, the TTC can continue to make valuable contributions towards a transatlantic market for emerging technologies and digital transformation based on common values.

Source: ECFR.EU

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