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Perspectives: US-EU trade differences are cultural, commercial and difficult to resolve

The launch of the high-level meeting of the United States and the European Union under the new form of the Trade and Technology Council  has rekindled hopes of the two sides finding common ground a number of issues. But to be realised the two sides will have to tackle competing commercial interests that have been a problem before.

For a time, it seemed that the first meeting of the Trade and Technology Council would not happen. The EU’s big idea for engaging the Biden administration was at risk of falling victim to Australia choosing to cancel a submarine order from France in favour of the US and UK.

A call between Presidents Macron and Biden helped put the meeting back on track. But there are many learning points and prime among them must be the way in which commercial interests trumped international relations. While dressed up as a defence technology partnership, it seems the Australia-UK-US partnership is predominantly a win for the US defence manufacturing sector over that of the EU and in particular France.

There is precedent on the US side for the importance of commercial interests over deep partnerships. The long running emphasis on attacking EU agricultural policy, in particular on the prohibition of various US products like chlorine washed chicken, was a factor in the failure of TTIP talks. It has continued in this administration, indeed the message has been strengthened in recent days.

Clearly the EU is also not averse to putting its own interests first, not least in the desire to use the Brussels Effect for commercial advantage. Indeed, the prevalence of EU free trade agreements can also be seen in this light.

There are a variety of subjects under discussion this week, including artificial intelligence, industrial policy with particular regard to semi-conductors, investment screening, and data governance. The success of many of these will depend on the ability of the US and EU to find ways to cooperate on regulation.

But the precedents for this are poor. Commercial and cultural differences have been an obstacle before and it isn’t clear what will be different this time.

The difference between US and EU regulatory approaches is often explained as the difference between a precautionary EU and science-based US. Indeed, this has entered common understanding. Helped by the presence of the precautionary principle in the Treaty of the Functioning of the EU.

However, there is little basis for seeing the EU as more precautionary. That is the case for certain types of food like chicken, but not for others like cheese. For electrical products the US is notably more cautious.

As a senior US official in the Commerce Department said during TTIP negotiations, they have no problem with the precautionary principle, just specific issues with the ways in which it is implemented. This was meant as a suggestion of both over-regulation and putting commercial interests first.

Diverging regulatory cultures

To the US, the EU over-regulates.

This reflects perhaps the most important regulatory difference between the EU and the US, the EU being more of a single market. The rights of states to regulate in the US are far more important than those of EU member states: that makes the US less inclined to regulate federally. One key reason for the Brussels Effect is indeed the EU regulating and the US not doing so.

By extension, government action on regulation is expected in Europe, but meets more resistance in the US. In particular for newer areas such as data privacy there is a default inclination in the US not to seek government intervention, even though in international discussions US officials will engage happily.

It is likely that the same pattern will be seen for artificial intelligence, which the US will simply find harder to regulate than the EU.

Such a cultural difference is also a likely explanation for a structural one, namely the presence powerful independent regulators in areas where the US has chosen state intervention. This could also be linked to a distrust of elected politicians.

For example it is the Occupational Safety and Health Administration that mandates strict checks on electrical products on sale in the US, while it will be the Federal Communications Commission which might need to be given oversight over artificial intelligence if the US decides to regulate. These agencies do not always work well with the US Trade Representative, let alone another country.

Such differences have done much to make regulatory cooperation between US and EU difficult in the past. It needs something of a match in desire and approach, which has happened in recognition of good manufacturing practice for pharmaceuticals, but not in many other areas.

Regulation expresses national interest

Underlying the cultural difference is an uncomfortable truth that countries regulate according to perceived economic interests, and frequently their largest stakeholders. The powers of respective food producers in EU and US has kept regulations very different. On technology the US is likely to listen more to their dominant players, the big suppliers such as Microsoft and Google, while the EU, without these, will tend to be concerned more for the consumer.

Public demands may exacerbate such difference. While facilitating trade takes us in the direction of closer international cooperation on regulation, the public typically seek more distinctive national or regional rules. This tension needs to be recognised and respected. It doesn’t prevent regulatory alignment but will always make it challenging.

The challenges to making transatlantic cooperation work were previously discussed in this column with particular focus on being careful with stakeholders wanting to divide the US and EU. That is their commercial interests, on which it is worth spending money.

The differences in regulatory approach will make delivering results through the Trade and Technology Council even more challenging.

These divergences aren’t completely insurmountable. There are many international approaches to regulation, to ensure at the very least that trade flows. It does however require that an awareness that even for future issues such as artificial intelligence the EU and US are likely to start in very different places. It may also mean that the high hopes of a deep agreement may need to be tempered somewhat.

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