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Podcast: The Future of US-EU Trade, With Denis Redonnet

Podcast: The Future of US-EU Trade, With Denis Redonnet

Trade tensions between the United States and the EU have increased over the past few years. Decreasing those transatlantic tensions while promoting fair competition will be especially important with the challenge of a rising China. That is a key goal of the new U.S.-EU Trade and Technology Council (TTC). Rob and Jackie sat down with Denis Redonnet, the EU’s chief trade enforcement officer, to discuss the opportunities and challenges for the TTC and the broader implications for trade policies in the United States, the EU, and in the World Trade Organization.




Rob Atkinson: Welcome to Innovation Files. I’m Rob Atkinson, founder and president of the Information Technology & Innovation Foundation. We’re a D.C.-based think tank that works on technology policy.

Jackie Whisman: And I’m Jackie Whisman. I handle outreach at ITIF, which I’m proud to say is the world’s top ranked think tank for science and technology policy.

Rob Atkinson: And this podcast is about the kinds of issues we cover at ITIF and the broad economics of innovation, so specific policy and regulatory questions about new technologies. And today we’re talking about trade and in particular transatlantic trade and the role of the EU.

Jackie Whisman: Our guest today is Denis Redonnet, who is the Chief Trade Enforcement Officer at the European Commission. The CTEO is a new post created by the commission to strengthen the enforcement of EU trade agreements. Welcome. We’re happy to have you.

Denis Redonnet: Thank you. Great to be with you.

Jackie Whisman: Over the last few years, there have been increased trade tensions between the EU and US, including US steel and aluminum tariffs, and recently negotiators agreed to a resolution to the long-standing Boeing, Airbus dispute. What do you see as the major challenges from both sides that need to be resolved?

Denis Redonnet: Well, I think we’ve been doing quite well recently in terms of dealing with some of the legacy issues, trade irritants that have accumulated over the last few years. I think it was a necessary first step, but we’ve got to build a forward-looking agenda. We feel that forward-looking agenda probably lies in trying to have a conversation which enables us to make sure that we find the right interaction between our emerging regulatory frameworks when it comes to digital economy and the green transition. These are going to represent and require a lot of regulatory developments on both sides. And it’s very important to have a framework to be able to work at seeing those frameworks converge. I think that’s the whole purpose of the newly established Trade and Technology Council, which has met, and which is right now ongoing its work ahead of a second political level meeting under these auspices on which we place of course great importance.

Rob Atkinson: Denis, I want to come back a little bit on the Trade and Technology Council. I had the pleasure of having joined Ambassador... Oh, I’m going to get his name wrong, I’m sorry... Dombrovskis, the new trade ambassador?

Denis Redonnet: Yep. That’s right. He’s our trade minister.

Rob Atkinson: Trade Minister. Yeah sorry, Trade Minister. When he was in Washington, right before the TTC meeting and a very impressive person and really seemed like he was focused on the right things for the TTC. But part of the motivation... certainly not all of it... part of the motivation I see for the TTC is we need to make sure that we are getting most of our tensions resolved, if you will, so that we can collectively focus on the bigger challenge, which is the role of China and the threat of China to the global trading system. And what I mean by that is not China inherently, per se as a country, but China, in terms of its trade practices that historically have distorted trade.

And the fact that the commission has now taken important steps in this direction, appointing you as the head of enforcement and talking about a number of different EU measures that could address this, including on subsidies... which maybe we can go into. Anyway, if you could just generally talk about that. What’s going on? Where do you see all this going? It seems to us from this side of the pond a pretty positive development.

Denis Redonnet: I think we are very clear that there are unfair trading practices, problematic non-market policies in China that need to progress and they are not actually currently addressed adequately within the existing rules of the trading system. I think this is a view that we do share with the United States. We’ve said that on several occasions in clinical frameworks. For example, the now newly resumed trilateral ministerial process between the US, Japan, and EU Trade Ministers. But we have indeed been developing our own policies and tools in order to make sure that we fill the regulatory gaps that are there. Again, to protect our interest. It’s great that you ask me this question because we do have the... sometimes sense that there’s perhaps an impression in DC that the EU is not willing or capable of stepping up in terms of trying to develop the necessary tools to counter unfair trading practices from any third country, but China in particular, given the challenges that it throws at the trading system. And I think that’s not quite right.

I think if you look at some of the developments... you were mentioning subsidies... Let me just say first that we should not forget that we are pretty robust and assertive users of traditional trade [inaudible 00:05:05]. I want to point out a few things here. We have a large number of anti-dumping orders in place, vis-à-vis China. We are starting to counter distortions in important sectors. Very recently, anti-dumping orders were imposed on imports from China of optical fiber cables. Now that is an important product for the development of the digital economy in Europe. And we do not want to see the transition, the digital transition or the green transition, being built on the basis of dump imports from China. And we’ll take the necessary measures to go against this. We have also been taking measures which I think use the flexibilities that we have on the trade defense instruments to create a new forms of distortions.

We have notably countervailed at cross border financial support from China. What we call transnational subsidies. Subsidies that are actually coming from China that are imported into the EU by our third countries. We’ve had a case with respect to glass fiber from Egypt where we consider that we have countervailed are actually Chinese subsidies, which would be through special economic zones established in third countries. We see that pattern out there and we are taking, in some cases, traditional trade defense measures to deal with those kinds of more complex forms of subsidies and distorted import that we’re seeing from China.

And finally, the problem with subsidy issue is that the rule book is insufficient. We are of the view that the current trade rules relating to subsidies, the anti-subsidy kind of way to measure an agreement, is basically insufficient, unfortunately. Essentially it’s efficient with respect to export, contingent subsidization. It doesn’t cover services. The remedies are prospective. There’s a range of reasons why this is insufficient.

Now, what we need to do is twofold. We need to probably try to put ourselves back into direction of actually augmenting these existing international rules on subsidies. And for this we will meet, join up probably EU, US, other players, and get China at a negotiating table on this issue. And at the same time, we’ve got to have autonomous measures to close regulatory gap where necessary. That’s why we’ve also introduced or proposed to our legislative branch in Europe a new foreign subsidies instrument which is designed to deal with the distortions from Chinese subsidies in the internal market where those subsidies flow through foreign direct investment and not through the importation of goods, which is of course limitation of traditional countervailing instruments. We are equipping ourselves there with a new instrument to close what we consider is a regulatory gap. This is under discussion in front of the legislative branch, expect this to be coming into force as part of the EU enforcement toolbox relatively soon. And it will be an important addition to that toolbox.

Rob Atkinson: That’s a really great description of what you’re doing, very impressive. ITIF actually filed... there was a request for comment. I can’t remember what the commission calls it. And we filed maybe about a year ago on that. I do want to ask you a little bit on... one question on anti-dumping. It’s good to hear you say that you don’t want to build your green or digital economy on subsidized goods. Because I know that certainly in the US and I believe in Europe, there was this period, this Larry Summers like view where if the Chinese are dumb enough to sell us solar panels at a discount, we’re the ones that benefit. Problem with that was that they decimated the US and a lot of the European, particularly German solar industry. They decimated it. The Germans and the US, others were much more innovative than the Chinese. We did a big report on that and found that the solar patenting peaked in 2010 and it’s been down ever since.

The idea somehow that subsidized trade is okay I just... yeah we always found that problematic, it’s not real trade, but... I’m glad to hear you say that. But I do have a specific question on dumping. In the US one of the problems with using an anti-dumping tool is that you have to prove harm. And by the time you’ve proven harm you’re halfway to the grave oftentimes with a firm. And I’m just curious, do you have the same standard in the US... and in Europe or can you say, “This is just simply dumping and we expect it to cause harm”?

Denis Redonnet: No, the instruments are governed by international rules on trade defense instruments. We do have to be evidence based and provide due process with respect to proving that there is dumping, that there is injury and that there is causality. And there is a certain standard there. It doesn’t prevent us from being able to use the tool. It’s incumbent, of course on public authorities to be reactive enough, nimble enough, understand what’s going on in terms of how different types of distortions again are slowly morphing and changing in nature to be able to be active. It’s true probably in the past we have not done that enough and systematically.

Somebody was telling me the other day that we did used to have magnesium refining capacity in the EU, which we don’t have anymore. Therefore we’re hugely dependent on China today. Now that industry has gone. Perhaps at that point in time there would have been a basis for protecting that industry, if it was subject to dumping, but we’re looking forward.

I was mentioning the example optical fiber cables because it is difficult to establish dumping an injury in a marketing product of this kind, not least because it’s not your traditional commoditized type product and the transactions takes place through tenders. It makes the anti-dumping investigation, yeah harder, more complicated and you need to put resources in order to get to a credible and solid result. We have adopted measures in this area after several months of investigation. Same for... For example, in steel, take stainless steel. We have a lot of anti-dumping orders in place with respect to dumped imports or stainless steel. That is important. It’s an industry that is going to be playing a role. Inevitably that part of the industry in the transition towards green steel. We must be mindful that these industries are not just industries of the past, but also industries of the future. And that’s why we have a certain legitimacy in deploying our trade defense instruments, vis-à-vis them.

Jackie Whisman: When it comes to the proposed foreign subsidy regime, how do make sure that this does not sweep up all government aid for business such as support for clean energy, R&D for example, and rather have it focus on real abuse especially from countries like China that engage in massive production subsidies?

Denis Redonnet: That’s right. I think we got to put our focus on the most harmful and egregious forms of distortions that are out there. I think that there is a fundamental difference between some of the distortions we’re seeing from non-market jurisdictions like China and perhaps what’s going on in terms of the natural government intervention in the economy that we’re seeing in market economies. It’s very clear that in China there’s a much wider economy, wide distortion to the cost of capital more generally. I think that we’ve got to look at and focus on what is really a dark amber box of subsidies that we really need to discipline better. At the same time we believe that, yes probably we need to look as part of a balance to this into approaches of perhaps reintroducing a green box in this sense of a future subsidy disciplines.

But I think I would just add perhaps one thing is that problem subsidies is one thing. We see other forms of distortions that need to be tackled. Forced technology transfer, clearly issues that remain a concern to us. And beyond subsidies I think the questions of the behavior of state owned enterprises in the economy is also something that can be subject to behavioral rules and disciplines. And we believe these are the sort of rules and disciplines around the notion of competitive neutrality that we should try to develop and that we should try to push into the global rule making agenda.

Rob Atkinson: You mentioned this notion of competitive neutrality and subsidies. It seems that with China, exactly what you’re saying, that the degree of subsidies, the size is so much bigger. And then you mentioned maybe we need to do something with green. I’m just curious about... I know that CBAM... what’s the term... CBAM, Carbon Border Adjustment Mechanism is one that people talk about. ITIF just came out with a report endorsing the idea of carbon based tariffs, but not the CBAM itself, which we thought was problematic as it gets down to the individual steel plant that was made and all that. We do think that there needs to be some sort of carbon adjustment tariffs that would make it so that countries like the EU or the US really who are doing things aren’t hurt by countries that aren’t. I’m just curious how you see that working out. Do you think there’s an opportunity for the US and the EU to compromise on that and come to some agreement that we could all move forward with together?

Denis Redonnet: I think in terms of Carbon Border Adjustment... just to be clear, I think we see that those measure as something which is really a response to a very specifically identified problem. Which it is a response to the problem of carbon leakage, not a general issue of competitiveness. It’s a carbon leakage problem solving mechanism, if you want. At the time when we on the EU side are increasing our green ambitions and the level of ambition in terms of decarbonization of the economy. I think in terms of how that’s going to play into international trade relations, I think it will depend very much on what are the evolving frameworks that different countries are going to be using and developing in this area. We’ll see with the US what is going to be exactly the direction of travel of the United States on these issues. As we augment our level of ambition in terms of decarbonization, as other countries perhaps do the same, then we will have to work on the question of convergence of these kinds of order adjustment mechanisms.

But before we get there, you were talking about the question of scale of subsidization. If you go back to distortions we’re seeing, for example, out of China in key industrial sectors, this is fairly well documented. We have been in the context of the OECD Trade Committee supporting work of the OECD Secretariat has been doing, looking at the question of market distortions in key sectors. Aluminum semiconductor. In aluminum the OECD study looks at a number of Chinese producing and exporting firms which represent a very significant part of the sector. And the analysis shows that these are concerns that are subsidized to the tune of 15 to 20% of that turnover. That is massive. And that of course will inevitably have trade distorting effects.

We’ve got to deal with this problem of scale of the subsidy issue and certain new forms of subsidization as well. Nonmarket equity injections, for example, are an issue which is important. We’re seeing that this constitutes a policy, and we’ll have to figure out how to deal with them intelligently to create remedial tools as necessary.

Rob Atkinson: Yeah, it’s interesting you mentioned there’s... One of the things to me the Chinese policies on this is there’s so many different ways that they subsidize. It’s not just writing a check. It’s multiple, multiple ways. One of the things I wrote recently was, somebody had done an analysis of Chinese backed venture funds. And some of these are owned by the government. Some of these are private, but they’re... And the amount of capital under management was bigger than the GDP of the Netherlands. And you think about that. Holy geez that’s... That’s just the government writing checks to then basically invest in these Chinese companies. And they claim it’s private sector, but it really isn’t.

Denis, maybe to just wrap up, I know we don’t want to take up too much of your time. You mentioned at the very beginning the new Technology and Trade Council, which we wrote a recent analysis or proposal of, and we thought it’s really positive. I think it’s really can do a lot. USTR’s Katherine Tai has talked about working more closely with the EU, with you, vis-à-vis the WTO reform issues. We’re also obviously in the TTC talking about areas of working together. Couple of high level areas you think we can move forward with on this, particularly vis-à-vis China?

Denis Redonnet: Yeah. For us acquire this question of reforming the WTO is absolutely central, because again, the issue is making sure that we remain within a stable predictable rules-based system. That’s got to be the baseline. Within which we can have everybody under the tent. It is very important that we maintain a functioning rules based multilateral trading system with the WTO at its center. If anything because we’ve got to work on absorbing China and other players differently and better inside that system. In order to do that you need to have actually a vibrant and functioning system. In terms of WTO reform, we feel that we need to have a very serious root and branch review of all functions of the WTO, starting with a rulemaking function. You’ve got to have a system which enables more global rules to deal with global problems.

Now that means the WTO needs to try to get a number of things done. There’s an ongoing negotiating agenda with respect to sustainability, notably fishery subsidies. Obviously ,you got this... has to be done, it is a question of credibility for the WTO to move forward. We think that these questions are new augmented disciplines to deal with non-market policies and practices are things that have to find their way into the rule making machine. Because ultimately this is how they’re going to become effective. In order to deal with some of these distortions, we need a number of tools. And some of them are the ones that I’ve been talking about, that we’re developing domestically, autonomous tools. But we need also rules. And for us it’s not rules or tools, it’s rules and tools. And we hope that this is a fundamental two on platform on which we’re going to continue to move forward with the US administration.

And, I would say finally, the dispute settlement arm of the WTO matters a lot to us. We think it’s very important because we need via a functioning dispute settlement arm in WTO, to preserve the primacy of international economic law. If not, we have a gap, we have a hole in the system. We need to make sure that that gap in our field, we’re ready to consider. As we have said before, a structural reform of the dispute settlement arm, over a whole range of issues in which the way the system is organized, we want to maintain a binding two step adjudicative system in the WTO. Within those parameters we are to engage in a process of reform. We’re very much looking forward to see US leadership also on the question of the WTO reform going forward.

Rob Atkinson: There’s so much areas of real promise, real importance here. And for a long time we were in this... I don’t know, maybe hopeful phase that maybe China’s going to do well. And then there was the Trump interlude where it was people were just stuck and doing things. And hopefully now we’re at a place where we can move forward together and really make positive changes. Denis, thank you so much for being here. It was really great to hear more about how you’re thinking about that and what the EU is planning to move forward on.

Denis Redonnet: Thanks for the conversation. Much appreciated.

Jackie Whisman: And that’s it for this week. If you liked it, please be sure to rate us and subscribe. Feel free to email show ideas or questions to [email protected]. You can find the show notes and sign up for our weekly email newsletter on our website, and follow us on Twitter, Facebook and LinkedIn @ITIFdc.

Rob Atkinson: We have more app episodes and great guests lined up. New episodes will drop every other Monday. We hope you’ll continue to tune in.

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