A German-American Dialogue of the Next Generation

Geoeconomics Virtual Meeting

Participants of the Geoeconomics Group came together for their second virtual meeting on January 30, 2018. The group discussed transatlantic economic cooperation challenges, which have been more visible under the current U.S. administration and its “America First” rhetoric. The group confronted several issues, including prospects for transatlantic trade relations, the need for EU reform and why this is important for the United States, the role of China in the global economy and the need for foreign investment screening mechanisms, and the relevance of the digital economy in transatlantic cooperation. The group developed various policy recommendations that are scheduled to be presented at the final conference on April 9-10, 2018.

Trade relations between the United States and Europe might become more strained in light of the new U.S. tax reform that gives companies incentive to invest in the United States because of tax cuts and specific provisions with respect to cross-border business. The American attitude is that the tax cuts will pay for themselves and promote growth while decreasing the deficit, but many Europeans believe the opposite–they expect investment in the U.S. not to be as large as predicted, and that while there may be a couple years of growth, the tax system will inevitably increase the deficit and hurt the global economy. Why are the conclusions so different? The EU will be discussing possible reactions, such as a common corporate tax base in the EU or the introduction of a digital tax. The issue of U.S. tax reform in the global economy may be hard to bring up in an international setting, since in the end taxes are a domestic policy issue. However, when a player as big as the United States reforms taxes so drastically, it affects the global arena (with respect to growth, trade balances, currency movements etc.).  This issue will certainly be brought up at the OECD, G20, G7 and the IMF.

In addition to EU-wide tax reform, the topic of overall EU reform and the implications of Brexit were discussed. Even though the UK is technically not out of the EU yet, they are not taking part in EU reform talks. This has transatlantic implications–the “special relationship” between the United States and the UK used to mean that the UK was a sort of “Trojan Horse” in Europe for the United States. However, now that that is no longer a possibility, who will be the “in” for the U.S. in Europe, if anyone? The previous administration tended to lean towards Chancellor Merkel and Germany, however, that relationship has become perhaps contentious with the current U.S. administration. This poses the question of whether EU reform should include policies that make the EU more independent of the United States. Yet President Trump appears to like French President Macron. Germany should support the relationship between France and the United States, while teaming up to lead the way in EU reform. Areas of reform are institutional reforms of the euro area (e.g. creation of a European Monetary Fund and a Euro finance minister, Banking and Capital Market Union) but also macroeconomic imbalances, investment in infrastructure and education. The latter can be considered an issue of common interest in transatlantic relations.

Another topic discussed was the issue of a screening mechanism for foreign investments. In recent years, there has been an increase of European strategic assets acquisition by non-EU state-owned enterprises, but there have been barriers put in place that prevent EU states from a similarly open investment environment. One of the targets on the EU reform agenda is to create a screening mechanism similar to what other large economic players already have to prevent the loss of more European assets to non-EU states. There is momentum towards state cooperation within the EU, but not all states are on board yet. The U.S. itself is in the process of amending its CFIUS process. A bill with bipartisan support is currently discussed in Congress. The EU and the U.S. could compare notes and learn from each other.

There is also the issue of the digital economy and cryptocurrencies. There should be some common regulation of platforms and cryptocurrencies between the United States and Europe. This should be a topic at the G20 Finance Ministers’ meetings. Artificial Intelligence (AI) is another aspect of the digital transformation that needs to be addressed. The U.S. and China are on opposite ends of the spectrum when it comes to AI; China has a top-down approach in which the state is very involved in the production of and research into AI and can set federal goals for AI. In the United States, AI is being researched and produced almost entirely by private firms who do not have access to as much data as the Chinese. Europe is a sort of in-between hybrid, where there is private development with state involvement. There should be international rule making for AI, especially given its potential.

Recommendations:

• Establish workshops to understand the different aspects of the U.S. tax reform, especially related to corporate taxes; continue to discuss the effects of tax reform in multilateral fora, such as the OECD and G20.
• On trade agreements, continue and enforce dialogue on the positive elements of trade agreements and determine what should be on the agenda of bilateral talks
• Europeans should explain to the U.S. the political idea behind the EU and ongoing reform efforts, in particular of the euro area. A functioning EU after Brexit is in the interest of the U.S. as well.
• The EU needs to set up a screening mechanism for foreign investors similar to what other countries already have (e.g. CFIUS in the U.S.), especially vis-à-vis China, but delink the effort from China and make it general; take advantage of the current momentum for cooperation and exchange best practices with the U.S.
• Regarding the digital economy, focus on employers and production; future of work; collective representation; education and training of workforce for digitalization as well as data protection regulation and cybersecurity.
• There should be common transatlantic regulations of cryptocurrency and AI; define who the actors should be: government or private?
• Continue the dialogue between the United States and the EU regarding financial regulation and make sure that an international level playing field is in place.
• If the U.S. is turning away from Angela Merkel and towards Macron as their “in,” Germany should support this and work even closer with France.