The European Union and the United States: Cooperation & Competition

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Geopolitical realities continue pushing the economies of the European Union (EU) and the United States (US) closer together, even as the battle over industrial competition and global trade standards intensifies. The foundation of the modern EU-US trade and investment partnership stretches back to the Marshall Plan, the ambitious effort to rebuild Europe in the aftermath of World War II. Since then, the US and countries of the EU have been the closest of allies – and fierce economic competitors. The tension between these competing poles has largely defined the trade and investment relationship, which waxes and wanes according to shifting global challenges.

Today, the EU and US must confront a dangerous Russia, an export focused China, and turmoil in the Middle East. At the same time, the transatlantic partnership is locked in an intensifying industrial competition which demands a zero-sum mindset and heavy fiscal stimulus. These geopolitical and economic pressures are further complicated by internal political dynamics within both regions, including rising populism and protectionist policies. The current iteration reflects trends that came of age in 2016, the year of Brexit and the election of Donald Trump. In that year, nationalist sentiment and populist politics reached a crescendo. COVID-19 and Russia’s invasion of Ukraine not only strained economic resources but also tested the resilience and adaptability of the transatlantic alliance.

Both the EU and the US are intent on carving out an independent economic and industrial strategy. Both are using all their resources to dominate the future of economic growth. But both need the enduring benefits of cooperation via the transatlantic economic and security coordination to be successful. The interconnectedness of their economies, shared democratic values, and mutual strategic interests continue to provide a strong foundation for collaboration.As the EU and US race to outpace China and each other, four key sectors are important to follow:

Defense and industrial. Industrial producers based in the US stand to benefit greatly from Europe’s energy challenges and commitment to regulation, but supercharged European defense spending will ensure a core industrial base remains located on the continent. Rising defense budgets in Europe, especially in reaction to Russia’s aggression, are likely to strengthen cooperation in defense and joint industrial projects across the Atlantic.

Energy. American firms will capitalize on the Russia-sized hole in European energy markets, but the US may not fully embrace its new status as an energy exporter. The shift towards renewable energy sources and energy independence in Europe presents both challenges and opportunities for transatlantic energy trade.

Agriculture. EU food and beverage brands will continue to strive for their version of environmental sustainability, while US crop producers and agribusiness processors seek to tilt agricultural trade and innovation policy in America’s favor. The EU’s Farm to Fork strategy, part of the European Green Deal, contrasts sharply with the US’s AIM for Climate initiative, highlighting varying approaches to sustainability in agriculture.

Digital and artificial intelligence. The EU’s continued deficiencies in digital innovation will incentivize even more aggressive action against America’s tech giants. Efforts to regulate digital markets and promote homegrown digital solutions in the EU are likely to escalate, especially as AI and tech integration become more critical to economic growth.

As always, we believe it’s critical to have context to understand the world. If you don’t know where you’ve been, you’ll certainly not understand where you are and you will never see where you’re going. This is why we create research that goes beyond today’s headlines, to dig into the structures driving today’s opportunities. Without it, people are just guessing.

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The Ghost of Charlemagne…or George C. Marshall?

When Charlemagne forged disparate European peoples into the first Holy Roman Empire in the 7th and 8th centuries, he helped usher in a period of economic and cultural development throughout Western Europe. His reign not only united vast territories but also laid the groundwork for a shared European identity that influenced the continent for centuries 12 centuries later, when European leaders agreed on the 1957 Treaty of Rome, they still harkened back to Charlemagne’s example of European integration.

The Treaty of Rome laid the foundations for the European Economic Community, a predecessor to the European Union that we know today. However, it’s essential to acknowledge the significant role played by former US Secretary of State George Marshall in shaping the modern landscape of European economic integration. The Marshall Plan, formally known as the European Recovery Program, channeled over $13 billion into European coffers to support economic recovery. This substantial financial aid not only facilitated immediate reconstruction but also fostered long-term economic stability and growth across the continent.The funds, equal to over $170 billion today, rebuilt critical infrastructure and industrial assets that were devastated during the war.

European businesses never looked back. Buoyed by the Marshall Plan’s support, powerhouse firms emerged in a diverse range of industries, including pharmaceuticals, chemicals, electrical equipment, energy, financial services, and agriculture. These sectors became the backbone of Europe’s post-war economic revival, driving innovation and creating millions of jobs.

The US and Western European powers took the lead in constructing a global economic order with their firms and financiers at the center. This collaboration extended beyond mere economic cooperation, and they solidified their status through bilateral and multilateral treaties, agreements, and institutions designed to reinforce the global order. The establishment of institutions like the World Bank, International Monetary Fund, and Organization for Economic Cooperation and Development, greatly expanded their reach and influence in the post-World War II era.

Eventually, the General Agreement on Trade and Tariffs, implemented immediately after the war, would grow into the World Trade Organization (WTO), which effectively laid down the rules of the road for the global trading system for 20+ years.

Frictions would arise between the US and European nations, but both economic behemoths enjoyed the fruits of global economic growth. They competed on a similar playing field and maintained their champion firms. Boeing versus Airbus. General Electric versus Siemens. And on, and on it went. Not all European nations prospered equally. France and Germany leapt out to a clear lead in industrial capacity, an advantage both enjoy to this day. However the global economic order seemed largely stable and served both well. The structure of the European Union that exists today (save for Brexit) arrived on the scene in 1993, when optimism about the capitalist world’s ability to meet global challenges was at an apex.

2016: The Year the World Changed

2016 stands out as a pivotal year when tracing the evolution of the US and EU trade relationship. If confidence in the global economic order built by the US and Europe reached an apex in the 1990s, by the late 2000s it was starting to fray.

China received official recognition as a WTO member in 2001, then proceeded to catapult to the front of the global manufacturing industry using aggressive strategies and bending/not following the WTO rules. The so-called “China Shock” decimated manufacturing jobs in the United States, Germany, Spain, and Norway. By the time the Great Recession rolled around, the economic pain inflicted by increasingly globalized supply chains was being felt acutely in advanced economies. The Great Recession gave us Occupy Wall Street, the language of the “one percent” and a Chinese export machine. It also put in motion increasing anxieties about the global economic order that the US and EU built together.

These trends finally culminated in 2016, the year of Brexit (June 2016) and Donald Trump’s stunning rise to the White House (November 2016). The two events on either side of the Atlantic reflected a similar mood of populist resentment against global elites and skepticism of the free trade system. The reactions and responses to the events of 2016 irrevocably altered the course of the EU and US economic relationship.

The EU’s newfound resolve

In the wake of Brexit, the EU sought to reorient trade and economic relationships with the world. By 2016, China’s manufacturing powerhouse was a full-blown juggernaut. The EU’s outlook started to shift. An increasingly hawkish tone toward China took hold on both sides of the Atlantic. But for the EU, the gravity of the China threat also exposed the risk of a future where the US was not the only economic or geopolitical superpower. In Paris, Brussels, and Berlin, policymakers wondered how to balance their alliance with the US and their future business interests in China. European firms enjoyed immense success as China and the broader Asia Pacific region gained new wealth, lifted billions out of poverty, and created a class of nouveau riche willing to spend money on European cars, clothes, and fashion.

Consider the luxury goods industry, where European firms dominate globally. From 2008-2014, the number of Chinese households purchasing luxury products doubled. Annually, Chinese purchasers account for almost a third of the global luxury market and the average household purchasing luxury goods spends nearly twice as much as French or Italian households.

European industrial giants, particularly from Germany, also benefited greatly from expanding opportunities in China. Former German Chancellor Angela Merkel encouraged companies to enter the Chinese market. From 2008-2018, German firms accounted for about one-third of all European investment in China.

The EU’s post-Brexit re-evaluation of their economic and industrial competition strategy coincided with a distinct shift in US policy. President Trump tilted the US away from a cozy transatlantic relationship to one of confrontation. In addition to using bombastic rhetoric to criticize low levels of EU defense spending, Trump slapped tariffs on EU-based producers of steel and aluminum products. The Trump Administration also imposed tariffs on $7.5 billion worth of EU products to compensate for subsidies provided to airplane manufacturer Airbus, which were deemed illegal by the WTO.

The EU responded in kind, receiving WTO authorization to impose tariffs on US products related to a parallel case against Boeing. EU authorities also responded firmly to the steel and aluminum tariffs, targeting symbolic US goods like Harley-Davidson motorcycles and Kentucky bourbon with tariffs of 10- 25%.

From the European vantage point, the message was clear. The EU could not rely solely on a stable US trade relationship for its future prosperity. The bloc needed a distinct policy approach to protect market access and win the industries of the future. The US used national security and access to American consumers for leverage. China sought to exploit its central position in global manufacturing supply chains. For the EU, policymakers decided to draw on environmental sustainability and regulatory standards as their main source of competitive advantage.

EU policy documents boast about the bloc’s “social market economy” philosophy. In their view, the EU can use the power of regulation to tame the excesses of the free market and promote prosperity for all. The EU is also intent on leading the world in the transition to climate neutrality, even if more stringent standards create barriers for European firms in the short-term. To even the playing field, the EU is experimenting with novel regulatory concepts, such as the carbon border adjustment mechanism, which increases tariffs on imported goods produced with higher carbon footprints.

The EU demonstrated their commitment to their trade and economic policy posture when the possibility of ratifying an agreement with Mercosur nations came into focus. Mercosur is a Southern American trade bloc which includes Brazil, Argentina, Paraguay, and Uruguay. Despite reaching an agreement-in-principle with Mercosur in 2019, the EU has never moved forward with ratification, largely due to objections from France and other EU Member States about poor environmental standards within the Mercosur trading bloc. For the EU, pure market access considerations do not take precedence when environmental standards could be undermined. The business community, particularly within Germany, has expressed frustration with the EU’s reluctance to move forward with the agreement. Still, EU policymakers seem to be willing to walk away from the market access and investment advantages to preserve the high environmental standards.

The impact of twin crises: COVID and Ukraine

While much of the EU’s trade and industrial policy posture endures to this day, two global crises in 2020 helped snap some aspects of the EU-US economic partnership back into alignment.

The first was COVID-19. The early days of the pandemic strained EU-US relations, as competition for critical medical supplies and the Trump Administration threatened to withdraw from the World Health Organization. Ultimately, however, both the EU and the US emerged from the pandemic with a shared recognition of the threat China’s manufacturing dominance posed to both sides of the Atlantic. When President Biden assumed office, his administration pledged to enhance cooperation with Europe in dealing with COVID-19 impacts and building a more resilient global supply chain.

Nonetheless, the desire to provide impactful stimulus to aid in the COVID-19 recovery quickly launched the EU and the US into the fiscal policy equivalent of an arms race. For all the rhetoric about shared resilience, both the EU and the US pursued their own fiscal stimulus agendas independently.

The EU channeled economic recovery efforts through a €540 billion (about $590 billion) financial aid package for workers and businesses impacted by the pandemic in April 2020. Less than a year later, the EU launched a €750 billion (around $911 billion) fund called NextGen EU to help spur innovation. Consistent with their overall economic and industrial strategy, the EU also continues to promote the European Green Deal, a set of policy initiatives designed to make the EU fully climate neutral by 2050.

For its part, the US also provided robust stimulus to help steward the American economy through the pandemic. The American Rescue Plan funneled nearly $2 trillion in stimulus spending into the US in 2021. Uncle Sam’s largesse only expanded from there. Over the course of six relief laws, the US approved over $4.5 trillion in funding for pandemic relief and recovery. One measure in particular, called the Inflation Reduction Act, caused particular concern in the EU over generous incentives aimed at locating more manufacturing capacity in the US.

The second major crisis with consequences for the EU-US trade relationship was the Russian invasion of Ukraine. The outbreak of hostilities exposed the EU’s deep dependence on Russian energy supplies and exacerbated economic challenges stemming from the pandemic. Higher fuel prices, supply chain disruptions, and rising food costs all contributed to global inflation. The situation became especially dire as Russian natural gas stopped flowing through pipelines into Germany, Italy, and other EU nations. The exchange rate between the Euro and the greenback underscored just how gravely investors assessed the situation. The Euro reached the strongest level against the US dollar in five years at the end of 2020, when $1 equaled 82-84 cents for the Euro. By August 2022 – six months after Russia launched the invasion in Ukraine – the Euro and the dollar reached parity for the first time since 2002.

Thankfully, favorable weather conditions staved off the worst impacts of the energy crisis. Fears of massive natural gas rationing and an EU recession were avoided. But there is no denying that the loss of cheap, abundant gas from Russian producers delivered a major blow to the EU’s industrial competitiveness. In October 2022, German chemical giant BASF announced permanent cost reductions to European manufacturing operations, citing higher energy costs and over-regulation as permanent, structural factors driving the change.

The ongoing consequences of the Russia-Ukraine war are still running their course, but a few developments are worth noting. First, the security situation provided a real impetus for increased European defense spending. Second, America’s attractiveness as an energy supplier for the EU has increased drastically. Natural gas is a major part of the story, but the EU is also a major market for nuclear power equipment, which represents the second largest US export segment. Third and finally, while the EU has not abandoned its environmental and regulatory goals, the reality of conflict on the EU’s doorstep has forced a slight shift in thinking on food and energy security. The EU has eased off on some aggressive regulatory measures in the food and energy sectors, even as the social market philosophy and climate neutrality continue to drive the agenda.

Impacts on Future Economic Growth

As the EU and US continue to navigate the ongoing impacts of the COVID-19 recovery and the war in Ukraine, they are confronted with an increasingly fraught geopolitical landscape. The EU is engaged in a delicate balancing act, maintaining a “tough-on-China” posture while also seeking to insulate itself from economic harm. The EU Commission often talks about “de-risking” from China. They have promised investigations into Chinese imports and teased the possibility of future tariffs. Yet at the same time, the major EU industrial players continue to invest heavily in China to grow market share and protect their assets. In fact, four German firms – Volkswagen, BMW, Daimler, and BASF – accounted for 33% of all European investment in China between 2018 and 2021.

Given the ongoing dynamics, four economic sectors promise plenty of action for investors.

First, the defense and industrial sector provides an incredible growth opportunity for US industrial producers. Firms with manufacturing facilities in the US – including many subsidiaries of European companies – will benefit massively from a favorable investment climate. Massive government stimulus from the US government, combined with America’s cheap, reliable energy, will allow US-based producers to reap huge rewards. In addition, ongoing geopolitical tensions and the need for technological advancements in defense systems will likely sustain high demand for industrial products in the coming years.

Despite the EU’s best efforts, the feared migration of industrial capacity into the US is likely to materialize. The EU will try its best to match US government incentive packages. In the end, they will be unable to compete, hampered by more limited fiscal firepower and less cohesion in government response. The EU Commission’s power relative to EU Member States pales in comparison to the US federal government’s ability to set the economic and trade policy agenda in the nation. The messy internal politics of the EU will prevent a truly fulsome response.

One exception will be the European defense sector. Supercharged defense spending by EU Member States (Germany pledged $100B in new defense spending) will ensure some semblance of an industrial core remains based in Europe. US defense firms will benefit to be sure, but in the wake of Russia’s continued aggression, there will be plenty of funding to go around. French and German aerospace and automobile manufacturers seem particularly well-placed to benefit. The European industrial sector may shrink, but the most successful industrial giants will continue to invest heavily abroad. Whether in North America or China, these multinational firms are eager to maintain a global manufacturing and production footprint.

Second, the energy sector will represent an increasingly fruitful area of cooperation for the EU and the US. The US is enjoying newfound status as a net energy exporter, at the exact time when Europe’s energy needs are not being fully satisfied. LNG infrastructure is being built out across the EU, and American firms like Cheniere Energy have already inked long-term supply deals with European customers. Europe is also more favorable to nuclear energy today than at any other time in recent memory, providing opportunities for firms like Westinghouse Electric. Moreover, advancements in renewable energy technologies, such as wind and solar power, present additional avenues for collaboration and growth, with both regions striving to meet ambitious climate goals.

The critical question is whether the US can continue to live up to its role as a global energy supplier. Energy security and independence have often occupied a sacred place in the minds of American policymakers. Until 2015, the US even employed an active policy against exports of crude oil. To truly capitalize on the potential of future EU energy needs, the US cannot let domestic politics impede and undermine export supply. The Biden administration’s announcement of a temporary pause on pending decisions on exports of Liquefied Natural Gas (LNG) to non-FTA countries is causing the EU to search for alternative suppliers and casts the US in a negative light as an unreliable trade partner.

Third, the agricultural arena presents interesting sector growth opportunities. The EU is already the fifth largest export for US agricultural products, worth $44 billion in 2022. Yet the US continues to run a sizable trade deficit of about $20 billion annually in food and agriculture.

The EU’s success in branding their version of agricultural and food production as “sustainable” and “high-quality” is part of the reason behind the trade deficit. As the EU aggressively promotes their preferred food and agricultural standards around the world, US producers are trying to muster a response. The EU’s Farm to Fork strategy, an outgrowth of the European Green Deal, is being challenged by the US’s AIM for Climate initiative. Both strategies offer competing visions for what makes a healthy, sustainable food system.

If the EU is successful in exporting their food and agriculture standards around the world, they will set the stage for European food and beverage companies to grab more market share. In addition, they will also be able to shape production practices in emerging markets around the globe desiring to export to the EU’s common market.

US crop producers and agribusinesses take a different view. Instead of heavy regulation in food and agriculture, US firms prioritize efficiency and quantity. They are eager to adopt new technologies, including genetically-modified crops, that can increase profitability. If the EU’s gambit on standards fails to win supporters around the world, US firms stand to gain relative to their EU peers.

Fourth, expect a continuation of the EU’s aggressive enforcement posture on digital products and artificial intelligence. Compared to the US, the EU is a relative laggard in digital innovation. While the EU claims that their actions will help spur competition in a highly-concentrated digital landscape, the reality is that the global technology ecosystems are largely either American or Chinese. President Biden’s Administration has not pursued a digital market access agenda as vigorously as predecessors, but expects US firms to continue to dominate as they incorporate more artificial intelligence products and services into their offerings. Additionally, the EU’s stringent data privacy regulations, such as the General Data Protection Regulation (GDPR), continue to shape the global digital landscape and present both challenges and opportunities for tech firms operating in Europe. The good news is the 2023 EU-US Data Privacy Framework (DPF) agreement has overcome the question of allowing personal data to be transferred from the EU to participating organizations in the US.

The wildcards: domestic policy landscapes

Beyond the four industry sectors, wise investors should also pay close attention to domestic political developments within the EU and the US. These developments hold important clues to future areas of economic growth and contraction.

In the case of the US, the relationship with the EU in the short-term future is a tale of two administrations. If President Biden holds the White House, the continued tone of collaboration and partnership will persist. The Biden Administration is much more closely aligned with the EU on a range of policies, from trade and climate to labor and digital. In their 2024 market access report, the Office of the US Trade Representative even agreed to drop language concerning the impact of digital trade barriers on American companies.

By contrast, a second term for Donald Trump would portend a much more turbulent ride for the EU-US relationship. Trump continues to press EU nations to contribute more to their defense and has mused about across-the-board tariffs on imported products. With a President Trump at the helm, EU industrial firms are likely to face more headwinds in the form of tariffs and other investigations that could limit exports to the US.

One promising area of cooperation for the EU and US concerns trade policy. Formal trade agreement talks have faltered, but the EU Trade and Technology Council continues to provide a valuable forum for exchanging views on economic policy. Since both sides seemingly lack the will for a full-fledged trade agreement, a foreign investment agreement may help facilitate further bilateral economic cooperation. Foreign investment agreements are much lower effort than a full trade agreement, as they are typically limited to the rights and responsibilities of cross-border investors as opposed to goods and services market access considerations.

The EU is also not immune from internal pressures and contrasting policy views. As we approach the ten-year anniversary of Brexit, will the United Kingdom remain the only country to leave the EU? The growing sentiment of Euroscepticism in countries like Italy, Hungary, and Poland suggests that future exits cannot be entirely ruled out, particularly if economic conditions deteriorate or EU policies fail to meet the needs of member states.

Imagining a world where the EU starts to break apart is difficult given the status quo. Indeed, if the EU is able to successfully compete with the US and China using their preferred economic and industrial strategy, the EU will have a bright future. However, there is an alternate scenario where the EU’s inability to effectively support their industrial base and gain market share in future growth industries falters. As the war in Ukraine shows, commitments toward climate neutrality and environmental standards often wane during periods of crisis.

Together, France and Germany account for 31 of the biggest 50 publicly-traded firms in Europe. Will their domestic constituencies continue to support EU institutions if future competitiveness proves to be undermined? How long could the EU survive intact if the global race for economic supremacy elevates the US and China, while leaving Europe behind?

EU political rhetoric is already becoming more extreme. Far-left and far-right groups are poised to make considerable gains in early June elections. If the long-term EU strategy does not pay off, the bloc may be vulnerable to breakaway ideas.

And then there is the risk of an escalating war in the Ukraine. Poland’s Foreign Minister stated they would not rule out sending troops to Ukraine. Poland is a member of the EU and NATO. French President Emmanuel Macron made similar comments about French troops earlier this year. If the war progresses poorly for Ukraine, the risk of a wider war increases as the existential threat shifts to a broader EU.

Finally…

The EU-US trade and investment relationship has always adapted in the face of external pressures. Over the next 10 years, these pressures will continue to rise and economic competition will grow more intense. At the same time, geopolitical realities and defense arrangements will keep the transatlantic partnership from growing too far out of alignment. The ongoing challenges posed by a resurgent Russia and an assertive China will necessitate continued cooperation in defense and security, reinforcing the strategic importance of the transatlantic alliance.

The EU is embarking on an ambitious plan for winning the economic future, betting that regulatory edicts can effectively push the private sector toward more domestic desirable outcomes. Key initiatives such as the European Green Deal and the Digital Decade targets aim to position the EU as a leader in sustainable and digital innovation. These policies are designed to foster a competitive and resilient economy that can withstand global shocks and drive long-term growth. If they are successful, they will set the stage for a new era of EU prosperity where EU policymakers and businesses define the rules of the road. If the EU misses the mark, the consequences could be grave as regulations always act as sand in the gears of the economy. The US and China will not wait for the EU to catch-up – they will seek to capture the spoils of future economic growth for themselves.

With two pivotal elections putting potentially new leaders at the helm in Brussels and Washington, DC, opportunities for future economic growth and challenges abound. The outcomes of these elections could significantly influence trade policies, regulatory approaches, and bilateral relations. The leadership choices will reflect the domestic priorities of each region and could either bolster or strain the transatlantic partnership. Investors needs to pay close attention to how domestic policy trends and global realities continue to shape the contours of EU-US trade.

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If things feel crazy in the world today, that's because they are. We are seeing huge shifts in risk and reward, leading to a lot of economic uncertainty and confusion about where we go from here.

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