Is the EU about to get more free trade with the US?

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In a twist that surprised some, the Treasury Department is signaling its intent to sign a bilateral agreement between the United States and the European Union covering insurance regulation in the world’s two largest insurance markets. This development has to be considered a positive sign coming from an administration that has hitherto signaled skepticism toward international trade.

The agreement is the result of almost two years of negotiations headed up by Treasury’s Federal Insurance Office, which concluded the pact in the Obama administration’s waning days this January. The substance of the US-EU covered agreement focuses on harmonizing regulation in three areas: reinsurance, group supervision, and the exchange of insurance information.

The agreement’s ultimate goal is to ensure that regulators in the U.S. and Europe view each other’s systems as “equivalent” when it comes to licensing, oversight, and operation, making it easier for U.S. companies to do business in Europe and for European companies to do business in the US Probably the single-biggest change is a pre-emption of state laws that require European reinsurers without a US subsidiary to post 100 percent collateral for any cross-border business they write.

But Treasury’s decision to move forward has implications beyond harmonizing insurance standards. What is particularly noteworthy for trade watchers is the extent to which it appears to set a precedent that the administration views negotiations with the EU to be bilateral, rather than multilateral.

With its professed hostility toward multilateral trade negotiations, there has been concern that the Trump administration would abandon the Transatlantic Trade and Investment Partnership (T-TIP), a potential trade agreement with the EU. Treasury’s announcement went out of its way to emphasize that the covered agreement with the EU is “bilateral.” This is the strongest signal yet that T-TIP may avoid the same fate as the Trans-Pacific Partnership, which the Trump administration scuttled in one of its first official acts.

Created by the Dodd-Frank Act in 2010, the FIO has just one regulatory power: to negotiate so-called “covered agreements” concerning insurance and reinsurance, which can pre-empt state law in limited ways. The office was created following decades of complaints that federal trade representatives were limited in their ability to negotiate international insurance rules. The executive branch couldn’t credibly bind the states to change insurance law, while the Constitution doesn’t permit the states themselves to conduct foreign policy, creating something of a Catch-22.

This particular agreement has proven a serious point of contention within the US insurance industry. The American Insurance Association, American Council of Life Insurers, and the Reinsurance Association of America—all of whom have some members with European corporate parents, as well as US-based members with significant interests in Europe—argue it is a necessary step to facilitate trade in services in both directions and to prevent discrimination against their members operating in Europe.

The National Association of Mutual Insurance Companies, whose membership is almost wholly domestic and few of whom do significant business abroad, opposed the agreement as a giveaway to European regulators looking to impose foreign requirements on US firms. The other major trade group for US property/casualty insurers, the Property Casualty Insurers Association of American, has characterized international regulation as an “emerging risk,” but never formally opposed the agreement.

Unsurprisingly, for their part, the National Association of Insurance Commissioners and National Conference of Insurance Legislators—which consist, respectively, of state insurance commissioner and state lawmakers who sit on committees with insurance oversight—both opposed the covered agreement on grounds that it would compromise a system of state-based insurance regulation that has proven historically successful.

The measure also has encountered pushback from some members of Congress, including from Reps. Sean Duffy, R-Wis., and Dennis Ross, R-Fla., the chairman and vice chairman of the House Financial Services Committee’s Housing and Insurance Subcommittee. But the only way for Congress to block the deal with be through regular legislative order – a bill that passes both chambers and is signed by the president.

That appears terribly unlikely at this point. Once Treasury signs the agreement, it will take effect seven days after the U.S. and EU complete their approval mechanisms.

Trade relations with the EU nonetheless remain touchy. The Trump administration is currently debating whether to use its national security authority to impose tariffs or other restrictions on imported steel. The national security case for steel restrictions is extremely weak and the economic case is even weaker. Steel tariffs would hit EU members particularly hard and are likely to be challenged at the World Trade Organization. The Financial Times recently reported the EU would likely retaliate against American bourbon, dairy, and citrus products.

Nevertheless, moving forward with the covered agreement is a promising sign that we can potentially avoid a major trade-induced diplomatic conflict.