After years of expansion and growth, the Eurozone finds itself in crisis. Austerity measures following a sovereign debt crisis have spurred anti-European sentiment and a wave of nationalism, recently illustrated by the outcome of the Italian elections. The European project is at risk of being undermined by economic forces, while the region is in dire need of economic recovery and a success story.
The Transatlantic Trade and Investment Partnership, recently announced by President Obama in February during his State of the Union, provides exactly this long-needed economic rescue after fiscal and monetary measures have failed to end the economic slump in the EU. The United States continues its slow recovery trajectory since the beginning of the financial crisis in 2008, and thus both sides of the Atlantic should be in favor of a comprehensive transatlantic free trade agreement. Such an agreement would not only bolster unemployment and income in both economies but also secure their joint leadership position in global trade negotiations.
A Promising Relationship
Today, the European Union and the United States, whose economies account for half of the world’s GDP, maintain the largest trade relationship in the world, amounting to nearly a third of global trade. According to a study from the Centre for Economic Policy Research, the increase in trade resulting from a free trade agreement could expand this relationship by increasing exports by six percent in the EU and eight percent in the US, adding €119 billion and €95 billion to the European and American economy each year, respectively.
As Karel de Gucht, the European Commissioner for Trade, highlighted in his speech during the European Conference at Harvard, this income effect equal to about 0.5 percent to one percent of EU GDP would be “the cheapest stimulus package” one can imagine. The German Federal Ministry of Economics told the HPR that it expects that “a comprehensive, ambitious reduction of non-tariff barriers could create up to 110,000 new jobs in Germany and approximately 400,000 in the EU.” The U.S. economy, for its part, could add up to 100,000 new jobs. Such news would be welcome in the current economic climate.
The Failure of Doha
The political climate is favorable for such change, as well. Vital Moreira, chair of the Committee on International Trade in the European Parliament, identifies the absence of progress in multilateral trade negotiations as another motive for choosing to enter negotiations now. He explained to the HPR that the Doha rounds were expected “to bring a new wave of trade liberalization to the table.” Their subsequent breakdown has encouraged the formation of regional trade agreements instead, which is liberalizing global trade without including all 159 WTO member countries simultaneously. The multiplicity of interests within the WTO suggests that negotiations on a global level will hardly deliver any significant results in the near future; the European Union and the United States are better off engaging in a regional trade agreement instead.
In addition, the economic rise of China has likely contributed to the timing of President Obama’s announcement. The fear that global politics is shifting in favor of emerging economies may underpin Western interests in creating the largest free trading zone in the world. If the European Union and the United States overcome difficult negotiations to close a deal, they would “secure their leadership in establishing the rule-making” in international trade, according to Moreira. This will be crucial for the two largest economies in the world to maintain their grip on cornerstone trade issues such as intellectual property rights.
Setting the Tone for Future Trade Negotiations
The transatlantic agenda is not meant to merely benefit the two powerful blocs at the expense of third parties. In Moreira’s words, “there are externalities to non-tariff barriers … they will benefit not only parties who are negotiating but also third parties.”
According to the Centre for Economic Policy Research, an agreement would increase global income by up to ¤100 billion through greater global trade from the removal of nontariff barriers.
Both the European and the US side are aware that eliminating these regulatory non-tariff barriers is the essential component of any agreement. Average transatlantic tariffs are already very low at only about four percent and nontariff barriers currently represent the greatest impediment to free trade between the EU and the U.S. An ambitious agreement therefore has to focus on the convergence of regulatory standards in areas such as car emissions, product safety standards, or regulatory approval procedures of pharmaceuticals.
Successful negotiations that remove such barriers to free trade offer additional advantages beyond the immediate increases in trade. De Gucht emphasized that they could provide “a policy laboratory for the new trade rules we need.” Former World Bank President Robert Zoellick agreed with de Gucht’s position in a March interview with Der Spiegel, explaining that an “EU-U.S. trade agreement, if completed, could be a great facilitator and set some good standards for the global economy.”
The challenges that stand in the way include very controversial trade issues, such as food safety and intellectual property laws. The Europeans have so far rejected genetically modified foods and refuse to serve American beef that is injected with growth hormones. They have claimed a right to “cultural exceptions” that, among other things, reserves the right to the Champagne region to produce sparkling wine labeled as champagne, or allows the French government to support its domestic film and audio industry through quotas and subsidies. It was hardly surprising that the French government, known for its more protectionist agenda, voiced concerns over a far-reaching EU-U.S. trade agreement and conditioned its support on the respect of European attitudes and values.
Seizing the Political Momentum
Nonetheless, Moreira noted that the political configuration in the European Union suggests that such divergences may be overcome through “creative and smart compromises that could keep the cultural differences.” Since the European Union ultimately has the power to set trade policy for all its 27 member states, it seems highly likely the European Commission can negotiate an extensive trade deal through a mandate from the European Council. The Commission can further count on the support of many European leaders, including German Chancellor Angela Merkel or UK Prime Minister David Cameron, who have spoken out in favor of the deal, and on the support of the European Parliament, where five out of the seven political groups support trade.
In fact, the European support of a transatlantic trade deal is not simply a product of the crisis. Dr. Claudia Schmucker from the German Council on Foreign Relations, a think tank based in Berlin, told the HPR that Europe has for over 20 years attempted to “further deepen the partnership” with several initiatives. In the past, there had been reservations from the U.S. side, which only agreed to limited economic cooperation.
Therefore, it is important that the two blocks take the opportunity now to advance a difficult, wide-scoped free trade deal. The two sides are aiming to conclude negotiations in two years, after the projected start in June 2013. There is urgency to act, especially from the crisis-wrought European side, which should provide enough incentive to also address issues that are more difficult to negotiate. Though Moreira points out that a deal should not be rushed because of its complexity, he nonetheless hopes that both sides conclude an agreement before Obama’s last year in office when campaigning comes to the fore. Hence, both the EU and U.S. should be able to agree on reducing transatlantic tariffs, subsidies and non-tariff barriers to trade by as much as possible by 2016.