Bloomberg | Jun 18, 2012
EU-US free trade deal offers painless stimulus for both
By the Editors
Before the end of the month, U.S. and European Union trade officials will recommend whether to pursue a free-trade agreement.
Such a deal has the potential to jump-start economic growth and create millions of jobs, even as it sidesteps the paralyzing debate on both sides of the Atlantic over austerity versus stimulus. A trade agreement is necessary, achievable and urgent.
The economic relationship between the U.S. and the 27 countries of the EU is the biggest in the world, accounting for almost one-third of all trade. About $5 trillion in trade and investment flows each year between markets representing 54 percent of global gross domestic product. This back and forth is largely in balance. (The U.S. runs a deficit in goods, a surplus in services and direct investment is roughly even.)
In 2011, Europeans bought three times more U.S. goods ($286.1 billion) than did the Chinese, and Europeans sold about twice as much merchandise to the U.S. ($368 billion) as they did to China. Investment flows dwarf these figures: In 2010, U.S. direct investment in the EU reached $1.9 trillion, while the EU’s share in the U.S. was $1.5 trillion. About 15 million jobs are directly linked to the transatlantic trade.
The benefits of increasing these flows are unequivocal. Although the remaining tariffs on goods are comparatively low (5 percent to 7 percent, on average), bringing them to zero would increase U.S.-EU trade by more than $120 billion within five years and generate combined GDP gains of about $180 billion, according to a study by the U.S. Chamber of Commerce, which, along with its European counterpart, BusinessEurope, is pushing hard for a comprehensive agreement. Further, more than one-third of transatlantic trade is conducted between affiliates of the same companies, and eliminating the tariffs they pay would make companies on both sides more competitive.
There are even larger prizes to be had from pruning regulatory barriers to trade — the myriad restrictions on the sometimes specious basis of health standards, national-security concerns or consumer protection. A study by ECORYS that was commissioned by the European Commission showed that eliminating just half of these so-called non-tariff barriers would increase GDP by 0.7 percent in the EU and by 0.3 percent in the U.S.
The recognition of this codependence — and its potential to provide pain-free stimulus — should be reason enough for trade officials to recommend moving ahead with a free-trade agreement. Their report this month will assess whether the two sides can overcome enduring and pesky irritants (such as EU restrictions on genetically modified foods, or U.S. laws limiting maritime freight and airline ownership) that have derailed at least three attempts over the past 20 years to close a formal U.S.-EU trade deal. A final decision is due by the end of the year, and negotiations could begin immediately after. The EU trade commissioner, Karel De Gucht, has said he thinks an agreement could be concluded by mid-2014.
That is a tall order, but it is doable. The economies of the EU and the U.S. don’t have the disparities in social, labor and environmental standards that have made other bilateral trade agreements so difficult. And this one has some powerful champions, including German Chancellor Angela Merkel, U.K. Prime Minister David Cameron, business leaders and associations on both continents. Even the AFL-CIO and other labor unions, which traditionally oppose trade deals, have urged negotiators to push ahead. This month, the President’s Export Council, the principal national advisory committee on international trade, sent a letter to President Barack Obama recommending that the negotiations begin before the end of the year.
Areas still in dispute are only about 1 percent to 2 percent of the total trade in goods and services. These issues include perennial arguments over agricultural products such as U.S.-produced chicken washed in chlorine or tit-for-tat recriminations over unfair subsidies to the aircraft manufacturers Boeing Co. (BA) and Airbus SAS. Other sticking points include access to markets for services, which account for about 70 percent of both sides’ economies; EU concerns over Internet privacy and the flow of electronic data; and the lifting of restrictions on investment and bidding for public procurement contracts.
The two sides have been meeting since November to assess whether some of these points can be resolved pre-emptively. These exploratory discussions could ensure that no single issue, industry or interest group can sabotage the talks, as has happened in the past.
A deal could have benefits beyond the immediate effect on growth. By enhancing competition and reducing regulatory barriers, it could compel the countries of the EU to adopt the more flexible economic, investment and labor policies that many economists say will be necessary to restore growth and bring down deficits. In other words, it could help achieve what many European governments say they want, but lack the political clout to do. It also could serve as a template for future trade negotiations with rising powers such as China and India, setting common EU-U.S. standards on regulation, tariffs and investment rules.
When Obama and European leaders gather at the Group of 20 meeting in Mexico this week, they will talk about ways to prevent Europe’s troubles from dragging the world into recession or worse. A new trade alliance would be a good place to start.