Momentum is building for a new and comprehensive free-trade and investment agreement between the United States and the European Union, with President Obama pledging his support for the plan in his State of the Union address. Such a deal would not only boost growth on both sides of the Atlantic, it would also strengthen the U.S.-EU economic axis relative to developing nations and key emerging powers like China.
While a high degree of market integration already exists between the U.S. and Europe thanks to existing agreements, much more can be done to fuse the world’s two largest economies together. A transatlantic trade and investment pact would not only be about reducing tariffs, it would also be about reducing non-tariff barriers and harmonizing the web of regulatory standards that inhibit transatlantic trade and investment flows, and which add to the cost of doing business on both sides of the ocean.
The issues are more micro than macro.
An ambitious agreement would include the harmonization of food safety standards, e-commerce protocols, and data privacy issues. It would also encompass the standardization of a myriad of service-related activities in such sectors as aviation, retail trade, architecture, engineering, finance, maritime, procurement rules and regulations, and telecommunications.
The move towards a more barrier-free transatlantic market would also include product standardization: for example, a car tested for safety in Bonn would be sellable in the U.S. without further tests in Boston. Or a drug approved by the Federal Drug Administration would be deemed safe and market-ready in Brussels. Labeling and packaging requirements on both sides of the pond would be standardized, saving companies millions of dollars over the long run.
Technical regulations and safety standards are hardly headline-grabbing topics, but when these hurdles to doing business are stripped away, the end results are lower costs for companies, reduced prices for consumers, and more aggregate demand of goods and services. That in turn spells more transatlantic trade and investment, with total trade between the U.S. and EU amounting to over $500 billion last year. Cross-border foreign direct investment (FDI) between the two parties topped $300 billion last year, making U.S.-EU investment ties among the largest and thickest in the world.
As for tariffs, average transatlantic tariffs are relatively low — in the 5-7% range — although tariffs remain quite high in such categories as agriculture, textiles and apparel, and footwear, so there is room for barriers to fall in a number of industries. More importantly, in that a large percentage of transatlantic trade is intra-firm, or trade in parts and components within the firm, even a small decline in tariffs — which are in effect a tax on production — can lower the cost of producing goods and result in lower prices for consumers on both sides of the pond. The more intense the intra-industry trade component of trade between two parties, like the one that characterizes U.S.-EU trade, the greater the effects and benefits of lower tariffs.
In addition to trade in goods, there are services: the transatlantic service economy is the sleeping giant of the partnership. Unleashing service activities requires that existing regulatory rules and regulations be eliminated or reduced, which means doing away with “behind-the-border” barriers that include complex domestic regulations, cumbersome licensing and qualification requirements, and duplication of professional credentials, to name just a few barriers.
At a broad and macro level, a study by the EU Commission found that eliminating or harmonizing half of all remaining tariffs and non-tariff barriers on bilateral trade could add up to 1.5 percentage points to growth over the medium term on both sides of the ocean. The European Center for International Political Economy, meanwhile, estimates that a deal could boost U.S. exports to the EU by 17% and EU exports to the U.S. by 18% over time. The figures are not overly large, but given how large the U.S.-EU economies are today — combined, the U.S. and EU account for over half of world GDP — even a small percentage increase in trade or investment translates into a large increase in aggregate output.
In addition, given that both parties are hobbled by massive debt obligations and chronic deficits, any growth strategy should have a net positive effect on the transatlantic economy.
A free-trade and investment deal would help create jobs and income on both sides of the pond, and spur more cross-border trade and investment in goods and services. The more far-reaching the agreement, the greater the impact on key sectors of the transatlantic economy, notably in services where there is plenty of scope for further integration.
A U.S.-EU free-trade agreement would do more than trigger economic activity. It would help reinvigorate a critical bilateral relationship that has been badly frayed and fractured over the past decade. Indeed, the last ten years have been among the rockiest in decades for the transatlantic partnership. Transatlantic solidarity and cohesion have been undermined by the increasing frequency of economic recessions on both sides of the ocean. The U.S. dotcom bust and ensuing transatlantic recession in 2001, the U.S.-led financial crisis-cum-recession in 2008, and Europe’s sovereign debt crisis of 2010: all of these economic shocks have taken a toll on U.S.-EU economic relations and have eroded bilateral trust and cooperation.
Add in Europe’s sovereign debt crisis juxtaposed against robust economic growth emanating from China, India, and the developing nations, and there is little wonder that many in Washington now believe Europe is increasingly irrelevant on the global stage. The rapidly aging, heavily indebted, and increasingly fragmented continent is viewed as more of a withering partner of the United States than as an engaging, forward-looking, and dynamic ally. Hence the strategic “pivot” towards Asia.
But enter the prospects for a free-trade and investment agreement. Such a deal — if comprehensive and far-reaching — could be just the spark that regalvanizes a bilateral partnership responsible for constructing and maintaining the global economic order of the post-war era. A free-trade agreement could halt the divergence of interests between the U.S. and Europe, and instead spawn a new dawn of cooperation and convergence between the world’s two largest economies.
Under this scenario, the transatlantic economy, the largest commercial artery in the world, would be revived. The global clout and credibility of the United States and Europe would be restored. By coming together as opposed to drifting apart, the U.S. and Europe would remain the standard bearers of the global economic architecture. Whatever the common standards of a free trade and investment agreement, and whatever the harmonization and standardization of industry/sector regulations, a transatlantic deal could become the template by which the United States and Europe negotiate with various emerging market economies — China included.
In this sense, a transatlantic free trade and investment agreement would serve notice to the developing nations that the world’s two largest economies can still work together, and when they do, they still have a great deal of global economic leverage over most, if not all, developing nations.
In the end, a sweeping free trade and investment agreement between the United States and the European Union would be a global game-changer. The deal would reverberate around the world. And in time, Washington and Brussels would come to realize that the best way to promote growth and rise to the challenge of emerging powers like China is by working together, not apart.