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U.S.-EU Free Trade Agreement: Global Game-Changer?

Obama raised the possibility during his State of the Union. He's right, it's a great idea.

Daniel S. Hamilton and Joseph P. Quinlan


February 23, 2013 - 12:00 am

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.

Daniel S. Hamilton and Joseph P. Quinlan are Director and Senior Fellow at the Center for Transatlantic Relations at Johns Hopkins University. They are the authors of The Transatlantic Economy 2013.

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Liberty involves not just political freedom but also ecoomic freedom.

While bureaucrats find central control intoxicating, I prefer ordered liberty.
2 years ago
2 years ago Link To Comment
The authors did not notice, one presumes, that the European Union set up a single market some few decades ago, that was supposed to bring about all of the wonderful effects the authors predict would come out of Barack Obama' implementation.

What this would do is not free commerce but chain it to a centralized hyper-regulatory hydra, benefiting government. We don't need more steps in the direction of an Orwellian end state, a human face stomped on by a boot, forever.

Here is a counterproposal for our ingenious authors. Let's try having free trade, economic freedom that is to say, the corrolory of freedom writ large, AT HOME in the USA. You know, let me buy an insurance product of my choice out of those that insurance companies coast to coast would like to offer me, free of government mandates and intrusions. Let me buy a pistol in another state than my home state. Basics.
2 years ago
2 years ago Link To Comment
I'm no economist and I didn't even read the entire article but, I see a one world economy as a very bad idea for reasons that everyone should plainly see. OOur forefathers came to the New World to get out of europe. We have different cultures, different standards of living, and different costs of living. Besides with just one economy that economy lives and dies. Keep the economies separate and modular. Use tarrifs so that countries with poor standards of living and wages don't take advantage of those with higher standards. We can't finance everyones economy. With modular economies when one goes down it won't pull the others down with it. The ones that don't get pulled down can help the the others back up. But really, one world economy? what's next a one world government? Besides if obama likes it the quicker we shitcan this idea the better!
2 years ago
2 years ago Link To Comment
Another bunch of experts who are either mendacious or ignorant.
It must be recalled that the establishment stuffed shirts (experts) are the people who helped our society get into the sad state it is in today!If we were to to put a name on all of this we could call it the "Krugman effect".
These guys nibble around the edge of a huge economic crisis that is coming down on the world at this very minute.They speak of bandaids for a global economy which is suffering from fatal hemorrhaging.We are in a series of financial traps with no visible way out & these guys are offering nickel & dime cures which will do very little for our problems!
2 years ago
2 years ago Link To Comment
I'm no economist, but know for a fact that the only things we'll export to Europe are food and raw materials. . . increasing the domestic cost of both.

The only thing that will happen by "harmonizing" obscure, bureaucratic rules is that the more bureaucratic option will always, always, dominate.

I know that this will cost the US money, lots of money, the author sites the "post war" economic order, but then there is the pesky memory called the Marshal plan. If you tie two balloons together they will become the same size as the gas equilibrates.

This is another step toward becoming Europe, a step backwards and a huge mistake on every level. In my simple, non-economist, realist opinion.
2 years ago
2 years ago Link To Comment
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