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

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.