Don’t Buy the Hype on the Transatlantic Trade Deal

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Q&A
Summary
Expectations for the U.S.-EU free trade agreement are dangerously high. Reaching a deal is likely to take longer and produce smaller gains than optimistic figures suggest.
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Negotiations over a free trade agreement between the United States and the European Union have received a great deal of fanfare. And accounting for around half of the global economy and 30 percent of its trade, the two powers could produce a deal that sets a global standard, reaps major payoffs for both sides, and reinvigorates the U.S.-EU alliance.

But in a Q&A, Uri Dadush, former director of international trade at the World Bank, warns that expectations are dangerously high. Reaching an agreement is likely to take much longer and produce significantly smaller gains than the optimistic calculations currently suggest. Beyond dashed expectations, the launch of these negotiations probably marks the final blow against the moribund Doha round of global trade talks.

What is the transatlantic free trade agreement supposed to include?

The deal is ambitious. It is meant to be a very deep and comprehensive trade agreement between the two largest trading blocs in the world: the European Union and the United States. It’s not unusual for the goals to be very high when entering into talks over new, major trade deals, and this one is no different. 

The two blocs are already vibrant trade partners with relatively integrated economies. Trade between them is relatively free, and they represent a very large share of foreign direct investment around the world. The deal is meant to deepen that relationship. 

Its aim is to eliminate all tariffs between the United States and the EU. And the agreement is supposed to include all aspects of trade (from goods to services), both tariff and nontariff barriers (particularly regulations), and foreign direct investment. The negotiations will also include discussions on government procurement and intellectual property rights.

What are the economic reasons for the deal?

Economic integration between the United States and the EU may have advanced enormously, but there are a number of notable barriers to free trade remaining. The removal of these obstacles could potentially generate large economic gains. Even when the barriers are small, if the amount of trade is large enough, there can be significant gains in terms of absolute values. 
 
Tariffs are the most concrete but not the most important item constraining U.S.-EU trade. On average, tariffs are 3 percent, but they are much higher for agricultural products, so the elimination of tariffs is especially important for agriculture. But even within the manufacturing sector, there are high tariffs on certain goods—from automobiles to garments—that should be cut down.  
 
There is even more to be gained by reducing regulations. “Buy American” provisions are getting in the way of European suppliers. Differences in sanitary standards as well as Europe’s ban on genetically modified crops reduce American food exports. And differing safety and environmental regulations curb car exports in both directions. 
 
According to some estimates, regulatory barriers are four or five times more important than tariff barriers. But it’s important not to put too much stock into these figures as the impact of regulations is very tricky to measure. And even when and if regulations are made more similar, it will be difficult to evaluate their impact on trade in the short term. 

Are there political drivers of the negotiations?

Certainly. On the American side, this is a key initiative for the new Obama administration. With the United States emerging from a recession, the time is ripe for talking about trade and how it can generate more growth. Obama is looking for issues that he can work with the Republicans on, and this fits the bill. Now, whether the Democrats in Congress will end up supporting the deal is another matter. 

For the EU, this is an important part of renewing its relationship with the United States. There are plenty of Europeans who feel—I think correctly—that Washington is losing interest and prioritizing other issues. 

With America’s pivot toward Asia, including the Trans-Pacific Partnership (TPP) trade effort, the Europeans are nervous that the distance—measured in terms of trade or security interests—between the EU and its most important ally will widen. And Europe doesn’t want to lose out because of any potential benefits the TPP may bring to countries that compete directly with it, such as Japan and Korea. 

The transatlantic deal is also a response to the stalled Doha round of global trade talks. The United States and the EU have traditionally dominated the international economic system, whether in the World Bank, International Monetary Fund, or World Trade Organization. The pair is under increasing competition from rising economic powers, and this is a way to reassert and consolidate their leadership at the heart of the system.

What complications could derail or stall the negotiations?

Despite conventional wisdom, the potential deal is not as comprehensive as people think. The negotiations may not cover subsidies for the agricultural industry and aircraft manufacturers—Boeing and Airbus. Nor has there been mention—so far at least—of the movement of temporary workers. These are important issues and their omission could result in a big lost opportunity or cause problems as the parties most interested in them may block the deal. 

There are several other complicating factors that could hold up negotiations. 

Tariffs will be harder to reduce than imagined. The reason the tariff peaks have existed for so long is that there are powerful vested interests involved that will not easily forgo their domestic advantages. Anything to do with agriculture is particularly sensitive, as special interest groups have strong organizational foundations and sway in their own regional political environments—making them unusually powerful. For example, French farmers and the U.S. sugar and cotton industries exhibit a remarkable track record of victory over the general interest.

And these negotiations are going to wade into some of the thorniest issues imaginable. Regulations are even more challenging than tariffs to negotiate. Regulations are highly technical and exist for a reason, often to protect health, the environment, or safety. Tariffs are clearly protectionism. But it is usually entirely possible to argue over the merits of the regulations and there can be genuine differences of opinion among experts over what a change will do. 

Moreover, agreements on modifications to regulations cannot just be made between trade negotiators. It quickly becomes much more complicated because it involves other government agencies, such as the Food and Drug Administration or the Environmental Protection Agency in the United States, and agencies from all EU countries. Each of these agencies and national authorities will be relentlessly lobbied.

What internal U.S. and EU factors could impact the outcome?

A major hurdle looming on the horizon is that Obama doesn’t have fast-track authority. This means that he cannot present the deal to Congress for a yes or no vote without allowing lawmakers the chance to change the legislation first. 

If Obama doesn’t get his trade promotion authority back, it will be a major stumbling block. Without it, the EU will face two stages of negotiations—once it offers a concession, Europe will know that it’s just the starting point because Congress will get involved. This is an enormous deterrent to agreement on anything. 

The euro crisis threatens the talks as well. While a deal would buttress business confidence in Europe by showing that new growth avenues are being opened up, countries such as Spain, with a quarter of their population unemployed, or Italy, whose car market has collapsed, are going to be incredibly reluctant to make concessions if doing so would threaten domestic industries. And the euro crisis is going nowhere fast

Historically, these kind of agreements—even if they don’t face all of these difficult issues—take much longer to negotiate than people think and achieve much less than anticipated. That’s just the nature of the beast. 

Will a deal be reached?

I’m skeptical. On paper there is a great deal the United States and Europe can do, and these prospects can help propel negotiations forward. But everything that needs to be addressed is complicated and, for very different reasons, political forces on both sides are more divided than ever. 

Given all the obstacles, if a deal is reached it will almost certainly not happen before the end of Obama’s term and will deliver a lot less than is promised. And there is a significant possibility that the deal won’t happen at all. Much simpler trade deals than this have faltered and fallen apart in the past.

Will a deal impact global trade talks and benefit the world economy?

If it works, the deal will lead to significant gains, just not to the degree currently touted by supporters. While estimates of 1 percent gains in GDP in both the United States and the EU are tossed around, it’s actually extraordinarily difficult to make those calculations. Because the EU accounts for a larger part of U.S. trade than the United States does for the EU, the United States may gain more proportionally. 

But probably more important than the increase in trade and growth in GDP are the systemic implications for the world. 

This may nudge the world toward adopting a common U.S.-EU standard. Some developing economies will strongly contest and resist this development, but there will naturally come a point when every country converges to what is agreed upon in this deal. Countries will be faced with the simple fact that if they want to export their products and services to half of the world market, they will have to meet this common standard. 

Even the negotiations themselves will create more competitive pressures on trading partners to adjust their own trade policies. Countries like Japan and South Korea cannot afford to be left out in the cold by the U.S.-EU deal and lose competitive advantages over their economic rivals, so they will have a greater incentive to finalize the TPP. 

Similarly, big developing countries—from China to India to Brazil—will also feel pressure to make headway on trade. This could inspire new bilateral trade deals with the United States or the EU, or it could shift their stance on the Doha round, making them more accommodating and supportive of a multilateral deal. 

Unfortunately, a more likely outcome is that a successful negotiation of a U.S.-EU deal will drive a stake into the heart of the moribund Doha process, and leave the World Trade Organization—the core of the multilateral trading system—still searching for relevance.  

End of document

About the International Economics Program

The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, drawing out their policy implications. The current focus of the program is the global financial crisis and its related policy issues. The program also examines the ramifications of the rising weight of developing countries in the global economy among other areas of research.

 

Comments (1)

 
 
  • Marija
    I am writing a master thesis on the issue: how China's rise affects the transatlantic partnership. I would like to know, to what extent China's economic role will be affected by this agreement. Any calculations so far? Thank you
     
     
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Source http://carnegieendowment.org/2013/03/18/don-t-buy-hype-on-transatlantic-trade-deal/frd5

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