Will there finally be free trade between Europe and the US?

On 13th February, Barack Obama, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso announced that both the US and the EU will prepare to launch negotiations on a so-called “Transatlantic Trade and Investment Partnership” to boost their struggling economies.

It is clear to see why the leaders of both the US and the EU are seeking to develop their economic relationship. A free trade agreement between the two would create the largest economic alliance in the world, a relationship that already accounts for around €455bn in trade, as well as millions of jobs on both continents.

The logic is that these sums could increase significantly if a trade agreement were in place between them. Recent estimates show that a comprehensive trade agreement could increase the EU GDP by a non-negligible 0.5% and the American GDP by a similar 0.4%. In pure monetary terms, this would equate to an added annual income of €86 billion for the EU economy and €65 billion for the US economy by 2027. In these current economic times, it goes without saying that such sums would do a lot of good to growth and jobs in both economies.

In a joint statement, Jürgen Thumann, the president of the association BusinessEurope, and US Chamber of Commerce President Thomas Donohue confirmed this by stating, “The agreement presents an unmatchable opportunity to boost competitiveness, jobs and growth that are needed in our economies.” In addition to the obvious economic benefits that could come out of the agreement, political leaders on both sides also believe that the deal could help to establish new, globally relevant standards and rules, and thus strengthen global governance.

Beyond standard trade agreements
Following recommendations from the US-EU High Level Working Groups on Jobs and Growth, the Transatlantic Trade and Investment Partnership’s ambition is to go beyond the archetypal trade agreement approach of solely removing tariffs and opening markets for investment, services and public procurement. It will also attempt to align rules and technical product standards which are currently the most important barrier to trade between the two partners.

The negotiations will attempt to achieve ambitious outcomes in three broad areas: market access; regulatory issues and non-tariff barriers; and rules, principles, and new modes of cooperation to address shared global trade challenges and opportunities.

For example, based on the current trade relationship between the US and the EU, the most important trade barrier is not the tariff paid at customs, but the so-called “behind-the-border” impediments to trade such as aligning different safety and environmental standards for cars. This means that companies wishing to sell their goods on both sides of the Atlantic will often need to pay and comply with procedures twice before their products can be approved.

As such, it makes sense to seek to improve trade the US and the EU by attempting to harmonise rules and standards in order to lower costs for the producers and therefore, on paper at least, increase transatlantic trade.

Cultural differences
However, the negotiations will not proceed without hitches. There are strong historical differences between both partners on a variety of issues which could prevent rapid progress towards a deal.

These issues were pointed out by the European Parliament, when it gave the EU executive its approval to begin negotiations, stating that it “stresses the importance of continuing with the strengthening of transatlantic economic relations, while supporting EU interests, in fields such as environmental, health and animal protection standards, food safety, cultural diversity, labour rights, consumer’s rights, financial services, public services or geographical indications, among others”.

In a bi-partisan letter to the US Trade Representative Ron Kirk, the Senate Finance Committee Chairman Max Baucus and ranking member Orrin Hatch confirmed that although such a free trade agreement is an enticing opportunity, “there are remaining barriers to free and fair trade that are long-standing and difficult to overcome.” Similarly to the European Parliament, they identify several priorities ahead of the negotiations such as access for US agricultural exports, strong intellectual property protection, access for US services exports, regulatory compliance and a mechanism for dispute settlement.

Not only are there strong differences with regard to regulations and standards, there are also strongly embedded cultures behind these. Although the debate surrounding the effect of regulation on competitiveness takes place throughout the world, the average stances in the EU and the US differ rather strongly.

The US’s general position can be reduced to a statement made in the bi-partisan letter previously presented which states that “it is also critical that the United States strongly promote the interests of U.S. businesses, farmers, ranchers, and workers with respect to EU policies…that impede their ability to compete.”

This is in contrast to the German MEP Bernd Lange’s, of the centre-left Socialists & Democrats group, view that an agreement might compromise on the EU’s “high environmental and sustainability standards.”

In other words, whereas US political leaders are afraid that an agreement could limit the US’s ability to compete, EU leaders do not wish to allow, for example, genetically modified crops or products derived from cloned animals to enter onto the European market, as is codified in European law following political agreement.

These differences are made even more complex by the fact that an agreement would need the 50 US states and the 27 EU Member States to adhere to the regulatory convergence. This is what is argued by the Greens in the European Parliament who believe that “it is unrealistic that the necessary regulatory convergences required for a Free Trade Agreement could be achieved, given the various layers of regulatory decision-making in the US,” and, indeed, in the EU.

Both partners recognise these stark differences and difficulties, yet acknowledge that eliminating tariffs alone would bring an additional $120bn to transatlantic trade within the next five years alone. This incredible economic boost has led both partners to go beyond their differences and envisage to pursue a so-called “living agreement” that would allow for progressively greater regulatory convergence over time against defined targets and deadlines.

EU Commissioner for Trade, Karel de Gucht, argued that he hoped the two sides could reach a deal within two years. Trade analysts, however, see this scenario as over-optimistic. In view of the significant differences previously mentioned, it would be hard to disagree with them.