Crisis leads to push for a transatlantic trade deal

The European Union and the United States have the world’s largest bilateral trade relationship, and the economic crisis has led to renewed calls for an ambitious free-trade deal between the two sides.

The US has the upper hand

The quest for economic growth has prompted leaders in the European Union and the United States to dust off plans for a transatlantic free-trade deal. Business groups such as the US Chamber of Commerce and BusinessEurope, its European counterpart, are hoping that a meeting of the G8 group of the world’s leading economies at Camp David on 19-20 May will produce a political commitment to launch negotiations. Wide-ranging trade talks between the two sides could start as early as next year, after the American presidential election in November.

In the past, the case for an EU-US trade agreement – compelling in theory, tricky in practice – failed to gain the necessary political support: the view prevailed that low-tariff barriers made the negotiating effort a bad investment. But now weak growth prospects in Europe and north America have generated momentum for an ambitious deal.

A working group of EU and US officials chaired by Karel De Gucht, the European commissioner for trade, and Ron Kirk, the US trade representative, is currently discussing the scope of future negotiations. The working group received its mandate from Barack Obama, the US president, and Herman Van Rompuy, the president of the European Council, at their last summit, in November, and is aiming to issue an interim report in June and a final report by the end of the year. Both David Cameron, the British prime minister, and Angela Merkel, Germany’s chancellor, have come out in public in favour of an EU-US free-trade agreement.

A deal is desirable in theory because the US and the EU together form the world’s largest bilateral trade relationship, with two-way trade approaching €500 billion last year – roughly one-third of global trade.

The bilateral investment relationship is even stronger. According to a study by the Center for Transatlantic Relations at Johns Hopkins University in Baltimore, the EU and the US accounted for 63% of the world’s stock of inward foreign direct investment (FDI) and 75% of outward FDI stock.

It is precisely the size of EU-US trade that has provoked resistance against a deal in the past. If the world’s two largest trading blocs strike a deal outside the World Trade Organization (WTO), where would that leave a global trade regime under the Doha round?

Dirk Vantyghem, director of international affairs at the Association of European Chambers of Commerce and Industry (Eurochambres), said that his organisation feared as recently as two years ago that an EU-US trade deal would undermine the WTO negotiations.

“The reason for changing our position is that the WTO is not making any progress, so we need to move forward on a second-best scenario,” he said. “But we hope that such a bilateral package [between the EU and the US] could give a boost to the more global, multilateral trade negotiations.”

This appears to be the thinking in the European Commission as well. José Manuel Barroso, the Commission’s president, told a transatlantic business audience in Brussels last week that an EU-US free-trade deal might be “the best way forward”. “It could send a strong signal to the rest of the world,” he said.

But the doubters warn that the gruelling negotiations that would be required for a deal would be disproportionate to the gains such a deal would bring, given that average tariffs stand at just 5%-7%. Beyond that lurk the pitfalls of getting a trade deal ratified, with farm lobbies and other sector interests expected to mobilise against a deal. Barroso refused to go into the details of what a trade agreement might contain.

Peter Mandelson, a former European commissioner for trade, said at the World Economic Forum in Davos earlier this year that an EU-US deal “would have to focus not on tariffs but on very many non-tariff barriers, technical specifications, differences in regulation”. He added: “They are the hardest things to agree and those two negotiating partners are the hardest two to find agreement.”

But others believe that the depth of the economic crisis has changed this equation. Marc Vanheukelen, the head of De Gucht’s private office, told a conference at the European Policy Centre in Brussels in March that “the real problems faced by businesses can only be solved by tackling the most difficult issues”.

The shared challenge of generating growth at a time of fiscal retrenchment had made the US “a more crucial partner for the EU than ever before”, Vanheukelen – previously responsible for EU-US relations in the Commission’s trade department – said. “Trade and investment plays a key role here. Thirty-six million EU jobs are dependent on foreign trade. With the right trade agreements, there’s huge potential to expand this.”

Thomas Donohue, the president of the US Chamber of Commerce, spoke even more bluntly at an event of the Atlantic Council in Washington, DC last month: “This is a great time to do [a trade deal] because the need is there, the fear is there. I go around talking to a lot of these heads of state and the fear is in their eyes. They are not afraid of national security issues, they are worried about putting people to work, they are worried about getting their economy going, they are worried about what’s going to happen to the eurozone.”

But if an EU-US trade deal is to stimulate growth and inspire others, it needs to be sweeping and bold. The challenge for the political leadership in Washington, DC and Brussels is to find a deal whose content is sufficiently substantial to change the economic mood.