Irish literary legend Oscar Wilde once quipped how the only thing worse than being talked about was not being talked about. As feverish speculation continues to dominate the airwaves about the collapse of the euro and perhaps even the European Union under the weight of mounting debts, the truth of Wilde’s adage is becoming evident. Responding to the pressing need to create more jobs and growth in order to find a way out of the crisis, transatlantic leaders have given a green light to exploratory talks for an EU-US Free Trade Agreement, which would establish, among other things, a tariff free zone encompassing the two largest economies on the globe.
On June 19, amidst little fanfare, the White House and the EU Council and Commission Presidents endorsed an interim report produced by a High Level Working Group on Jobs and Growth that the leaders established at the November 2011 EU-US Summit. For years, the prevailing narrative has been that U.S. President Barack Obama had little personal interest in Europe, and was preoccupied with strengthening links with Asia and in particular, China. This new EU-US trade initiative, however, could presage a shift in focus back toward Europe. It is still early days, of course, with the Working Group to make its final recommendation by the end of 2012, at which point the political leaders will decide whether or not to launch formal talks.
Despite all the discussion about China’s impressive economic growth in the past decade, China’s GDP of $12.4 trillion, adjusted for purchasing power, is still less than that of the EU and U.S., whose GDPs are $16 trillion and $15.6 trillion, respectively. Moreover – and this is often lost in the discussion over the rise of China - Americans and Europeans remain much wealthier than Chinese individually and have much greater purchasing power. Consequently, GDP per capita in China is about $9,000, compared to $32,000 in the EU and nearly $50,000 in the U.S. The case transatlanticists can make is that in addition to Europe and the U.S. being more aligned politically and economically than any other part of the world, an EU-US FTA will provide the biggest bang for their respective buck.
EU Trade Commissioner Karel De Gucht, co-author of the interim report, has described recent developments as “extremely encouraging,” adding “we are now entering the last leg of mapping out how we should tackle any eventual negotiation to boost growth and jobs through our trade partnership.” The EU Ambassador to the United States, Joao Vale de Almeida, is similarly upbeat, underscoring the report’s “high level of ambition and the comprehensive nature of what we want to achieve,” including tackling “traditionally difficult areas.”
The leaders are favoring an EU-US FTA that is broad in scope, covering the removal both of conventional trade tariffs and of regulatory barriers to trade in goods, services and investment. When the FTA idea was initially mooted some years back, there was talk of picking the ‘low hanging fruit option’ by limiting it to removing tariffs on goods, which are already relatively low. Tariffs should indeed be covered by the new FTA, the interim report says. The goal is to eliminate all duties on bilateral trade in the long term, and the “phasing out of all but the most sensitive tariffs in a short time frame.”
But the report is equally insistent that a future free trade pact must address an issue that has plagued – even poisoned – transatlantic trade relations in recent years: Sanitary and Phyto-Sanitary (SPS) regulations (concerning the health of plants), which are especially contentious in the food sector. An SPS chapter would force the trade partners to tackle longstanding, thorny dossiers such as EU delays in approving U.S.-produced genetically modified foods, and the EU’s ban on hormone-treated beef from the U.S.
A U.S. trade official with experience in negotiating FTAs stressed that SPS issues would need to be part of an overall package. “The U.S. only negotiates FTAs that are comprehensive – meaning they also cover so-called beyond-the-border issues. U.S. industry will also be pushing for this comprehensive approach.” A pivotal figure in the U.S. administration on this initiative is the White House-based Mike Froman, President Obama’s advisor for international economic affairs. During a policy seminar hosted by the U.S. Congress in May for Transatlantic Week, Froman said both the manufacturing and agricultural sectors would have to be covered, describing agri-trade disputes as “the elephant in the room that we can’t ignore.”
Froman’s prominence is noteworthy given that nominally, U.S. Trade Representative (USTR) Ron Kirk, not Froman, is in charge of this dossier. The explanation that one U.S. trade official gave for the prominence of Froman was that “the White House is calling the shots” on the potential transatlantic trade deal. The same pattern was evident, the source said, with the U.S.-South Korea FTA, which President Obama insisted be re-worked before he would submit it for Congressional approval. However, formally speaking, any future international trade negotiations would be conducted by the USTR.
On the European side, Trade Commissioner De Gucht has emerged as a staunch advocate for a comprehensive deal.
Hiddo Houben, the trade and agriculture counselor at the EU delegation in Washington spoke to European Affairs and cited four reasons why the comprehensive approach is best: (1) it is the most likely to get a political blessing,(2) it would reap the greatest economic gain, (3) it would create momentum by grouping together sectoral agreements, and (4) it enables the EU and U.S. to set global standards. “If you tried to do a piecemeal approach, you would get into a permanent cycle of parliamentary approval, which would take up a huge amount of time,” he notes. That said, Houben admits that “in virtually every sector, you will have difficulties.” The EU, for instance, is very sensitive about its agricultural sector, while the U.S. is equally sensitive about liberalization of its air transport sector. However, ultimately “it is better to overshoot than undershoot,” Houben argues. He says that the goal, once talks are launched, is to reach an agreement “within 18 to 24 months.”
Two other players, the European Parliament and the U.S. Congress, will also play central roles if these EU-U.S. FTA talks do get off the ground. The EU and U.S. administrations will be able to start the FTA negotiations without the lawmakers’ consent but parliamentary approval will be required once a deal is concluded. On the EU side, there is an additional player, the EU member states, because while the European Commission would conduct the trade talks, the Council of Ministers would decide the negotiating mandate.
For now, neither Congress nor Parliament has formally pronounced on the issue but they are beginning to pay closer attention to it. According to sources on Capitol Hill, there is strong support among House Republicans for it and some frustration with the Obama White House for not taking up the mantle more enthusiastically. As for the Democrats, while typically they tend to be more hostile to FTAs such opposition tends to focus on agreements with emerging or developing economies like South Korea and Colombia rather than advanced ones such as the EU.
Meanwhile, in the European Parliament, a wave of protectionism has been sweeping through the chambers of late, according to one Parliament official. Some euro-parliamentarians are sympathetic to the view being expounded in recent months by EU Internal Market Commissioner Michel Barnier, who is demanding that the opening up of markets be done on a reciprocal basis only. Thus, if a country does not, for instance, open its public procurement sector to EU companies to the same extent that that country’s firms have access to the European procurement market, the EU should start to rescind that access, Barnier is arguing. Procurement would likely be an important issue in a transatlantic agreement as presently, the EU market is more open to U.S. firms than vice versa.
Another potential game-changer is the U.S. presidential elections. President Obama’s Republican challenger, Mitt Romney, has been silent on the trade pact plan so far. C. Boyden Gray, who served as U.S. Ambassador to the EU under Obama’s predecessor, George W. Bush, has criticized Romney for not embracing the initiative so far given the enormous amount of jobs and wealth it could create. An EU-US FTA could add $156 billion to the transatlantic economy, according to a 2011 study cited on the website of the EU delegation in Washington. The business community both in Europe and America has for years been urging the administrations to take action and with the jobless rate stuck at 8% in the U.S. and 10% in the EU, it certainly seems like the opportune moment.
This initiative comes as bilateral and regional FTAs are very much in vogue (as opposed to global solutions), due to the failure of the Doha round of World Trade Organization (WTO), launched back in 2001, to produce any agreement on further liberalization. Worth noting, here, are the divergent responses taken by the EU and US administrations to the paralysis in the WTO. While the EU Commission has embarked on a dizzyingly diverse series of trade talks with countries and regions across the globe, President Obama has essentially called a time-out on negotiating new trade agreements. The Trans-Pacific Partnership, an initiative that brings together a slew of countries from Asia and the Americas, is the only round of bilateral or regional trade negotiations that the Obama administration has involved itself in. Those talks themselves have become bogged down as more and more countries join the process and a final, even modest agreement, does not look to be imminent.
The question remains, will the U.S. administration ultimately pivot away from Asia and back to Europe? In these fraught economic times, the relative financial opportunities may become the deciding factor.