European Affairs

But simply avoiding the pitfalls of protectionism does not provide a strategy for growth. We need to bring trade forward again if we want to bring back economic dynamism. This can best be achieved by opening up new areas of commerce, which will have positive effects on productivity and therefore growth. The current inward-turn must end if the U.S. and the EU want to make headway on their urgent need to create jobs. Such a new approach will mean that some economic sectors currently suffering from the crisis will need to be restructured and energies concentrated on creating higher-paying and more sophisticated jobs in other sectors. To borrow a word popularized by President Barack Obama, what is needed is “audacity” – at least enough to think about taking some fresh steps to revive trade-driven growth.

Pious Rhetoric Lacks Substance

But instead, in both the U.S. and the EU, formerly champions of global economic integration, the mood has turned defensive. The U.S., seen from across the Atlantic, seems to be seized with government paternalism wrapped up in lofty Obama rhetoric that cannot hide the commitments to protecting the American car industry and bashing a seemingly triumphant China. A more positive note came this year in the form of the Obama administration’s National Export Initiative: its goal -- doubling U.S. exports in five years – marked an attempt at reviving the American can-do attitude. The trouble is that the world is still waiting for some flesh to be put on the bones of this initiative. Europe appears to be obsessed with “social inclusion” and with “greenness” – at least rhetorically. In practice, governments have been focused on bail-outs for (pollutant) car-industries rather than having these companies finally shed overcapacity and think, for example, of other ways of developing transport systems that are less car-centered and therefore less CO2-emitting. As for “inclusiveness,” every new election in European countries seems to bring fresh proof of the rise of anti-immigration sentiment in a time when migrants are most needed in aging societies that require a younger workforce to pay for pensions. The latter can only be provided in sufficient numbers if migration flows are more open. At the European Commission in Brussels, the man responsible for trade -- Commissioner Karel de Gucht, a Belgian -- recently told a Polish audience that “the best way to prevent economic globalization from going backwards is to push it forward.” This sentiment reflects a bold vision of how trade might be harnessed for another surge of growth, but its champions are a minority these days. The Commission will need to strike compromises with more reluctant EU member states and an increasingly powerful European Parliament. All these factors seem to have contributed to the U.S. and the EU avoiding straight talk on trade with each other -- their major partners -- and instead busying themselves signing free-trade agreements with junior partners. The new European Commission has not yet come up with a strategy or even specific plans on trade. In practice, Commissoner De Gucht is continuing his predecessors’ initiatives while he waits for the European Parliament to exercise, for the first time, its new power gained under the Lisbon Treaty to ratify trade agreements on equal terms with the member states. Indeed, there are pending bilateral agreements with South Korea, Colombia and Peru awaiting the Parliament’s green light. The EU has abandoned plans for a big free trade deal with the Association of South East Asian Nations (ASEAN) and instead it is pursuing trade deals with two ASEAN members – Singapore (commercially an easy proposition) and with Vietnam (politically sensitive but commercially not very significant).

EU self-stymied on China

The vexed issues of China trade have become a taboo topic: the much-touted High Level Dialogue, launched in 2008 to ease trade tensions, has just become another empty talking shop at summit level of the style that Brussels has practiced in the past with Beijing. So there is no serious effort delving into the question of coming to terms with the contentious commercial issues with China –services, investment, intellectual property, to name a few. This is because the EU knows it will need to respond to some Chinese demands such as recognizing it as a market economy. This status would lead to less anti-dumping duties being imposed on China, which is the country most targeted by these measures. But while the EU keeps being defensive on what is ultimately a minor trade issue (anti-dumping is only a fraction of EU-China trade), the EU is forsaking the chance for better opportunities for commerce in China by failing to strike a deal on the big issues. Similarly, on the Doha Round of trade liberalization, Brussels continues to officially support the need for an agreement, but it has shown no appetite for taking risks in trying to get closer to a deal and a new pact. Instead, it prefers to point a critical finger at Washington for not taking an initiative. Of course, there are some good reasons for finger-pointing: the National Export Initiative, laudable as a bid to revive trade in the form of U.S. sales promotion, can only be successful when backed by a bold market opening policy – a part of the puzzle that is conspicuously missing. The President’s 2010 Trade Policy Agenda officially supports the WTO and the Doha Round. But apart from asking for an “ambitious and balanced” outcome, it does not articulate a coherent strategy for making progress in this domain.

U.S. has lost ambition on trade

Admittedly, the political obstacles to an “ambitious” deal are enormous in Washington. A “balanced deal” would imply heeding developing countries’ demands for a reduction of farm subsidies, starting with cotton – a demand that is unmentionable in Congress, especially in an election year. This Agenda further states that the aim of “leveling the playing field for American workers,” which in practice translates into resistance to opening up U.S. markets further to imports from countries with a comparative advantage in labor-intensive production in the developing world and in emerging Asia. On this issue, too, U.S. leaders are skewing the facts: the debate on the Chinese currency (which carries its own risk of political poison) misses the key point that the U.S. trade deficit is already dropping and the weakness of the dollar is already helping boost general U.S. export competitiveness. What is more, the Obama administration is letting free-trade deals signed by the previous administration – with South Korea, Colombia and Panama – twist in the wind. It is unclear whether the White House is playing for time hoping for a more cooperative Congress on these trade deals or if it wants to re-open negotiations. Obama recently launched an initiative, the Trans-Pacific Partnership, which is a regional trade agreement offering only limited advances in terms of net creation of trade opportunities. Of the seven countries involved, the U.S. already has free-trade agreements with four of the biggest: Australia, Chile, Peru, and Singapore.

What is to be done by the U.S. and EU?

With no wind filling the sails of global trade, the U.S. and the EU -- by far the world’s two biggest trading blocs, which are also each other’s greatest export partners and are likely to remain so -- should look to each other and specifically work at removing the remaining obstacles to their trade and investment. A recent study for the European Commission cited in the blog of the European Institute estimated that 50 per cent of the remaining tariffs could be eliminated. Producing export growth between two and six per cent across the Atlantic.

In a separate study, the think-tank, the European Center for Political Economy (ECIPE), recommended an operational change in the political approach to be adopted in seeking to boost transatlantic trade. It suggested that the U.S. and EU should learn from the record of failure at negotiating further transatlantic integration so far. Instead they should adopt a new approach that turns old methods on their head. The “old method” followed the findings of most economic studies, which argue that both sides of the Atlantic should remove non-tariff barriers in goods (such as diverging technical standards, regulations, sanitary rules, customs procedures etc) and restrictive regulations in services, as the best way to deepen their trade integration. This can be done in either of two ways: harmonize regulations or else agree to recognize each other’s laws, rules and standards. And this is the approach that has been adopted so far. Full mutual recognition and harmonization are possible, theoretically. But they are almost impossible to achieve politically, and harmonization is technically extremely challenging. It would lead to better results, so the study argues, if the U.S. and EU adopted an incremental approach and start with the basics: tariffs. There are a few tariffs that could be eliminated and trade creating gains be made in machinery/electrical machinery, chemicals, steel, minerals, vehicles, optical instruments, plastics, rubber, to name the most important. Given that current tariff levels are rather low and that many parts imports come from Asia, there would be limited net trade diversion from other parts of the world or hardly any displacement of workers or other politically sensitive adjustments. But trading costs would be lowered. Most importantly, it would send a strong signal of fresh momentum. The precedent set by the Information Technology Agreement in the WTO, which brought tariffs to zero on goods in this field, has demonstrated that zero tariffs are a real booster for trade volumes. Given the already huge trade that exists between the U.S. and the EU, gains would be relatively limited in terms of percentage. But in absolute terms, the gains would be significant, and would be more helpful in bringing the U.S. closer to its official export target. Ultimately, third countries will be incited to open up their markets too, as the two leading trading nations show the world the road ahead. On top of tariffs, both parties should then proceed incrementally to deal, step by step, with other issues, in particular services and some key non-tariff issues for goods. Any misguided attempt to try dealing with everything at the same time -- commercially second-order sanitary regulations such as washing methods for poultry -- will lead yet again to what has happened to the Transatlantic Economic Council. Bogged down by failure to settle the dispute over U.S. practices of washing poultry in chlorine, the TEC sank into oblivion soon after it was launched in 2007. There is lip service in Washington about the TEC, which was a project close to the heart of Chancellor Angela Merkel. Isn’t it time for a fresh kick start?

Iana Dreyer is a trade policy analyst at the European Centre for International Political Economy(ECIPE) in Brussels.