In his State of
the Union address, President Obama revived a long mooted idea: a Transatlantic
Trade and Investment Partnership (TAFTA). The aim of this initiative is to
abolish or drastically reduce barriers to trade in goods and services between
the United States and the European Union and turn the North Atlantic into a
huge single market. The prize is alluring, but the hurdles are high. The
Partnership will not be easy to set up, given the complicated regulatory
barriers that fence off trade and services and the use that numerous and
powerful interest groups make of them. Also, TAFTA may be against international
law. The essence of the Treaty establishing the Word Trade Organisation (WTO)
is the "most favored nation" principle, so that any advantages
granted by the parties in a trade zone stopping short of a full customs union
must be extended to all countries having a previous agreement with them. True,
this rule is more honored in its breach than in its observance. Witness what
Jagdish Bhagwati has called the 'spaghetti bowl' of bilateral trade agreements,
shamelessly adopted by advanced countries in thrall of special interests.1 The
parlous state of the Doha Round, whose aim is to extend the benefits of trade
by an agreed application of the most favored nation rule, is another evidence
of general prevarication.
But there is
another, more serious obstacle to making a North Atlantic Partnership area a
success; TAFTA may go against the laws of economics. Jacob Viner warned
that mutually trading concessions within a free market agreement may be
trade-diverting rather than trade-creating, and hence to some degree
self-defeating. Defenders of free trade zones such as the European Common
Market and TAFTA argue that the larger the area, the smaller the negative trade
diverting effects on its members—but what about those left out in the cold?
Mexico and Canada, who share a trilateral trade agreement with the United
States and have signed bilateral agreements with the European Union, have no
other way out but to join unconditionally, if they are accepted. They must be
content to feed on reheated spaghetti.
The gains from
TAFTA
Even before any
Partnership, the U.S. economic relationship with the EU is the largest and most
complex in the world. According to the Office of the United States Trade
Representative, it generates flows of goods and services of some $2.7 billion a
day.2 Transatlantic
investment is responsible for roughly 6.8 million jobs. A total of 15 million
American and European jobs are directly or indirectly linked to transatlantic
commercial activity. The stock of U.S. foreign direct investment (FDI) in the
EU totaled $2.1 trillion in 2011, and the stock of European FDI in the United
States amounted to $1.6 trillion. These figures may be put in perspective by
comparing them with the GDP of the areas concerned, to wit, some $15 trillion
each.
The Office of
the U.S. Trade Representative reports very large figures for trade across the
North Atlantic (latest figures). U.S. exports to the EU accounted for 21
percent of overall U.S. goods and services exports. U.S. imports from the EU
amounted to 19 percent of overall U.S. goods and services imports. Within this
total, service figures loom larger; the U.S. purchased 25 percent and supplied
31 percent of all EU private services exports. Especially revealing of the
ongoing integration of the area is the fact that majority U.S-owned affiliates
sold some $499 billion worth of services in the EU in 2010, while sales of
services in the United States by majority EU-owned firms were $382 billion.
Intrafirm trading—trade that takes place within the same company—accounts for
more than half of total U.S. trade with the EU.
Given the large
figures involved, TAFTA liberalization should result in annual gains of at
least 1-2 percent of the GDP of the whole area, accruing in perpetuity, some
$600 billion per year to both partners. If the liberalization could be extended
to the whole world, the gains would larger for all concerned.
Technical
hurdles
Despite these
hoped for gains, I am skeptical. Creating an Atlantic Partnership implies much
more than lowering tariffs. That is the easy bit. And as the weighted average
tariff on goods in the United States and the European Union is below 3 percent,
the gains from lowering them might not be that large. The sensitive area is
agriculture; in the United States, the simple average tariff imposed on
agricultural imports is around 9 percent, and the comparable figure for the
European Union is no less than 18 percent. A zero tariff could be within reach
if the United States forgot about sugar and corn quotas and the European Union
gave up its Common Agricultural Policy and its hostility to genetically
modified foodstuffs. Easier said than done.
The real
obstacles are non-tariff barriers. They would loom large even if all concerned
were true friends of free trade. There are genuine differences in property
rights protection between the United States and the European Union, especially
as regards intellectual property and patents, since the procedures are
judge-based in America administrative in Europe. And agreement about accounting
standards is still not within reach despite the many years of negotiation.
Technical standards differ widely and not all are hidden forms of trade
protectionism: examples include differences in data and consumer protection
norms, the procedure for the approval of drugs for human use, financial
regulations, corporate governance rules, and telecommunications standards,
re-export and trade facilitation among many others.
There may be a
way to cut through this red tape if there is a will.3 This way
is mutual rule recognition, whereby what is cleared through the proper bodies
in America would be automatically accepted in Europe and vice versa. This is
what Europeans tried with the Bolkenstein Directive and it has not worked very
well among EU States. Is it realistic to expect a better outcome in a future TAFTA?
Sinister
interests
Jeremy Bentham, the
utilitarian philosopher, used to call pressure groups "sinister" that
were always out to defend their privileges under cover of darkness. These
groups will use technical hurdles to keep barriers down. And failing that, they
will appeal to feelings of fairness and altruism to put genuine reformers in
the wrong. Free trade in food will harm the environment. The cinema or
education cannot perform their much needed and indispensable role without
public subsidy. Public procurement needs to be fair to local firms. National
airlines and airports cannot be left in the hands of foreigners for reasons of
defense. Complex regulations must govern the medical and legal professions for
fear of a fall in quality. There will be a race to the bottom as free trade
forces national workers to compete with the underfed and exploited foreign
masses whose products unfairly compete away the social conquests of national
workers. And failing all that, we can ask our central banks to wage a little
currency war.
******
In the end, our
hope for free trade lies with the Internet, with anonymous money, with offshore
financial centers. The freedom to trade cannot be put in the hands of
governments.
Footnotes
1. Jagdish Bhagwati's Spaghetti bowl effect. Wikipedia.
2. Office of the United States Trade Representative, Executive Office
of the President. European
Union.
3. For more discussion of the possibilities of freer trade between the
United States and the European Union, see Cabrillo, Schwartz, and Garcia-Legaz.
(2006) New approaches to free
trade: in favour of an open atlantic prosperity area.Fudación
para el Análisis y los Estudios Sociales.
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