Fabian Bimmer / Courtesy Reuters Volkswagen's headquarters in Wolfsburg, Germany.

For Transatlantic Trade, This Time Is Different

Why the Latest U.S.-EU Trade Talks Are Likely to Succeed

In his State of the Union address two weeks ago, U.S. President Barack Obama announced that Washington would launch negotiations with the European Union this year on a comprehensive venture called the Transatlantic Trade and Investment Partnership (TTIP). Negotiators in the United States and Europe aspire to make the TTIP the most advanced economic agreement in the world, and any deal will likely go beyond the most basic aspect of free trade -- namely, the elimination of tariffs. More broadly, Europe and the United States can be expected to align their regulations regarding manufacturing and services such as finance and telecommunications. The deal would also address new frontiers of economic growth, including the U.S. shale gas market and online intellectual property. They also hope to eliminate almost all barriers to foreign direct investment.

The elimination of tariffs alone, which average out to four percent on goods traded between the United States and Europe, could remove a $24 billion impediment to transatlantic trade. Beyond free trade, however, the real gains from the deal would come from regulatory cooperation. Transatlantic business would flourish, for example, if German cars that passed safety inspections in Stuttgart also met standards appropriate for U.S. drivers, if drugs and medical devices designed in one market could be sold to consumers in the other more quickly, and if smart-phone plugs built for both markets would be interoperable. In the highly regulated areas of advanced manufacturing and services, the backbone of the U.S. and European economies, streamlining business would give each side a huge boost in competitiveness.

The idea for such a deal is not new. Apart from the enlargement of NATO and the EU to formerly communist countries, no joint project has captured the imaginations of American and European leaders as much as the creation of a transatlantic marketplace. Together, the U.S. and European economies account for approximately 50 percent of global GDP, and the trade, investment, and commerce that passes between them amounts to $5 trillion annually. The sheer size of this relationship provides the logic behind the United States and Europe's continuing to set the economic rules by which the rest of the world abides. Bringing the two economies together in a free trade agreement could unleash growth of 0.5 to two percent of GDP on each side of the Atlantic and create as many as two million jobs in the process.

IF AT FIRST YOU DON'T SUCCEED

For all its potential, this great economic project has remained illusory. One previous effort, the Clinton administration's 1995 New Transatlantic Agenda, aimed to refocus U.S.-European relations on economic ties, with the newly created European Union as the primary interlocutor. As with the TTIP, negotiators then sought to create a flurry of new institutions and mutual recognition agreements that would establish a free trade area between the United States and Europe. Essentially, they tried to create a transatlantic marketplace in one swift stroke. But more immediate security issues in the Balkans and the admission of China to the World Trade Organization pushed this goal to the wayside.

Later, in 2007, the Bush administration sought to revive the issue of transatlantic economic cooperation, working with Germany to create the Transatlantic Economic Council. The TEC was meant to graft the U.S. and European economies more closely together, primarily through regulatory cooperation in areas as disparate as accounting, electric vehicles, and nanotechnology. This initiative aimed at growing a transatlantic marketplace by slowly breaking down the regulatory barriers between the two markets. But the effort quickly became bogged down in technical disputes around one issue: the import of chlorine-washed chicken from the United States to Europe.

A major obstacle to such deals is that culture and commerce collide when two governments attempt to align their regulatory policies, often with unpredictable outcomes. In the United States, the basic building block of regulation is cost-benefit analysis. Europe takes a more cautious approach, placing the burden of proof of a product's safety on the innovator. In essence, the differences in regulatory approach can easily fall into the stereotypes that each side harbors about the other: whereas the American approach emphasizes the outcome, the Europeans care more about the process.

Could this time be different? Differences in U.S. and European agriculture policies, particularly Europe's more restrictive regulation of genetically modified organisms, have been insurmountable stumbling blocks in previous rounds of U.S.-EU trade talks, and there are signs that agriculture could play the same role this time around. Other sectors are also likely to sow discord between the two sides. Europe and the United States have different ideas about how to regulate online tech companies, the use of cloud computing, and cybersecurity. These issues have become the subject of highly politicized debates throughout Europe on citizens' rights to privacy and data protection. In general, some European policymakers believe that the American system lacks adequate protections against the commercialization of individuals' personal information, demanding that companies such as Google and Facebook respect their users' "right to be forgotten."

THE FIERCE URGENCY OF NOW

Still, despite these challenges, there are a number of indications that a deal can actually be achieved this time around. Europe's desire for an agreement is palpable, and Washington knows it. In light of the eurozone crisis and larger challenges to the European approach to social welfare, governments in the United Kingdom, the Netherlands, and Germany are looking to rejigger the European economy for long-term competitiveness -- and are looking to adopt more market-based stimulus. As a result, there is now a greater willingness to accommodate U.S. conditions for a deal. The United States has been determined to leverage its position to win favorable terms before the negotiations begin. In particular, Washington insisted on achieving certain preliminary agreements to ensure that the Europeans had sufficient political clout to dislodge the interest groups that had prevented past deals, such as agricultural lobbies and smaller parties such as the Greens and the Pirates, and anti-globalization parties on the far right and the far left.

More important, the strategic calculus for a Transatlantic Trade and Investment Partnership seems to have changed. First and foremost, a U.S.-EU trade and investment deal could boost the slumping economies on both sides of the Atlantic. This allure has always been there in previous trade talks, but given anemic U.S. economic growth and the eurozone recession, the need for stimulus is particularly acute these days. In December 2012, unemployment stood at 7.8 percent in the United States and at 10.7 percent in the EU. Consider the potential effects of a deal. Today, a third of the tariffs paid by the United States go to Europe. Zeroing out tariffs could add $180 billion to both economies. And the greatest benefits to be gained may come from deeper regulatory alignment, in which both sides seek ways to recognize the other sides' standards, certifications, and safety tests for products as roughly providing an equivalent level of protection for their consumers.

What is more, the logic behind such a deal is not just economic -- it's also political. Several geopolitical developments could also tip the scales in favor of the agreement.

For starters, a trade deal would give logic to a transatlantic relationship that many observers lament is becoming irrelevant. A budget-constrained Washington and a Europe still battling its sovereign debt crisis may find it difficult to take joint action on the global stage. With the United States increasingly looking east toward Asia, and the EU increasingly turning inward, the threat of the transatlantic community being pulled apart is real. But trade negotiations would reinvigorate the transatlantic alliance. Moreover, they would also help legitimize the EU in the eyes of some euro-skeptic governments, such as in London and in Prague, by providing a project that would put market access at the core of the EU's global mission and allow their countries to balance their European and Atlanticist identities.

On a grand strategic level, closer U.S.-European ties would also enhance the West's leverage with China at a time when it is sorely needed. As a result of China's state-capitalist model, Beijing can harness its money to enhance its industrial competitiveness. Moreover, it selectively follows international economic rules, for example by restricting market access to and exports of its raw materials, such as rare earths, and ignoring international norms about intellectual property. Left unchallenged, such behavior could undermine commerce in ways not seen since the establishment of the Bretton Woods system. A robust trade and investment deal would give the United States and Europe greater leverage in the coming decades to push back against China and reaffirm the liberal international order.

In 1995 and 2007, when the economic preeminence of the United States and Europe was unquestioned, the two sides had the luxury of putting off negotiations. When the Clinton administration pushed for a trade deal, China's economy was the size of Turkey's. By the time of the last round of talks, the Chinese economy was the size of Germany's. Now, however, the OECD predicts that China will become the largest global economy by 2016, giving it enormous ability to set the terms of global trade. As much as anything, this change in the economic pecking order has enhanced the need for a U.S.-European trade deal.

In the broadest terms, a U.S.-EU trade deal would allow the United States and Europe to maintain their sway over global economic governance. Both recognize that their ability to set global rules will diminish as economic power shifts to the Asia-Pacific region. In the coming decade, no one power will be able to drive the international agenda. But if they join forces, the United States and Europe can channel their combined economic weight to keep control of the reins of the global economic order.

In his 1901 novel Buddenbrooks, Thomas Mann describes the staid German middle class, writing, "The outward, visible and tangible signs and symbols of happiness and achievement often appear only when in reality everything is already starting to go downhill again." The same could be said of the U.S.-European relationship. The honeymoon period offered by the global financial crisis and the rise of China, during which both sides may be able to make the necessary compromises, will be short, quickly subject to a battery of political timetables and shifting priorities. The political leaders who have pushed for opening negotiations now have the responsibility to ensure that the current conducive climate leads to success.  

 

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