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Why Transatlantic Trade Winds Are Blowing

Interviewee: Jeffrey J. Schott, Senior Fellow, Peterson Institute for International Economics
Interviewer: Jeanne Park, Deputy Director
February 25, 2013

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President Barack Obama in his State of the Union address threw his support behind a broad free-trade deal with the twenty-seven-member EU. While such an accord has eluded U.S. and European policymakers for more than twenty years, experts like the Peterson Institute's Jeffrey Schott believe that both sides have greater incentives to follow through on negotiations this time around. "What's different now is the economic conditions in the world economy, the recession in Europe, the stalling of multilateral trade negotiations in Geneva, and the desire to promote stronger economic growth and employment in both the United States and Europe," says Schott. For instance, the current high commodity prices could help both sides rationalize farm policies that would otherwise threaten a new deal, he says. As for the global trade round, Schott says a transatlantic deal could lend momentum to multilateral talks.

How significant is this proposed free-trade accord?

The United States and the European Union already have the largest trading relationship in the world; just the two-way trade of goods and services is $1 trillion a year, and that pales in comparison with the direct investments that each side has in the other's market. The two-way stock of foreign direct investment is equal to about $2.7 trillion. So it's already a highly integrated and very deep commercial relationship, which underpins a comprehensive security alliance. This free-trade pact is something that is seen as a supplement--a reinforcement of the world's largest commercial relationship.

Why now?

There have been efforts to create a transatlantic partnership for more than twenty years. What's different now is the economic conditions in the world economy, the recession in Europe, the stalling of multilateral trade negotiations in Geneva, and the desire to promote stronger economic growth and employment in both the United States and Europe and to create new precedents that can hopefully jumpstart multilateral trade negotiations.

What do the United States and the EU stand to gain from this free-trade pact?

"This free-trade pact is something that is seen as a supplement--a reinforcement of the world's largest commercial relationship."

The purpose of the agreement is to promote greater productivity growth in the economies of each side by removing barriers to trade and investment, either at the border or through regulatory policies that increase transaction costs and inhibit new economic activity. And that should encourage resources to flow into the more innovative and competitive sectors of the economy, which will see growth. There will also be more competition in each other's market, though both our markets are relatively open, so there won't be the major changes that would occur in the case of an agreement that we would have with a highly protective developing country.

The key here for two highly industrialized, advanced economies is to remove disincentives to trade and investment, to encourage greater competition, innovation, and therefore productivity and growth in the economies--and those benefits should spread widely across the range of economic activities in goods and services.

Is a two-year timeline to complete talks realistic?

What has been agreed to by the two sides is a multi-stage process, and the ambition to craft a framework agreement with some basic trade liberalization in the first stage is quite doable in the eighteen-month period that is foreseen by both sides. But that won't solve all the difficult regulatory issues that beset transatlantic trade and investment, and the two sides have agreed to a process of continuing negotiations and continuing consultations so that they can make progress on issues of great importance to both trade and investment in the region.

"What's different now is the economic conditions in the world economy, the recession in Europe, the stalling of multilateral trade negotiations in Geneva, and the desire to promote stronger economic growth and employment in both the United States and Europe."

Is agriculture still a major impediment to the trade deal?

Agriculture poses challenges in terms of trade liberalization. But it also poses difficult problems in terms of the cost of agricultural policies to the local economies. Efforts are under way in both the United States and Europe to try to rationalize farm policies while we have a window of opportunity given the high commodity prices in which subsidies have been sharply reduced because of the conditions in world markets.

If commodity prices soften, then it would be much more difficult to begin to discipline the use of subsidies because of the pressures under the current policies to increase the level of subsidization. But right now, those levels are quite low given historical standards, and the objective would be to try to lock them in or set a ceiling at the current low levels so that we can control the distortions once conditions change in world markets.

Does this proposed pact reinforce the concept of proliferating "spaghetti bowls" of preferential deals?

That's an analysis that was becoming outdated ten years ago. What we see now are a small number of super-regional trading arrangements like the Trans-Pacific Partnership (TPP) and the ASEAN+6 (formerly called the Regional Comprehensive Economic Partnership). Now we'll have the transatlantic trade and investment partnership. These are all very big deals--they're not small bilateral deals that privilege a small number of countries and discriminate against everyone else. These preference areas are very large, and they overlap. And they're all following a similar model in terms of comprehensive trade agenda, though they have different regional perspectives.

"There are new efforts underway to restart the multilateral negotiating process at the WTO ministerial in Bali at the end of this year."

There will be an incentive to take these super-regional arrangements and the precedents that they are setting involving both developed and developing countries that say,"Let's make sure that we don't harm the weakest among us in the trading system, because the countries that are left out of these super-regional arrangements are the African countries, a few Asian countries, and some Latin American countries." And there will be a great effort and incentive to say,"Let's try to seek some convergence on these broad rule-making initiatives, by bringing the agreements together in Geneva and trying to multilateralize regionalism." We may be reaching a time when we can begin to operationalize the concept of multilateralizing regionalism.

Does the EU-US free-trade accord present new obstacles to global trade, or can it incentivize states to concede to multilateral trade agreements?

Both.

The Doha round as initially constructed is unworkable, but the progress that has been made in the Doha round can be harvested with a restructuring of the negotiating agenda and complementing the initial work with new initiatives in areas that have achieved greater prominence in the [intervening] years since the Doha round negotiations began.

The history of multilateral trade negotiations is that they almost always add new issues to the agenda during the course of the negotiations, but if issues are taken off the agenda it's much more difficult to bring them back on. And so there's still hope, and indeed, there are new efforts under way to restart the multilateral negotiating process at the WTO ministerial in Bali at the end of this year, with an initial deal that would provide immediate benefits for the poorest countries. And the supplement that allows the negotiations to progress in the next couple of years would be a good result whether you call it finishing the Doha round or, as I prefer to call it, a WTO recovery package. And there's a chance that we'll see some positive movement on the multilateral front this year.

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