It’s safe to say that both the US and the EU are going through something of a rough patch at the moment. The US, after flirting with the possibility of defaulting on its national debt has, as a result, suffered the humiliation of a credit-rating downgrade for the first time in its history. The EU, meanwhile, is still struggling with a sovereign debt crisis that threatens to tip the whole world into a double-dip recession. Both, then, could do with a strategy to take us back to the good times. Eric Grover, writing from the US on his blog, argues that boosting transatlantic trade could be part of the solution. He suggests a transatlantic Free Trade Agreement (FTA), which he believes would give a much-needed kick in the pants to the economies of both the US and the EU.
We took this suggestion to several people for comment – including J. Thomas Rosch, a Commissioner of the United States Federal Trade Commission. Commissioner Rosch agreed that boosting US-EU trade was a good idea, but blamed the lack of progress on party-political infighting in the US:
Well, first – let me say that I’m all for free trade. I had a dinner conversation with Charlene Barshefsky, who used to be the head of our operation, and under the Clinton Administration she was the tariff chief. And I took her to task for the Democrats being so in the pocket of organised labour in the US, because I thought that was getting in the way of free trade…
The European Centre for International Political Economy (ECIPE), recently began publishing a series of working papers on the possibility of a transatlantic Free Trade Agreement. We got in touch with Fredrik Erixon, the director of ECIPE, and asked him about the proposal:
It’s a very good idea. And it’s a good idea for three reasons. The first one is exactly what Eric is pointing to: such a deal would increase levels of trade, economic growth and jobs. Those gains are going to be bigger than you would assume given that tariffs are already quite low between the EU and the US. This is because economic gains are higher when you do trade deals between bigger economies – the numbers will simply be higher than with small economies. So it’s the logic of big numbers.
Secondly, if you look at trade patterns, there is a lot of intra-firm trade going on (i.e. trade between a parent company and its affiliates). Even a small tariff reduction would have a significant impact here, when the trade-structure is so intertwined. In addition, there is a lot of intra-industry trade between the EU and US (i.e. trade in exactly the same sectors). In other words, the comparative advantages of the US and Europe are basically in the same areas. If you have that sort of pattern – the gain is going to be bigger if you reduce barriers to competition, simply because you will then have competitors who will expand their trade.
That’s my first set of arguments. My other argument is that, if you look at the world economy right now, and if you take into account the failures of the WTO in the Doha round, you can see the need for other types of strategy and other kind of leadership to promote free trade. Even if the structure has shifted Eastwards, it’s still the case that the US and Europe are the two giants of the world economy. If they can find a strategy that will generate results, they can create a dynamic that will inspire others to follow their lead. They need to look for something outside the WTO and something that will work pretty swiftly, and there are no other options around.
Not everybody is quite so convinced, of course. We spoke to Clyde Prestowitz, President of the Economic Strategy Institute and a regular blogger for Foreign Policy magazine in the US. We asked him what he thought about the idea of a US-EU FTA:
I disagree with that. There is not a problem with trade between the US and the EU – other barriers are not substantial. And I actually think that if you did a US-EU free trade agreement that would probably destroy the WTO because the US and the EU together represent somewhere between two-thirds to half of the world economy. If half of the global economy entered into an FTA and excluded the other half – where would that leave the WTO?
I think these FTAs are counter-productive. We call them free-trade agreements, but they’re really preferential trade agreements. They’re the reason we created the GATT and the WTO in the first place. This was part of the problem in the 1930s. After the war we created the GATT, and now we’re reverting back to the 1930s with the spaghetti bowl of bilateral trade agreements.
These deals are reactions to the difficulty of reforming the WTO. But, really, we do need a renewal or a resetting of the whole international global system. I think the IMF needs to be redone, the WTO needs to be redone but these are really hard things to do. It’ll take persistence. We shouldn’t give up now and move back to the old way of doing things.
What do YOU think? Are we moving back towards the protectionist system of the 1930s, and free trade agreements are the best strategy to prevent this? Or, conversely, are FTAs actually a return to the policies of the 1930s? Maybe free trade is the wrong approach entirely, and we need to focus on alternative forms of globalisation? Let us know your comments and reactions in the form below, and we’ll take your thought to policy-makers and experts to respond.