eu-us-ftaIt’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.

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15 comments Post a commentcomment

  1. avatar
    Christos Mouzeviris

    Yeah, sure..Why not…?? A very good idea…But I hope the Americans won’t start putting all those rules and regulations on the Europeans again, like they demand to have our data, if we want to travel over there…Free trade on equal terms..Yes..??
    Otherwise I fully support…

    • avatar

      please stop saying americans. Its these big drug companies in both countries that are drooling over this. Trust me, our political system is already captured by corporations and now they want to use a lot of the muddy US law, that helps corporations more, and reinstate it on the rest of the world thru “free trade acts”

  2. avatar
    Eric Grover

    Global trade liberalization, not the WTO, is the goal. The WTO is a means. Clyde Prestowitz is wrong to place all his bets on one path to freer trade: the WTO. While EU-US trade barriers are not significant compared with many others there would nonetheless be real tangible immediate and symbolic benefits to an EU-US free trade zone. Furthermore, human nature being what it is, it would spur other countries – fearing being left out, to push for broader trade liberalization.

    Prestowitz has said “..we need a system of dirty free trade.” Perhaps. We shouldn’t let pursuit of the perfect become the enemy of the good. Advocates should advance the cause of freer trade on multiple fronts, realizing prosperity gains and increasing incentives for individuals, firms and countries to cooperate, when are where they are achievable.

    Eric Grover

    27/09/2011 Ivan Hodac, Secretary General of the European Automobile Manufacturers’ Association (ACEA), has responded to this comment.

    • avatar
      Jean P

      I can’t believe there are still people willing to believe that free trade is the answer. We’re witnessing the dying days of late capitalism, yet some stubbornly cling to the dangerous old neo-liberal solutions. We do NOT need more deregulation and more laissez-faire plundering of developing economies. Have we learned nothing from the mistakes of the past couple of years? It’s time for a global rebalancing, and a new, democratic and accountable era of fairer trade.

    • avatar

      I remember hearing that “die-ing days of capitalism” argument before. It was made by people who not only could not add, but was heard while living in the eastern block in the die-ing days of Marxist-Leninism, a system which construct large scale poverty, couldn’t manage to produce growth, or deal in any effective way with it’s own (frequent) recessions.

  3. avatar
    Christos Mouzeviris

    Fairer trade yes..It can be free trade if only it is done properly..Free trade can be good, if negotiated well and the “poorer” regions that participate get a good deal..A lot of the times they are not…Capitalism as you say…Greed and stuff…Shame!

    • avatar

      Fair trade, as defined by people who actually do something: and agreed to price by two individuals for the transaction of goods and services.

      Fair trade, as defined by the detached social observer living in nanny-state comfort: anything that they want that will explain away what they don’t understand about economics.

    • avatar
      Christos Mouzeviris

      We may not understand economics because not all of us have studied economics..But we see the mess that those who supposedly “know better” created but we, the ignorant nanny state citizens have to pay…So I guess Joe we should have a say in it especially when we are called to pay up the bill of the mess of those “who understand economics” have create…?? Yes??

  4. avatar

    Actually, I don’t think a free trade agreement is advantageous to the Eurozone. They already have a positive balance of trade with the US.

    By the way, the US didn’t risk default of bondholders – it risked governments having to reign in their spending increases. Get it right, and realize that a partisan political press statement is not, per se, a precis of factual news.

    • avatar

      There is no particular benefit in having a trade surplus. If the Eurozone has a surplus of trade with the US, then it follows that their is an outflow of capital from the Eurozone (presumably) toward the US. A US/EU FTA would presumably either increase Europe’s trade surplus or reduce it, but overall trade volume would increase. To take the analogy and ram it home: there is no point Europeans accumulating US $ (by surplus) and not spending them, so it follows that it doesn’t really matter which direction the trade balance is going- it would benefit both countries to trade more.

  5. avatar

    Liberalised trade between the two largest economies would be great. High labour standards, high environmental standards, free trade. That’s the ticket to prosperity. Free trade doesn’t have to mean “exploitation of the developed world”. Mutually beneficial trade done in a context of rule of law and respect for human rights lifts everyone’s boat.

    • avatar

      Doubt it. It will be a race to the bottom as companies cherry picks what best suits their companies and enforce it on all of us instead

  6. avatar
    Phil Lancaster

    The IMF and the WTO surely need to be looked at but also should not interfere with the goings on between struggling economies trying to make sense of the world post recession. NAFTA is moving forward, an EU-USFTA looks to be a smart move. I lived in France in the pre-EU years and watched the fits and spurts getting ironed out. When the Eastern Block opened up and another near dozen countries knocked on the EU door I couldn’t help but think that there would be more fits and spurts but look at the potential trade market of Europe with nearly as many people as the US. I couldn’t help but think, the US needs to get right with Europe because this could be a balance that will help define the future of free world economy. I only hope to see more regulations of corporations and real justice levied toward those players who choose greed over good economics.

    • avatar
      Phil Lancaster

      A footnote, the environment is key to the future development of resources and industries. The EU is already keen on this and the US needs to get in line with the new future of mankind.

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