US-EU Free Trade Deal Still Far Off

Europe is abuzz with the prospect of a Transatlantic Free Trade Agreement [TAFTA] after a single sentence in President Obama’s State of the Union address mentioned it. The EU is desperate for something to spark growth, and proper economic policy appears impossible thanks to Chancellor Merkel’s obsession with austerity. However, TAFTA has been on hold for 20 years, and despite slightly better prospects, it is likely to stay on hold for another 20.
The president called for a “comprehensive transatlantic trade and investment partnership.” He explained, “Trade that is free and fair across the Atlantic supports millions of good-paying American jobs.” The Europeans see it the same way. And in theory, there is everything to gain in the long term from open markets. As an ultimate goal, TAFTA is a worthy objective.

The evolution of the global political-economy has made achieving such a deal more probable. Europe is in the economic doldrums, and neither the US nor EU can ignore the impact that China’s rise has had. In, Mr. Obama has overtly and transparently started realigning American policy to take account of Asia’s increased importance. This has made many Europeans feel he does not put sufficient emphasis on their region and their concerns. TAFTA talks would address all of this.

That said, the economic impact of dropping tariffs would not be that great. Trade between the US and EU is largely tariff-free; economists claim that tariffs cover just 3% of the $646 billion traded between the two continents in the last year. Abolishing tariffs would be a $20 billion boost. With their combined economies in the $30 trillion range, the amount saved is a rounding error. Where the real benefits would come would be in harmonizing regulations and practices — and that’s where things will unravel.

For example, harmonizing safety rules for autos would save several hundred dollars per car because the manufacturers wouldn’t have to produce a US version and an EU version of the same model. Yet, harmonizing things like food is a big deal. The US is content to produce and consume genetically modified food; in Europe, there is serious resistance to “Frankenfood.” And Europe’s Common Agricultural Policy makes matters dicier. The pharmaceutical industry is even more complicated when it comes to such harmonization; drug safety is often cited as a reason not to import drugs from places where they sell for less.

Jeffrey J. Schott, at the Peterson Institute for International Economics, said, “We’ve had 20 years of failure on these trans-Atlantic initiatives. Before they signed on the dotted line they wanted to make sure there weren’t any potholes that would trip them up.” The road to TAFTA is nothing but potholes. It’s a good idea, but expectations of it happening in the next two years as some have suggested are on the edge of plausibility.