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EU-US free trade deal could be costly

Report of February 22, 2013

The wrong signal is being sent at the wrong time, writes Marcel Fratzscher in: Financial Times (21st of February 2013)

There is a lot of hype about the prospects of an EU-US free trade agreement, especially in the wake of Barack Obama’s State of the Union address last week. Supporters point to the benefits such an agreement could bring to both economies. Yet the costs are likely to outweigh the benefits. Most importantly, a transatlantic deal will undermine multilateralism, in particular the long-overdue completion of the Doha round, and weaken multilateral institutions such as the World Trade Organisation. An FTA will of course bring some benefits to the EU and the US via enhanced trade. The removal of trade barriers might raise the gross domestic product of the EU by €190bn and of the US by €100bn, according to estimates by the German Marshall Fund.

While these figures are not negligible, they constitute rather modest gains – boosts of only 1.5 per cent and 0.9 per cent of GDP to the EU and US respectively. The largest potential benefit from an EU-US free trade deal would be enhanced competition among companies that become part of a much larger common market. Yet that is difficult to quantify. Even these modest estimates are based on the hope that a comprehensive abolition of trade barriers can be achieved. This is more than doubtful, in particular as some of the largest trade barriers erected by the EU are on agricultural products, while the US is a major exporter of agricultural products.

The recent EU budget deal alone assigns about €370bn for the common agricultural policy over the next seven years. Do we believe the EU will now alter its stance on agriculture to allow an FTA to be a more meaningful achievement? However, the main drawback of an EU-US FTA is that it might extinguish the remaining hope of achieving a truly multilateral trade agreement. The WTO’s Doha round, which commenced in 2001, is paralysed and lingering unfinished.

The unwillingness of the EU to compromise on trade liberalisation in agriculture and of the US to accept smaller tariff cuts for emerging markets have played no small part in the failure. The negotiation of an EU-US deal will not only capture the trade bureaucracy on both sides of the Atlantic, it will allow policy makers to forget the unfinished global agenda. Furthermore, bilateralism undermines the few functioning global policy institutions. The WTO has been a success story by being a neutral, even-handed and fairly effective judge on trade disputes. Multilateral rules lose their relevance in a world where bilateral agreements come to dominate.

Why is multilateralism so important for trade? For one, because it gives all nations an equal chance to benefit from globalisation. The risk of trade protectionism and trade wars is another argument in favour of a multilateral approach. Global Trade Alert, an independent academic initiative, has found that trade protectionism is not a ghost of the past but rose sharply in the wake of the 2008-09 financial crisis. Who in the future is going to ensure consistency and a level playing field among the multitude of bilateral trade agreements in the world? And who will be the neutral arbiter when nations clash over conflicting bilateral agreements?

In any case, emerging markets are already the main trading partner for both the EU and US, while their bilateral trade has been shrinking. Take Germany – only 7 per cent of its total exports are going to the US, while 25 per cent go to Asia. The best response to the relative decline of the EU and US is multilateral engagement, not seclusion.

It is true that the US and the EU are both pursuing other bilateral trade agreements with a multitude of partners. But the bilateral EU-US deal is sending the wrong signal, and does so at the wrong time.
The gap in potential growth between the industrialised countries and the emerging market countries is widening. Hence the right strategy for the EU and the US is to deepen engagement and to get emerging markets, such as China and India, to become more responsible partners at the global level.

What the world economy needs in the years to come is more multilateralism. And it needs a revival of strong global leadership by the US and Europe to make it happen. An EU-US trade agreement will weaken the prospects for both.

The writer is head of DIW Berlin, a research institute and think-tank.

Republishing with courtesy of Financial Times