Toward a US-EU Free Trade Agreement — Things Are Far From Rosy

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    After years of battling each other on trade issues, the United States and the European Union are contemplating a dramatic change in direction: joining together in what could be the world’s largest free trade agreement (FTA). The economic relationship between the two partners is indeed the biggest in the world: It accounts for about the half of the world’s GDP and almost a third of global trade flows.

    In late 2011, the failure of the so-called Doha round of global talks at the World Trade Organization (WTO), combined with the ongoing financial and economic crisis, led European and American leaders to look for new ways to stimulate growth.

    An EU-U.S. High-Level Working Group on Jobs and Growth was created with the aim of “identifying new ways of strengthening our economic relationship and developing the full potential” of the transatlantic partnership. Jointly chaired by the European Commissioner for Trade Karel de Gucht and U.S. Trade Representative Ron Kirk, its mandate includes the examination of existing barriers to trade and assessment of opportunities and ways to eliminate them.

    The High-Level Group published an Interim report in June 2012. A definitive report is expected by the end of the month: It will probably recommend a comprehensive and ambitious agreement at which point political leaders will decide to launch formal talks. According to the European Commissioner for Trade, such a pact would include tariff elimination; services liberalization; public procurement; regulatory cooperation; the establishment of rules in key areas like competition, trade facilitation, labor, the environment and intellectual property.

    Businesses and political leaders on both sides of the Atlantic are pushing hard for an agreement saying it would increase levels of trade, economic growth and jobs. Tariffs on goods traded between the two parties are already low, averaging 3 or 4 percent. But companies say that even a relatively small increase in the volume of trade could deliver major economic benefits. The media have also been joining the chorus of praise.

    EU-US Free Trade Deal offers painless stimulus for both, Bloomberg titled last June. The New York Times spoke of “a potential huge economic effect” in an article last November. As for the interim report of the joint High-Level Group, it concludes that “a comprehensive agreement is the option that has the greatest potential for supporting and promoting growth and competitiveness across the Atlantic.”

    The tone is set: There seem to be a general and unanimous consensus in favor of a comprehensive transatlantic free trade agreement. In the end, everything will, of course, depend on the will of the negotiators and the provisions in the agreement. It may be useful though, at this stage, to come back to a few issues that may be food for thought and that seem to us to be all too easily ignored or omitted by the staunch supporters of the deal.

    • There clearly is a one-sided way of presenting the case — political leaders, businesses, the media all speak of a big economic impact, huge benefits, increase in trade, job creation and growth. Those are the ones pushing hardest for an agreement. Trade unions, environmental organizations and consumer representatives are almost invisible. There is an absence of the general public for whom these matters are much too complicated. As a result, coverage is lopsidedly pro-“free-trade.” The fact is that at this stage no one can predict the actual results of an agreement. So, the bombastic talk appears to us to be at the least premature.
    • The idea of such an agreement is based on free trade as a universal solution. But free trade still has not demonstrated its usefulness or its efficiency. If anything, it has shown that it has the potential of creating a huge financial and economic crisis and the loss of thousands of jobs everywhere. Growth is about encouraging firms to produce more and consumers to spend more. But some experts have repeatedly warned against the unsustainability of such a development: Our planet simply cannot go on supporting this kind of approach. Sooner or later, we run the risk of running up against the wall if we persist in that direction. Yet, political leaders continue to hail free trade as a vital ingredient to economic recovery.
    • One of the rational for a transatlantic pact is its potential for growth and job creation. But a free trade agreement, through the elimination of barriers to trade, leads to increased liberalization and this means increased competition. This is why figures do not tell the whole story: Those likely to benefit from such an agreement are the strongest ones, the only ones that will be able to survive in a more competitive environment, with the weakest and smallest probably the hardest hit. Additionally, more trade means more exports – good for jobs creation – but also more imports – more likely to lead to job losses. This is exactly what happened with NAFTA: Although the North-American Free-Trade Agreement on the whole led to an increase in trade between the United States, Canada and Mexico, it resulted in job losses for the U.S. In other words, more trade does not necessarily mean more jobs.
    • Recent FTAs have all included the liberalization of financial services: This means that the European Union and the United States continue to liberalize trade and investment in a wide range of risky financial services as if the financial crisis never happened. Again, liberalization increases international competition and this increased competition results in a more risky behavior by the financial sector. Trade in derivatives, with their risky and speculative nature, has been shown to aggravate financial crises and even food price crises. Additionally, the fierce international competition makes banks increasingly focus on serving the most profitable clients whereas poorer clients are left with fewer, or no, possibilities.
    • Those deals are called free trade agreements but they really are preferential trade agreements. What it means is that products and services of the partner are favored over other’s countries products and services. This is not really free trade, it is discriminatory trade. They are the reason why the WTO was created in the first place: to have a level playing field for everyone. Any move to forge a bilateral deal between the two partners would be sure to upset smaller countries, who have demanded an “all or none” approach to global trade. A bilateral agreement between the two largest economies would probably look like the betrayal of the WTO-Doha round, more precisely called the Doha Development Agenda because it was supposed to make trade rules fairer for developing countries. Not only could the “world’s largest free trade agreement” be viewed as a signal that the WTO has become irrelevant, meaning the death of the WTO, it could also be seen as the rich ganging up and perpetuating discrimination against developing countries, thus widening the already far-too-wide gap between developed and developing nations.
    • Those bilateral agreements inherently increase the risk of competing standards in various parts of the world that will only complicate doing business in the future. In the case of the United States and the European Union though, given their weight on the global scene, “enhanced cooperation for the development of rules and principles on global issues of common concern,” as indicated in the interim report, is likely to make the whole exercise seem more like global governance than free trade. Instead, it would be fairer to redo the whole international system. Additionally, the danger is that any agreed standard in a transatlantic framework does not take into consideration the seismic international changes on the horizon, for example, the rise of China.

    Apart from these general considerations, there are a few contentious issues that are likely to make a free trade agreement between the EU and the U.S. particularly arduous to negotiate.

    Agriculture is probably the most problematic one. The U.S. Farm Bill and the EU Common Agricultural Policy have been blamed in the past for subsidizing exports, supporting farmers by a system of income support and for restricting market access for other countries. A famous dispute between the U.S. and the EU in this area arose over bananas: It stemmed from a set of tariffs imposed by the EU on imported bananas which encouraged imports from African, Caribbean and Pacific countries (i.e. developing countries) and discriminated against imports from other regions, including Latin America.

    Those hardest hit by the tariffs were not small Latin-American producers though but American companies active in the region, like Dole Food and Chiquita Brands International, which complained against the European tariff regime. Incidentally, the case also shows how smaller producers from developing countries very often are disadvantaged by so-called “free trade” because they cannot compete with large corporations.

    The greatest obstacles to transatlantic trade are not tariffs though but non-tariff barriers (i.e. technical specifications, differences in regulation). Unlike tariffs, non-tariff barriers cannot simply be removed because they often have a purpose, such as safeguarding human health, etc. For example, tensions over beef hormones arose from the EU’s decision to ban the use of all hormones in livestock production; and Washington maintains a 15-year old ban on EU-beef imports imposed because of American concerns about mad cow disease.

    This actually stems from two fundamentally different attitudes towards sanitary and phyto-sanitary issues. First, there is a trend towards stricter environmental regulations in the EU compared with the U.S. Second, Europeans are by and large more concerned with their health and what they eat. Hence the EU restrictions on U.S. genetically modified corn and soy products or U.S.-produced chicken washed in chlorine.

    Other sticking points include access to market for services which accounts for about 70 percent of both sides’ economies; EU concerns over Internet privacy and the flow of electronic data; intellectual property rights; and the lifting of restrictions on investment and bidding for public procurements contracts. Presently, the EU market is more open to U.S. firms than vice versa.

    These numerous contentious issues have the ability to threaten the potential success of any new initiatives for a comprehensive EU-U.S. trade agreement. In other words, things are far from being rosy, despite all the declarations by political leaders and businesses alike. And pretending that an EU-U.S. FTA has the capacity of solving the economic crisis is misleading. There is a little sentence in a recent speech by the European commissioner for trade that should draw our attention: “I believe we should convince people in Europe that a deepening of trade relations with the U.S. is to our benefit, despite the sacrifices any compromise entails.” We’d better be aware of what these sacrifices may mean.

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