• REVIEW & OUTLOOK
• The Wall Street Journal, December 4, 2012

Trans-Atlantic Trade Stimulus

A way to spur growth without spending taxpayer money.

A Trans-Atlantic Free Trade Agreement is one of those ideas that's always at the wedding party but never catches the bouquet. Since 1985, when the U.S. signed its first bilateral free-trade deal (with Israel), America has agreed to FTAs with 19 countries. The EU has four comprehensive trade deals to its own name, in addition to agreements of various sorts with non-EU neighbors and former colonies.
But despite approving noises from both sides of the ocean over the years, a comprehensive EU-U.S. trade deal has never seriously been attempted. That could be about to change, and a good thing too.
In the coming days, the European Commission will make a formal recommendation on whether to open FTA negotiations with Washington. The Commission is enthusiastic. The Obama Administration is ready to start talks, though it remains to be seen whether President Obama will spend political capital backing a deal given how hostile his labor constituency is to open markets.
A good trade deal could be the cheapest stimulus that you don't need money to buy. The U.S. and the EU represent nearly half of global GDP. One-third of world trade is between the U.S. and Europe. Trans-Atlantic direct investment totals some $2.7 trillion, and total bilateral annual trade tops $600 billion.
Europe and America, in other words, already do a lot of business. Tariffs between the two are relatively low on most goods—5% to 7% on average. The problems come in such politically sensitive areas as agriculture and textiles, although a simulation run by the Brussels-based think tank ECIPE suggested that the EU and U.S. would both see increased textile exports to each other if trade barriers were eliminated. In any case, the usual way around sensitivities in one area is to do a comprehensive deal, so the total benefits outweigh the fears of any particular industry.
This is where things get sticky. The EU's usual modus operandi in trade negotiations is to attempt to impose its standards—in food safety, or public procurement, sometimes environmental or labor standards—on its trading partner. The U.S. often isn't much better.
But the EU isn't likely to get a deal if it tries to force the U.S. to sign up to whole swaths of Europe's regulatory state. Nor is regulatory harmonization necessary if the two sides commit to genuinely free trade, as opposed to some sort of joint regulatory cabal. Fredrik Erixon of ECIPE likes to say that a true free trade agreement is a blank piece of paper, and he has a point. The bigger the rulebook gets, the less free the trade is, whatever the tariff schedule says.
The 1930s saw a global economic downturn become the Great Depression in no small part because governments reacted by throwing up tariff barriers to protect domestic industry from foreign competition. In pursuing free trade as a way out of the current economic quagmire, the EU and U.S. could show that, sometimes, we do learn from history.