The idea of such a deal is nothing new. The last time the European Union and the U.S. seriously contemplated negotiating a far-reaching trade agreement was in 2007. They eventually decided to create the Transatlantic Economic Council instead—an important step but hardly an ambitious one.
Six years later, a true free-trade agreement is finally within reach. The day before the joint presidential announcement, the EU-U.S. High Level Working Group on Jobs and Growth recommended a comprehensive deal that would address a wide range of bilateral trade and investment issues.
For the EU, this means that the European Commission needs to obtain a negotiation mandate from the European Council. This should not be too difficult: An EU-U.S. trade deal is a priority for Ireland's EU presidency and Britain's G-8 presidency, both of which commenced on Jan. 1. The initiative also has the strong backing of German Chancellor Angela Merkel. Even France has not openly opposed a deal.
But the increased power of the European Parliament means that the Commission can no longer quietly push trade agreements through. The Parliament has declared its support for a trans-Atlantic deal, but not at any price: Genetically modified organisms (GMOs), animal welfare, environmental and health standards, food safety, cultural diversity, and labor and consumer rights are issues on which there is likely to be dispute. It will take some persuasion for the Parliament to compromise on some of these.
The signs are also encouraging on the American side. It's true that President Obama does not have trade promotion authority, which would oblige Congress to expedite deliberations on trade agreements. Without this authority, Congress can demand changes or amendments to an agreement—or delay ratification endlessly.
Despite the current deadlock in Washington, however, trade seems to be the one area of policy in which accord between Republicans and Democrats, and between Congress and the president, seems possible. Democrats have traditionally been more skeptical of liberalizing trade, but even they have not voiced opposition to an EU agreement, as was the case in recent U.S. trade deals with Korea, Panama and Colombia. Given the EU's high labor and environmental standards, American politicians don't need to fear that a trade deal will lead to outsourcing to Europe.
Neither side wants another Doha, however. The World Trade Organization negotiations have dragged on for 12 years now, and no end is in sight. The EU and the U.S. want to conclude negotiations on a free-trade agreement within a reasonable period, preferably during Mr. Obama's second term. "We need to get there on one tank of gas," U.S. Vice President Joe Biden emphasized at the Munich Security Conference this month.
Hence the importance of a clearly defined agenda. Both sides agree that a Trans-Atlantic Trade and Investment Partnership cannot just deal with trade in goods and services. The working group outlined a few broad areas in which the negotiators should aim for ambitious outcomes.
An agreement should first address market-access obstacles relating to tariffs, services, investment and government procurement. Import tariffs are already quite low—3.5% on average in the U.S. and 5% in the EU. Still, removing the remaining ones, including tariff peaks for key products such as transport equipment and chemicals, would have significant economic effects due to the sheer volume of EU-U.S. trade.
The partnership also needs to address behind-the-border obstacles to trade. Domestic regulations often act as barriers to trade and add additional cost to traded goods and services. Such non-tariff barriers are particularly prevalent in the cosmetics, chemicals, biotechnology, medical-equipment and measuring-instruments sectors, and in the aviation industry.
Despite the enthusiastic response to the working group's report, nobody should expect negotiations to be easy. Agriculture will be a particularly knotty issue. Farm products make up only 5% of EU-U.S. trade. But this figure obscures the importance of the sector for the U.S., one of the largest producers and exporters of many agricultural products world-wide. America accounts for 38% of global corn production and 20% of global beef and chicken production. But only a small share of exports in these goods goes to the EU—1.8% of corn and 3.7% of poultry. Overall, the EU exports far more agricultural products to the U.S. than the other way around.
The U.S. attributes this to high market barriers in the EU. Average tariffs on agricultural products are nearly 14%. But on some animal and dairy products, tariffs can exceed 100%.
An even greater barrier is the multitude of sanitary and phytosanitary standards in the EU. For decades, Washington and Brussels have bickered over GMOs, chlorinated chicken and hormone-treated beef. Especially when dealing with issues such as consumer protection or health and food standards, differences in public preferences and in regulatory philosophies have led to conflicts.
It does not help that the two sides don't always trust each other's intentions. Brussels argues that it is protecting consumers' health when proscribing certain products, but Washington sees a desire primarily to protect domestic European farmers. Promisingly, Brussels lifted two longstanding import bans this month: on live hogs, whose imports had been restricted out of fear of vesicular stomatitis, a virus that can infect humans; and on beef carcasses sterilized using lactic acid. But the toughest issue of all, GMOs, is still on the table, and a solution is not in sight.
Concluding an agreement won't be easy, but the effort is worth it. Eliminating tariffs could, in the long run, add 1.33% annually to U.S. GDP and 0.47% to EU GDP, according to the research firm Ecorys. Substantially lowering non-tariff barriers would add 0.28% annually to U.S. GDP and 0.72% to EU GDP. Boosting economic activity through deeper integration is a chance not to be missed in these low-growth times.
A common EU-U.S. approach could also facilitate trade world-wide by influencing the way standards—including health and sanitary regulations and licensing procedures—are set in other markets. This is especially true in areas that have not yet been regulated under the World Trade Organization. These are the prizes to remember when negotiations run into tough times, as they surely will.
This article was published in The Wall Street Journal.
