EU-US trade relations: towards a free trade agreement?

By Claudia Louati and Alexander Whalen | 5 November 2012

To quote this document: Claudia Louati and Alexander Whalen, “EU-US trade relations: towards a free trade agreement?”, Nouvelle Europe [en ligne], Monday 5 November 2012, http://www.nouvelle-europe.eu/node/1562, displayed on 28 February 2020

The economic crisis that continues to affect both the American and European economies has contributed to the re-launch of the debate on the negotiation of a transatlantic free trade agreement (FTA). While the establishment of a working group on EU-US trade relations shows the commitment of both parties’ to a thorough reflection process on the possibility of an FTA, obstacles to its realisation should not be underestimated. Furthermore, the impending US Presidential election raises the question of which candidate will be most willing to address these obstacles and work towards a more integrated transatlantic market.

Transatlantic trade flows account for approximately $3.6 billion a day according to the Office of the US Trade Representatives and are mostly driven by mutual investments, which reached over €2.1 trillion in 2010. The US invests three times more in the EU than it does in all of Asia and the EU invests eight times more in the US than in India and China together. It is, however, generally agreed that the creation of a free trade area, through the elimination of regulatory and non-regulatory barriers to trade, would further deepen transatlantic trade relations. According to the US Chamber of Commerce, the reduction of existing non-tariff and regulatory trade barriers could lead to GDP growth of up to 3.5% on both sides of the Atlantic. This economic argument alone has proven to be the backbone of the debate on the creation of a transatlantic trade area. 

A recurring theme in EU-US relations

The idea of a transatlantic FTA gained momentum in the mid-1990s. In 1995, American and European leaders set up the Transatlantic Business Dialogue and agreed on a new Transatlantic Agenda, which called for the creation of a New Transatlantic Marketplace. Consultations at governmental and non-governmental levels aimed to find ways to strengthen economic cooperation and tackle any remaining trade barriers. Little progress was made in the years following the consultations as the Mutual Recognition Agreement signed in 1997 foresaw the possibility of comparable standards and testing for only six products.

The European Commission published in 1998 a Communication entitled ‘The New Transatlantic Marketplace’ in which it proposed ambitious measures to achieve better economic integration between the two partners, including the complete elimination of industrial tariffs by 2010 and the creation of bilateral free trade area in services. Unfortunately, support for the Commission’s proposals was limited and a far less ambitious Transatlantic Economic Partnership was negotiated and signed later that year. The process was unsuccessfully re-started in 2005 with the launch of the Transatlantic Economic Integration and Growth Initiative, and later in 2007 with the creation of the Transatlantic Economic Council, whose primary goal was to achieve regulatory harmonization in selected areas. Despite these initiatives and increased momentum at the end of the 2000s, achievements were limited.

The idea was resuscitated last year as the recognition of the failure of the Doha Round combined with the on-going financial crisis led European and American leaders to look for new ways to stimulate growth. In November 2011, an EU-US 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 US Trade Representative Ron Kirk, its mandate includes the examination of existing barriers to trade and assessment of opportunities and ways to eliminate them. Wide support was expressed for this initiative, as demonstrated by favourable declarations by German Chancellor Angela Merkel, French President Nicolas Sarkozy and British Prime Minister James Cameron in late January 2012. The interim report of the Working Group published in June 2012 calls for the negotiation of a comprehensive agreement, which could include “ambitious reciprocal market opening in goods, services, and investment, and address the challenges of modernising trade rules and enhancing the compatibility of regulatory regimes”. In particular, the Group calls for the elimination of all duties on bilateral trade and a commitment from both sides to the reduction of regulatory barriers. It however does not directly call for the negotiation of a fully-fledged free trade agreement.

Persisting trade barriers

The fact that the High level working group acknowledges the existence of contentious issues that will need particular attention during the negotiation process can be interpreted as a sign of prudence after several failed attempts at negotiating a free trade agreement. The reasons for these failures are multiple: lack of commitment by political leaders, insufficient public profile, low priority in the bureaucracy on both sides of the Atlantic and insufficient transparency. The intrinsic shortcomings of the European decision-making system can also be underlined, as the opposition of certain member states, for economic as well as cultural reasons, also blocked the process.

The inability to agree on the removal of all trade and regulatory tariffs is, however, the most significant obstacle on the road to an EU-US FTA. In 2009, the average tariff applied to trade between the transatlantic partners was between 3% and 4%. However, this very low average hides huge differences between sectors as agriculture in particular is subject to much higher tariffs both on the EU and US side. The two policies that seem to encapsulate the limits that agriculture puts on transatlantic free trade are the US farm bill and the European Common Agricultural Policy (CAP). These policies have been blamed for restricting market access for third countries, subsidizing exports and supporting farmers by a system of income support. A famous dispute between the US and the EU in this area arose over bananas. It stemmed from a set of tariffs imposed by the EU on banana exports which encouraged imports from African, Caribbean and Pacific countries and discriminated against imports from other regions, including Latin America. The American companies Dole Food and Chiquita Brands International were particularly affected by this tariff regime.

Agriculture is an example where traditional economic patriotism, based on economic interests and political considerations, makes the negotiation of an FTA difficult. Similar disputes have occurred in the aircraft industry as the US and the EU regularly accuse each other of providing massive subsidies to Boeing and Airbus. In certain extremely protected areas such as defence, where market access is strictly limited for foreign firms in EU member states as well as in the US, complete liberalisation appears even less likely.

The existence of other non-tariff barriers to free trade might appear even more contentious. For example, tensions over beef-hormones arose from the EU’s decision to ban the use of all hormones in livestock production. Although the ban was judged illegal by the WTO as it did not follow an objective risk assessment and scientific conclusions, it took the EU over eight years to negotiate an agreement with the US allowing the import of American high quality hormone-free beef.

Addressing these regulatory barriers is a more serious challenge for decision makers, as some observers argue that they do not stem from economic interests but originate from fundamentally different regional attitudes towards sanitary and phyto-sanitary issues. David Vogel (2001) identifies a trend towards stricter environmental regulations in the EU compared with the US over the last twenty years. He argues that “the divergence between European and American regulations of GMOs is part of a much political broader phenomenon, namely the adoption of more risk-averse policies in Europe”. Although Tim Josling warns us against a too simplistic differentiation between “a paranoid European consumer and a scientifically literate US counterpart”, the existence of a different approach to the precautionary principle in particular in food safety issues has been the cause of several transatlantic disputes at WTO and bilateral level.

These numerous contentious issues threaten the potential success of any new initiatives for a comprehensive EU-US trade agreement. Optimism however seems to dominate debates at EU level. Commissioner De Gucht recently stated in an interview with Europoliticism that ‘the omens are good to start negotiations at the beginning of next year’. However, the confidence expressed by EU officials does not mean that the feeling is shared by their American counterparts. In an interview with Europolitics, a senior US official commented that the FTA is ‘not a fait accompli’ and much hinges not only on the high-level working group’s final report, which is expected by the end of 2012, but also the outcome of the US Presidential elections.

Impact of the US Presidential Election

A potential hurdle facing the implementation of an EU-US FTA is the looming US Presidential election. The key question surrounding the election is not whether the outcome will affect the eventual signing of an FTA between the EU and US, but rather will the proposed timeline hold?

Throughout the Presidential campaign, President Obama has been repeatedly attacked by Candidate Romney for his inability to make significant progress on numerous pending FTAs. Romney has repeatedly referenced the statistic that since President Obama has taken office, no trade deals have been signed and no trade negotiations have been initiated. During the same four year timeframe, the EU has signed 25 trade deals and China has signed 19. Faced with such mounting pressure from Candidate Romney over a lackluster record on trade negations, the Obama administration has stated that it is firmly behind its pursuit of an FTA between the EU and the US. Moreover, on the 19th October, President Obama signed three FTAs with South Korea, Colombia and Panama, the first such signing of his Presidential term, indicating that the Obama administration is swiftly working to address its lack of trade negotiation activity prior to the election while simultaneously setting the tone for a potential second term. With a potential economic impact of $156 billion, officials on both sides of the Atlantic strongly believe that an Obama re-election would lead to continued efforts in achieving a trans-Atlantic FTA while honoring the proposed negotiations timeline.

President Obama’s Republican challenger, Mitt Romney, has provided no evidence that he would attempt to derail the on-going negotiations between the EU and US if he were to win the race for the White House. However, Romney has also been surprisingly silent on the status of the trade pact. C Boyden Gray, the former US Ambassador to the EU under President George W Bush, has publicly lashed out at Romney for not discussing the initiative on the campaign trail due to the significant amount of jobs and wealth it would bring to both the US and EU markets. Moreover, in his highly publicized ‘Plan for Jobs and Economic Growth’ Romney puts little emphasis on the importance of an FTA between the EU and US. Instead, Romney’s proposed policy on trade focuses on concluding the Trans-Pacific Partnership, creating the Reagan Economic Zone and confronting China through increased enforcement of existing laws and the implementation of punitive measures on unfair trade practices. Many analysts believe that a Romney administration would shift its attention squarely on the Asia-Pacific region leading to stalled negotiations in Europe.

Conclusion

The question remains, will an Obama or Romney administration move towards Asia at the expense of Europe, or will it stick to the proposed timeline? During a time of economic crisis on both sides of the Atlantic the answer may lie in the relative financial opportunities of an FTA. Obstacles and contentious issues are well known; it remains to be seen whereas both sides will, this time, take the necessary steps to address them. 

To go further

On the internet

To read

  • AHEARN, Raymond J. (2002), “Trade Conflict in the US-European Union Economic Relationship” and “US-European Union Trade Relations: Issues and Policy Challenges” in LANE, Jeremy V, European Union-U.S. Trade Conflicts and Economic Relationship, New York: Novinka Books
  • BERDEN, Koen, FRANCOIS, Joseph, THELLE, Martin, WYMENGA, Paul, TAMMINEN, Saara (2009), “Non-Tariff Measures in EU-US Trade and Investment – An Economic Analysis”, Reference: OJ 2007/S 180-219493, ordered by the European Commission, DG Trade
  • JOHNSON, Michael D. C. (2001), “EU-US Trade disputes: their causes, resolution and prevention”, BP Essay Contest 2001, European University Institute, Robert Schuman Centre for Advanced Studies.
  • JOSLING, Tim (1999), “Transatlantic Trade on Steroids: The Ongoing Saga of the Beef-Hormone Dispute”, Paper prepared for a Seminar at the European Center of California Scripps College, Claremont, CA
  • VOGEL, David (2001), “Ships Passing in the Night: The Changing Politics of Risk Regulation in Europe and the United States”, EUI Working Papers, RSC 2001/16

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