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Economic Stimulus for Both Sides of the Atlantic

The proposed EU-U.S. free-trade agreement could result in increased U.S. production capacity for export and accompanying plant expansion and regional economic growth.

James T. Berger (Directory 2013)
With the economies of both the United States and many of the European Union nations in need of a boost, the proposed free trade agreement (FTA) between the United States and the 27-member European Union (EU) has the potential to jump-start economic growth and create millions of new jobs on both sides of the Atlantic.

Noting that an FTA would not cost taxpayers a nickel, Karan Bhatia, a former deputy U.S. trade representative who is now vice president for Global Government Affairs at General Electric in Washington said, “This is the great, untapped stimulus.” He added, “This could be the biggest, most valuable free-trade agreement by far, even if it produces only a marginal increase in trade.”

Although tariffs on goods between the United States and the EU are relatively low (between 5 and 7 percent), bringing those tariffs to zero would, according to the U.S. Chamber of Commerce, increase U.S.-EU trade by more than $120 billion a year within five years, and would result in combined GDP gains of about $180 billion for the U.S. economy.

According to Bloomberg news, there are additional benefits that pruning regulatory trade barriers would provide. These benefits involve various restrictions in controversial areas such as health standards, national-security concerns, and consumer-protection issues. A study by ECORYS that was commissioned by the European Commission showed that eliminating just half of the so-called non-tariff barriers would increase GDP by 0.7 percent in the EU and by 0.3 percent in the United States.

EU-U.S. Trading Partnership
Although rapidly rising economies such as China have gained much attention in recent years, the United States and Europe remain the anchors of the global economy. Transatlantic trade generates $5 trillion a year in total commercial sales and employs 15 million workers. “It is the largest and wealthiest market in the world, accounting for three-quarters of global financial markets and over half of world trade and world GDP,” according to Johns Hopkins University Professor Daniel Hamilton and University of San Pablo (Madrid) Professor Pedro Schwartz, writing for New Direction — the Foundation for European Reform.

Hamilton and Schwartz go on to write that no other commercial artery is as integrated. They point out that every day approximately $1.7 billion in goods and services crosses the Atlantic, and this represents about one third of global trade in goods and 40 percent of global trade in services. To put it into greater perspective, Americans sold three times as many merchandise exports to Europe than to China and 15 times more than to India. The European Union sold the United States nearly twice as much in goods than it sold to China and seven times what it sold to India.

Beyond pure trade in goods and services, the United States and the EU are each other’s most important investment partners. The transatlantic flow of nearly $2.7 trillion far exceeds investment from other continents. In addition, U.S. and European companies account for 60 percent of the top R&D spending in the world.

Issues To Be Addressed

According to Simon Lester of the Cato Institute, the following are the key issues that the proposed free-trade agreement would address:

Tariffs: The goal would be to eliminate all duties on bilateral trade, with the joint objective to achieve — in a short timeframe — substantial elimination of all tariffs and phasing out all but the most sensitive tariffs.

Services:
The aim of the negotiations would be to create and extend liberalization in existing free-trade agreements (FTAs), while seeking to obtain new market access through addressing longstanding market-access barriers. Such a new agreement would include binding commitments to provide transparency, impartiality, and due process with regard to licensing and qualification requirements and procedures, as well as enhancing the regulatory principles included in current U.S.-EU FTAs. Government Procurement: The objective would be to enhance business opportunities through substantially improved access to government procurement opportunities at all levels of government.

Investment:
The goal would be to negotiate investment liberalization and protection provisions on the basis of the highest level of liberalization and protection that both sides have ever negotiated with one another.

Rules:
Included here would be (a) trade facilitation and customs; (b) trade-related aspects of competition and state-owned enterprises; (c) trade-related aspects of labor and environment; (d) horizontal provisions on small- and medium-sized enterprises; (e) strengthening of supply chains, and (f) access to raw materials and energy.

Intellectual Property:
Because both the U.S. and EU are committed to high levels of intellectual property protection, including enforcement, the objective of the trade agreement would be to foster extensive cooperation through the Transatlantic IPR [intellectual property rights] Working Group.

The Transatlantic IPR Working Group, established in 2005, provides coordination in three main areas: (1) engagement on IPR issues in third countries, (2) customs cooperation, and (3) public-private partnerships. Both sides already agree that it would not be feasible to seek to reconcile across-the-board differences.

Impact on U.S. Development
According to a January 2012 study by the Congressional Research Service, in 2010 the EU was the U.S.’ leading trade partner with $239.6 billion in exports and $319 billion in imports with a total trade turnover of $559. This represented 17.5 percent of U.S. world trade. Other leading trade partners were Canada, $527 billion in turnover, 16.5 percent; China, $457 billion in turnover, 14.3 percent; Mexico, $393 billion in turnover, 12.3 percent; and Japan, $181 billion in turnover, 5.6 percent.

That same report pointed out that there were a number of key industries that stood to gain, resulting in a 6 percent increase in annual exports that would add some $53 billion to the GDP. Primary industries to benefit include electrical goods, chemicals, pharmaceuticals, financial services, and insurance.

A 2009 study commissioned by the European Commission estimated that aligning and rationalizing non-tariff barriers would bring potential annual economic gains of $158 billion to the EU economies and increase exports to the United States by 2 percent. EU industries that stand to benefit include motor vehicles, chemicals, pharmaceuticals, food, and electrical goods.

Traditionally, the following categories of products were the leaders in exports to the EU (according to 2008 data): machinery, $54 billion; medical/optical, $53 billion; electrical machinery, $40 billion; pharmaceutical products, $29 billion; and aircraft, $29 billion. As for EU exports to the U.S., leading categories were machinery, $50 billion; vehicles, $38 billion; pharmaceutical products, $35 billion; minerals, $29 billion; and organic chemicals, $29 billion.

Since a U.S.-EU free-trade agreement would increase levels of trade in these key industries, it is logical to assume there would be a need for increased U.S. production capacity and plant expansion in these key industries. This would, in turn, result in millions of new jobs and a substantial expansion of GDP. Those areas where the key industries are clustered should expect to experience major increases in spending as plants and distribution centers are built and expanded to absorb the estimated $53 billion increase in GDP that is projected to result from the trade deal.

Other Major Aspects
Another major aspect of U.S.-EU trade is agriculture. U.S. exports of agricultural products to EU countries totaled $8.8 billion in 2008. The EU countries together rank fifth as an agricultural export market for the United States. The U.S. imported $15.5 billion in agricultural products from EU countries in 2008.

In services, U.S. exports of commercial services (excluding military and government) to the EU were $179 billion in 2007, up 19.7 percent from 2006 and up 221 percent since 1994. Sales of services in the EU by majority U.S.-owned affiliates were $402 billion in 2006, while sales of services in the United States by majority EU-owned firms totaled $336 billion. Finally, U.S. and EU investors owned roughly $2.7 trillion in direct investments in each other’s economy in 2007. U.S. foreign direct investment (FDI) in the EU totaled $1.4 trillion in 2007, a 15.9 percent increase over 2006; and EU FDI in the United States was $1.3 trillion in 2007, an 11.6 percent increase over 2006. (All data is latest available.)
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