March/ April 2013 A Tale of Two Trade Deals

Never mind Asia, time to pivot to Europe.

By Clyde Prestowitz

That entity would be the world’s biggest, richest economy. It would eliminate the structural impediments to U.S. exports in much of Asia, and bring most of the world economy under a true free trade standard. With this kind of a union there would be much less currency manipulation and much less (if any) need for “pivots” and more U.S. military in Asia. But, alas, Washington isn’t even thinking about anything like this, even though it would be a game-changing economic and geopolitical move.

So if the TPP looks like a lose-lose situation for the United States, what about a deal with Europe?

This notion was first voiced at a high level in 1995 when then Secretary of State Warren Christopher proposed a joint effort to better bridge the Atlantic. In November of that year, I was with 100 European and American CEOs when they met in Seville, Spain, and proposed a far-reaching agenda to increase trade and investment in the European and American markets. The following December, Washington and Brussels agreed to conduct a joint study on how to reduce tariff and non-tariff barriers. In a book at the time, I cited analysis by my own Economic Strategy Institute estimating that a TAFTA would boost U.S. GDP by 1.6 to 2.8 percent while raising EU GDP by 1 to 1.9 percent.

Nevertheless, objections were raised. Because it would be so large, some feared that a U.S.-EU deal might destroy the newly created WTO. Because the markets were already highly integrated, the likely gains from the deal might be small. A formal negotiation might actually worsen U.S.-EU relations by bringing contentious issues, like subsidies to our respective aircraft manufacturers, brutally to the fore. Some also said it would really be the rich, white guys ganging up against the rest of the world. So nothing happened. Eventually the WTO launched the aforementioned Doha Round, in which important parts of the rest of the world thumbed their noses at the European and American visions of free trade.

This experience is one reason why TAFTA deserves a second look, but there are also others. First is the need for growth in an age of high debt and austerity. Neither the U.S. nor Europe is politically prepared to stimulate its economy through any significant increase in deficit spending. That means growth must come from some other source, and the efficiencies that would come from further integration of European and American economies are a plausible answer.

Labor unions in the EU are strong and wages are high, so there will be no race to the bottom. And the EU and the U.S. largely share a commitment to free markets, free trade, and democracy. Much of what has gone wrong with the WTO derives from systemic conflicts between the U.S. and the EU on the one side and the more interventionist and authoritarian political economies of the rest of the world on the other.

The biggest economic gain from TAFTA would be from harmonizing regulation. Inconsistencies in regulation raise the costs of transatlantic trade in automobiles, for example, by 27 percent, and by 6.5 percent in the electronics sector alone. The United States and Europe both have safe headlights, for instance, but EU cars exported to America must have different headlights than those sold in Europe and vice versa. That non-tariff barrier inhibits exports while raising costs by forcing producers to keep extra stocks of different headlights. The same holds true for electronics and most other products. Mutual recognition of essentially equivalent standards and removal of similar non-tariff barriers would boost U.S. GDP by 1 to 3 percent ($150 billion to $450 billion), according to a 2005 study by the Organisation for Economic Co-operation and Development.

Beyond this, there are also significant economic gains to be had by eliminating non-tariff barriers to trade in services. More than 70 percent of the GDP in both markets derives from provision of services. Yet service trade is highly restricted by non-tariff barriers, such as differing rules and conflicting standards that bar the integration of cell phone service in the U.S. and Europe.

Meanwhile, although tariffs between the two economies are already low, there would also be significant immediate economic gains from tariff elimination. These potential gains range from 1 to 1.3 percent of GDP ($135 billion to $181 billion) for the United States. The European Commission has estimated that a comprehensive deal would result in a 50 percent increase in overall transatlantic trade. Putting all this together suggests that TAFTA would add 2 to 4 percent to U.S. GDP.

There is also a strong geopolitical case for TAFTA. For one, it would help contain the centrifugal forces in the EU that are gaining strength. British Prime Minister David Cameron wants to renegotiate the UK’s membership and submit the results to a referendum. This creates a real threat of a UK exit from the EU that might take others along. TAFTA would provide glue to hold Europe together, something that is a major long-term U.S. geopolitical and economic objective for the very good reason that the EU is not only a zone of peace and democracy but also America’s major partner in dealing with Russia, the Middle East, and Africa. It is also, of course, America’s biggest economic partner by far.

To those who view Europe as a demographic and economic backwater compared to Asia, it may be surprising to know the facts. Yes, Europe faces an aging population. But birth rates have plunged far deeper and faster in East Asia than in Europe, and as a result East Asia’s population is aging far more quickly. Fully 30 percent of Japan’s population will be over sixty-five by 2030, and its working-age population has been shrinking since the mid-1990s. China’s workforce is shrinking now too, thanks to its one-child-one-family norm. Demographers expect China to soon experience hyper-aging unlike anything in the cards for Europe. South Korea, Singapore, and Taiwan are already experiencing the same fate. The United Nations projects that by 2030, France and South Korea will each have the same proportion of elders in their population.

Europe also remains, despite its slow recovery from the Great Recession, the world’s largest economy and a powerhouse that is vital to the United States. Americans sell three times more merchandise exports to Europe than to China, while the EU sells the United States nearly twice the goods it sells China. Transatlantic trade generates $5 trillion in sales annually and employs fifteen million workers. It accounts for three-quarters of global financial markets and more than half of world trade. No other commercial artery is as integrated. Roughly $1.7 billion in goods and services cross the Atlantic daily, equaling one-third of total global trade in goods and more than 40 percent in services.

Finally, far from destroying the prospects for a global economy based on true free trade, TAFTA may be the only thing that can get China and other mercantilist nations on board. Given that the U.S.-EU economies constitute more than half of the global economy, TAFTA would tend to set global standards, and along lines affirming the fundamental precepts of free trade.

Clyde Prestowitz is the founder and president of the Economic Strategy Institute. He formerly served as counselor to the secretary of commerce in the Reagan administration, as vice chairman of President Bill Clinton’s Commission on Trade and Investment in the Asia-Pacific Region, and on the Advisory Board of the ExIm Bank. His most recent book is The Betrayal of American Prosperity.


  • Jim Eckland on April 10, 2013 10:31 PM:

    These two deals will only hurt America's economy and jobs. These "Partnerships" are more about "Regional Government" than trade and should be avoided !!

  • clarence swinney on April 30, 2013 5:05 PM:

    TAX CUT FOR 2%-----

    A typical Republican contribution to Wall Street Ultra Rich
    Once known as CCP (country club party) now known as WSA party (wall street of america)

    2% get 70 Billion per year from the tax cut
    2%--get 30% of our Total Income
    2%--took 75% of total income gain from 2001-2007
    2% wealth--own about 50% of total financial wealth
    2% are among the Forbes richest 400.
    2% are among Fortune highest 400 incomes
    2% pay 17% in income taxes
    2% own major corporations that pay 16% income taxes
    2% that 1980-2009 got 281% increase in Income while middle 20% got 25% or less than inflation for a net loss. 3 million investors/gamblers versus 120 million workers

    What did we get from Bush 1700B Tax Cuts from which 2.7% got four times as much as bottom 80%.
    2% that in 8 under Bush sent 2,300,000 jobs to just China.
    2% that in 8 under Bush created 31,000 net new jobs or worst since Hoover.

    Tell the people the Republicans are the PARTY OF WALL STREET with a goal of eliminating the MIDDLE CLASS. Since 1980 their policies have made America number ONE in major nations in INEQUALITY of Income-Wealth. Declining Ame