Friday, October 19, 2012

US/EU Trade Deal?

. Friday, October 19, 2012

The news that the US and EU will begin negotiating a bilateral trade treaty next year is welcome to me. This could be a big deal. For all the talk of China and emerging markets the US and EU are still the most important parts of the global economy:

EU-U.S. commercial links are unrivalled. Transatlantic trade in goods and services is worth $700 billion a year.

Total U.S. annual investment in the European Union is higher than in all of Asia, while EU investment in the United States far outstrips EU investment in India and China combined.
Some, like Jagdish Bhagwati, decry the proliferation of bilateral trade deals, believing that they pull momentum from the WTO and therefore limit the possibilities for widespread trade liberalization. This may or may not be true. What is true is that the Doha round of WTO talks is all but dead, as the politics remains intractable. If there are tangible gains to be found in other forms of liberalization then there is a compelling case to take them. A US/EU deal has the potential to have a big effect. It appears that the focus of the US/EU talks will mostly revolve around regulatory issues:
Businesses on both sides would like an agreement in which a car tested for safety in the United States would not have to be tested again in Europe, and a drug deemed safe by Brussels would not have to be approved as well by the U.S. government.

Small companies who make household appliances, lighting and wiring equipment say prohibitive costs of certifying products for different requirements in Europe and the United States make it impossible currently to export, according to a public consultation by Brussels-based lobby group Business Europe.
These types of restrictions make little sense on welfare grounds, and lifting them will almost surely have a positive effect on efficiency. Also true to form is that lifting agricultural restrictions is off the table:
But both sides appear likely to leave much of the highly sensitive agricultural sector out of the agreement altogether, diplomats say. Washington maintains a 15-year-old ban on EU beef imports imposed because of American concerns about mad-cow disease. The European Union says the ban breaks World Trade Organisation rules.

The United States, in turn, faces prohibitively high tariffs for its beef and pork products, running into Europe's complex definitions of high-quality meat.

Genetically engineered foods are also contentious, with the United States in favor of developing the industry but with the European Union against. "They will not be part of the deal," said one EU diplomat in Brussels.

It's worth remembering that the GATT -- the precursor to the WTO -- only had 23 members at first. These members were predominately the later EU members (and the remnants of their empires) and the US*. The WTO now has 157 members, with a wide range of conflicting interests, plus a rule of unanimity. That makes it very difficult to get a comprehensive deal passed.

So in a sense a bilateral US/EU deal is a step backwards. It could also be a precursor to future action. If the US/EU successfully pass a bilateral deal it might provide an impetus for their antagonists in the WTO to make further concessions to get a multilateral deal through the WTO process rather than be locked out of trade arrangements. This deal is the US/EU exercising its outside option. Having good ones increases bargaining leverage. So Bhagwati could actually be wrong: bilateral trade deals could actually be a force for completion of WTO rounds.

This is less than certain of course, and perhaps this US/EU deal will either fall apart or be less than transformative. But it's at least a possibility that the conventional wisdom is wrong.

*The full list is Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, United Kingdom and the United States.

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