World’s biggest free trade pact planned for EU and US

Preliminary talks are underway between US and European officials to create the world’s largest free trade pact. Signaling a dramatic change of direction after years of conflict over trade issues, the aim is to boost both nations’ struggling economies.

To be successful, significant obstacles need to be overcome, including wide differences in agriculture, food safety and climate change legislation. Nonetheless, the pact has the support of both EU and U.S. officials and also of the main trade union in the US, which normally objects to US trade pacts.

Secretary of State Hillary Rodham Clinton talked about the Obama administration’s interest in the pact during a speech in November on trans-Atlantic relations. She said: “If we get this right, an agreement that opens markets and liberalises trade would shore up our global competitiveness for the next century, creating jobs and generating hundreds of billions of dollars for our economies.”

EU Commissioner for Trade Karel De Gucht is just one of a group of EU officials who have talked of their support. A working group has been appointed to study the issue, the results of which should be available in the the next few weeks. If it makes a positive recommendation, negotiations could start early next year.

Negotiations will be tricky

The US interest in a pact is an unusual one. The politically fraught debate over the NAFTA agreement with Mexico and Canada in 1991 has meant that trade pacts have been difficult to negotiate in the US due to opposition from workers’ groups. However, smaller deals with individual countries, including Peru and South Korea, have been approved.

Disagreements between the US and the EU have also in part been responsible for a stall in further reductions in tariffs between the more than 150 countries in the World Trade Organisation in recent years.

The US and the EU are currently caught in a spat over the EU’s carbon trading scheme that could penalise airlines which fail to meet EU standards. There is also conflict over intellectual property enforcement and food safety issues. Other challengers to negotiators include agricultural concerns, such as EU restrictions on the use of pesticides and genetically modified foods.

Tyson Barker, who directs trans-Atlantic relations at the Washington office of Germany’s Bertelsmann foundation, said the agricultural issues will be of particular concern in France. He said: “This will not be smooth sailing in Europe, by any stretch of the imagination.”

In the US, the negotiations do appear to have the backing of both big business and trade organisations. Unions have previously opposed US free trade deals with developing countries, fearing that American workers would lose out to lower wages due to inferior environmental and labour standards in those countries. But the umbrella workers organisation the AFL-CIO does not see that as a concern in any deal made with the EU, where social welfare and environmental standards exceed those in the U.S.

Sizeable economic benefits for both sides

Tariffs between the EU and the US average around 5 per cent to 7 per cent, which is already low. But because of the sheer size of the markets, even marginal reductions could have a big economic impact. A study by the European Center for International Political Economy estimated that eliminating tariffs could boost US exports to the EU by up to 17 per cent and EU exports in the other direction by 18 per cent.

The chamber says a deal could add $180 billion to the US and EU economies over five years, with the US seeing larger gains than the EU. A potential deal could also ease trade by streamlining regulations and expanding the mutual recognition of product standards that the two sides use.

Peter Chase, the chamber’s vice-president for Europe, said both sides have previously negotiated deals, but with much smaller economies. They had therefore become used to negotiating from a strong position. In this case, they will be roughly equals.

Jeffrey Schott, a fellow at the Peterson Institute for International Economics, sees a potential roadmap in trade deals already in place with South Korea. He said the EU used the US deal with Seoul as a guide for its own deal.