US, EU gang up for trade deal

A cartoon in the Economist shows a room titled ‘The Doha Round’ full of people representing different nations screaming at each other and a tired (frustrated?) looking US representative being asked by the European Union (EU) representative if they should leave the room, perhaps to have separate talks.

That probably captures what is behind the US initiative, made public by President Obama during his State of the Union address last month, of a EU/US round of talks on a free trade deal.

Titled as the ‘Transatlantic Trade and Investment Partnership’ (TTIP), this has been talked about for some time now, but the mention by the President not only suggests that it is moving to the front burner, but that it is an opportune time for both parties to be talking seriously about it.

Economic recovery in the US has been struggling. The talks between the two political parties on a budget cutting deal has been going nowhere, resulting in forced $85 billion (about Rs 4,50,500 crore) of spending cuts that the president fears would further dampen recovery.

Recovery is not even a term the EU uses. The Euro Zone, a 17 nation subset of the EU, saw its economy shrink by an annualised rate of 2.3 per cent during the last quarter. Italy and Spain, in particular, saw drops of 3.7 per cent and 2.8 per cent, respectively.

In such a context, a trade deal between the US and EU could provide a boost of confidence for their economies. The EU Commission estimates that the free trade deal could add about 0.5 per cent to Europe’s GDP.

SORTING OUT IRRITANTS

That would be good news for the rest of the world too, for these two account for about half of the global economy, and their trade already accounts for about one-third of all trade in goods and services.

But before we cheer both parties on, some reflection would be in order. I recall editorials in many US newspapers when the EU was being strengthened and the Euro Zone being built, on whether ‘fortress Europe’ was emerging that would be closed to US businesses. Those fears did not come to pass but the EU-US free trade deal may well create a fortress that the rest of the world will find difficult to penetrate.

The average tariffs between the EU and US are already pretty low under 3 per cent and while that could drop further, that may not be the key part of the deal.

What the deal is expected to do is to iron out various regulations and standards that make trade difficult. These include EU’s concerns about genetically modified products from the US where many biotech plant strains have been approved. Regulations on mutual fund products, car emissions and food safety issues have also been irritants in the transatlantic trade.

I don’t expect the metric system of weights and measures, which the US, a stand-out from the rest of the world, to adopt to be one of the issues to be resolved!

If and when the two arrive at mutually acceptable standards, these are most likely to be presented to the rest of the world as a template if they want to deal with a transatlantic fortress. At that time, the emerging economies that gang up to try to get subsidies in agriculture reduced in the US and EU will have even less negotiating power than at present.

EXPORT MARKETS IMPACT

A transatlantic fortress is not that far-fetched either. Recall the effort to create the Multilateral Agreement Investment (MAI)? In 1995, the rich man’s club, OECD, initiated this move.

One of the objectives of this deal was to ensure that investments in various countries were treated in a uniform manner and to build protections for multinational corporations. It remained under the covers till an NGO got wind of it and publicised it 1997.

Most developing countries saw it as a treaty that would be imposed on them without their input, and restrict their ability to regulate foreign investments. The hue and cry that followed led to the MAI effort being abandoned in 1998.

Let us cut to a recent tomato deal that the US entered into with Mexico, both members of a free trade area with Canada.

Bowing down to pressure from about 80 US growers, the deal sets a floor price on tomato imports to the US, to avoid anti-dumping complaints in the future.

The net effect is that the US consumer would see tomato prices at the store go up by 30-150 per cent for various varieties.

The message here seems to be that the US would work hard to protect its pressure groups in a trade deal. And when you read that the largest labour unions such as the AFL-CIO have been supportive of the TTIP, you can be sure there would be enough protections in it that would make labour and environmental issues a barrier to entry.

Newspapers reporting on the TTIP have already begun suggesting that it would give the US and EU a chance to shape global rules.

A new US-EU free trade deal need not necessarily harm the rest of the world, but it would definitely set standards that would become a base point for the rest of the world that would want to serve these markets.

This is especially true for big emerging markets like China, India and Brazil, for whom exports serves as a growth engine. That is enough reason for them to keep a wary eye out for what is going to happen with the TTIP.

(The author is professor of International Business and Strategic Management at Suffolk University, Boston, US. >blfeedback@thehindu.co.in )

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