A lowering of trade barriers between the two recession-hit regions could provide the necessary economic stimulus.

It has been five years since the European Union and India launched negotiations on a free trade agreement in goods, services and investment, and still a deal seems far away, with the two sides struggling to resolve a number of issues, including on investment in the retail and services sector. The repeated urgings of politicians on both sides for an agreement at the earliest possible date seem increasingly futile.

While focus on that deal may have waned — in the interim, the EU has already concluded a free trade agreement with South Korea and completed talks on one with Singapore likely to be signed this year — the prospect of another mega-trade deal is gaining prominence, this time with the US. Talk about an EU-US trade deal has been doing the rounds for several decades, though the focus of both sides on developing trade relations with Asia has meant it has been largely a back story.

However, over the past year, it has been picking up pace. Last year, an interim report by a US-EU High Level Working Group called for a “comprehensive” deal covering a wide range of issues — from the elimination of all duties on bilateral trade to improving the compatibility of regulations and standards and increasing access to government procurement opportunities.

The report was swiftly welcomed by the US government and European Commission, which described a potential FTA as a “bold initiative” to expand trade and investment and make a significant contribution to a strategy to strengthen growth and create jobs. A final report is expected later this month. British Prime Minister David Cameron has included the start of negotiations on a US-EU FTA on his list of priorities for Britain’s current Presidency of the G8, and despite his party’s increasingly Eurosceptic stance.

“This is long overdue. I think there is certainly enough political will to see this through,” says Sony Kapoor, managing director of European think tank Re-Define.

Indeed, given that an estimated €1.8 billion worth of goods and services are traded every day between the US and Europe, its rather surprising its taken so long to get to this point. “There was no progress because of the complexity of the issues and no strong political consensus on either side of the Atlantic to push things through,” says Fred Irwin, President of the American Chamber of Commerce in Germany.

MAJOR SPIN-OFFS

The stalling of the Doha Round negotiations, and the lack of other opportunities of quite the scale that a trans-Atlantic partnership would have, is increasing interest, particularly in Europe; Germany, the UK, Spain and Greece among the countries to have expressed their support for a deal.

The estimated economic boost to both sides from such a deal is significant, and even though existing tariffs are relatively low by international standards, the sheer volumes involved could provide a considerable boost to both economies. According to a paper by the European Centre for International Political Economy, the elimination of tariffs (currently in the region of 5 to 7 per cent) on goods and services could boost European GDP by an estimated $69 billion a year, and that of the US by up to $182 billion.

However, to many of its proponents, it is the other elements that the FTA could encompass, such as regulation, procurement, common standards and investment protection, where its true value would lie, providing a significant for both economies. “For example a pharmaceutical company that got approval for a product in Europe could automatically get it in the US — a huge cost reduction,” suggests Irwin, who likens the deal likely to emerge more to a “partnership” than a pure trade agreement.

The comprehensive nature of what is being pushed for is likely to slow things down, and could complicate things particularly from the US side. “Tariff elimination will be the least of the issues,” says Irwin, pointing to matters that continue to divide the two powers, such as a long-standing EU ban on US poultry (in the US it is treated with chlorides to reduce pathogens, which the EU frowns upon). “The Americans have shown less political will — they are willing to negotiate but have focused on the small details,” he says. Other matters such as rules governing the protection of investments, and environmental standards could prove divisive, argues Kapoor.

ROADBLOCKS TO DEAL

Differences exist between the two sides on a host of issues — from genetically modified food to restrictions on FDI in certain sensitive sectors. The difficulties of coordinating policies was recently highlighted by the controversial anti-piracy treaty, ACTA, which was rejected in the European Parliament, following vocal protests across the region.

It has been signed by the US, among other nations.

Late last year, a US coalition of 60 food and agricultural organisations expressed their concerns about the FTA, including about comments made in the EU Parliament about limits on the use of words such as “Parmesan” outside the area where the cheese is produced. “We cannot help but be sceptical that the EU is prepared to undertake a US-style comprehensive negotiation and to include the agricultural sector,” wrote the group in a note to US Trade Representative, Ron Kirk.

In Europe, for the moment, the reaction has been overwhelmingly positive, though concerns about the impact of increased competition on the region’s workforce could increasingly become an issue, as negotiations progress.

Perhaps, the most significant developments for such a deal emerging are the increasingly positive and interested tone with which the US administration seems to be approaching Europe. In November, Secretary of State Hillary Clinton acknowledged the existing differences on trade policy but called for more work. “If we get this right an agreement that opens markets and liberalises trade it would shore up our global competitiveness for the next century.”

The country’s eagerness to have an enduring and close relationship with Europe was highlighted last week, when the US assistant secretary for European Affairs Philip Gordon, in an interview with the Financial Times, expressed his nation’s concern about the British government’s increasingly anti-European and pro-referendum posturing, suggesting that the country was far eager to have a relationship with a Britain strongly involved in Europe, rather than one on its periphery.

Past periods of economic hardship have often been accompanied by protectionist steps by countries across the world — and this recent bout is no exception (a report by the European Commission published last May noted 123 trade restrictive measures introduced globally by its 31 main trading partners).

A comprehensive free trade agreement between the world’s two largest economies would not only provide the economic stimulus that both regions sorely need, but also send a message that there was at least one lesson the two regions at the heart of the crisis have taken heed of.

(This article was published on January 13, 2013)
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