What’s the “Big Deal”? Potholes on the Road to an EU-US Bilateral Trade Agreement

By: Remi Moncel, Assistant Contributor

This is potentially a very big deal.”  That’s if you ask Michael Forman of the US National Security Council. President Obama set the wheels in motion for a trade agreement between the United States and the European Union when he endorsed the idea during his 2013 State of the Union Address. Some European leaders are equally enthusiastic.

The Stakes

The reason this would be a “big deal” is that the US and the EU are top trading partners and, taken together, they represent half of global economic output and one-third of world trade.

A March 2013 report for the European Commission estimates that a bilateral agreement could boost exports of EU goods and services by 6% and US ones by 8%. Economic gains for the two sides would depend on the scope of the deal, but they could reach as high as EUR 119 billion (USD 152bn) a year for the EU and EUR 95 billion (USD 121) a year for the US.

Considering today’s weak economic recovery and remaining fiscal instability, this is an attractive proposition for countries looking to create jobs and bring in more revenue without straining public finances.

The slow pace of the multilateral trade negotiations under the World Trade Organization also makes a bilateral pact attractive. Yet publicly, the leaders on both sides state that they want to reach a bilateral deal in order to reinvigorate, rather than bypass, the multilateral talks. In any case, an agreement between the two blocks could de facto set, or at least influence, new global production and trade standards.

The Blueprint

We are still far from a concrete deal. Negotiations would not conclude until at least late 2014. Still, we have hints of what a future agreement might include.

The Transatlantic Economic Council, a political body aimed at promoting economic cooperation between the EU and the US, released a report in early 2013 recommending the adoption of a bilateral trade agreement. Although the final deal may depart from these recommendations, the report lays out a roadmap that spans duties, regulatory harmonization, intellectual property and even public subsidies of state-owned enterprises.

EU Trade Commissioner Karel De Gucht expressed a desire to see product tariffs, currently at four percent on average, drop to zero down the line across a range of sectors. As an example, removing tariffs and harmonizing safety standards could boost exports of European cars to the US by 149 percent.

Mr. De Gucht suggested that the partners could reach a “comprehensive agreement,” or alternatively strike a more limited “living agreement” that would continue to develop over time.

There are indications that the pact would not include financial regulations, which are the subject of discussions under other international fora. But it would include market access in the financial sector.

The Challenges

The US and the EU have tried this before. The pair has been talking of a trade pact since the 1990s. But discussions broke down over agricultural issues later in the decade.

This time too, some possible roadblocks loom. The following issues are illustrative:

  • Politics: While both sides generally view trade as a path to domestic economic growth, there is some resistance. One concern is that increased trade with the other side will outsource rather than create jobs. Some Europeans also worry that a bilateral pact might force the EU to water down its own products regulations. On the American side, the President will aim to strike a deal that benefits not just major US companies, but also small and medium enterprises.
  • Public procurement: The Europeans are keen on gaining access to the public markets in the US. Today, many US public procurement contracts contain “Buy American” clauses, which restrict the ability of foreign providers to bid on those markets.
  • Public subsidies: This issue plays out most visibly in two areas. The first is aviation, where Boeing and Airbus have had a long running dispute over the public subsidies they receive from national governments. The two manufacturers have turned to the WTO resolve their dispute. The second area is agriculture; however contentious farm subsidies will likely not be part of the discussion.
  • Agriculture: Although agricultural subsidies appear off the table, farming and food regulations will be hotly debated. The Europeans have long been wary of genetically modified organisms (GMOs). They will face pressure from the Americans to let US crops and foodstuffs that contain GMOs into the EU market, where regulations are tighter. The same is true of poultry and meat treated with chlorine washes and growth hormones.
  • Privacy: With the rise of online service providers and social media, privacy has become a growing source of contention between the two partners. In the US, companies like Facebook and Google face a combination of state and federal regulations, and there is greater reliance on the market and the consumer to restrain excessive practices. By contrast, the EU has been enacting continent-wide privacy restrictions and is scrutinizing the practices of major online players.

In sum, real challenges stand in the way of a bilateral trade deal between the US and the EU. They have doomed past attempts at reaching an agreement, but things may be different this time. The stakes are high, particularly in the current economic and fiscal climate, and the leaders on both sides are determined to find common ground.