The confirmation of Michael Froman as the US Trade Representative is a fitting moment to highlight the many opportunities that a free-trade agreement between the European Union and the United States would offer Europe, America, and the world.
Today’s three-tier global economy – 6% growth in emerging markets, 2% growth in the US, and no growth in Europe – shows ominous signs of paralysis and nationalistic unilateralism. Many see currency wars looming.
In such an economically insecure global environment, riddled with protectionist booby traps, a free-trade pact between the world’s two largest trading blocs, accounting for roughly 40% of global GDP, has never been more important. Historically, free trade and economic growth have gone together, as have protectionism and stagnation, and deeper trade integration of the US and EU economies would strengthen growth on both sides of the Atlantic.
The US economy’s projected 2% growth this year, despite a 1.8%-of-GDP cut in government spending, implies real private-sector growth of 3.8%. Although both the Federal Reserve and the European Central Bank have actively intervened to boost economic recovery, the results could not be more different.
In the US, the banking crisis was tackled rapidly and in a sustainable manner, while Europe is still going from one bailout to the next. Moreover, America’s stimulus program obviously worked (notwithstanding criticism from the left for being too small, and attacks from the right for being too large). Another contributing factor may be a basic difference in mentality: many Europeans tend to over-emphasize risk when assessing opportunities.
In any case, America is the first country in the recession-stricken part of the global economy where public stimulus has led to enough private investment and growth that fiscal consolidation has become possible. The more America and the EU grow together, the more the EU will benefit from the US recovery.
Demand for European goods will increase, and the EU’s member states can – and should – align their economies with US growth. History suggests that the hope for a self-sustained recovery in Europe might well prove deceptive; almost always, the European economic cycle has followed and reinforced that of the US. Today, for example, a prolonged recession in Europe is, alongside budget cuts, generally seen as posing the greatest risk to a sustained US recovery.
Labor costs in the US industrial sector are currently 25% lower than the European average. Even more significant, however, are the differences in energy costs, which are now up to 50% lower in the US – a gap that is likely to widen further as America’s shale-gas revolution continues.
This has led energy-intensive European industries – including producers of glass, steel, chemicals, and pharmaceuticals – to invest heavily in the US. Often, they manufacture high-quality upstream products, which are then processed further in Europe. The Austrian steel producer Voestalpine AG, for example, will start producing steel pellets in the southern US that will then be upgraded to high-quality alloys in Austria.
The combination of lower production costs in the US and Europe’s world-class finishing capabilities is a recipe for first-rate products at competitive prices. In this way, European investment is contributing to the re-industrialization of the US while simultaneously ensuring high-quality European jobs.
But Europe must do more to reinvigorate its own manufacturing sector. The last attempt to create an EU-US free-trade zone, under President Bill Clinton, failed because of the EU’s rigid, antiquated agricultural policy. A new effort would help Europe to replace its agricultural policy with a research-and-development policy aimed at boosting industrial competitiveness.
Despite all the lip service paid at multilateral summits to policy coordination, imbalances within the global economy are fueling a rise in tensions. At a time when many are seeking salvation in nationalism, an EU-US free-trade zone would be a powerful symbol of cooperation in overcoming global challenges.
The increasing economic weight of Asia is also a geopolitical game-changer. China’s massive arms build-up shows that economic power without military power is only a temporary phenomenon. So the focus in world politics is shifting from the Atlantic to the Pacific.
Europe should know where it belongs. An EU-US free-trade zone would strengthen transatlantic political bonds and effectively refute the frequent lament that America has lost interest in Europe.
In his second inaugural address, President Barack Obama called an EU-US free-trade zone a core project of his second term. Secretary of State John Kerry repeated this during his visit to Germany this spring. Now it is up to export-oriented EU countries like Germany, the Netherlands, Sweden, and Austria to press for action on the American offer of negotiations.
Europe has engaged in navel-gazing for long enough. Its malaise has raised questions about whether its democratic capitalism will survive the economic challenge posed by authoritarian and quasi-authoritarian regimes.
I, for one, prefer making political decisions to wallowing in doubt and self-pity. A transatlantic trade pact would align both economies with the fundamental interests of the West.
Copyright Project Syndicate.
For additional reading on this topic please see:
New Free Trade Agreements: A Cure for the Crisis?
The EU–US Free Trade Agreement
The Transatlantic Free Trade Agreement: Think of the Consequences!