Tuesday, April 9, 2013

Transatlantic Trade and Investment Partnership: Reshuffling Trade Talks

For years, I've thought about international trade agreements mainly in terms of how high-income countries relate to lower-income countries: for example, would the high-income countries be willing to reduce their support for domestic farmers in exchange for greater intellectual property protection for for their exports? Such issues seem to have stalled the World Trade Organization "Doha round" talks, which started back in 2001 and have not yet found a way to reorient themselves toward an agreement. In the meantime, countries around the world have been moving ahead with regional trade agreements.

Nonetheless, I was surprised when President Obama and representatives of the European Union announced in February that they planned to start negotiations on a Transatlantic Trade and Investment Partnership."  My presumption was that such talks wouldn't offer much in the way of gains, because trade barriers were already low between these economies. Jeffrey J. Schott and Cathleen Cimino offer a useful overview of the issues in "Crafting a Transatlantic Trade and Investment Partnership: What Can Be Done," written as Policy Brief PB13-8 for the Peterson Institute for International Economics.  My own reading of their argument is that the gains from reducing trade barriers between the U.S. and the EU are likely to be perceptible, but low. However, the talks may behave a greater effect if they can kick-start the Doha round of trade talks. And the outcome may ultimately turn on trade agreements already in place with South Korea!

Basic facts first: In recent years, the U.S. has sent 21-25% of its exports to the EU, and received 19-21% of its imports from the EU. The U.S. runs trade deficits with the EU, but they are relatively small is size: for example, just $20 billion in 2009, and up to about $70 billion in 2012. About half of the stock of all U.S. foreign direct investment is in the EU; just over 60% of the stock of all EU foreign direct investment is in the United States. Given this fairly high level of economic interconnectedness, how much more is possible?

Many of the remaining issues seem important to those in certain industries, but not important overall.
For example, in the last couple of years there have been ongoing negotiations between the U.S. and the EU in which the U.S. had three main requests: "approving lactic acid as a pathogen reduction treatment for processing beef,"  "amending regulations for determining the disease status of US hogs exported for breeding," and "conditions for the use of tallow or animal fat in the production of EU biofuels."  "On the European side, the main demands involved regulations designed to (1) open the US market for European beef cleared of “mad cow” disease, (2) facilitate the import of apples and
pears, which are currently prohibited due to the lack of official pest-free status, and (3) apply “regionalization” to animal and plant disease determinations, which would allow the continuation
of overall EU agricultural exports to the United States in the event exports from a certain region were restricted due to disease outbreak."

Perhaps fortunately, if these negotiations are to matter, larger issues are on the table, too. The starting point would be to phase out remaining tariffs. But other steps would include: rules for international investment; freeing up international bidding for government contracts; harmonizing a wide range of regulatory issues across finance, insurance, telecommunications, and other industries;  environmental protections; labor rules; customs procedures; competition  policy; and intellectual "property rights."

Schott and Cimino's discussion has a lot to say on all the details of a Transatlantic Trade and Investment Partnership in all of these areas, but it barely pauses to mention a few estimates of how such an agreement would affect the U.S. economy. The general tone of these estimates is that removing tariff and nontariff barriers might increase trade flows between the regions by 10% or so, with a lot of that change occuring in service industries. Like most economists, I have a knee-jerk reflexive support of lower barriers to trade, but even for me, this sort of change does not elevate my pulse rate.

More intriguing is this suggestion from Schott and Cimino: "A successful effort to resolve disagreements across the Atlantic could become a template for the stalled global trade talks in several difficult areas, from agriculture to cross-border rules on services, investment, and regulations." For example, if the U.S. and the EU can free up trade in their agricultural sectors, this might create some movement in the Doha round trade talks. If the U.S. and EU can agree on how to address regulatory and environmental and intellectual property issues with each other,  perhaps it will create some flexibility for them to make agreements in these areas in the multilateral trade talks. This approach certainly has enough plausibility to be worth exploring. At a minimum, if the U.S. and the EU can't agree with each other on these sorts of issues, it certainly doesn't bode well for worldwide trade agreements.

 Oddly enough, the proposed Transatlantic Trade and Investment Partnership between the U.S. and the EU could turn on trade agreements with South Korea. Both the U.S. and the EU have detailed and extensive free trade agreements with South Korea that address many of these issues. Thus, Schott and Cimino explain that U.S. and the EU could essentially work on consolidating their already-approved trade agreements with South Korea--and use the result as a bridge toward their own agreement. When the U.S. and EU are negotiating trade agreements based on pre-existing agreements with South Korea, we have clearly entered the 21st century globalized world economy!