Freeing up transatlantic trade

Last week European leaders endorsed the launch of negotiations between the EU and the US over a bilateral trade agreement. Leaders said that they reiterated ”support for a comprehensive trade agreement which should pay particular attention to ways to achieve greater transatlantic regulatory convergence.” And yesterday President Obama gave the US endorsement for the talks in his State of the Union speech. President Obama said: “And tonight, I’m announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union...”

This is good news. A transatlantic agreement freeing up trade between the EU and US can give a significant contribution to economic growth on both sides. It can also establish a good framework for incentivising trade liberalisation by other countries, provided that a new transatlantic agreement will be open for other countries that wish to join on equal terms and that the results will support rather than thwart ambitions by other countries to reform non-tariff barriers and regulations to be compatible with transatlantic ambitions.

Yet it is also a trade agreement that will face serious obstacles – political and technical obstacles. Here are a couple of random comments about these obstacles – and how to tackle them.

First, ambition sometimes bites the nails of success. Or to put it differently: too grand ambitions will erode the chances of reaching an agreement. Negotiations should aim for an ambitious agreement, and it is important that the EU and the US move out of the depressing format of negotiations in the Transatlantic Economic Council, which clearly suffered from being to narrow and lacking context. But the point now is that too many of those offering sundry views about a transatlantic FTA have unrealistic ideas about what can be achieved. Some talk about a “transatlantic single market”, which clearly is beyond reach. There is not a complete single market in the EU – and many sectors in the US are fragmented by regulations by US states. Others take aim for regulatory harmonization of a kind that simply is impossible. There are plenty of regulations on both sides that will be too difficult to address in trade negotiations, and there is no point spending time on them.

An ambitious agreement would eliminate close to all tariffs, foster a good number of mutual recognition agreements and more generally converge (but not harmonize) regulations in many sectors, reduce direct market access restrictions in most service sectors, improve rules on subsidies and state-owned enterprises, and establish a framework for progressive improvements of the agreement.

Second, it will prove a challenge to get independent authorities in the US and member states authorities in the EU to sign up to necessary MRAs and regulatory convergence. Pressure will in particular have to come from business associations and individual companies that today suffer from regulatory divergence. A good number of business associations have already stated their preferences for the negotiations, but I think they will have to go a step further and actually start to flesh out actual agreements. In other words, negotiations on regulatory convergence should initially be privatised. Sectoral associations on both sides should be tasked to negotiate the actual agreement. It is an exaggeration to say they should negotiate the agreement – in many sectors, business associations on both sides are made up of the same companies. Those companies that are big in the EU in one sectors are usually also the ones that are big in the United States. The problem for them is not that they have diverging views about what should be accomplished in a trade agreement. Nor is the problem that they prefer regulatory divergence as a means to protect themselves against foreign competition (in some sectors, that is the case, but not in many). A bigger problem is often that regulatory divergence protects regulators, and that they are unwilling to change even the most silly type of regulatory differences because that would hurt their authority.

Third, there are two things that are important with the regulatory negotiations. The first is to reduce the levels of non-tariff barriers and regulatory difference in services sectors. The emphasis is on reducing them, not eliminating them. The size of an NTB is often constituted by many different obstacles, and all of them are not very important. For some sectors, it does not make sense to aim for elimination of an NTB – perhaps not even to go for a really serious reduction. The important thing may rather be to just take away the most egregious parts. This points to the need to approach negotiations in a pragmatic way, looking at the actual details rather than using formulae or aggregated notions.

The second part is to set in motion processes of deregulations rather than taking away the differences between regulations. There are on both sides plenty of silly regulations that just should be eliminated. Excessive regulations in the past years have amplified that problem. They make up a good part of the aggregate levels of NTBs, but the main economic gains will come from eliminating them rather than just reducing the difference between them in the EU and the US.

Lastly, and following on the third point, both sides are entering the talks with deflated aspirations about deregulations and economic reform. The expectation is rather than gains will come without any serious efforts to reform the economies on both sides. If that will be the spirit of the negotiations, leaders will waste an opportunity to boost economic growth and give new energy to the agenda for global trade liberalisation.