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What's the Trade Deal?

Irwin M. Stelzer

You probably know what NAFTA is—the North American Free Trade Agreement that reduced trade barriers between the U.S., Mexico and Canada. You might even know that TTIP is the acronym for Trans-Atlantic Trade and Investment Partnership, a deal that would remove some of the non-tariff barriers to trade (NTBs: tariffs are already low) and investment between the U.S. and the EU. It is less likely that you recall that TPP is the Trans-Pacific Partnership, about to enter the 19th round of negotiations, and even less likely that you have heard of CAFTA-DR, the free trade deal between U.S., on the one side, and Central American countries and the Dominican Republic on the other hand. And if you have heard of AGOA, the trade pact between America and the sub-Saharan African countries, due to expire in 2015 unless Congress responds favorably to President Obama’s request to renew it now, you are a first class trade-deal junkie.

The most consequential of this alphabet soup of trade deals is that between the world’s two largest markets, the U.S. and the EU, which between them account for almost half of world output and one-third of global trade. For a brief period it seemed as if the professed horror of EU, German, French and other officials to our government’s spying on them—the Europeans were shocked, shocked to find out that allies spy on allies—might derail the TTIP negotiations. But the perceived benefits of a deal overwhelmed the Europeans’ feigned surprise and outrage at Edward Snowden’s revelations of American spying. Negotiations are progressing.

I start with a warning about those perceived benefits. These estimates are somewhere between informed guesses by economists, wishful thinking by free-trade advocates, and gossamer creations by politicians. The most sensible European economist from whom I have sought guidance says that his modest hope is that his estimates have the correct sign—there are net positive benefits. In private, he shies away from estimates of the magnitude.

Officials at the EU, revealing an awe-inspiring faith in the precision of their forecasts, estimate that a partial but attainable agreement would do more for Europe than for the U.S.—EU GDP up by 0.5 percent, our GDP up by 0.4 percent. But two other studies claim the U.S. would be the biggest winner. The Munich-based Ifo Institute, a prominent German think tank, estimates that a transatlantic agreement would, in the long run, raise real incomes per capita in the U.S. by 13.4 percent, and in the EU by only 5 percent, in part by diverting some intra-European to transatlantic trade. And the London-based Centre for Economic Policy Research (CEPR), puts the annual increase in disposable income at about 545 ($700) for a European family of four, and $840 for a comparable American family. The fact that America gains more than Europe in what is a win-win situation, “heighten[s] European scepticism … at the start of the negotiations” reports the Financial Times. That will come as a surprise only to those unfamiliar with the EU bureaucracy’s unwillingness to concede that the Anglo-American economic model, which they despise as “the law of the jungle,” just might be performing better than the tightly regulated EU version.

It is a long way from where the negotiations now stand to those benefits, whatever their size. The biggest plus for the President’s negotiators is that they can tell the trade unions, liberal Democrats’ most potent supporters and usually skeptical of freer trade, that this would be the first trade deal with a region that has higher labor and energy costs than the United States, and is therefore unlikely to cost jobs, and might actually create some. 

But the biggest barrier to a U.S. sign-on is the President’s demand that any agreement exclude the financial sector. Banks generally favor freer trade, but their special enthusiasm for this deal stems from its promise of harmonizing the regulations under which they do business in the U.S. and the EU. It is precisely that prospect that arouses the Obama’s suspicion: he fears harmonization would allow backdoor repeal of portions of the Dodd-Frank law that Democrats see as necessary to prevent a repeat of the post-Lehman Brothers turmoil in financial markets. Bankers’ enthusiasm for regulatory harmonization might wane if they use their summer vacations to consider whether the application to them of EU restrictions on bankers’ bonuses might make the price of mansion rentals in the Hamptons next summer a bit beyond their reach.

Bankers are not alone in seeing themselves as winners. Auto manufacturers would benefit significantly from the increased economies of scale that would result from agreement to eliminate NTBs that are the equivalent of a 26 percent tariff, according to data provided by Jeffrey Werner, a Daimler executive. A single set of safety standards, eliminating the need to build vehicles with flashing brake lights to meet EU requirements, and cars with steadily shining ones to meet requirements in this country, is one example of such saving. And then there are America’s farmers, who would in the aggregate benefit from freer competition, but some of whom will resist the loss of their generous subsidies, and reside in states with important political clout—think Iowa, corn, and the first presidential primaries. Of course, it may never come to that, since agriculture is one of the land mines on which trade negotiators avoid stepping by leaving that sector out of many trade agreements. France’s politically potent high-cost farmers are not apt to extend President Hollander’s tenure at the Élysée Palace if he even considers reducing the protection to which they have come to feel entitled.

Two aspects of these regional agreements are not well understood. One is the belief by such as Pascal Lamy, the outgoing head of the World Trade Organization, that they reduce the chance of achieving a global agreement. Their proponents, he adds, have failed to consider how the transatlantic and transpacific agreements fit together. Lamy, of course, is mourning the failure of the Doha round of global trade-opening negotiations.

The second is the effect of a successful conclusion of these regional deals, especially TTIP, on China, which will find itself encircled by trade blocs with substantial negotiating power. This “overbalance of power,” would attract China, which is launched on a major restructuring of its economy, to the “economic core” created by an EU-U.S. trade area and will “resuscitate the West in its dealings with the rest of the world,” writes Richard Rosecrance, an adjunct professor at Harvard’s Kennedy School of Government. That would dwarf many of the merely economic benefits of a TTIP.

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