Forget Asia – Time to Pivot to Europe

A United States-European Union free-trade proposal will be a big opportunity for the Obama administration. 

Don’t look now, but for all the buzz about the Obama administration’s “pivot” to Asia and the Trans-Pacific Partnership, momentum is building on both sides of the Atlantic for a U.S.-EU free trade agreement that could be at least as consequential in shaping the world order. In fact, considering the messy geopolitical landscape with few opportunities and no shortage of challenges, a successful new U.S.-EU accord could well end up as the signature foreign-policy achievement of Obama 2.0.

A U.S.-EU High Level Working Group is expected to issue a report in February calling for initiating talks on a trade and investment accord this spring. This may seem counter-intuitive: isn’t all the economic action in emerging economies, China, or the BRICs? Europe, in contrast, is engulfed in financial crisis. The continent’s future and currency, the Euro, seem in doubt. But Europe cannot be ignored. Today we are beginning to see signs of the EU financial situation stabilizing, with the first positive net inflows in three years, as investors are returning one hundred billion Euros to the Eurozone.

The sheer magnitude of U.S.-EU economic relations is eye-popping. Despite the recession plaguing the West, the U.S. and EU still account for about 50 percent of the world’s GDP and have more than $3 trillion in foreign direct investment in their respective economies. U.S.-EU trade in goods and services reached $636 billion in 2011, nearly 40 percent of the world total. Reinforcing the transatlantic economic relationship could give new impetus and focus to a sagging U.S.-EU relationship and enhance the global leverage of both actors. Call it the new Trans-Atlantic Partnership.

Hardly had the votes been counted last November when Europe’s top trade official renewed a longstanding call for a new trade agreement with the United States, a view strongly supported by key allies such as Germany’s chancellor Angela Merkel and UK prime minister David Cameron. The private sector on both sides of the Atlantic is no less enthusiastic. In a recent letter published in the Financial Times, a group of CEOs from Fortune 500 US and European firms stressed their enthusiasm for “a new and comprehensive deal to boost trade and investment flows across the Atlantic.” Reducing tariffs, regulatory barriers and opening new sectors to investment they argued, could boost U.S. and EU growth by as much as 1.5 to 2 percent a year, according to some studies.

Why now? At time when Washington and the EU’s twenty-seven member states are struggling to achieve growth and fiscal pressures make increased spending an improbable option, a trade accord could provide a stimulus at no cost to taxpayers. Such logic may also explain why the European Commission has given a green light to begin Japan-EU talks on an FTA. During a recent visit to Tokyo, senior Japanese officials stressed to me their bullishness on an EU accord, emphasizing that they sought close consultation with the United States as talks move forward. EU eagerness to pursue both accords may also reflect European concern at the proliferation of Asian FTAs and the U.S.-promoted Trans-Pacific Partnership that seeks to boost trade among APEC members.

Potential Obstacles

U.S. and EU trade tariffs are already low, averaging between 5 and 7 percent. However, a tariff-free accord would boost transatlantic commerce. But the larger issues are non-tariff, regulatory barriers: standards for testing, certification and licensing where the U.S. and EU diverge significantly. Unlike many previous free trade agreements such as NAFTA, where Congressional pressure to adopt U.S. labor and environmental standards has tended to be a sticking point, this time it’s likely to be EU environmental policies, particularly in regard to climate change, that will be tougher on the United States. Labor should not be an issue, as major unions such as the AFL-CIO appear to be supportive of a U.S.-EU trade accord.

There are some potential obstacles—mainly divergent regulatory approaches—that could well block a U.S.-EU trade accord. Martin Schulz, president of the European Parliament, was recently quoted in the Financial Times as saying, “We have differing takes on food safety, consumer protection, and environmental standards.”

Indeed. There have been some nasty disputes over phyto-sanitary standards (particularly in regard to U.S. beef). One macro-issue is the “precautionary principle,”which holds that if there is a risk of harm, the burden of proof is on the provider. This is a somewhat elastic concept: how certain is science? Is it 100 percent risk-free? One of the most the most dramatic divides is over genetically modified organisms (GMOs), which are increasingly used to enhance agriculture in the United States, China, India, Brazil and other countries. GMOs are viewed by many as an increasingly important part of the answer to meeting the challenge of feeding eight billion people by 2030 and nine billion by 2050. African farmers, who have large markets in Europe, have refrained from drought-resistant GMO crops for fear of not being able to export them.

Similarly, on climate change, the EU has adopted a host of policies to comply with the Kyoto Protocol, such as a cap-and-trade scheme for GHG emissions and a tariff on foreign airlines for GHG emissions.

Under strong protest from the United States—including legislation passed by Congress—the EU has suspended its effort to apply tariffs to foreign airlines. But is there room for compromise on GMO food? There are also divergent regulatory approaches to testing and licensing on chemicals, pharmaceuticals and several other categories of goods.

The idea of “mutual recognition” of regulatory standards is one considered way forward. Last spring the United States and EU did sign an agreement on this basis that facilitiates trade for thousands of “authorized traders.” But the gap on things like FDA approval standards for drugs and the EU’s precautionary principle may be a bit of a reach. More likely is a more modest version of mutual recognition: recognizing certified compliance with respective standards and regulations. While obviously not as sweeping or elegantly simple as full mutual recognition, such an approach would facilitate trade and lower transaction costs.

Global Impact

If there is sufficient political will on both sides of the Atlantic to reach a U.S.-EU trade and investment accord, the impact would have ripple effects well beyond a new impetus for a transatlantic relationship. An accord could shape new global standards in areas such as intellectual property and investment, as well as emerging new sectors such as industries based on nanotechnology, biotechnology, 3-D printing and electric vehicles.

At a moment when the Doha Global trade round is effectively dead, an agreement covering the world’s largest market and 40 percent of its trade could raise standards for other bilateral and regional trade accords, if not provide momentum for further liberalizing global trade and investment—one of the foundations of the global system. A U.S.-EU accord might, for example, give momentum to the Trans-Pacific Partnership.

At a time of austerity, when many doubt the future military capabilities of NATO allies as defense budgets shrink, a trade accord could reinforce the EU role as a geoeconomic power. Europe has played a critical role, for example in tightening sanctions on Iran well beyond anything the mullahs anticipated. Collaboration with the EU is also key to pressing China to adhere to WTO rules. Acting in economic concert could be a source of leverage for the transatlantic community at a historic moment when power is diffusing to emerging economies like China, India, Brazil and Turkey.

There are multiple benefits, both economic and geostrategic, to both partners of a U.S.-EU free trade agreement—or economic partnership, as it is likely to be known. Whether its promise can outweigh the differences that must be overcome may be a key political question for Obama’s second term.

Robert A. Manning is a Senior Fellow at the Atlantic Council. He previously served in the State Department as a senior advisor to the Assistant Secretary for East Asia and the Pacific (1989-93) and on the Secretary’s policy planning staff (2004-08).