The Trouble with TAFTA
During her January visit with President Bush, German Chancellor Angela Merkel made it clear that under her watch as the rotating president of the European Union she will work to mend relations between the U.S. and Europe that have been ailing since the Iraq War. Merkel's emphasis is on rejuvenating ties across the Atlantic through the creation of a "transatlantic market" that would tighten economic links in areas like intellectual property protection, investment and financial markets. In that way, the United States and EU could serve as forerunners to updated global rules.
What Merkel is proposing is not really new: since 1998 the "Transatlantic Economic Partnership" has set in motion bilateral talks to achieve similar goals, although success has been scant as differing U.S. and EU regulatory regimes have proved resistant to harmonization. These talks will and should go on. Perhaps with another big political push by Merkel and Bush the two sides will be able to overcome some of the political and cultural differences that have hindered progress.
But something much more ambitious is also in the air: the idea of a Transatlantic Free Trade Area (TAFTA) that would bind the United States and Europe in much the same that NAFTA brings together the United States, Canada and Mexico. A number of senior German officials from both Chancellor Merkel's Christian Democratic Union and her coalition partner, the Social Democrats, have expressed sympathy for a broader free-trade zone. In the United States, Senator Max Baucus (D-MT), the new chairman of the Senate Finance Committee has called for the negotiation of free trade in services between the United States and European Union. This would encompass the lion's share of a TAFTA, since industrial tariffs across the Atlantic are already low.
In the current political environment it is not hard to see how the all-encompassing TAFTA notion could gain traction. In both the United States and Europe, where fears about job losses and outsourcing are increasing, a U.S.-EU free trade zone could appeal to the public's anxieties about globalization. As the respected German daily Sueddeutsche Zeitung has put it, TAFTA could "very quickly demonstrate that [the United States and Europe] accept the challenge from Asia and that they will work together to combat the aspects of globalization that threaten Western prosperity and values."
In other words, TAFTA could be sold, both in America and Europe, as a way to maintain generous welfare programs and high wages in the face of competition from China, India and other countries. But such thinking is probably an illusion in any case. Just as NAFTA led to both winners and losers in the U.S. economy, a transatlantic free trade area will probably cause some dislocation, especially in Europe, as it faces increased competition from U.S. products and services.
In Washington, the timing for a TAFTA may be tempting. With the recent Democratic takeover of both the House and Senate, Congress is now led by a party that is close to the European mainstream on social, labor and environmental issues. While the chances of Congress ratifying the Doha Round may have gone down, the willingness of Congress to do a deal with like-minded Europeans is probably much stronger. That would particularly be the case if such an arrangement did not cover agriculture. But that points to only one of the obstacles facing a potential TAFTA. Article XXIV of the World Trade Organization prohibits any free trade area that does not cover "substantially all trade." With agriculture accounting for around 5 percent of U.S.-EU trade, the two sides would be violating trade law if they tried to leave it out.
If not carefully crafted, a TAFTA could both directly and indirectly be detrimental to the interests of the rest of the world. One study, for example, has shown that a transatlantic deal would decrease welfare in North Africa and the Middle East-hardly something that should be a shared U.S.-European policy goal. Although a TAFTA has sometimes been portrayed as complementary to or supportive of multilateral trade liberalization, it is unlikely that negotiators in Washington and Brussels would have the time and resources to bring the troubled Doha Round to conclusion while launching transatlantic talks.
Even if the White House and Congress were to agree on a TAFTA, it is worth asking if the Europeans could ever agree among themselves to launch such an initiative. The EU is struggling to complete a constitution that would streamline decision making in a group that now includes 27 members-a far cry from the 15 of only three years ago-but which was rejected by French and Dutch voters 18 months ago. Many in the EU believe that the Union should get its own house in order before embarking on far-reaching and uncertain projects like a TAFTA. It is also true that some EU member states are not particularly disposed right now to embrace the United States via a trade deal because of lingering unhappiness with the Iraq War. And other EU countries, concerned about the need to reduce global poverty through more open international trade, would not want to launch a transatlantic deal if it harmed the chances of the Doha Round reaching a conclusion.