Economic Policy Program

November 2011

Summary: The times are long past when U.S.-EU summits were major political events. Not only do they take place only sporadically today, but they generate little interest from both heads of state and the public. While the United States and the EU are still each other’s most important trade and investment partners, the transatlantic economic partnership has seen better times. Regardless of this bleak picture, there is a small window of opportunity to breathe some new life into the transatlantic trade partnership before the U.S. presidential campaign takes off in early 2012. While the U.S. public is increasingly skeptical about trade, most Americans still say that increased trade with advanced countries such as Canada, Japan, and the European Union would be good for the United States. It will take bold and unfaltering U.S.-EU leadership to revitalize transatlantic trade cooperation. The upcoming summits present an opportunity that should not be wasted.

Time for a Transatlantic Reset: Talking Trade at the U.S.-EU Summit
by Stormy-Annika Mildner and Claudia Schmucker
The times are long past when U.S.-EU summits were major political events. Not only do they take place only sporadically today, but they generate little interest from both heads of state and the public. The November 28-29 summit and meeting of the Transatlantic Economic Council (TEC) follow this pattern and has been shoe-horned in between President Obama’s trip to Asia, Congressional budget negotiations, Thanksgiving, and the Christmas holidays. While the United States and the EU are still each other’s most important trade and investment partners, the transatlantic economic partnership has seen better times. The transatlantic partners bicker over the best way to revitalize economic growth, how to tackle their mutual debt problems, and how to reduce macroeconomic imbalances. Both the Obama administration and Congress see Europe primarily as an economic problem rather than an opportunity for the U.S. economy. There is no cooperation on concluding the Doha Round of World Trade Organization (WTO) negotiations. And there are many new trade conflicts looming on the not-so-distant horizon, including the EU’s plan to require all airlines to obtain carbon emission permits for aircraft traveling routes either originating or terminating at EU airports. Both partners race each other for new markets in Asia. Cooperation in the TEC to reduce regulatory nontariff trade barriers is slow and tedious. Just recently, the United States and eight other negotiating partners agreed on the framework for an ambitious free trade agreement — the Trans-Pacific Partnership is to be completed in 2012, despite the fact that EU-U.S. cooperation in the WTO and in advancing bilateral economic integration promise more benefits. Regardless of this bleak picture, there is a small window of opportunity to breathe some new life into the transatlantic trade partnership before the U.S. presidential campaign takes off in early 2012. After an initial neglect of trade policy, the Obama administration is slowly defining a clear trade policy agenda. In October 2011, the U.S. Congress finally passed three pending free trade agreements (FTAs) with South Korea, Panama, and Columbia. Now the White House is searching for lighthouse projects. While the U.S. public is increasingly skeptical about trade, most Americans still say that increased trade with advanced countries such as Canada, Japan, and the European Union would be good for the United States. The transatlantic

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Economic Policy Program
partners should use the 2011 U.S.-EU summit to launch a bigger vision for the transatlantic relationship and position themselves to put pressure on the WTO Ministerial Conference, which will take place 15-17 December 2011. A New Transatlantic Trade Agenda Concluding the Doha Round The United States and the EU alone certainly cannot carry the Doha Round over the finishing line. But they are still the only actors that can provide leadership in world trade — at least as long as China is not willing to do so.
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ment, government procurement, and competition, and sectoral agreements to remove barriers to trade in environmental goods and services. At the same time, they should expand the product coverage in existing sectoral agreements such as the Information Technology Agreement. In order to encourage the emerging economies to consent to this approach, the transatlantic partners need to offer something in return. Current budgetary constraints in both the EU and the United States provide an opportunity to do so by cutting domestic support for agriculture. Deepening the Transatlantic Economy l A Zero-Tariff Agreement: While transatlantic tariffs are already quite low, their elimination would generate considerable welfare gains due to the sheer volume of current EU-U.S. trade, as well as existing tariff peaks for some key products such as transport equipment and chemicals. The Brussels think tank ECIPE calculated that the removal of all remaining tariff barriers could boost both the EU and the U.S. economies. If improved productivity and reduced trade facilitation costs are taken into account, the EU could realize an increase of GDP by 0.32-0.47 percent (or $46 to $69 billion) annually, while the United States could gain 0.99-1.33 percent (or $135-$181.9 billion). In addition to trade gains, this agreement would send a strong new signal about the importance of the transatlantic relationship. A fresh impetus is urgently needed — particularly as the U.S. focus increasingly shifts to the Pacific region. This impetus could come through a transatlantic zero tariff agreement. As a follow up, Brussels and Washington could negotiate a free trade agreement on services and an investment treaty. Regarding liberalization of trade in services, the Dutch think tank ECORYS finds that a 75 percent reduction of barriers could increase EU (EU-27 minus the Netherlands) GDP by $10.2 billion and U.S. GDP by $9.6 billion annually in the long-run.
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Early Harvest with built in Follow-up: As an ambitious Doha Round deal is currently far out of reach, the transatlantic partners should push for a “Doha lite” agreement, focused on trade facilitation, reduction in agricultural support, and market access for poorer countries, building in mechanisms for continued negotiations down the road in 2012 and beyond. It is true that such an “Early Harvest” would bring few benefits and would unevenly distribute welfare gains worldwide. But, it would restore some of the WTO’s credibility and free the way to long overdue governance reform in that institution. While the EU has spoken out in favor of such an agreement, the U.S. is still in strong opposition, arguing that such a deal would not generate enough market access to be worth investing the political capital to get Congress to approve it. It’s high time to change this attitude and consider the wider implications of a Doha failure. The lack of even a small compromise could endanger the credibility of the WTO and the authority of the dispute settlement system. So far, even countries like China have accepted most of the WTO’s rulings; this could change in the future, in particular if issues were pushed into the dispute settlement system. Allowing for plurilateral and sectoral agreements under the WTO for new trade issues: Going forward, not all countries will be ready to proceed at the same speed in multilateral trade liberalization. The United States and the EU should push for a softening of the current Single Undertaking approach to WTO trade negotiations, in which nothing is concluded before everything is agreed upon. They should propose allowing plurilateral agreements among like-minded countries on invest-

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Removing Nontariff Barriers: Nontariff trade barriers — such as incompatible regulations — are costly obstacles to transatlantic trade and the basis of many heated transatlantic trade disputes. Removing these barriers promises tremendous welfare gains. According to a 2009 ECORYS study, under an ambitious longrun scenario, removing NTBs could translate into an

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Economic Policy Program
increase in GDP of $158 billion per year (0.72%) for the EU; exports could grow by approximately 2.1 percent. For the United States, the benefits from removing nontariff barriers are estimated to be a $53 billion per year increase in GDP (0.28% of GDP), and approximately 6.1 percent increase in exports. But removing nontariff barriers would not only reduce costs and boost exports and national income in the EU and United States. A common EU-U.S. approach could also influence standard-setting in third markets, facilitating trade worldwide. Unfortunately, the current agenda of the TEC does not bode well for an ambitious, new approach to U.S.-EU trade liberalization. Topics include the Innovation Action Partnership (including the discussion of raw materials), as well as E-health and recommendations for the High-Level Regulatory Cooperation Council. Furthermore, E-mobility, nanotechnology, investment in third countries, and property rights enforcement rank high on the TEC action plan. But this is not enough to revitalize the transatlantic project. And one thing is clear: It will take bold and unfaltering U.S.-EU leadership to revitalize transatlantic trade cooperation. There is a small window of opportunity created by the two upcoming summits: the bilateral meeting in late November in Washington and the WTO meeting in Geneva in early December. These gatherings should not be wasted.

About the Authors
Dr. Stormy-Annika Mildner is member of the Executive Board of the Berlin based think tank Stiftung Wissenschaft und Politik, German Institute for International and Security Affairs (SWP) and currently Robert Bosch Fellow at the GMF’s Transatlantic Academy; Dr. Claudia Schmucker is Head of Program, Globalization and World Economy Program at the German Council on Foreign Relations (DGAP).

About GMF
The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm.

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