Will the Transatlantic Free Trade Pact Materialise?: Mohamed El-Erian

March 7, 2013Marketsby Mohamed A. El-Erian

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Will the Transatlantic Free Trade Pact Materialise?: Mohamed El-Erian

The promise of freer transatlantic trade is potentially transformational and comes at a time when the West is increasingly dragged down by short-term disruptions and continued policy inertia. But its implementation prospects are far from promising - its challenges highlight how the proposal is subject to the dulling forces of 20th century mindsets and institutions that are too slow to adapt to 21st century challenges and opportunities.

NEWPORT BEACH – After instant and seemingly coordinated fanfare in Europe and the United States, the proposal for a European Union-US free-trade area has been generating little media attention. There are three reasons for this, and all three highlight broader constraints on good national economic policymaking and productive cross-border coordination.

In his “State of the Union” address in February, US President Barack Obama proposed a “comprehensive Transatlantic Trade and Investment Partnership” with Europe based on trade that is “fair and free.” His administration regards this as part of a comprehensive approach to generating “good-paying American jobs.”

Obama’s bold proposal received an immediate and enthusiastic reception in Europe. Taking to the airwaves within hours, European Commission President José Manuel Barroso and European Council President Herman Van Rompuy called the proposal “ground-breaking.” Arguing that it could increase Europe’s annual economic growth rate by half a percentage point, they declared that formal negotiations would start quickly.

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At first, there was quite a bit of general interest, and understandably so. The proposal involves the world’s two largest economic areas, with national, regional, and global implications. Yet, despite the realization that an agreement could fundamentally alter the nature of global trade and production networks, it only took a few weeks for interest to drop off.

One reason is rooted in initial conditions that limit direct gains from increased trade while widening the scope for tension and conflict. Free-trade agreements that promise the greatest benefits are those that link economies characterized by high tariffs, low levels of trade, and little overlap in consumption and production patterns. This is not the case for the EU and the US. Average tariff levels are only 3 percent. The EU already accounts for almost 20 percent of US imports, and the US for 11 percent of EU imports. And, given similar per capita income levels and cultural orientations, overlaps in production and consumption are considerable.

Having said this, there would be immediate upside potential, owing to better resource allocation, more harmonized investment regimes, stronger standards, and the elimination of outdated non-tariff and regulatory barriers. Aerospace, auto manufacturing, biotechnology, cosmetics, and pharmaceuticals are among the sectors that stand to gain. There is also the potential for reforming inefficient approaches to food and agriculture, particularly in Europe.

The second reason for waning attention to the proposed partnership speaks to a broader issue: A seemingly endless stream of short-term political dramas has made it extremely difficult for both Europe and the US to focus for long on any secular and structural initiative.

In Europe, broad-based discussion was undermined by the outcome of the Italian election – just the latest sign of how frustrated citizens in a growing number of countries are rejecting conventional political parties and the political status quo. With that, it becomes more difficult to pursue longer-term policy objectives, which merely adds further uncertainty about the precise path of European economic and financial integration.

In the US, the disruption took the form of yet another fiscal mini-drama. With a dysfunctional Congress again letting down the American people, the country is now on the receiving end of a budgetary sequester – another self-manufactured headwind to economic growth, job creation, and progress on reducing income and wealth inequalities.

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Put the two together and you get a barrier to EU-US trade negotiations – one that renders ambitious (though not entirely unrealistic) the two-year timeline that has been set for completing the deal.

The third reason concerns the poor state of global policy dialogue, notwithstanding all the happy talk about global challenges and shared responsibilities. Last month’s G-20 meeting ended up as yet another expensive summit lacking sufficient content and follow through. Rather than catalyzing constructive policy coordination, it has inadvertently encouraged complacency.

All three reasons are highly regrettable. They underscore the West’s seeming inability to break out of a short-term mindset in order to respond to the risks and opportunities related to historic national and global re-alignments.

The real promise of freer transatlantic trade consists in its potential to transform global trade, production networks, and multilateral organizations to the benefit of all. At the most general level, it would act to rationalize the current system of four poorly functioning blocs – centered on China, Europe, the US, and the rest – to three, and eventually (and perhaps quite quickly) to two better-functioning blocs that would have little choice but to work well together: one dominated by China, and the other by the EU/US.

Such a global structure has the potential to encourage better medium-term alignments to reduce trade barriers, set proper standards, and enhance mutually beneficial cooperation. It would facilitate coordination on stronger global rules and principles, including those pertaining to intellectual-property rights and trade in services. And it would force multilateral organizations to reform if they wish to retain even the limited relevance that they have now.

The proposal for freer transatlantic trade is potentially transformational. It comes at a time when the West is increasingly being dragged down by short-term disruptions and continued policy inertia. Yet the implementation prospects are far from promising. The proposal has the capacity to act as a catalyst for adapting policy approaches to current realities; but it is subject to the dulling forces of twentieth-century mindsets and institutions that are too slow to adapt to twenty-first-century challenges and opportunities.

Related Story: The World Needs A New Trade Pact: Robert Zoellick et al.

By Mohamed A. El-Erian

Copyright: Project-Syndicate, 2013

Mohamed A. El-Erian is the current CEO and co-CIO of PIMC0. Prior to his stint at PIMCO, he served as President and CEO of the Harvard Management Company for 2 years, while also working at the IMF for 15 years. In 2008, his book "When Markets Collide", won the Financial Times award for Business Book of The Year in addition to being named as the one of the best business books of all time by The Independent.

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