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Hamish McRae: A free trade agreement between Europe and the US is just what the West needs in a difficult climate
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04 March 2013
It is as yet a distant rumble, a sign the earth might be about to move rather than of any immediate seismic shift, but it seems a reasonable possibility that in two or three years’ time North America and Europe could be joined in a free trade area.
If the deal comes off, it will have huge long-term effects not only on the economies of our two continents but also on the political relationship between them. It would bring particular benefits to the UK. Yet, perhaps because the outcome is at least a couple of years away, hardly anyone here seems to be focusing on it.
The story runs like this: formal talks between the EU and the US on a deal are scheduled to start in the summer. Preliminary work has been done by officials but the whole process was given a massive boost by President Obama’s commitment in his State of the Union address. Suddenly a distant vision has become a real one.
The idea has been around for a long time — indeed many might be surprised that we don’t already have a free trade agreement but the politics have blocked it. The two regions do a lot of trade together, of course, but have often tended to behave as rivals, co-operating much of the time but with scratchy relations over many details of trade. Now the politics have shifted. For Europe, a deal with the US is seen as helping the EU’s slow-growing economies gain better access to a faster-growing one. For the US, doing more trade with Europe is seen as a counter-balance to the rise of China. You could say that in the boom years neither side felt it needed the other very much; now both are frightened, as they should be.
Quite how much our two regions might gain from a free trade area is hotly debated. Estimates by the German Marshall Fund put the gain for Europe at the equivalent of 1.5% of GDP, and for the US at 0.9% — worth having but not something that utterly changes the economic performance of either. But the impact will not come from a one-off boost and the EU estimates that a “comprehensive and ambitious agreement” would increase annual growth by 0.5% which, if achieved, would very much be worth having.
The UK would on the face of it be a particular beneficiary in that the US is our largest trading partner, larger than Germany, and we have a current account surplus with it, by contrast to the deficit we have with the rest of the EU.
But this is not just about economics. Politics will be reshaped too. The negative first, for there is a danger that if you start doing bilateral deals between trading blocs you undermine the progress towards global free trade.
You also undermine the World Trade Organisation which has sought with some success to police international trade so that countries follow the rules in a reasonably fair way. The Doha round promoting further trade is still alive — it resumes in Bali later this year. But many of the smaller developing countries are concerned that any move away from multilateralism will work to their disadvantage. The large trading powers talk of giving access to smaller emerging nations but in practice often shut them out.
So there is a worry that a US/EU trade deal would be a second-best solution to freer world trade policed by the WTO. But in the real world, second best solutions are better than nothing. Besides, this trade deal will change politics in a number of positive ways.
For a start the North America/Europe relationship will become more co-operative just as the relationships between the US, Canada and Mexico have been transformed by Nafta, which is 20 years old at the end of this year. Within Europe, the deal will sweep in the non-EU countries, in particular Norway and Switzerland, as members of Efta. Turkey also has a free trade deal with the EU so it too may be swept up into this agreement.
It will also re-focus the EU on what it is good at: promoting freedom of trade and thereby improving the economic prospects for its members. You could almost say that it is helping to create a common market linking Europe and North America — ie, going back to its original purpose of being a common market but in this instance on a much wider scale. Quite what this means for British membership I have not quite managed to figure out but a free trade deal with North America must be good unequivocal news.
It is always hard, amid the clamour of daily financial and economic news to pick out the events which really change things. But a US/EU trade deal feels like an idea whose time has come. President Obama has four years to push it through. Europe has responded positively. This is a big one, and if the deal does come off, we will, in another 20 years, come to see it as just what the West needed to pull itself together in these difficult times.
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