The State of the Union: Beyond Free Trade

Alexander Privitera

AGI Non-Resident Senior Fellow

Alexander Privitera a Geoeconomics Non-Resident Senior Fellow at AGI. He is a columnist at BRINK news and professor at Marconi University. He was previously Senior Policy Advisor at the European Banking Federation and was the head of European affairs at Commerzbank AG. He focuses primarily on Germany’s European policies and their impact on relations between the United States and Europe. Previously, Mr. Privitera was the Washington-based correspondent for the leading German news channel, N24. As a journalist, over the past two decades he has been posted to Berlin, Bonn, Brussels, and Rome. Mr. Privitera was born in Rome, Italy, and holds a degree in Political Science (International Relations and Economics) from La Sapienza University in Rome.

Forging a transatlantic free trade agreement is an ambitious but elusive goal. The record of past trade talks is littered with disputes. Just recently, Europeans and Americans managed to fight over such things as chlorinated chickens. The aftertaste left by the failure to agree was so bitter that skeptics on both sides of the Atlantic thought an attempt to forge a comprehensive trade deal was simply going to be a waste of time and lead to more disappointment. They still could be proven right. However, as of Tuesday night, we know that we have entered a new phase in the transatlantic dialogue.

In his State of the Union speech, U.S. President Barack Obama finally confirmed that he is prepared to find a way to bridge differences with Europe. A few senators from both sides of the isle have even signaled that Obama could be granted the all important fast track authority that expired in 2007. This is needed to speed up passage of trade deals through Congress and avoid potentially disruptive amendments. For now, the ambitious deadline for an agreement with Europe is 2014.

Many commentators have pointed out how important a deal would be, not only in terms of added growth for the respective economies but also politically. In an age of protracted fiscal restraint, trade is quickly turning into a convenient substitute for stimulus. Furthermore, a transatlantic free trade area would not only boost the partners’ respective economies, it would also set standards that emerging powers, and in particular China, could not ignore. By choosing to reengage with each other, the U.S. and Europe are demonstrating a sense of urgency now that was absent in the past.

For Europeans, Obama’s commitment to seek a grand bargain with Europe finally mitigates widespread fears about the much-hyped pivot to Asia. In European capitals, the president’s announcement is interpreted as the sign that he is reaffirming the centrality of the transatlantic partnership.

A more mundane interpretation could be: Europe and the U.S. are trying to lock in past gains before it is too late. The U.S. and Europe recognize that the global landscape is changing quickly, and that it might soon become impossible to impose a western way of doing things on an increasingly reluctant world. In fact, this specific argument won over Chancellor Angela Merkel. She is obsessed by the rise of China. In the past, she preferred a global approach to trade because of fears that bilateral agreements could lead to trade blocks and protectionism. But about a year ago recognizing that the DOHA round was stalled and that time was running out, she felt compelled to endorse the American approach. Lately, even French officials have started paying lip service to the need for a transatlantic deal, but probably not for the same reasons as Merkel.

Few can argue with the fact that both the U.S. and Europe are acting out of a sense of growing weakness. But is this enough to avoid new transatlantic rifts on thorny issues such as access to public procurement markets and agriculture, just to name a few? Only time will tell. It is certainly true that pre-negotiations must have been quite encouraging, and political endorsement at the highest level is both necessary and promising. But now that everybody seems to agree on the shared goal, the real journey starts in earnest.

Let’s start with the U.S. Even if the president were to be granted the fast track powers by Congress, a deal still needs to be ratified by the Senate. Democrats and Republicans might have quite different things in mind when they talk about the need for a free trade agreement with the European Union.  Furthermore, think of one of the central European demands: opening the public procurement market. Which constituencies are affected? What will senators say when questions of national security are involved? The fate of the bilateral agreement with Colombia shows how hard things can get. The deal was passed by the Senate years after it had been signed. Major delays are not in themselves a disaster, but they would severely dampen hopes that transatlantic trade can have the effect of a stimulus package in the near future.

The situation in Europe is not necessarily unlike that of the U.S. France might have something completely different in mind than Germany or the UK when it speaks of a deal with the U.S. Agriculture is still the big elephant in the room. Paris may think that the wrong kind of deal with Washington could turn out to be a Trojan horse for Berlin and London to go after the heavily subsidized agricultural sector in France and southern European countries. How would politicians in Paris react if they were asked by European partners to make sacrifices in a sensitive sector in the name of the greater good? These are just some of the examples of the big stumbling blocks out there.

We should not leave traditional disputes between Europe and the U.S unmentioned. Given the fact that tariffs cannot go much lower than today’s levels, negotiations will focus on common standards. But what does it mean exactly to harmonize standards and regulations? Does it mean more or less regulation? Which standards in which areas are negotiators going to focus on? What about the strength of the respective currencies, i.e do they need to be pegged to avoid competitive devaluations? What about the potential impact of the financial transaction tax (the famous Tobin tax) now favored by a number of European countries?  Which roles are financial services going to play? I could add a further question, one that was raised by Germany’s Finance Minister Wolfgang Schaeuble after the State of the Union speech, regarding the shared commitment to reduce debt levels in western Economies. Barack Obama said in his State of the Union speech that austerity alone is not an economic plan, and then proceeded to shelve any ambitions to significantly reduce the U.S. debt anytime soon. Schaeuble did not like what he heard. Speaking before a group of German Christian Democrats, he promised that at the upcoming G20 meeting in Russia he would remind the Americans that their economy will not recover by simply issuing more debt. These are just some of the questions that could severely slow down or even derail negotiations.

I don’t doubt that negotiators can find ways to navigate the many icebergs that still separate the EU from the U.S. I also have no doubt that they can find a lowest common denominator. However, given the huge expectations triggered by Obama’s speech, reality could turn out to be quite disappointing. For a deal to fulfill its promises, it needs to be comprehensive. The easy part was to announce the goal. Now it is up to politicians to stay on top of the process and make sure that negotiators don’t get bogged down by the details.