Opening Transatlantic Markets
German Chancellor Angela Merkel is reviving talk of a Transatlantic Free Trade Area. As leader of the world's number one export nation, she is looking to liberalize trade despite the stalemated Doha round. She also wants to reinvigorate transatlantic ties and boost European competitiveness on the eve of Germany's Presidency of both the European Union and the G8 in January.
Her impulse is right. Doha is floundering and the U.S. and the EU are muddling through their annual summits with liberalizing rhetoric and few results. The answer against this backdrop, however, is not another bilateral trade deal but a transatlantic version of the EU's Single Market.
The transatlantic economy distinguishes itself from others in important ways. First, trade really isn't the problem. Transatlantic trade tiffs often steal the headlines, but they represent only one to two percent of overall transatlantic economic activity. Trade barriers are actually very low, averaging only about three to four percent of the $500 million in annual transatlantic trade.
Second, our research shows that trade accounts for only twenty percent of transatlantic commerce; the rest is comprised of foreign investment, which is the real backbone of the $3 trillion transatlantic economy. For example, German affiliate sales in the U.S. are more than three times larger than German exports to the U.S. These dense flows of investment reach so deeply into our economies that we are literally in each other's business.
As a result, the most important economic obstacles are not "at the border" trade barriers but "behind the border" non-tariff barriers to the free flow of capital, goods and services. Even small changes in domestic regulations could generate far bigger economic payoffs than further reductions in tariffs.
For these reasons, a truly transformative initiative would go beyond another trade deal and seek an Open Transatlantic Market by tackling domestic barriers to transatlantic commerce, based on the principles of nondiscrimination, comprehensiveness, and equivalence of U.S. and EU testing and regulatory procedures, which are rigorous on both sides of the Atlantic.
The payoff could be substantial - the equivalent of giving every American and every European an entire year's extra salary over their working lifetimes. The benefits would be widespread. Research conducted by sectoral experts for our recent transatlantic economic study (1) indicates that an open transatlantic market for air transport services could boost transatlantic travel by up to twenty-four percent, increase consumer welfare by over $6 billion annually, and boost economic output in related industries by at least $9 billion a year. Full transatlantic integration of securities markets could lead to a nine percent reduction of the cost of capital for listed companies, sixty percent reduction in transaction costs, and an almost fifty percent increase in trading volume. Aligning U.S. and EU automotive regulations could reduce the cost of every car and truck by up to seven percent, with important knock-on effects for the extensive networks of suppliers and distributors across each continent. Liberalizing Europe's service economy alone could create up to 600,000 European jobs and boost investment by the U.S. and other nations by up to thirty-four percent.
Freer transatlantic markets could also unleash innovation necessary to sustain the transatlantic knowledge economy. Bioscience is emerging as the innovation driver across many economic sectors, from health care to energy to food, and is deeply rooted in transatlantic interconnections, but further life science innovation is hampered by domestic barriers on each side of the Atlantic. The benefits of regulatory cooperation in information and communications technology would be enormous.
Some worry that an ambitious transatlantic economic initiative could threaten the multilateral system. The reverse seems nearer the mark. Europeans and Americans certainly share an interest in widening the circle of prosperity through multilateral trade liberalization. But even a successful Doha agreement will not address such pressing "deep integration" issues affecting the European and American economies as competition policies, corporate governance, more effective regulatory cooperation, tax and other issues. Nor will it address cutting-edge issues raised by European and American scientists and entrepreneurs, who are pushing the frontiers of human discovery in such fields as genetics or nano-biotechnology.
Transatlantic markets are the laboratory of globalization. Together we face issues that neither of us yet faces with others. That is why the "multilateral versus transatlantic" dichotomy is a false choice. The U.S. and EU should advance on both fronts simultaneously: push multilateral liberalization through Doha and press transatlantic market-opening initiatives in services, financial markets, telecommunications, energy, innovation policies, and other areas not yet covered by multilateral agreements. The alternative is not drift; it is growing protectionism and U.S.-EU rivalry in third markets.
Chancellor Merkel has posed the right question: shouldn't Europeans and Americans position themselves to absorb the shocks of global economic change and be true pathfinders of the global economy, rather than waste their time on banana-and-beef trade disputes and fruitless competition to eke out marginal advantage in third markets? If Merkel lifts her sights beyond trade and is prepared to tackle the real barriers to freer transatlantic commerce, her European and American counterparts should welcome her leadership and launch this attractive new project at the U.S.-EU Summit this spring in Washington.
1. Daniel S. Hamilton and Joseph P. Quinlan of the Johns Hopkins University Center for Transatlantic Relations are editors of Deep Integration: How Transatlantic Markets are Leading Globalization (2005) and their forthcoming annual survey, The Transatlantic Economy 2006.
This essay appeared in the December 21, 2006, AICGS Advisor.
The original German version of this essay appeared in the November 30, 2006, Frankfurter Allgemeine Zeitung and is available by clicking here (PDF).