Feb 21 2013

Obama’s proposed trade deal – Good for America, Good for Europe – so who are the losers?

In his state of the Union address last week, US president Obama shared his plan for a “transatlantic trade and investment partnership”. The proposed agreement would eliminate tariffs and take other steps to promote free trade of goods and services traded between the United States and the 27 European Union nations.

While tariffs on most goods are already very low (rarely higher than 3% according to the Economist)there still exist several non-tariff barriers to trade between world’s two largest economies.  These barriers to trade include policies such as:

  • The “buy American” provision that many US congressmen support for government spending
  • Subsidies to farmers in both the US and the EU
  • Subsidies to the world’s two largest airplane manufacturers, Boeing and Airbuss
  • Protection of “geographically unique brands” such as Champagne and Roquefort cheese (which reduces competition in the US market for these European products)
  • Different standards and regulations in the two economies over health and safety requirements for foreign produced products such as pharmaceuticals and food, vehicles, information flows, and so on.

Truly free trade between nations requires not only the removal of protective tariffs, but also the dismantling of subsidies for domestic producers as well as non-tariff barriers to trade such as strict rules and regulations of imported products.

If the US and Europe succeed in forming a new free trade agreement, the benefits could be substantial for both economies:

Trade in goods and services between the two economic giants amounts to nearly $1 trillion each year, and total bilateral investment between them to nearly $4 trillion. Getting rid of remaining tariffs could raise Europe’s GDP by around 0.4% and America’s by a percentage point. Ditching even half of today’s non-tariff barriers could boost GDP in both places by 3%.

A single TTIP test for new drugs would be a massive boon for pharmaceutical firms. Agreed standards for electric cars would create a vast market, as well as huge demand for accompanying infrastructure. Think how Amazon and Google could gain from looser rules on cross-border flows of information in Europe. And think how Europe’s austerity-blighted economies could gain from more demand from abroad.

The gains from trade are many. However, the arguments against free trade often prevent these benefits for many from being enjoyed to protect the interests of a few. One question to consider when looking at the likely outcome of any new free trade agreement is whether it will lead to trade creation or trade diversion. One nation that may have reason to be concerned about a new trade agreement between the US and the EU is Switzerland, which is not part of the EU. If a new agreement creates new trade and increases the flow of goods and services between the US and the EU, it may be the case that this comes at the cost of of reduced trade between the US, the EU and Switzerland.

The Swiss, not being part of either major economy, would maintain its own rules, regulations tariffs and subsidies that affect trade with the other two economies. It may, therefore, be the victim of increased trade between the other two economies, while trade is diverted away from the Swiss economy as Americans buy more EU-produced goods and Europe buys more American produced goods. If this results, it may put pressure on the Swiss to reduce or remove many of their own trade barriers so as to prevent losing demand from the US and EU.

Discussion Questions:

  1. How do non-tariff barriers to trade such as subsidies and health and safety regulations reduce the flow of goods between nations?
  2. The article mentions that “Europe’s austerity-blighted economies could gain from more demand from abroad.” Interpret this statement. Do you think free trade could provide relief to the debt-ridden countries in the Eurozone?
  3. Why should Switzerland be worried about a new free trade agreement between the US and the Eurozone.

 


About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

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