The Proposed U.S. – EU FTA: The Good, the Bad, and the Ugly

Over the past year or so, there has been a slow and steady effort to generate support for a U.S.-EU free trade agreement. The Obama administration is now behind this, and there is no reason to think a President Romney would change gears. Thus, regardless of the outcome of the Presidential election, this trade initiative is likely to go forward.

So should free traders be excited by the prospect of a trade agreement with the EU? Maybe a little. But before getting too wound up, it’s worth taking a look at the possible details of such an agreement, as set out in an interim report by a U.S.-EU “High Level Working Group”. As indicated by the post title, there are things to like, but also some things not to like – the Good and the Bad. I’ll go through the list roughly in order of those I am most to least happy with, quoting the report and offering some comments. I will conclude with the Ugly. (See if you can guess what it is.)

Tariffs

The goal would be to eliminate all duties on bilateral trade, with the shared objective of achieving a substantial elimination of tariffs upon entry into force and a phasing out of all but the most sensitive tariffs in a short time frame. In the course of negotiations, both sides would consider options for the treatment of the most sensitive products.

This is pretty good, but not great. Note the part about “options” for “sensitive products.” How many of these would there be? This language makes me nervous.

Services

The aim of negotiations would be to bind the existing autonomous level of liberalization of both parties at the highest level of liberalization captured in existing FTAs, while seeking to achieve new market access through efforts to address remaining long-standing market access barriers, recognizing the sensitive nature of certain sectors.

This is all sounds good (except for that reference to “sensitive” sectors again).

But then it goes off in a different direction:

the United States and the EU would include binding commitments to provide transparency, impartiality and due process with regard to licensing and qualification requirements and procedures, as well as enhancing the regulatory principles included in current U.S. and EU FTAs.

“Impartiality” and “due process” are useful concepts in domestic law. But can they be effectively used in international trade agreements?  Are these concepts appropriate for binding international agreements, or do they turn trade agreements into a kind of global constitution?

Government Procurement

The goal of the negotiations would be to enhance business opportunities through substantially improved access to government procurement opportunities at all levels of government on the basis of national treatment.

While there is a good free market objection that governments spend too much on procurement, nonetheless, if they are going to spend, it would be better to do so in a non-protectionist way.  This part of the report is good. It promotes economic welfare through non-discrimination in government procurement. We buy their products and services, and they buy ours. Note, of course, that it refers to “substantially improved access,” not full free trade. But it is still an improvement over today’s situation.

Investment

The aim would be to negotiate investment liberalization and protection provisions on the basis of the highest levels of liberalization and protection that both sides have negotiated to date.

Here, there are two very different concepts included. Investment “liberalization” is great. By all means, let’s make sure foreign investors are welcome and not subject to discrimination, in both the U.S. and EU. But “protection” of foreign investors is something else entirely, as the rules on this issue in other agreements go far beyond a simple non-discrimination requirement.  Furthermore, of all the groups that need “protection” in this world, I would put “foreign investors” near the bottom of the list.

Rules

(a) trade facilitation/customs; (b) trade-related aspects of competition and state-owned enterprises; (c) trade-related aspects of labor and environment; (d) horizontal provisions on small- and medium-sized enterprises; (e) strengthening supply chains; and (f) access to raw materials and energy.

In this hodge-podge of items, we have some good and some bad. It’s great to make customs procedures more efficient; but including labor and environment provisions in trade agreements makes the whole exercise seem more like global governance than free trade.

Regulatory Issues and Non-Tariff Barriers
Here, there are several issues that are difficult to understand. First, it is important to note at the outset that existing international trade rules do not allow discriminatory laws and regulations. That’s a core principle of the GATT/WTO, and has been since 1947. So, keep that in mind when you hear calls for trade agreements to address “regulatory issues and non-tariff barriers.” They are already addressed in important ways.

Getting specific, the report calls for the following related to Sanitary and Phytosanitary (SPS) issues (e.g., food safety) and Technical Barriers to Trade issues  (TBT) (e.g., product regulations):

• An ambitious “SPS-plus” chapter, including establishing a bilateral forum for improved dialogue and cooperation on SPS issues.
• An ambitious “TBT-plus” chapter, including establishing a bilateral forum for addressing bilateral trade issues arising from technical regulations, conformity assessment procedures, and standards.

It is not at all clear to me why existing WTO SPS and TBT rules are insufficient.

The report also asks for:

• Horizontal disciplines on regulatory coherence and transparency for goods and services, including early consultations on significant regulations, impact assessment, upstream regulatory cooperation, and good regulatory practices.
• Provisions or annexes containing additional commitments or steps aimed at promoting regulatory compatibility over time in specific, mutually agreed sectors.

Here, I agree that there may be benefits from regulatory cooperation. But I’m not sure why they should be held hostage to free trade agreements. If the idea is to promote things like mutual recognition (say, in the auto industry), couldn’t it just be done now?

Finally, the report says:

In view of the importance of developing an ambitious and realistic approach to regulatory differences that unnecessarily impede trade, the two sides would invite stakeholders to present, before the end of the year, concrete proposals to address the impact on trade of those differences.

As noted above, the principle of non-discrimination has long been a core part of international trade rules. The principle mentioned here – “regulatory differences that unnecessarily impede trade” – is potentially much broader, as it intrudes into domestic policy-making to a greater degree.

Intellectual Property

Both the EU and the United States are committed to a high level of intellectual property protection, including enforcement, and cooperate extensively through the Transatlantic IPR Working Group. Both sides agree that it would not be feasible in negotiations to seek to reconcile across the board differences in the IPR obligations that each typically includes in its comprehensive trade agreements. Before the launch of any negotiations, both sides would further consult on possible approaches to deal with IPR matters in a mutually satisfactory manner.

It has never been clear to me why intellectual property should be included in trade agreements at all. Now the U.S. and the EU, who often push for strong protection in this area, will work together to achieve very tough international rules (except where they can’t agree, as with geographical indications, which will be left out).

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So, that was the Good and the Bad, all mixed together. Now let me wrap this up with the Ugly: No coverage of agricultural subsidies, or possibly agriculture trade of any sort! That means excluding one of the biggest sources of protectionism, not to mention two other big ones, with trade remedies and aircraft subsidies also out. Those are some serious omissions.

Oh, and one other thing: Free trade with just the EU is not really free trade!  It is discriminatory trade, with EU products and services favored over other countries’ products and services.

I don’t mean to rain on this free trade parade.  But keep all that in mind when evaluating this proposal.