Creating the World’s Biggest Free Trade Zone In his February 12, 2013, State of the Union address, President Barack Obama committed the United States to negotiating a free trade deal with the European Union (EU). The proposed agreement is known as the Transatlantic Trade and Investment Partnership (TTIP). The United States and the 28 countries that are members of the EU already make up the world’s largest and richest trading partnership, accounting for about 60 percent of global GDP, 33 percent of world trade in goods, and 42 percent of world trade in services. Moreover, both the United States and EU are members of the World Trade Organization, and many trade tariffs between the two economic blocks are already low. Nevertheless, the announcement was greeted with approval on both sides of the Atlantic and, unusually for President Obama, from both sides of the political divide in the United States. The reason for the enthusiasm for the proposed TTIP can be traced to widespread acceptance of the key axiom of international trade theory—trade is a good thing for all countries involved in a free trade agreement. Free trade is a positive-sum game; it is equivalent to the rising tide that lifts all boats. Both the United States and the EU have struggled with low economic growth, persistently high unemployment, and large government deficits. A new free trade deal could help economies on both sides Page 189of the Atlantic grow faster, thereby reducing unemployment, without costing another dime in government spending. A trade deal is in effect a cost-free stimulus package. Generic drugs manufactured by Indian firms help the country emerge as a major exporter of pharmaceuticals. Source: © Image Source/Getty Images, RF How big the economic impact will be remains to be seen. For both the United States and the EU average tariffs (taxes) on imported goods are currently close to 3 percent by most measures. Further reduction could nonetheless stimulate additional trade, and there are some areas where tariffs are much higher, notably on agricultural goods. Beyond tariff reductions, there are many nontariff barriers to international trade that could be reduced or eliminated as the result of a deal. One example is found in the automobile industry, where the EU and United States both employ equally strict but different safety standards. This means that to sell in both the EU and United States, automobile manufacturers must adhere to two different sets of regulations. Similarly, pharmaceutical firms currently have to submit new drugs to two sets of safety tests, one in the United States and one in the EU. Such regulatory requirements are functionally equivalent to an import tariff insofaras they raise the costs of business and international trade. By some calculations, nontariff barriers such as these are equivalent to a traditional import tariff of 10 to 20 percent. Initial estimates suggest that a comprehensive and ambitious agreement that covers both tariff and nontariff barriers to trade will boost annual GDP growth by about 0.5 percent per annum on both sides of the Atlantic, producing an additional $200 billion a year in economic activity. Talks on the TTIP began in July 2013 and currently are expected to be completed sometime in 2015. Sources: “Transatlantic Trading,” The Economist, February 2013; Andrew Walker, “EU and US Free Trade Talks Launched,” BBC News, February 13, 2013; Paul Ames, “Parmesan Cheese: Thorn in US-EU Free Trade Deal?,” GlobalPost.com, February 25, 2013; Henry Chu, “U.S., EU Resume Negotiations on Free Trade Agreement,” Los Angeles Times, November 11, 2013.
Case Discussion Questions
1-What are the benefits of the proposed TTIP?
2-Can you think of any drawbacks associated with the TTIP?
3-Two decades ago when the United States entered into the North American Free Trade Agreement with Canada and Mexico, there was significant opposition from organized labor and some politicians. There does not seem to be the same level of opposition to the TTIP. Why do you think this is so?