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Analysis: EU-U.S. trade talks promise both prizes and pitfalls

An European Union flag flutters outside of the European Parliament in Brussels October 12, 2012. REUTERS/Francois Lenoir
An European Union flag flutters outside of the European Parliament in Brussels October 12, 2012. REUTERS/Francois Lenoir

By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters)- Forthcoming transatlantic trade talks might offer a fresh incentive for Europe to worry a bit less about protecting past economic gains and focus a bit more on securing sources of future prosperity.

The negotiations, announced last week and due to start in June, are also an important chance for the European Union to rejuvenate political ties with the United States as Washington pivots towards a rising Asia.

The talks will be tough. Successive attempts to prise open markets over the past 15 years made some progress but ultimately failed. This time round, extensive consultations have convinced officials that an agreement can be forged at a lower political cost.

One reason is that agriculture, a constant thorn in the side of negotiators, is less of a bilateral bugbear than it was even two years ago thanks to changes in the global market for farm produce, said Fredrik Erixon, director of the European Centre for International Political Economy, a think tank in Brussels.

What's more, the world's two largest economies are anxious to tap into new sources of growth. They estimate that by 2027 a comprehensive pact could add 0.5 percent a year to the EU's gross domestic product and 0.4 percent to U.S. output.

But the belief in Brussels and Washington that they will not have to cross too many negotiating red lines drawn by powerful vested interests will be quickly tested, Erixon said.

"It will become much clearer that you're not going to get an agreement that can deliver short and medium-term economic gains or longer-term dynamic gains unless you're willing to do supply-side reforms," he said.

EU COULD DO BETTER ON REFORM

Indeed, Erixon said the European Commission, the EU's executive branch, sees the talks as an opportunity to try to push through some deep-seated changes to improve the 27-country bloc's economic performance.

Governments have shown a greater appetite for reform in response to the global financial crisis, notably in pensions and labour markets. But Ben Noteboom, chief executive of Randstad, the world's second-largest global recruitment firm, said he would give Europe an overall mark of less than six out of 10.

He said Europe had no choice but to keep up the momentum of reform given the challenges it faces from an ageing population and, especially, the hollowing-out of medium-skilled jobs due to technological change and competition from emerging markets.

"As a society we must come up with answers to prevent that from becoming both a social and economic problem," Noteboom told Reuters. "The question is whether we will do it fast enough. We don't have a lot of time."

The United States and the EU are eying a "21st century" agreement that, as well as scrapping tariffs, sweeps away many non-tariff barriers, such as differences in technical standards, that are annoying speed bumps in an age when goods sourced around the globe cross borders at dizzying speed.

Yet earlier this month, the same EU showed its 20th century face by concluding a budget for 2014-2020 in which farm subsidies still gobble up by far the biggest share of spending.

Agricultural handouts were cut, but France and other major farming nations thwarted attempts to shift a greater slice of EU spending towards steps to boost investment and competitiveness.

A similar Janus-like fault line is likely to run through the trade talks given the EU's reluctance to lower its guard against U.S. biotech food such as genetically modified plants or hormone-fed beef.

So even if the goodwill exists to park such issues in the sidings, agriculture still has the potential to poison the talks, said Philip Whyte with the Centre for European Reform, a research outfit in London.

A GLOBAL PRIZE UP FOR GRABS

Simon Evenett, a professor of international trade at St Gallen University in Switzerland, agreed that a way would have to finesse differences over agriculture for Washington and Brussels to grasp what both see as the big prize - designing the next generation of business regulations and inducing the rest of the world, notably China, to sign on to them.

For example, jointly recognised rules on car safety or a single transatlantic test for new drugs would cut costs for manufacturers and so should lower prices for consumers.

"That could have serious business payoffs," Evenett said.

Richard Baldwin, a professor of international economics in Geneva, said the fear of being excluded from global standard-setting and regulatory harmonisation was a key reason why this round of trade talks might succeed.

Washington is negotiating a separate Asia-focused free trade pact, the Trans-Pacific Partnership (TPP), which, if successful, would form the template for rules on ‘behind-the-border barriers' to trade that are crucial for the smooth functioning of integrated global supply chains, Baldwin said.

These include regulations, the movement of capital, intellectual property rights and competition policy as well as rules on foreign investment and state-owned enterprises.

"If TPP is the only game in town, the starting point for multilateralisation of these rules will be the TPP rules, which are basically being written by the U.S.

"These rules are not specifically anti-EU, but they are naturally slanted to please U.S. business, not EU business models and practices," Baldwin said by email.

Thus the EU sees a transatlantic pact as a geo-political counter-balance to America's Pacific push, he added.

But no matter how solid the business and political case is for the so-called Transatlantic Trade and Investment Partnership, Evenett said selling an agreement to voters wary of globalisation would not be easy.

"The benefits from trade reform are a bit like fitness training - not felt immediately and often accompanied by pain. This Partnership will be no different," he said.

(Editing by John Stonestreet)

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