The Case for TAFTA

As U.S. President Barack Obama opens his second term, America’s trade policy is showing signs of life. The United States is negotiating the Trans-Pacific Partnership (TPP) agreement with 11 countries in Asia, and at Tuesday’s State of the Union, Obama announced the launch of negotiations with the European Union for a transatlantic free trade agreement — call it TAFTA — to connect the world’s largest markets. European leaders greenlighted the talks last Friday, hoping a deal could jumpstart export-led growth — German Chancellor Angela Merkel says she wishes "nothing more." But the forthcoming battles with protectionist agricultural lobbies and entrenched regulatory differences from autos to pharmaceuticals risk giving the two sides cold feet and diluting the deal to a TAFTA-lite negotiated "on one tank." A deal without substance would be an epic lost opportunity: Much like the North American Free Trade Agreement (NAFTA) launched in 1994, TAFTA represents a game-changer in the global trading system that is in a deep crisis after 12 years of fruitless Doha Round talks.

In 1994, the world trading system looked very different. The United States, Canada and Mexico launched NAFTA in January, pressuring Europeans to ink the 123-country Uruguay Round, which made extensive cuts to tariffs and non-tariff barriers and established the crown jewel of the global trading system, the World Trade Organization (WTO). The mantra of free trade was spreading on the back of the so-called Washington Consensus across the emerging world and post-communist bloc. America’s export wars of the 1980s with Japan had drawn to a close, and Eastern European countries were joining the EU, forming a giant single market for trade, investment, and production. The world economy blossomed, with trade and investment growth rivaling 20-year highs. America’s Internet-fueled growth would eliminate unemployment and help balance the budget in 1998 for the first time in three decades.

As the world’s first serious free trade agreement, NAFTA consolidated U.S. export lobbies that would press for further deals in the Americas and Asia, inspired a wave of FTAs around the world, and created a template for a comprehensive, gold-standard deal that would be copied in subsequent U.S. FTAs and in countless of FTAs signed by Latin American countries.

Today, the setting is different. The multilateral trading system is flailing, as the United States, EU, India, and Brazil remain at loggerheads over liberalization in agriculture and manufactures, and developing countries fear opening their markets would only cause a surge in imports from China, WTO member since 2001. With Doha on a deathbed, trade negotiators focus on smaller free trade deals. Since NAFTA, well over 200 FTAs have been struck, connecting such couples as Chile and China, Japan and Mexico, Korea and the EU, and the United States and Singapore. The result of the FTA frenzy is more liberalization, but also more complexity. The labyrinth of distinct rules and regulations in the FTA "spaghetti bowl" is a daily headache to multinationals, small exporters, and customs the world over.

The world economy too is a gloomy place. Unlike the economic renaissance of the 1990s, the hallmark of today’s global marketplace is profound uncertainty and fierce competition for the marginal dollar — and the foul practices it can spawn. Countries are manufacturing competitiveness in the quick, easy, and dirty way — currency devaluations and quantitative easings that risk widening global imbalances and the U.S. trade deficit, the familiar precursor of protectionism. Insidious non-tariff trade barriers, such as the "indigenous innovation" policies employed by China, are proliferating as countries privilege domestic producers at the expense of domestic consumers and free trade pledges made by world leaders.

The troubled world economy needs a circuit-breaker. TAFTA could be is just that.

First, a substantive TAFTA will help jumpstart economic growth in the U.S. and Europe, which in turn will drive emerging markets’ trade and growth. Erasing non-tariff barriers would add 0.7 percentage points to the EU economy and 0.3 percentage points to the U.S. economy, according to the Dutch consultancy Ecorys — not bad for economies forecast to grow at 0.2 percent and 1.8 percent, respectively, this year. And when the global economic pie expands, the siren calls of currency manipulation and protectionism are held at bay.

Second, just like NAFTA did with Europe in the Uruguay Round, a deep and comprehensive TAFTA can force a return to the Doha table of cantankerous emerging markets — Brazil, China, and India, which torpedoed the deal in 2008, and set the tone and template for global trade rulemaking.

Third, TAFTA promises to recreate the global trading system. Much like the United States, the EU has deals with Mexico, Canada, Colombia, Peru, Korea, Australia, and Chile, and it is currently completing bilaterals with Singapore, Malaysia, Vietnam, and Japan — all likely future TPP members. Once wedded to each other, the United States and EU could next weave all these common deals into one mammoth FTA. Outside this giant TPP-TAFTA trade zone would remain India, Brazil, and China — which as a result should have every incentive to join. In this scenario, the agonized multilateral rounds are moot: Rather than pie-in-the-sky, big-bang deals at the WTO, world trading powers will have arrived at a multilateral deal from bottom-up, through knitting together the various FTAs — and along the way also sorted out the FTA spaghetti bowl that NAFTA helped inspire.

Fourth, a deep TAFTA is miracle water for the U.S.-EU relationship, which turned antagonistic last year as the United States failed to offer aid to Europeans at the IMF, Obama and Merkel locked horns on fiscal policies in the eurozone, and America’s attention kept shifting to Asia. TAFTA is a remedy like no other: Economically, it allows the United States and Europe to help each other grow and recover without spending a single stimulus dollar; strategically, it enables Washington and Brussels to reassert leadership in the world economy they have built together, and it undercuts Beijing’s divide-and-conquer tactics.

After a tiring slog of four years through insipid growth, sky-high unemployment, and soaring debts, the United States and Europe will have a chance to reignite growth and remake the world trading system they have championed for seven decades. As in 1994, special interests are drawing policymakers’ eyes off the ball. TAFTA offers President Obama a chance to make history. He’s laid out an ambitious goal. Now it is time to make it happen.