Washington, DC—Congress needs to pass new Trade Promotion Authority (TPA) by early 2002 to boost US trade and investment in Europe through the launch of a new global round of trade negotiations in the World Trade Organization according to a new Institute study, Measuring the Costs of Protection in Europe: European Commercial Policy in the 2000s by Patrick A. Messerlin.

Despite 50 years of trade liberalization, large chunks of the European economy are still highly protected. The average rate of protection (from tariffs, quantitative restrictions, and antidumping measures) is still 12 percent rather than the figure of 3 to 5 percent that is usually cited. Most of the market-driven services sectors (55 percent of European GDP) are in the same situation. As a result, eliminating these major trade barriers will bring considerable gains for European consumers—5 to 7 percent of GDP or the equivalent of Spain's GDP. These gains appear attractive because protection is a very inefficient way of protecting jobs, on average, each job "saved" in Europe by these trade barriers costs roughly 200,000 euros.

Opening of European markets through a new round in the WTO would yield three important benefits for the United States. First, US exports to Europe would be boosted because the US is one of only eight countries in the world which does not benefit from any EC trade preference. Even eliminating the average 6-7 percent rate of protection on EC products which do not enjoy unusually high protection would expand US exports sharply, eliminating the current US disadvantage against suppliers with preference. Second, certain of the goods that are highly protected in the EC are also highly protected in the US (e.g., sugar and clothing). In such cases, the simultaneous opening of the US and EC markets would diffuse pressures in the US market from additional imports.

Third, European markets in services would open substantial new trading opportunities for US firms. US service markets are almost always more competitive than corresponding EC markets, so US firms will often be able to enter liberalized European markets with competitive advantages. The coming Round is likely to deliver in services what the Kennedy Round provided in many product sectors: as the European Single Market in services is yet to be achieved, a new Round will not only reduce barriers between EC states and the rest of the world but will also dismantle barriers between each EC members. This will make it easier for US firms to exploit their capacities of operating in large markets, for the greatest benefits of European consumers.

Broader considerations should also be taken into consideration. Tangible progress in the new WTO Round, due to joint US and EC efforts, would be needed for WTO stability and robustness before the entry of China. It would represent a positive signal to US and EC financial markets. It will be a key input for additional growth in the world economy. But the EC (and particularly certain Member states) may be unwilling to go very far in new talks unless the US Administration gets Trade Promotion Authority (TPA) from Congress. Time is running since the EC, with its 15 current Member states, is much friendlier to freer trade than the future enlarged EC will be.

Simultaneous negotiations at the WTO, FTAA and EC-Mercosur levels will also open a window of opportunity for South American countries (and for other developing countries in similar situations, such as Mexico or Jordan). For example, the "political" costs to Mercosur countries of extending to the rest of the world the preferential access to their markets that they will grant to US and EC firms is small, compared to the substantial economic gains of "multilateralizing" free access to their markets. At this juncture, the multilateral and regional motives for trade liberalization should reinforce each other. The world should not waste such a rare opportunity.

Measuring the Costs of Protection in Europe: European Commercial Policy in the 2000s documents the level and evolution (from 1990 to 2001) of core EC barriers, with a special focus to 19 agriculture and manufacturing sectors and 3 services sectors (air transport, audiovisuals, and telecommunications). Following the approach initiated by Gary Hufbauer and Kimberly Ann Elliott (Measuring the Costs of Protection in the United States, Washington: Institute for International Economics, 1994), the study provides partial equilibrium estimates of the costs of these barriers for European consumers and for the European economy (including by introducing imperfect competition situations, which are more frequent in the EC than in the US because of the absence of an effective Single Market). The study shows not only that EC trade barriers are much higher and more resistant than usually thought, but also that this protection has mostly generated rents that are captured by vested interests and has been very inefficient in "saving" jobs. In addition, the author examines five major challenges for the EC:

• Will the EC reform—at last—its Common Agricultural Policy enough to be able to start opening EC farm markets to foreign competition? Will the EC be able to address emerging food safety issues (and, more generally, trade barriers derived from technical regulations) which are, slowly but surely, destroying its own common agricultural market?
• Will the EC change its approach to services liberalization in order to make it more friendly to regulatory competition and hence more palatable to WTO partners?
• Will the EC remind its WTO partners that the Treaty of Rome and its successors have clearly rejected the use of trade instruments for addressing labor, investment, environment and competition issues? In the highly integrated EC, these problems are dealt with by more direct, hence more adequate, instruments which are still mostly (sometimes exclusively) operated by EC Member states.
• Will the EC accelerate its slow evolution from regional (in fact, bilateral) preferential agreements clarifying its support for multilateral WTO disciplines as the undisputed foundation of its commercial policy?
• Will the EC be able to make modest, but constant, progress in political integration, hence removing political pressures from the economic integration process and allowing the over-regulated Community to review its regulations in a framework insisting on more competition, more accountability, and more trust-based mutual recognition?

About the Author

Since 1990, Patrick A. Messerlin has been professor of economics at the Institut d'Etudes Politiques de Paris. Since 1997, he has also been director of Groupe d'Economie Mondiale (GEM). Previously, Mr. Messerlin was a senior economist at the World Bank (1986-90). He is currently advisor on WTO Affairs to Mike Moore, WTO Director General.
Mr. Messerlin is the author, coauthor, or editor of several books on trade, including Le cycle du Millenaire, Paris: Conseil d'analyse economique du Premier ministre (1999); Commerce international, Paris: Presses Universitaires de France (1998); Antidumping Industrial Policy: Legalized Protectionism in the WTO and What to Do about it, Washington: American Enterprise Institute (1996); and La nouvelle organisation mondiale du commerce, Paris: Dunod (1995).

About the Institute

The Institute for International Economics is a private nonprofit research institution for the study and discussion of international economic policy. The Institute, directed by C. Fred Bergsten, provides fresh analyses of key economic, monetary, trade and investment issues and recommends practical policy approaches for strengthening public policy toward these important topics. The Institute receives funding from a large number of private foundations and corporations.