Policy Briefs

The Transatlantic Economic Partnership

by Ellen L. Frost, Peterson Institute for International Economics

September 1998

 


© Institute for International Economics. All rights reserved.

 

For the last 50 years, progress toward multilateral trade liberalization has depended heavily on agreement between the United States and the European Union. This Policy Brief argues that the current form of transatlantic economic cooperation—known as the Transatlantic Economic Partnership—is so limited that it runs the risk of diminishing this tradition. The follow-on action plan now being negotiated between Washington and Brussels, however, could provide much-needed momentum to the global trading system and should thus be viewed as an opportunity to restore the traditional pattern.

 

Origin of the Transatlantic Economic Partnership

Announced at the Birmingham summit of May 1998, the Transatlantic Economic Partnership traces back to the 1995 US-EU summit in Madrid, where Presidents Clinton and Santer announced a New Transatlantic Agenda. The agenda was essentially a political gesture intended to underscore the staying power of the transatlantic alliance and to offset a series of specific strains ranging from Bosnia to US economic sanctions. The economic pillar of the agenda was a Transatlantic Marketplace, to be achieved by “progressively reducing or eliminating barriers that hinder the flow of goods, services, and capital.” A new private sector group, the Transatlantic Business Dialogue (TABD), was established to define and promote the specific trade and investment agenda needed to bring the marketplace to fruition.

The 1995 summit sought to enunciate what Secretary of State Warren Christopher had heralded six months earlier: a common vision, a common purpose, and a common transatlantic agenda.1 But the Marketplace initiative was disappointingly vague. It was not defined with any specificity, included no commitment to comprehensive coverage, and lacked an overarching deadline for achievement. Not surprisingly, it never achieved any political momentum.

The one substantive achievement stemming from the Marketplace initiative was regulatory cooperation. Thanks in large part to the TABD, Washington and Brussels reached agreement in 1997—after years of effort—on a package of mutual recognition agreements (MRAs) eliminating duplicative testing and certification in six sectors.2 The US government estimates that this package, which covers about $47 billion worth of trade, eliminates costs equivalent to two or three percentage points of tariffs.3

In the meantime, other problems arose that soured the prospects for broader transatlantic economic cooperation. Chief among these was US sanctions legislation, namely, the Helms-Burton and D'Amato laws (directed at Cuba and Iran/Libya, respectively). Europeans reacted furiously to US efforts to impose sanctions on their companies and citizens, quickly invoking blocking legislation and launching a dispute settlement case in the World Trade Organization (WTO). A compromise solution, also announced at the Birmingham summit, provides for active EU support for certain US policy goals in return for exemptions from specific provisions of the sanctions laws. This agreement, however, has still not secured congressional approval.

In addition, several agricultural quarrels related to biotechnology have escalated. The US-EU trade quarrel du jour centers on resistance in several EU member states to importing genetically modified strains of corn, soybeans, and other commodities from the United States.


For the last 50 years, progress toward
multilateral trade liberalization has depended
heavily on agreement between the
United States and the European Union.

Mindful of these new disputes, and hoping to restore momentum to the process of trade liberalization, the European Commission proposed to EU member states in March 1998 a formal agreement that would establish a Transatlantic Marketplace with the United States. Spearheaded by Commission Vice President Sir Leon Brittan, this version of the marketplace proposal laid out an ambitious agenda covering both bilateral and multilateral topics. The proposed agreement envisaged such measures as zero tariffs on industrial goods by 2010, a free trade area in services, and a bilateral agreement on investment. Notable exclusions, however, included agriculture and audiovisual services.

For both substantive and tactical reasons, the Brittan initiative failed to secure the support of several EU member governments, most notably (and vociferously) France. But the transatlantic impulse did not die. Most of the topics covered in the Brittan initiative survived, albeit in a greatly watered down version, and were collectively renamed the Transatlantic Economic Partnership.

 

Content of the Transatlantic Economic Partnership

The document issued at the Birmingham summit was, however, little more than a vague, bare-bones outline of the Transatlantic Economic Partnership. Discussions are now underway to flesh out an action plan. Although it is too early to say what the action plan will consist of, a few facts seem clear.

This time around, the transatlantic thrust is primarily multilateral. Gone are the would-be bilateral commitments to zero industrial tariffs by 2010, a free trade area in services, and a transatlantic investment agreement. Initiatives on industrial tariffs and the liberalization of services sit squarely in the context of the WTO, while those on investment, competition, public procurement, and the environment refer to “appropriate multilateral fora” (this wording suggests, but does not spell out, a commitment to a new WTO round, as also proposed by Sir Leon Brittan under the label of the “Millenium Round”). Language on government procurement refers mainly to facilitation of bidding (e.g., through electronic notification of requests for procurement). The commitment to improved intellectual property protection is understood to refer mainly to enforcement of the WTO's agreement on Trade-Related Intellectual Property Rights (TRIPS) agreement in third countries, although bilateral initiatives may be included as well. There may be new language on worker rights. The prickly question of sanctions is addressed in a separate document, “Transatlantic Partnership on Political Cooperation”.4

Building on the prior success of MRA negotiations, the most explicit commitments in the Transatlantic Economic Partnership have to do with overcoming regulatory obstacles. Those named include technical barriers to trade, the treatment of biotechnology, and sanitary and phytosanitary standards (governing the treatment of animals and plants, respectively). Listed as “instruments” are MRAs, scientific and regulatory dialogue, and a high degree of transparency and consultation. Services are covered as well, but for the most part the focus is on reaching a consensus in advance so that future regulations (e.g., those arising from new technology) can be standardized or harmonized. Such negotiations are well suited to a bilateral framework because mutual recognition agreements and similar accords encompass country-specific facilities and procedures and are thus necessarily bilateral.

 

Observations

The document issued in Birmingham represented little more than a vague outline. The action plan now being negotiated may have a little more “meat,” but truly ambitious targets are unlikely at present. Still, the exercise may prove to be valuable. This mixed assessment rests on the following observations:

  1. A transatlantic initiative is not a high priority in Brussels at this time. Too many other events and evolutions are competing for policy-level attention: internal developments include European Monetary Union; the deregulation of key sectors, including telecommunications and financial services; and a range of institutional questions, ranging from voting procedures to the expanding role of the European Parliament. External competitors include the enlargement of the European Union toward the east; developments in the former Yugoslavia; relations with Russia; the fate of the Lome agreement; and EU activities in Latin America, notably negotiations with Mexico to establish a free trade agreement and the first-ever EU-Latin American summit, scheduled for 1999 in Brazil.


  2. The Clinton administration is not focusing much on trade. Despite pressure from House Republicans, the administration wants to postpone the effort to secure congressional renewal of fast-track trade agreement authority until some time after the 1998 elections. (An ambitious transatlantic initiative could be of help in winning the fast-track debate in 1999, if it is combined with the current Asia Pacific Economic Cooperation (APEC) forum and Free Trade Area of the Americas (FTAA) initiatives as well as with the WTO.) Trade remains a highly divisive issue within the Democratic Party.


  3. Not surprisingly, therefore, signs of commitment to real progress are weak on both sides. Neither the United States nor the European Union has demonstrated a real commitment to new trade liberalization at this point in time. Nor does the Transatlantic Economic Partnership live up to its middle name, since a truly “economic” agreement would include cooperation on external monetary policy. Despite the advent of the euro and the formal opening of the European Central Bank, transatlantic cooperation in this area is still woefully underdeveloped.5 A truly ambitious, comprehensive, strategic commitment to open trade and investment—similar to the North Atlantic Economic Community (NATEC) that I proposed last year—is nowhere in sight.6


  4. Nevertheless, officials on both sides of the Atlantic see value in the partnership because of its emphasis on regulatory harmonization. The partnership's emphasis on overcoming regulatory barriers reflects the high level of investment between the European Union and the United States. As of 1997, European companies accounted for 62% of foreign direct investment in the United States ($425.2 billion), compared with 22% from Asian companies. 49% of US direct investment abroad ($420.9 billion) has gone to Western Europe, compared with only 17% to Asia.7 Duplicative test and certification procedures cost these companies a lot of money—over $1 billion a year for the U.S. information technology industry alone.

    Since both Americans and Europeans maintain high levels of health, safety, and environmental protection, regulatory authorities should be able to agree on how to protect their citizens. But regulators on the two sides of the Atlantic reflect different traditions, answer to different constituencies, and see little reason to change their standards and procedures, especially when they face intense public pressure from nongovernment organizations. The partnership could help to overcome these cultural and political barriers.

  5. The failure of the Brittan initiative may have cleared the way for more focused thinking about global trade liberalization in the WTO. The partnership announcement asserts that the United States and the European Union will give “priority” to pursuing their objectives through the WTO and that their “primary goal” is multilateral liberalization. The Dutch and others resisted Sir Leon's notion of a free trade area in services in part because they wanted to avoid undermining the WTO. Several EU member governments are in favor of a new Millenium Round, but neither the European Union as a whole nor the Clinton administration has committed itself to an ambitious WTO agenda. The United States has agreed, however, to chair the next WTO ministerial meeting in late 1999—and thus implicitly to take the lead in forging the next set of major multilateral trade talks.

 

Conclusions

The Transatlantic Economic Partnership is so foggy and limited that one might well ask whether it is needed at all. After all, pressures stemming from globalization are pushing Brussels and Washington in the direction of liberalization anyway. Why bother? A partial answer is that the partnership adds limited but positive synergy to transatlantic economic cooperation, especially in the regulatory area. As one American official puts it, the partnership forces both sides to produce bigger “deliverables” at each summit than would otherwise be the case. Depending on the content of the action plan, another answer is that the partnership, if properly designed and publicized, could help to get the global trade “bicycle” moving forward again.


The action plan now being negotiated
may have a little more "meat," but truly
ambitious targets are unlikely at present.

Such momentum could be particularly helpful in the United States, which is already facing a domestic stalemate over trade policy—as reflected in the president's inability to obtain new fast-track authority since 1994, despite the strength of the economy. This stalemate could easily worsen, as the country is likely to experience both slower growth and a sharply rising trade deficit with Asia. Europe, with its stubbornly high rates of unemployment, could benefit from renewed momentum as well. Finally, cooperation between the world's two biggest economies sets a good example for others. Tackling new issues in a spirit of cooperation improves the atmosphere in Geneva and may set a precedent for future multilateral agreements.

A few reservations are nonetheless in order. While the new emphasis on multilateral agreement is welcome, the partnership is not yet ambitious enough to “ratchet up” the multilateral system. It is not even a potential “economic cooperation forum” that has adopted ambitious trade liberalization goals, as APEC has—let alone an “economic community” along the lines of the proposed NATEC. If the transatlantic partners are going to limit themselves to regulatory cooperation, they should not give their efforts grandiose titles.

If, on the contrary, the United States and the European Union want to reassert global economic leadership in a serious way, they should consider adopting a broad vision and a strategy, with an overall deadline for open trade and investment.8 An explicit commitment to external monetary policy cooperation would also be timely.

The usual objection to an ambitious commitment to joint action is that it is worthless unless it contains both detailed goals and meaningful enforcement procedures. At present, the United States lacks fast-track authority and the European Commission faces multiple distractions. Neither side is exactly overflowing with political will.

Nevertheless, an effort to define an ambitious bilateral and multilateral agenda is worthwhile. Indeed, it is essential to help to reverse the current malaise and get the trade bicycle rolling again. Experience with APEC demonstrates that the mere existence of a commitment to open trade and investment by a date certain generates momentum. A broad commitment of an APEC (or NATEC) variety would capture political attention and add political momentum to this unfulfilled partnership.

 

Notes

1. "Charting a Transatlantic Agenda for the 21st Century," speech by Secretary of State Warren Christopher, Casa de America, Madrid, Spain, 2 June 1995.

2. Telecommunications, radio transmitters, electric and electronic products, pharmaceuticals, medical devices, and recreational marine craft.

3. USTR press release, 28 May 1997, and Department of Commerce press release, 13 June 1997.

4. The Transatlantic Economic Partnership and other documents can be found on the European Commission's Web site, http://www.europa.eu.int.

5. C. Fred Bergsten. 1997. “The Dollar and the Euro.” Foreign Affairs 76, no. 4 (July/August): 83-95. See also C. Randall Henning. 1997. Cooperating with Europe's Monetary Union Policy Analyses in International Economics 49, Washington: Institute for International Economics.

6. Ellen L. Frost. 1997. Transatlantic Trade: A Strategic Objective Policy Analyses in International Economics 48, Washington: Institute for International Economics.

7. Figures are on a historical-cost basis (Bureau of Economic Analysis, Department of Commerce).

8. For example, free trade by 2010. See C. Fred Bergsten. 1996. “Globalizing Free Trade.” Foreign Affairs 75, no. 3 (May/June), 105-120.



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