Transatlantic Trade Goes Global

STANFORD – Negotiations have now commenced between the United States and the European Union on the , potentially the largest regional free-trade agreement in history. If successful, it would cover more than 40% of global GDP and account for large shares of world trade and foreign direct investment. The US and EU have set an ambitious goal of completing negotiations by the end of 2014. Historically, however, most trade agreements have taken much longer to complete.

The scale of the TTIP is enormous. With Croatia’s accession at the beginning of July, the EU now consists of 28 member states, each of which has its own particular set of special interests pressing for trade promotion or protection, based on comparative advantage, history, and raw domestic political power.

Moreover, the desired scope of the agreement is vast, complicating the process further. The TTIP would eliminate all trade tariffs and reduce non-tariff barriers, including in agriculture; expand market access in services trade; bring about closer regulatory harmonization; strengthen intellectual-property protection; restrict subsidies to state-owned enterprises; and more. This all but guarantees difficult talks ahead; indeed, France has already demanded and received a cultural exception for film and TV.

Expanding trade boosts income, on average, in all the countries involved. Economists estimate that global free trade, enabled by many successful rounds of multilateral talks (most recently the , culminating in the establishment of the World Trade Organization), has boosted worldwide income substantially.

Regional free-trade agreements (FTAs), such as the TTIP, do so as well, but some of the gains may come at the expense of other trade partners. Within each country, despite net gains, there are also some losers. The best way to deal with the economic, political, and humanitarian concerns raised by trade agreements is via transition rules, temporary income support, and retraining, as opposed to maintaining protectionist barriers.

The gains from such pacts stem from a variety of factors, the most important of which is comparative advantage: countries specialize in producing the goods and services that they are relatively most efficient at producing, and trade these goods and services for others. Economies of scale and other factors are also important.

As the scope of trade liberalization shrinks, so do the benefits – more than proportionally. Estimates of the annual gains from a fully realized TTIP are $160 billion for the EU and $128 billion for the US. British Prime Minister David Cameron predicts two million new jobs. And a non-inflationary boost to growth in a weak global economy would be particularly timely.

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