Europe and the U.S. Will Setup an “Economic NATO”

Europe and the U.S. almost simultaneously announced a creation of a global economy project. It will be realized in record time, by the end of 2014, in the form of the Transatlantic Free Trade Area (TAFTA). The fact that in March European Union representatives were already prepared to refer their position in negotiations that will take place no later than in the end of June to their American counterparts, is indicative of the urgency with which TAFTA potential members undertook the implementation of this formidable project.

Under existing conditions of economic stagnation in Europe and given the American manufacturers’ search for the new markets, one can only wonder why this idea has not been realized before. Today it is actively supported by representatives of the largest and most influential business and industrial lobby groups on both sides of the Atlantic.

During the annual Munich Security Conference on Feb. 2, 2013, U.S. Vice President, Joe Biden made a careful statement that TAFTA agreement is feasible. Meanwhile, European Union leaders unanimously expressed support for the idea of a trade agreement with the U.S. in Brussels on Feb. 8, after complicated negotiations concerning the EU budget for the nearest seven years.

A few days later, the United States announced the importance of a “trade and investment partnership” with the EU. Barack Obama at the last moment included this topic in his Annual Message to Congress, although he only spared it some 15 seconds. It was only after this statement by the American president that the leaders of the European Union unanimously announced the commencement of negotiations in the nearest future, making it clear that several months of intense work of experts under the guidance of the U.S. Trade Representative Ron Kirk and the European Commissioner for Trade Karel De Gucht were crowned with success.

Jose Manuel Barroso, the President of the European Commission declared on Feb. 13 that these negotiations will lay the foundation not only for future bilateral trade and investments, including the question of trade regulation, but also for the development of global trade rules in future. Meanwhile, the UK Prime Minister David Cameron announced that the issue of a Transatlantic Free Trade Area will be central to discussion during the nearest G8 summit, where Cameron will preside in June. The British Prime Minister wrote to his colleagues stating that what is being discussed now is prefiguring far-reaching changes in European countries and America, and the rules that determine relations between them. He expressed his confidence that the success of negotiations will depend on how soon the discussion of these changes begins, especially given the scale of ambitions.

According to the information available, the transatlantic agreement will touch upon all major areas of collaboration, but will focus on those areas that would enable maximizing the synergy of European and American economies regarding economic growth, employment and innovation stimulation. The agreement will be realized by countries comprising half of the global economy, as well as a third of the world trade volume (to put it in numbers, 4.5 trillion dollars in 2011). According to the previous forecasts of European analysts, as soon as the free trade agreement is implemented, it will increase the annual turnover between the two sides of the Atlantic by 116 billion dollars (or 86 billion euros). The removal of custom borders alone will increase GDP of the EU and the U.S. by 0.1 percent and 0.2 percent respectively and by 2017 European Commission expects TAFTA to give rise to the additional 0.5 percent growth for the EU economy and 0.4 percent for the American GDP, which is the equivalent of an additional income of 86 and 65 billion euros per year respectively. As a result, the main long-term effect will be achieved not only by the reduction of tariff barriers, but also as a result of the unification of technical standards and competition rules, which are in place in Europe and the U.S. say the experts of the IFO Institute in Germany. In the future, these standards will provide a framework for creation of the new generation of economic and labor contracts.

It is this issue, however, that may prove to be the most complicated. Rules and standards are not always the same within the European Union; the agrarian countries of southern Europe and France will first of all demand concessions under the agreement in relation to subsidies their farmers receive. They will try to preserve privileges for their agrarian sectors and will resist to the last, the delivery of genetically modified food products from the U.S. to Europe. It also remains unclear how Boeing and Airbus, as global competitors, will coexist in one trade area. It is uncertain on what conditions Washington will let Europe to enter its service market, the tastiest morsel of the American economic pie to which practically none was allowed to approach until now.

Even bearing all these cautions in mind, however, TAFTA can probably be called the largest and the most ambitious alliance in the world trade history since the creation of the World Trade Organization in 1995. It should nevertheless be mentioned that the WTO, which provided a framework for negotiations concerning trade liberalization in 2001, now demonstrates a lack of effectiveness in respect of this issue. It seems that this was a main reason for the U.S. and Europe to start looking for different alternatives and to their seeming intention to reach an agreement outside the WTO. Although only a few months ago it was in the corridors of the WTO Geneva headquarters where European and American trade conflicts were resolved, today both Brussels and Washington are prepared to discuss the most complicated questions without intermediaries.

In order to comprehend the essence of this change, it is important to examine history in greater detail. The question of setting up a Transatlantic free trade area was first raised back in mid-nineties, almost at the same time as the WTO was created, but no concrete steps were made to implement it. Ten years later, European leaders once again raised the question, and the parties arranged to create the Transatlantic Economic Council, which would examine the practical aspects of integration, but the global financial crisis delayed this process until 2010.

It was therefore only a year ago that experts began to discuss the possible conditions for the future agreement. Thus, the obvious economic benefits and the failure of the Doha round of negotiations aside, the real reason behind creating TAFTA was (and no secret is made of this fact) is the new alignment of forces in the world, the shift of the flow of goods to Asia and the increasingly influential role of China as a global trade center in particular. Today a number of experts attribute the success of the attempts of Europe and America to reach an agreement on the free trade area to the fact that if this alliance does not take place by 2014, the “transatlantic union” will no longer have an opportunity to prevent China and its BRIC counterparts taking over the initiative in determining the global “rules of the game.”

From 1945 onward, the U.S.’s share in the global economy has decreased from 50 percent to 19 percent. The support of Europe is absolutely essential to Washington if the United States is to preserve its influence. As Boyden Gray, the former American ambassador in the EU, states, the expected agreement between Europe and America would have the effects similar to those of the creation of “economic NATO.” If the current state of affairs is as stated, many facts fall into their places.

China has already warned that they do not want the new trade alliance to become an alternative to the WTO (since the last Doha round failed the chance of this happening is equal to zero). Overall, Beijing considers that it is too early to talk about the success of this alliance namely because its participants are not taking into account the other countries’ opinions. Indian representatives hinted that they do not consider the “drifting” of Europe into America’s arms right and that they believe it would have been more beneficial for the EU to focus on playing its unique role as a balancing force in the global relations. In addition, the new ideas of Brussels and Washington threaten Russia’s plans of “Eurasian integration” and make EurAsEC and the Customs Union seem less appealing. Besides, TAFTA will definitively put an end to Putin’s “Great Europe”, a project that would imply a free trade area “from Vladivostok to Lisbon”. Brussels has already made its choice in favor of the Western, and not Eastern, free trade area, despite the fact that Russia has been a full member of the WTO for over six months now.

The fact that both Europe and the U.S. favor TAFTA also creates a new situation for the countries which are currently in the process of negotiations regarding a free trade area with the EU. Ukraine is among those countries. EU leaders had previously given the understanding that they are primarily interested in the fastest possible completion of negotiations regarding free trade with Singapore and are getting ready to implement similar agreements with Japan and India this year. In addition Brussels had trumpeted the breakthrough in negotiations concerning a free trade area with Canada that had been on-going since 2009.