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The Trade Dream – and the Reality

By Karl-Theodor zu Guttenberg and Pierpaolo Barbieri

Where are the NAFTA haters now? The North-American Free Trade Agreement (NAFTA) will be 20 years old in 2014 and all those who predicted it would bring about disaster have long gone silent. NAFTA boosted intra-North American trade despite a painful initial adjustment, pushing its members to improve competitiveness and focus on their comparative advantages. Mexico is now a manufacturing powerhouse and a North American energy revolution only furthers the bloc’s global competitiveness.

Something similar occurs in Europe, where the Eurozone crisis never became a trade crisis, in stark contrast to the 1930s trade wars. In fact, one of the key conclusions to be drawn from the balkanization of European finance and divergent Eurozone growth over the last three years is that the EU’s single market needs to be deeper. The “unfinished” single market can only contribute to European recovery if we actually finish it.

Yet there is now a new trade horizon. At the G8, official talks were launched for a EU-US free trade agreement.

EU Trade Commissioner De Gucht is aiming high. He has talked about a “living agreement” to be finished by end-2014.

Superficially, this is good news for everyone: the collective interests of the world’s first and second largest markets would be served by an agreement, which would boost combined GDP by almost 1%. There is great hope in cooperation to reduce unnecessary and overly complex regulation on both sides of the Atlantic. But we need to realize the politics: as they stand, they do not work to achieve that goal.

De Gucht’s timing goal is understandable. After all, the current Commission will end its term in the next October – and both he and the leadership want the credit for finalizing an agreement with the US. Yet, first rule of trade talks is that they take time.

The second is that politics can shift the sands very quickly, creating a typical “tragedy of the commons” scenario in which an overall positive outcome is blocked by special interests. Take the EU negotiations with Canada. They have been ongoing since 2009 and are currently hostage to agricultural interests on both sides. While Irish and French farmers fret about the inflow of Canadian beef, Canada’s dairy producers are wary to lose their comfortable margins, currently ensured by quotas.

Still, the political barriers for the United States and the EU run far deeper.

The first hurdle is Gallic. France is not exactly the most free-trade loving EU member and President François Hollande is no exception. The French government’s has threatened to block negotiations if the Commission does not preserve Europe’s “cultural exception,” to protect audiovisual arts. Last Friday’s murky compromise whereby at is “not in, not out” allows everyone to claim victory, but it weakens the EU negotiating position fundamentally, by inviting the US to respond in kind and block the most politically sensitive issues.

Not unlike healthcare or defense, art is not an arena where the free market works perfectly; yet l’exception culturelle has as much potential to protect diversity as it has to destroy it. In any event, the worthy protection of French-Italian art films from comic-based Hollywood blockbusters should not be used as an excuse to derail transatlantic free trade.

For every area where the market may not know best – and film is one of them – there are quite a few others where entrenched, protected interests work against society at large. There are certainly those within the French administration who want to turn the cultural exception into a rabbit hole for everything from inefficient beef production to digital services.

In Germany, freer trade is a good talking point during the campaign ahead of federal elections in September. But will those who oppose deeper integration of finance and services within Europe really be willing to give American companies that kind of access? Don’t hold your breath.

As worrisome is the political situation in the U.S. President Obama is a late convert to free trade; up until his second term, he had done basically nothing on the issue, dithering even to seek legislative approval for the bold deals negotiated by his much-hated predecessor. Obama’s second term staff is very capable, but it remains to be seen whether the President is serious about confronting the trade critics that vote overwhelmingly for his Democratic Party. With Congress facing hurdles to pass immigration reform, it is unclear whether Obama will have the political capital to spend on free trade.

Given the complexity of the deal, it may be best to seek what Commissioner De Gucht called a “living agreement”, one that can be furthered if and when the political constellation allows. We would posit it should also be “living” from a geographical perspective: the open-ended nature of the groundbreaking 1957 Treaty of Rome, which enshrined the concept of an “ever closer union” in Europe, should be used as a template.

In short, the two regions that have done the most for global free trade in the post-war era should leave the door open for others to join in.  Down the line, this would allow a US-EU trade deal to serve as a platform for the inclusion of regions with which both parties have negotiations or agreements. We are thinking not only about Latin America, but also a wider “Atlantic Basin Initiative”.

That is an ideal worth fighting – and waiting – for. With Obama in Berlin, it is time to begin work in earnest to achieve it.

This article was provided to EACCNY by Karl-Theodor zu Guttenberg. Mr. zu  Guttenberg is Germany’s former Minister of Economics and former Minister of Defense and works at the Center for Strategic and International Studies. Mr. Barbieri is Ernest May Fellow at the Harvard Kennedy School.