FEPS Fresh Thinking

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by Ernst Stetter and Giovanni Cozzi

Last week the EU and the US promised to complete talks on a new free trade agreement within the next two years. If this agreement goes ahead it will unite two trading partners that account for almost half of the world economic output and of 30% of world trade.

The promise of such a free trade agreement is to intensify trade between the two blocs and to potentially boost GDP growth by 0.5% annually for both the EU and the US. This could be a rather significant achievement. However, we believe that a new free trade agreement alone is not enough to boost long-term growth and employment.

The main achievements that this deal is said to bring relate to the reduction of non-tariff barriers to trade, and in particular product regulations. Presently, these types of barriers, which prevent several European companies from competing in the US (and vice versa) are estimated to be equivalent to a traditional imports tariff of 10-20% (BBC 14/02/2013).

Subsequently, the most difficult task that a new trade deal seems to face is the harmonisation of competing standards, intra-company trade, tax regimes, and intellectual property rights. For instance, in the car industry the EU and US employ strict but differing safety standards rule, which means that European car makers must meet the US safety standards before selling cars in the US, or that they have to invest in production plants in the US to fulfil the American model. This currently puts them at a disadvantage.

Yet, there is also another important issue that we believe ought to be discussed: is this trade agreement going to bring sustained long-term growth and employment in Europe and the US?

It has often been argued that trade and financial liberalisation in the past 30 years have been a success in terms of growth for all those countries who have taken part (see for e.g. IMF 2001).

Undeniably, the last 30 years have experienced a slowdown in economic growth compared to the period 1960 – 1980. During the period 1960 – 1980 per capita GDP growth in high income countries was approximately 2.5%, whilst in the period 1980 – 2000, when trade and financial liberalisation increased, per capita GDP stood at approximately 1.7% (Weistbot et. al 2001). If we then move onto the current crisis period we are all familiar with very low and negative growth rates that both Europe and the US have been experiencing.

Also in terms of employment it has often been stated that the global economy has contributed to employment creation. However, it is also now evident that this is not the case in many parts of the world (see for e.g. Weisbrot et al. 2000).

This is not to say that globalisation, which has been driven by an intensive process of reduction in trade and non-trade barriers and financial liberalisation, is solely and fully responsible for the decline in growth rates across the world. However, these trends could indicate that the process of integration and globalisation has not been accompanied by those structural and macroeconomic policies essential for growth and employment creation. Consequently, we are calling for a different and fairer globalisation process that puts individuals rather than markets at centre stage.

Although a broader trade market area for Europe and the US would be a significant achievement, especially in political terms, it is also important to remember that long-term growth and employment are created through technological development and industrial evolution rather than by simply opening to trade, as historical evidence shows.

Over the past 30 years in Europe, in parallel with a process of increased trade and financial integration, we have witnessed a process of de-industrialisation which ultimately has had serious consequences for growth and employment.

The current crisis has made it even more apparent that Europe needs to embark on a process of structural change and transformation of its economic structure, where industrial and technological evolutions take centre stage, and where credit and financial markets strongly support the development of the real economy.

This ultimately calls for structural policies which can assist the process of learning and innovation and for Keynesian demand-management policies (in particular fiscal policies) to support investment and employment.

We believe that these policies are necessary to put the European economy into a long-term growth trajectory and to boost employment.

Therefore the challenge is not only on how to deal with tariff and non-tariff barriers but also on how to best complement the US-EU trade agreement with structural and progressive policies to boost aggregate demand.