Killing it softly? The effects of the American European Trade Partnership on the WTO

Killing it softly? The effects of the American European Trade Partnership on the WTO

The two largest economies in the world agreed to bring their economic relationship to a higher level. This may benefit them, but what will it do to the international economic cooperation in the World Trade Organization?

On the 13th of February 2013, Barack Obama of the USA and Herman Van Rompuy and Jos Barroso of the EU launched negotiations for a Transatlantic Trade and Investment Partnership. If successful, such an agreement would provide additional income in both the USA and the EU of around 0.5 % of their national income: 86 billion € in the EU and 65 billion € in the US by 2027. It would also affect the international economic regulatory regime, more specifically the World Trade Organization (WTO).

The Partnership

According to the European Commission, the Partnership will go beyond the classic approach of removing tariffs and opening markets on investment, services and public procurement. It will also focus on aligning rules and technical standards for products. This reads very much like the USA joining the Internal Market of the EU. It is, therefore, questionable whether the talks will result in early success.

The Obstacles

Creating the Internal Market has been an ongoing project in the EU for the past 60 years. It is difficult to align the regulatory regimes of all Member States. There are great differences that need to be ironed out. It would be naive to expect that aligning the regulatory regimes of the EU and the USA would be easy to negotiate. One only has to look at the example given by the Commission concerning the different safety and environmental standards for cars to understand the ambitious nature of the venture.

The Consequences

The USA and the EU were founding members of the World Trade Organization (WTO). This international economic institution aims to eliminate global trade barriers. It does so in negotiation rounds between its 159 (current) members. One of its important principles is that Member States should not discriminate between trading partners. It also provides a dispute settlement mechanism in the event of a trade conflict between members. The USA and the EU have always been important members of the WTO, but have lost some of their dominance in recent years to emerging economies like India, Brazil, China and others. The Partnership policy of the global behemoths violates the principle referred to above that every WTO member should receive the same treatment. The WTO has a legal provision for such partnerships but the famous trade economist Jagdish Bhagwati calls such Preferential Trade Agreements the Termites of the Trading System. These agreements make what Bhagwati calls a ‘spaghetti bowl’ of the global trading regime. It becomes harder for all countries to find out the prevailing trade regime in a country. In particular, the smaller and poorer countries do not have the means to do so. The EU and USA account for one third of the global trade flow. Their bypassing the WTO hurts its efforts to create a global trade regime. It may very well be a blessing in disguise that the obstacles to such a Partnership are large.


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