Transatlantic Free Trade Must Be Done Right

There's a buzz, says Washington Post columnist David Ignatius, in both Berlin and D.C. these days, for free trade as a potential path back to growth for the ailing economies on both sides of the Atlantic. Indeed, a Transatlantic Free Trade area would be a very good idea. And it would be a welcome admission of the fundamental economic truth that free trade benefits all involved. But achieving it is easier said than done. Therefore, policy makers should seek to make a Transatlantic Free Trade Area truly free. A highly regulated trade area would not deliver the benefits promised. Thankfully, there is a way to avoid that lackluster result.

The potential benefits and framework of a Transatlantic Free Trade area (TAFTA) are laid out in a new paper by the German Marshall Fund. The Transatlantic trade economy is already huge — the Center for Transatlantic Relations at Johns Hopkins University calculates its size at $5 trillion in annual commercial sales while it supports 15 million jobs. Yet substantial trade barriers remain, in the shape of tariffs and non-tariff barriers like regulations, restrictions on investment, and government procurement practices. Removing these barriers could significantly increase the size of that trade, leading to more jobs and higher wages. Such economic gains were achieved under NAFTA, but there is significant risk for such an agreement to be much less effective than NAFTA.

The problem is not in Berlin or Washington, but in Brussels. That particular federal "capital" has shown a complete misunderstanding of the benefits of free trade, having turned what was once a good idea — the European Economic Community — from a free trade zone into a highly-regulated customs union. Early efforts at trade liberalization, which bore fruit and helped expand trade, were replaced in the 1990s with "harmonization" of the single market through the imposition of uniform regulations. Brussels (by which I mean the European Union institutions) turned from a facilitator of trade to a supranational regulator with ambitions of its own, as evidenced by the failed EU Constitution (most of which was enacted by backdoor means) and the continuing failure of the Euro currency.

Brussels is likely to insist on a free trade agreement that looks much more like the EU's customs union than NAFTA. This will significantly reduce the benefits to the United States. As James C. Bennett, co-author of the forthcoming America 3.0 says, "The increased volume of trade might tempt American manufacturers to adopt EU standards in any event, although the advance of automated manufacturing reduces the costs of producing to multiple standards." It would be preferable to maintain separate regulatory standards.

Moreover, the EU is unlikely to survive in its current form for long. The Euro Zone crisis probably has only two solutions that are viable in the long term. The first is the abandonment of the euro, which will probably lead to the messy breakup of the EU itself. The second is much deeper integration of the Euro Zone, eventually leading to political union. That will leave several EU member countries outside the Euro Zone that value their sovereignty, such as the United Kingdom, with withdrawal from the EU as their only viable option. This will significantly reduce the size of the EU economy.

It would therefore be in America's interests to finalize a trade agreement not with the EU, but with its individual member governments. This would solve the problem of potential changes within the EU, and at the same time offer the EU a simple solution to its internal problem of what trade relations would look like with departing members.

Of course, there is no reason to stop at the Atlantic. The Trans-Pacific Partnership (TPP) already offers some of the benefits of a free trade area, and could be usefully expanded along the same lines as a potential TAFTA. Combining the three agreements (NAFTA, TAFTA, and TPP) could finally produce a global free trade area that everyone but the most autarkic of dictators would want to join. It would be a truly liberal achievement to the benefit all of the world's people.