In recent weeks there has been growing buzz about what many call a transatlantic free trade agreement, or TAFTA. President Obama may announce in his State of the Union address on Tuesday his intention to begin negotiations with the European Union; EU leaders gave their go-ahead on Friday.
Transatlantic trade is already sizeable. The U.S. exports three times as many goods to Europe as to China, and the EU exports twice as many goods to the U.S. as to China. Free trade could translate into millions of new jobs in the U.S. and Europe and improve both earnings and competitiveness for many companies, particularly small- and medium-sized enterprises. One European think tank estimates that a U.S.-EU free trade deal would be worth 5 times the U.S.-Korean free trade deal ratified in 2011.
But trade in goods accounts for only about 20 percent of transatlantic commerce. Even greater gains could be had if leaders go beyond a TAFTA and forge a broad-based Transatlantic Partnership that spurs mutual investment flows, boosts the services economy, cuts unnecessary red tape, and opens global markets.
The United States and the European Union are each other's most important investment partners. Transatlantic investments have combined annual sales exceeding $4 trillion, which dwarfs any other commercial relationship in the world. Investment from Europe accounts for 74 percent of total foreign direct investment in the United States. Foreign investment and sales by European companies in America and American companies in Europe power transatlantic commerce and provide millions of jobs on both sides of the Atlantic. Those sales are double comparable sales in the entire Asia/Pacific. Tackling investment barriers can create jobs and spur growth.
Services are the sleeping giant of the transatlantic economy. Most American and European jobs are in the services economy, which accounts for over 70 percent of U.S. and EU GDP. The U.S. and EU are each other's most important commercial partners and major growth markets when it comes to services trade and investment. The two economies have never been as intertwined as they are today in financial services, telecommunications, utilities, insurance, advertising, computer services, and other related activities. Yet protected services sectors on both sides of the Atlantic account for about 20 percent of combined U.S.-EU GDP -- more than the protected agricultural and manufacturing sectors combined. Removing barriers in services would generate the same gains to consumers and companies as have the past 50 years of multilateral trade negotiations in these other areas.
The real barriers to a more open transatlantic market are not trade barriers, they are differences in regulation. U.S. and EU regulators generally have the same high standards for protecting the welfare of our consumers, our environment and the health of our citizens. A detailed study of 3,000 risk-reducing regulatory decisions in the U.S. and EU shows that overall risk stringency is about the same; divergences stem largely from protectionism. If the transatlantic partners could recognize the essentially equivalent nature of many U.S. and EU regulations, they could open up even more opportunities for growth and jobs.
Finally, a Transatlantic Partnership should also be used to open global markets. The multilateral trading system is under challenge. A number of rapidly emerging countries do not share the core principles or basic structures that underpin open rules-based commerce, and are now showing no real interest in new market-opening initiatives. As a result, the global economy is drifting dangerously towards the use of national discriminatory trade, regulatory and investment practices. Yet given the size and scope of the transatlantic economy, standards negotiated by the U.S. and EU can quickly become the benchmark for global models, reducing the likelihood that others will impose more stringent, protectionist requirements for either products or services. Mutual recognition of essentially equivalent norms and regulatory coherence across the transatlantic space, in areas ranging from consumer safety and intellectual property to investment policy and labor mobility, not only promise to lift the lives of our people but form the core of broader international norms and standards.
We should have no illusions about the difficulties involved. Remaining tariff barriers, especially in agriculture, are politically sensitive. Some of the most intense transatlantic disagreements are over regulatory policy. Issues such as food safety or environmental standards touch nerves on each side of the Atlantic. To complicate matters further, responsibility for regulation is split in the EU between European and national levels, and in the U.S. between the federal and state governments, so simply getting the right people into the room can be a real challenge. Investment barriers, especially in terms of infrastructure and transport sector ownership, will be very difficult to change. But the potential payoff is high, and will translate into jobs and economic opportunity not only for our citizens but for billions around the world.
For a more complete overview of the transatlantic economy, including figures on jobs, trade and investment for all EU 28 member states and 50 U.S. states, as well as full data references, see Daniel S. Hamilton and Joseph P. Quinlan, The Transatlantic Economy 2013, Vols. 1 and 2 (Washington, DC: Center for Transatlantic Relations, 2013), from which the following section is largely drawn. Unless otherwise indicated, data are from Eurostat, the U.S. Department of Commerce, the WTO and the IMF; investment and investment-related jobs are from the U.S. Commerce Department's Bureau of Economic Analysis; trade data are from the IMF Trade Statistics and the Office of Trade and Industry Information of the International Trade Administration.