Meet the New Global Trade Leader: the European Union

08/12/2017 11:14 am ET
Yukiko Matsuoka, via Flickr

By Nicole Gunkle

Accounting for 23 percent of GDP worldwide, the United States has dominated the global economy for over 70 years. However, the US attitude towards trade policy has changed significantly since the new administration took office. President Donald Trump has removed the United States from the Trans-Pacific Partnership (TPP), slowed the progress of the Transatlantic Trade and Investment Partnership (TTIP), and called into question the benefits of the North American Free Trade Agreement (NAFTA).

With these notable changes in policies, the United States is no longer situated at the forefront of international trade, and in its absence the European Union has stepped in. The European Union recently signed a free trade agreement with Canada, finished free trade negotiations with Japan, and has essentially replaced the United States as the leader in global trade policy.

In recent years, there has been a significant rise in free trade agreements. This rise can be attributed to the lack of movement in the most recent round of trade negotiations among World Trade Organization (WTO) members, as well as the organization’s inability to set world standards. The WTO was created to negotiate trade agreements and remove obstacles to international trade. While the WTO had success in the early stages of removing tariffs, issues with non-tariff barriers have slowed down negotiations. As less progress is made through the WTO framework, even more emphasis will be placed on free trade agreements and their ability to shape global trade policy.

TPP and TTIP were significant trade deals, not just for the United States and its signatories, but also for the world more broadly. The Brookings Institution conducted a study on the impact of TPP, stating the agreement was significant because it represented 60 percent of global GDP and 50 percent of international trade, in addition to bringing together both developed and developing countries in the Pacific Rim. TTIP represented nearly half of the world’s GDP and, as Former Deputy Assistant Secretary of Commerce Michael Czinkota states, it was “the West’s last best opportunity to set global rules as the emerging markets continue to gain ground.” NAFTA, when instated, was the most comprehensive free trade agreement in terms of gross domestic product. The removal and stalling of these agreements leaves the United States no longer as the rule-setter for new trade policies, but as a follower to the decisions made in European free trade agreements.

In February, the European Union ratified its free trade agreement with Canada, the Comprehensive Economic and Trade Agreement (CETA). With plans for it to be in effect by September, this agreement will represent the most comprehensive trade agreement in the world. Besides the standard reduction of tariffs between the two countries, CETA addresses issues such as trade of services, simplifying technical and regulatory standards, and greater protection for intellectual property to reduce as many non-tariff barriers as possible. The most significant advantage the European Union has gained from this agreement, though, is access to the North American market – EU companies can now compete with US exporters in the Canadian market. Overall, CETA represents two strong, Western trade powers setting the global standards on non-tariff barriers yet to be addressed on the world stage.

Prior to the G20 summit held in July, the European Union and Japan concluded discussions on their free trade agreement. For both powers, it represents the commitment to improving global trade despite the United States’ new turn towards “America First” policies. With the fourth largest economy in the world and the EU’s second largest Asian trading partner, Japan is a huge market for the European Union. The agreement also demonstrates the benefits of being part of the European Union and is the first agreement concluded post-Brexit. For Japan, it will be the largest trade agreement made to date and provide their car manufacturers with greater access to the European Union, a market which was once heavily restricted. Both sides believe this agreement will encourage other countries to further reduce barriers and value free trade even without US support.

In addition to CETA and the EU-Japan agreement, the European Union has a free trade agreement with South Korea, which went into effect in 2015, as well as pending agreements with Singapore and Vietnam. While all will benefit from the higher standards being set by the European Union and its new trading partners, US companies will begin to feel pressure in current markets as EU companies gain preferred access through these new deals. Since 2000, the European Union has enacted over 30 trade agreements with countries in Africa, Asia, the Mediterranean, the Middle East, and South America. In the same time frame, the United States had enacted only 20 trade agreements with a more narrow focus on South and Central America. As the European Union continues to build agreements with more countries, it gains a larger role in defining global trade policy.

As long as the United States continues to follow its “America First” policies, the European Union will set the global trade standards and rules with its free trade agreements. The European Union has the largest free trade agreement in the world with Canada and it is forming more agreements with key nations. As free trade agreements become the new tool for defining global trade policy, recent developments could mark the end of US-dominated trade policy and a beginning of a new era led by the European Union.

Nicole Gunkle is a Fellowship Editor at Young Professionals in Foreign Policy (YPFP). Her focus is on European Affairs and International Trade with a particular interest in the European Union. Nicole holds a MA in International Affairs from American University.

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