TTRRAANNSSAATTLLAANNTTIICC PPEERRSSPPEECCTTIIVVEESS FFOORR GGLLOOBBAALL EECCOONNOOMMIICC RREECCOOVVEERRYY In search of congruence in trade interests and export promotion policies Seminar at Embassy of the Netherlands | November 30, 2010 New perspectives During a one day seminar at the Embassy of the Netherlands, top researchers from the US and the EU, accompanied by a select number of government representatives from both sides of the Atlantic, and high-ranked economists from several global institutions, came together to discuss congruence of trade interests between both economic giants. Main objective of this high level Chatham House Rule seminar was to find areas where trade liberalization (both transatlantically and globally) would generate gains for export and welfare growth that are comparable and mutually beneficial for both the EU and US. In combining and comparing existing empirical research on export growth in a comparative study, different sets of policy measures were ranked according to their influence on export and economic growth, thus providing insight into common interests. This study will be updated on the basis of the discussions during the seminar, and will be made available early 2011. The seminar, co-sponsored by the Embassy of Belgium, provided a unique opportunity for frank discussion on transatlantic trade interests, and the concrete possibilities for strengthening these. These possibilities for follow-up – most likely in the area of trade in services – will be the topic of a high level policy conference in the first half of 2011. The enduring importance of the transatlantic economic relation The economic relationship between the EU and US is still by far the largest and most integrated in the world. This is the case for trade in goods (20% of world exports), but even more so for services (33% of world exports) and especially for investment (68% of outward stocks). The combined GDP of the EU and the US adds up to 54% of global demand. Looking ahead, this relative significance will decrease, as GDP and population sizes will increase in emerging markets. Already the share of the US as a destination for EU exports has diminished, even though the EU is still as important for US exports as a decade ago. However, certainly in the coming decade, the US and the EU will remain each others most important trade and investment partners and the largest players in the global economy. Many participants felt that currently the EU and US do not exploit all opportunities of this interrelated trade and investment relation, for instance in the service market, due to an apparent inability to translate potentially win wins into concrete action. Although China may already have become the favorite metaphor in the political debate on trade (and China is the emerging market par excellence that will gain in importance as a destination for US and EU exports), this should not eclipse policy makers from the reality that the next 10 years will be predominantly another Atlantic decade in trade and investment. Efforts to strengthen global trade and investment will therefore certainly benefit from a transatlantic perspective, and given window of opportunity to do so will not be endless given the transformations of global trade and investment. Transatlantic interests in liberalizing global trade

The EU and the US have a clear shared interest in liberalizing global trade. Both trading blocks would benefit substantially from a further liberalization of global trade, in particular when this would also include IPRs, public procurement and exchange rate policies. The urgency for the US – with its falling share in world trade and fundamental ambition of redressing its economic imbalances with a stronger focus on foreign demand through export growth – in this is probably at least as big as for the EU. During the discussion, the differences in the political economy regarding trade in the EU and US played an important role, in particular how (temporary) ‘losers’ of liberalization could be included through redistribution mechanisms. A clear ‘private sector buy in’ (currently lacking for the DDA) in liberalization is essential for a favorable political economy towards liberalization. On the other hand, the growth of FDI and intra-firm trade potentially reduce political economic obstacles to liberalization. The EU and the US will benefit from a conclusion of the DDA, although several speakers underlined that the current state of the negotiations brings less than optimal (and, as put forward by some participants, in the case of the US, acceptable) benefits for both. In NAMA, procurement and services, more market access by emerging economies would be beneficial for both the US and the EU. In agriculture the issues at stake for the US and EU are in many respects comparable, whereas in some (potential) sectorals – such as financial services, telecom, cosmetics, environmental goods – some participants esteemed that win-win scenarios between the US and EU exist. Given the number of participants and the increased complexity of the round, its long duration is not necessarily surprising or worrying, compared to previous rounds. However, several participants stressed that the standstill in negotiations (and particularly a potential failure of the DDA) will harm both the US and the EU substantially. Broad consensus existed that the DDA suffers from a problem in its initial (too limited) scope and design. From this perspective, the paramount question is how the fundamental relevance of DDA can be strengthened without derailing the current negotiations. ‘Rethinking the model’ whilst at the same time realizing progress for many participants on the basis of the existing state of negotiations is in the interest of both the EU and the US. This would require a renewed focus on services, next to NAMA and agriculture, leading to the important question of how to structure the negotiations on services in the current round. Some argued that realizing significantly better market access for the poorest economies is not a significant obstacle for concluding the round. Overall, participants esteemed that concluding the DDA was of strong strategic importance for both the EU and US. Liberalizing the transatlantic market? A transatlantic free trade agreement… Between the transatlantic economies, substantial benefits are possible by eliminating tariffs (TAFTA) and by reducing non-tariff measures (NTMs). These benefits on trade and investment for the EU and the US in some cases (for instance the open skies agreement) surpass the expected benefits of the current DDA negotiations. Although remaining tariffs are low, given the large volumes of trade cost savings through tariff reductions could be considerable. The US Chamber

recently launched an initiative to introduce a zero tariff on traded goods between the EU and the US. Some participants warned for possible trade diversion due to a TAFTA, although others argued that the current low level of tariffs makes diversion of trade less likely. The gradual decline in the nearby future of the transatlantic relation as the focal point in global trade and investment would indicate that the relevance of TAFTA (and transatlantic NTM reduction) would probably be greater in the short term. In this respect, it was suggested that if sufficient political leadership was present, a TAFTA could be realized in a relatively short time span (possibly a year). However, another participant argued that both the US and the EU trade administrations currently would simply not have the capacity to work on TAFTA. Whilst some participants warned against the implications for multilateral trade negotiations if the EU and the US were to embark on a TAFTA, others argued that this actually would provide a useful signal towards emerging markets that they should offer more market access. …NTM reduction… The benefits of eliminating/harmonizing NTMs between the US and EU are potentially considerably higher than that of TAFTA. Apart from the existing low level of tariffs, the reason for this is that services (a ‘sleeping giant’) and investment constitute the backbone of the transatlantic economic relationship, and that NTMs – more than tariffs – stand in the way for these. Revealed comparative advantage of the EU and the US in services would also make this a less likely area for trade diversion. Also, with productivity increases in the US (as compared to Europe) being concentrated in services, a larger services market could be important for future US and EU growth. One participant argued that the success of the NEI was critically dependent on a robust investment agreement with Europe. A transatlantic approach to NTMs would not just allow for benefits by economies of scale between the EU and the US, but also contribute to global standard setting and the future competitiveness of US and European firms on global markets. The critical factor for NTM reduction is ‘actionability’, i.e. the question to what extent harmonizing/eliminating NTMs is technically and practically feasible. Some esteemed that 50% of NTMs could indeed be reduced, whereas others argued that this percentage was probably too optimistic. In any case, convergence of NTMs in industries where standards and regulatory frameworks are still in its infancy is probably more actionable than elsewhere, an issue that the TEC agenda is clearly aware of. Also, several participants stressed the importance of better cooperation between the trade policy community, and legislative/regulatory communities in the EU and the US, both in the effort of reducing NTMs and in setting up new regulation. …or the current course? Participants also discussed if there is currently leeway for taking further steps in strengthening transatlantic trade and investment. The renewed TEC perspective on regulatory issues was seen as a step in the right direction, although many participants expressed worry that small but complicated issues such as chlorine chicken would continue to dominate the agenda. Whereas for NTMs the agenda would probably be to fill a productive pipeline with concrete steps towards

regulatory convergence, momentum for TAFTA could come from joint US and EU commitment to issue an official study as to its effects. Export (or better: trade) promotion: a shared interest Export promotion constitutes an increasingly popular instrument for governments to stimulate exports and economic growth in both the US and EU. There was a strong consensus among the participants that a focus on export promotion risks to have serious economic flaws, both in terms of its goals (not just exports, but trade including imports and ultimately welfare growth) and instrumentation (as in industrial policy there is the risk that policy makers are over ambitious and go beyond what close analysis of market failure would suggest). On a macro level, the fact that export growth presupposes the presence of international demand was also brought up as a warning for overzealous public export promoters. Although empirical studies on trade promotion are rare, a compelling agenda is present to reduce framework barriers to international trade for instance in business services. Also, a meta analysis of a large number of studies on economic diplomacy indicates that in many cases this has a significantly positive effect on export, and even more so on imports and welfare growth. Finally, there is clear evidence that trade facilitation has positive effects on welfare and trade. From a practitioner’s perspective it was argued that frequently the promotion of exports, in particular for SMEs, has its basis in information asymmetries where governments can play a useful role. Over the whole, the session indicated that the EU and the US instead of being competitors in the promotion of their exports in reality often have parallel interests in promoting trade, through mutual learning, realizing market access in third markets and most of all in realizing a more efficient allocation of production through both exports as well as imports growth. Conclusions Overall, the conclusions of the seminar were: • There is strong congruence of interests between the US in liberalizing global

and transatlantic trade and investment; • Given the shared interest in concluding the DDA, the US and EU have a joint

interest in strengthening the inclusion and commitment of the emerging markets in the world trading system.

• The importance and benefits of strengthening the transatlantic trade and investment relation should be carefully weighed against the potential negative impact this may have on the above.

• Both globally and transatlantically, services would probably provide the domain where a joint EU and US agenda would be most successful.

One participant summarized what it takes to concretely bring joint US and EU interests further: i) common definitions of challenges,

ii) a shared sense of corporate interests, iii) a vision of partnership in implementation, and iv) a shared political economic outlook.

Whereas for all three topics discussed congruence of interests takes a partly different shape, in all three areas stronger cooperation in the area of services was certainly a common denominator that could be further explored for the intended conference in 2011.