CIAO DATE: 06/07

European Affairs

Fall/Winter 2006

 

Economy and Trade

Is It Time for TAFTA? Or What?

Robert Zoellick

 

The Doha round is in the doldrums. There are many reasons for the stalemate, including the absence of a decisive breakthrough on dismantling agricultural subsidies either in the European Union or in the United States. Economic nationalism is resurgent in many EU member states. The U.S. Congress coming into office in January will be controlled by the Democrats and contain more – and more vocal – protectionists.

Advocates of further trade liberalization know their goal, but they are in a quandary about how to get there. The obvious option is to press on for a deal in the Doha round of talks under the auspices of the World Trade Organization (WTO) to achieve a global deal on opening markets and cutting subsidies. The political challenge remains unchanged – how to stretch domestic support for reciprocal concessions, without overreaching and outrunning domestic political support for a deal. There is little reason for optimism that the barriers are being lowered, meanwhile the political clock is running out on the leaders in France and in the United States. With French elections coming in May and the U.S. President’s special negotiating authority due to lapse unless it is renewed by summer, Doha could be dead in 2007.

An obvious alternative for everyone would be renewed emphasis on bilateral and regional trade deals. In many ways, these are the enemy of the greater good of global trade agreements. But in practice, might a regional pact – especially a Transatlantic deal – remind the WTO’s members that a global stalemate will not only stifle growth but also goad the richer nations to turn to their own narrower interests? All these questions have surfaced in the suggestions that it might be time for a TAFTA. The idea has caught the imagination of German Chancellor Angela Merkel: prudently, she explains that it could only be considered in a situation where Doha seemed doomed. But she also seems interested in the idea as a dramatic initiative that could help revivify Transatlantic unity.

Few people are as well-qualified to analyze and “contextualize” this idea as Robert Zoellick, now a senior executive at Goldman Sachs, after years in policymaking jobs in several U.S. administrations. He was part of the small team that masterminded U.S. policy on German reunification under President George Bush. In the current Bush administration, he was the top aide in the State Department as Deputy Secretary under Condelezza Rice. He has also been the U.S. Trade Representative dealing with these issues of global commerce, including negotiations between Washington and the EU. In November Mr. Zoellick spoke with European Affairs. The following are edited excerpts from the conversation.

Zoellick is wary of TAFTA for two reasons. One is the risk of jeopardizing Doha, which he believes is still achievable if negotiators will move from posturing to mutual concessions in a mood driven by the looming risk of the talks’ collapse. Secondly, Zoellick contends that the Transatlantic economic tissue is already so dense – so rich and so sophisticated – that any improvements in it (except for agriculture) are already beyond the reach of classical free-trade deals. In his view, it is time to look for subtler measures – such as Fine-tuning the two sides’ approach to regulatory and other non-tariff questions – that could boost Transatlantic business. This modified approach would amount to a new degree of public-private cooperation in ironing out the problems restricting major liberalization in the Transatlantic market place. He calls for an approach of “building blocks” of changes in sectors identified by the business world as problematic.

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European Affairs: A lot is being heard these days about a “new big idea” in U.S.-European relations: launching negotiations on creating a “Transatlantic free trade area” between the United States and the European Union. Chancellor Merkel has spoken publicly about a Transatlantic economic partnership. What do you make of the proposition?

Robert Zoellick: The idea of a TAFTA has come up for discussion over the years. It represents a positive inclination to deepen integration across the Atlantic for business and economic purposes. In some people’s minds, it also represents a desire to further connect the Transatlantic democracies. Usually, people visualize it applying to the service sector: manufacturing tariffs are relatively low already, and there are undoubtedly ways the European and U.S. service sectors could be brought closer together. The greatest challenges probably lie in dealing with regulatory questions. But goals of convergence and harmonization turn out not to be so easy to achieve: both sides have independent regulatory bodies that have their own practices based on their own expertise and experience. We’ve seen the difficulties of trying to coordinate regulatory approaches in our Transatlantic experience on issues such as competition policy or health and safety rules. Given the understandable differences between systems, the way ahead seems to lie in pursuing an approach based on mutual recognition: the two sides agree to live with different systems while recognizing that they both seek to achieve the same basic objectives.

EA: Does this mean you are skeptical about calls for TAFTA?

Given the degree of integration already achieved for the Transatlantic economies, there are undoubtedly ways in which we could reduce barriers even further. But when you delve into the details, they are not as simple as it might seem at first. For that reason, some very strong proponents of the Transatlantic relationship like Pascal Lamy (the head of the World Trade Organization) and Peter Sutherland have been skeptical of a special Transatlantic bargain on trade – for example, when it was put forward by people like Sir Leon Britain (the former EU Commissioner). A major problem with TAFTA is how one deals with agricultural liberalization. This is not just a question of subsidies or quota reductions: both sides have their sensitivities about market access. In general, the European Union has higher agricultural tariffs and more quota limits than the United States. Does one expect the EU would be willing to eliminate these to achieve free trade? On the U.S side, there would be real scrutiny based on the perception that a number of openings were already secured by global agreements in the GATT/WTO and then undercut by non-tariff barriers such as biotech limitations, beef hormones prohibitions and the like. American farmers feel that they do not have much agricultural access to the EU even where openings have been negotiated. That makes the politics of agricultural free trade in a TAFTA very difficult.

EA: Couldn’t the farm dossier just be taken off the table so negotiators could concentrate on progress in other sectors?

Under WTO rules, developed countries are not supposed to do free trade agreements unless they cover substantially all trade. (The WTO actually should scrutinize this matter more closely because certainly some Japanese and EU free trade agreements raise questions about whether or not they comply with that standard.) In any case, in the light of both European and U.S. interest in the WTO, one would be very reluctant to pursue a TAFTA that did not maintain that comprehensive standard. Also, omitting agriculture would be a difficult political issue. A major agricultural exporter like the U.S. would not want to forgo the opportunity to open EU markets in a deal that achieved free trade in other sectors. In reality, it could prove hard to remove agriculture. Taking all this in account, I and others over the last ten years have pointed to the potential for a slightly different approach – not a traditional free trade agreement but a process of finding building-blocks in different sectors to deepen Transatlantic economic and business integration. Right now, stock exchanges are discussing mergers, for example among the New York Stock Exchange and those in Europe. And there are questions of accounting standards and similar matters that are increasingly defining the service sector businesses. So it would be possible to come up with a working agenda that highlights those questions, gets energy from the top political levels and puts impetus behind regulatory bodies and other stakeholders with technical expertise to move forward.

EA: Would a formal bid to start work on TAFTA deal a final blow to hopes for a breakthrough and success in the Doha Round of global trade talks?

The risks are certainly one reason why people have to handle it carefully when they talk about a TAFTA. For better or for worse, the United States and the European Union remain the major drivers of the WTO, but they cannot succeed on their own in trying to foster freer global trade. As the Doha round has revealed, they increasingly are going to need strong cooperation from some of the developing countries – India, Brazil and, I would maintain, China. It would also help if other developed countries like Japan played a more significant role. Conceivably, U.S.-European discussions about a TAFTA now would help create a competitive sense that could help move forward the Doha negotiations. But the worst of all worlds would be to talk about a TAFTA in a very conceptual way without being prepared or able to get into some of the difficult details I’ve mentioned. That would certainly undermine the Doha agenda without creating a TAFTA. Frustrating as it has been, I believe the Doha negotiations can reach a deal. But it will require the U.S. and Europe to step up with a great problem- solving approach as opposed to posturing, in which each side just defends its tactical position with public arguments and without really exploring package deals with all the others. At this juncture, frankly, I would urge more attention to getting the Doha round done rather than launching a TAFTA-type project.

EA: Is there an institutional or political calendar or deadline for these decisions?

By mid-2007, the United States (obviously, with the new Congress) will have to decide whether to extend the President’s current “fast-track authority” on trade negotiations (now known as TPA for “President’s Trade Promotion Authority”). I believe the administration would increase its ability to organize support for extending TPA if the U.S. has momentum in trade negotiations. Some people disagree, arguing that getting any such “momentum” requires stirring up such sensitive issues that it actually makes it harder to build support. My reply is that it is better to be on the offensive so as to get support from the business community and other constituencies. To be on offence, the administration needs to be able to show the possibilities for a successful global round. Otherwise, they just won’t think Doha is a live option.

EA: German Chancellor Angela Merkel has shown interest in TAFTA as an alternative, if the multilateral Doha round talks collapse, which would also amount to a concrete and dramatic step to revitalize ties between the United States and Europe. Do you think she is on the right track?

Her comments are in line with ideas that have traditionally come from people on the political and foreign-policy side. I think Henry Kissinger broached this at one time. It is laudable, of course, but the challenge is that the desired Transatlantic political and foreign-policy deepening cannot be attained without really digging into some of the complex problems in the service and farm sectors – to see whether it can actually happen. The reason that Transatlantic trade initiatives of this sort have foundered in the past is that they have not drawn that connection – between the larger political and foreign-policy agenda and the concrete economic issues that would have to be solved in order to underpin progress on the initiative.

If the political leaders want to move in this direction – and I certainly think it shows a positive spirit on their part – then I would encourage them to look at other options like the building-block approach I mentioned. Certainly from my vantage point looking at financial flows, I see clearly that the Transatlantic economic community is already extremely well integrated. The substance can be viewed in two ways – in terms of the capital account (i.e. investment flows, mergers, etc.) or in terms of the current account (i.e. trade Flows) and they are two sides of the same thing.

So the question is, which side of the equation do we want to focus on now? If we look for the leading edge, we can see that the capital account is increasingly driving the agenda more that the current account. This is not just in traditional financial services. Think of new sectors such as air-express businesses, which is related to manufacturing but is, increasingly, part of the Transatlantic activities. In this context, one approach would be to take this positive political inclination to deepen Transatlantic economic integration (as manifested in talk about a TAFTA) and channel it into a fuller dialogue with people who are already driving the economic and business forces in the U.S.-European relationship. Let’s get their sense of the true obstacles to expanding these flows and then let’s try to set an agenda to overcome those impediments. The degree of Transatlantic deepening that already exists suggests that the core points that need to be addressed for further progress are probably not going to be captured by an agenda aimed at a traditional free-trade agreement.