Untapping the EU-US trade potential: Taking the Transatlantic Economic Council forward

Lucian Cernat, Bertin Martens 07 May 2010

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The EU and the US are arguably among the most open G20 economies. However, a recent study shows that there is still a considerable untapped trade potential between the two. A further reduction in transatlantic regulatory barriers to trade could boost US exports by 6% and EU exports by 2%. It could add €160 billion ($210 billion) to annual real income in the EU and US. That may not seem much in an age where we count our debts in trillions rather than billions but it remains an impressive figure. We could expand the size of the transatlantic economy by the equivalent of Portugal or Maryland by making an effort to reduce the unnecessary trade costs of regulatory differences between the EU and US.

Trade opening is not popular in times of economic crisis when protectionist and mercantilist sentiments get the upper hand. President Obama’s 2010 State of the Union address announced the goal of doubling US exports by 2015. This gave a strong signal that trade is seen as a key engine for the US economic recovery and job creation. The 2010 Trade Policy Agenda identifies several concrete instruments that would contribute to this goal, including the conclusion of free trade agreements with Korea, Colombia, and Panama and the launching of the Trans-Pacific Partnership. But no transatlantic initiatives?

Most commentators believe that there is not much to be reaped from further opening in transatlantic trade. Indeed, the US and the EU are vying for the status of most open economy in the world. According to the World Bank, the trade-weighted applied MFN average tariff in the US is less than 2%, the lowest among the G20 countries. It also indicates that the EU has the lowest unweighted applied average tariff (1.5%). Whatever the final verdict on tariff openness, this is clearly not a major issue. Both EU and US tariffs are very low.

However, the view that transatlantic trade should therefore be off the agenda is misguided. The EU Trade Commissioner, Karel De Gucht, sees the Transatlantic Economic Council as an important mechanism to address non-tariff regulatory barriers to trade. The recent study by the European Commission confirms this view.

Studies on the trade costs of regulatory barriers are not new. Ever since the Australian Productivity Commission started investigating it, a cottage industry of research work on this subject has emerged, often using gravity models to estimate the "missing trade" because of regulatory differences between trading partners. A lot of the early work was based on trade data only; more recent work has tried to complement that with experts' views on the trade restrictiveness of various types of regulation. This new study goes a step further. It uses survey information supplied by companies that are actually involved in transatlantic trade to estimate the trade restrictiveness of regulatory measures and the additional trade costs they induce for exports to the EU and to the US.

Table 1. Estimated EU and US non-tariff barriers, by sector

Index of NTM restrictiveness (scale 0-100) 
 
into US
into EU
Chemicals
46
53
Pharmaceuticals
24
45
Cosmetics
48
52
Biotechnology
46
50
Machinery
51
37
Electronics
31
20
Office & ICT equipment
38
32
Medical & measuring equipment
49
45
Automotive industry
35
32
Aerospace
56
55
Food & beverages
46
34
Iron, steel and metal products
36
24
Textiles clothing & footwear
36
49
Wood & paper
30
47
Travel
36
18
Transport
40
26
Financial services
30
21
ICT services
20
19
Insurance
30
39
Communication
45
27
Construction
45
37
Other business services
42
20
Personal & cultural services
36
35

Source: ECORYS (2009).

Not surprisingly, the study finds that the trade costs of non-tariff measures and regulatory differences across the Atlantic are almost invariably much higher than the tariffs that are applicable on these goods and services, if any.

Non-Tariff Measures are defined as ‘all non-price and non-quantity restrictions on trade in goods, services and investment, at federal and state level. This includes border measures (customs procedures, etc.) as well as behind-the-border measures flowing from domestic laws, regulations and practices’. The study did not examine the domestic cost of these regulations; it only looked into the additional costs that these regulations create for doing cross-border trade, i.e. the impact on exports and imports outside the EU and the US. If the regulatory set-up would be identical in the EU and the US, the additional trade costs would be minimal – but not necessarily zero. There would still be some minimal costs such as translation or filling out customs documents. However, when regulatory environments are different, or explicitly create additional costs for cross-border trade, than regulatory divergence induces additional trade costs, over and above the minimum required.

It is not realistic to assume that all NTMs and regulatory divergence can be aligned, even not between two of the most developed economies in the world. Some are driven by geography, language, consumer preferences, culture or history, and simply by path dependency in the legal system. How much of these trade costs are really actionable is not easy to gauge. Various measures were used to capture the degree to which an NTM or regulatory divergence can realistically be reduced by 2018, including the broadness and sensitivity of the regulation, the extent of legal change and technical work required, and industry incentives to reduce the costs. It turns out that, on average across 23 sectors, about half of all NTM costs can be eliminated, with strong variation across sectors, from less than 20% to more than 70%. That estimate of the degree of "actionability", or the extent to which regulatory trade costs can be reduced, was then fed into a trade policy scenario in a dynamic general equilibrium model. A more conservative scenario whereby only half of these regulatory costs reductions can be realized was also tested.

Table 2: Estimated gains from NTM liberalization

 
Ambitious scenario
Limited scenario
 
Real income
 
 
US
+ 53 billion USD
+ 24 billion USD
EU
+ 158 billion USD
+ 70 billion USD
Real income
 
 
US
+ 0.3 %
+ 0.1 %
EU
+ 0.7 %
+ 0.3 %
Exports
 
 
US
 + 6 %
+ 3 %
EU
+ 2 %
+ 1 %
Imports
 
 
US
+ 4 %
+ 2 %
EU
+ 2 %
+ 1 %

Source: ECORYS (2009).

This is not a beauty contest between the US and the EU. Both sides have homework to do to reduce the unnecessary trade costs that regulatory diverge induce.

Apart from specific sector regulatory issues, many cross-cutting issues were indentified in the study that affect a wide range of industrial and services sectors, including differences in intellectual property regimes across the Atlantic (and fragmentation among EU member states), difficulty of access to R&D subsidies for research network partners from the other side of the Atlantic, access to public procurement markets, rapidly developing differences in regulatory regimes in energy & climate change, all-pervading homeland security regulations in the US, and, last but not least, differences in the approach to regulation: US emphasis on producer liability versus EU emphasis on the regulatory role of government.

Perhaps the most important implicit policy message is that the EU and the US have an important window of opportunity left to reinforce their global regulatory leadership role. Because they represent the largest markets in the world, they have become the most important regulatory standard setters for much of the global economy. Creating a transatlantic market with harmonised regulation would strongly reinforce this global regulatory leadership role. Not creating such a market implies the risk that competing standard setters may gain more regulatory traction in global markets in the foreseeable future.

Where to start? Regulatory processes and outcomes are mostly driven by domestic political economy factors. External competitiveness and trade policy concerns are rarely figuring prominently in these domestic debates. It would probably not be very productive to try to re-open debates on well-established regulation. A more promising approach would be to focus on on-going regulatory debates and regulatory issues that are likely to become important in the near future. Energy standards, climate change, financial sector reforms, internet-based services, and high-tech industry standards (bio- and nano-tech) are but a few examples where today's debates will determine the regulatory environment of important sectors for the future of the global economy. The Transatlantic Economic Council and the regulatory dialogues between the EU and the US could best be revamped with a strong focus on the future rather than on the past.

If there's one thing that the financial crisis has bought home, it is the degree to which the world's economies are integrated, both financially in terms of physical production and trade flows. In an era of economic interdependence and global value chains, can we really afford not to pursue the elimination of trade barriers with our biggest partners? John F. Kennedy said in 1962: "the United States will be ready for a Declaration of Interdependence... we will be prepared to discuss with a united Europe the ways and means of forming a concrete Atlantic partnership"1. A transatlantic partnership is an idea whose day has now come. If we turn on the Transatlantic Economic Council, more trade and economic prosperity will flow.

Disclaimer: The views expressed in this article are those of the authors and do not necessarily reflect the views of the European Commission.

References

ECORYS Nederland BV (2009). “Non-Tariff Measures in EU-US Trade and Investment – An Economic Analysis,” Study for European Commission, Directorate-General for Trade.


1 Address at Independence Hall, Philadelphia, 4 July 1962
 

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Topics:  International trade

Tags:  EU, trade, transatlantic trade, EU-US cooperation

Chief Trade Economist of the European Commission

Deputy Chief Economist, DG Trade, European Commission