The European Union and the United States will begin formal talks on a free-trade agreement, paving the way for the biggest trade deal in the history.
Jose Manuel Barroso, President of the European Commission, made the announcement following Barack Obama, President of the United States.
A deal would bring down trading barriers between the two biggest economies in the world. European Union-United States trade is worth around 455bn euros a year. According to Obama, everything is on the table in the talks.
One aim of the free-trade agreement would be to eliminate or reduce tariffs, taxes that apply to imported goods.
For both the European Union and United States average tariffs are already low, below 3% on one measure. But further reductions could nonetheless stimulate additional trade and there are some areas where tariffs are much higher, notably food.
Beyond that, the negotiations would try to reduce regulatory barriers to trade. That is more complex, but the experience of Europe’s internal market shows it is sometimes possible.
The desire for bilateral trade liberalization on both sides of the Atlantic reflects the failure of negotiations for a global deal in the World Trade Organization. Those talks were launched 11 years ago and are nowhere near concluding. The big powers are anxious to use any opportunity to boost their economic performance.
Barroso said that a future deal between the world’s two most important economic powers will be a game-changer, giving a strong boost to our economies on both sides of the Atlantic.
The European Union estimates that a comprehensive and ambitious agreement will boost annual GDP growth by 0.5%.
Obama announced United States support for talks as part of his annual address to the United States Congress yesterday, saying a free-trade deal would boost American exports, support American jobs and level the playing field in the growing markets of Asia.
It is not clear how long the talks will take, but similar trade deals have involved years of negotiations. Analysts said the most optimistic timeframe given by European officials is two years.
A United States-European Union working group was established in 2011 to discuss the prospect of a free-trade agreement. Ron Krik, trade representative of the United States, said that even sensitive issues such as agricultural subsidies will be up for discussion.
Kirk said that for them, everything is on the table, across all sectors, including across the agricultural sector, whether it is GMOs [genetically modified organisms] or other issues. He added they should be ambitious and they should deal with all of these issues.
Karel De Gucht, Trade Commissioner of the European Union, said that free trade between the United States and the European Union had been under discussion for several years, and said he hoped talks would begin in the summer.
But he admitted that the negotiations would be difficult and complex, but he warned that as the two biggest economies in the world, failure is not an option.
The European Union says the deal will focus on bringing down remaining tariffs and other barriers to trade, and standardize technical regulations and certifications.
Currently the United States and European Union impose relatively low tariffs on goods traded between them, but analysts say other barriers are often in place to prevent European companies competing in the United States and vice versa.
One example is found in the car industry, where the European Union and the United States employ equally strict, but differing, safety standards, meaning that European car makers must meet both before they can sell cars in the United States market, putting them at a disadvantage. De Gucht estimates that such barriers are equivalent to a traditional imports tariff of 10-20%.
Agriculture is also likely to be a significant bone of contention. The European farming industry is already heavily subsidized through the Common Agricultural Policy, and the European agriculture minister has already expressed reservations about the impact a free-trade deal might have.
The United States government is also likely to come under pressure from domestic businesses who have in the past called for protectionist measures to prevent the market from being swamped by cheaper Chinese imports.
The European Union has already said that certain sensitive sectors will require more negotiation but said no sectors would be excluded from the deal completely.
Some analysts suggested that the emergence of China as an economic power along with other emerging markets has encouraged the United States and Europe to unify in order to remain economic leaders.
De Gucht denied that they were seeking to combat Chinese growth. He said they are the leading economies and it’s important that they remain the leaders, but in a way that allows others to develop.
Some analysts said they believed the economic crisis in Europe was a far more important factor. They argued that it’s happening now because there has been seriously depressed growth in the European Union, and this will be good news for economic growth.
And on the American side, the critical factor is that Obama is now in his second term, so he doesn’t have the protectionist pressures from United States businesses to worry about.