Hints of a Trans-Atlantic Trade Grouping - Sep 23

Wow, have I got a winner here. You wanna talk New World Order? How 'bout a free-trade zone that makes up a little over half the entire global economy? My mind reels. This is at least 10 to 20 years away I reckon but my God! Surely Jesus is coming soon! Be prepared my friends and pray always.

Mr. Johnny Cash

Global Market Brief: Hints of a Trans-Atlantic Trade Grouping
Sep 21, 2006

On Sept. 15, the German press began buzzing with talk about Chancellor Angela Merkel's sudden interest in promoting a free trade dialogue with the United States during her term at the head of the European Union in the first half of 2007. Such a move, if successful, would completely rework the global trading regime, and with it global power balances.

The German chancellery has not yet made any formal announcements, although advisers have been leaking hints of new policy to publications such as Bild newspaper and Financial Times, but Merkel's views on a trans-Atlantic free trade agreement (TAFTA) are beginning to solidify, and not only for economic reasons.

While Merkel is an avowed Europeanist, she is uncomfortable with some aspects of European integration. Issues like a common foreign policy or a system that constrains German options rub her the wrong way, and currently Germany is blocking efforts to streamline EU policy formation in issues of judicial affairs -- preferring to retain Germany's veto. Merkel may prefer a tighter EU than the United Kingdom would like to see, but the federalist superstate idea originally espoused by Belgium and France is simply too much for the chancellor to support.

Simply hinting that TAFTA is a possibility indicates there is unlikely to be a grand federalist push during Merkel's turn as EU president. Typically, heads of state can only push one or two big topics during their terms (if they want to even be remotely successful), and forming a common European position on something as large as TAFTA would take every spare moment Merkel has.

Moving toward a TAFTA would fundamentally alter the EU, and in a manner that Merkel would probably like. TAFTA would play to and reinforce the union's economic strengths, lessen the need for a restrictive transnational political union and (in theory, at least) inject a dose of U.S. economic vitality into what has traditionally been a less economically dynamic Europe. Though the positive economic impact would be tremendous, it would also be controversial. Many European states -- France comes to mind -- tenaciously protect their social welfare models, despite the economic drag they often produce.

The idea of TAFTA has been tossed around from time to time, first by the United States at the end of the Cold War, and later by the Europeans in the mid-1990s. In fact, some of the building blocks for the FTA are already in place; high-level officials from commerce, justice, transport and treasury/finance already meet regularly under the aegis of the Trans-Atlantic Economic Partnership and the Trans-Atlantic Business Dialogue, constituting a sort of informal TAFTA. Yet, before now, whenever negotiators have delved deeper, they have hit snags, first and most destructively over agriculture -- the issue that has stalled the World Trade Organization (WTO) Doha Round as well. If Merkel is serious about pushing for TAFTA negotiations, her decisions on what to take off the table are just as important as what to put on; agriculture is not likely to feature at all.

In many ways Merkel is simply admitting the futility of future Doha talks, which have been deadlocked for some three years. A fresh venue and a fresh goal would likely do U.S. and European negotiators far more good than simply rehashing the blamestorming that has marked Doha negotiations for the past few months. But regardless of the details of the history, the rationale for the interest or still-fuzzy commitment to negotiations, the implications of a successful TAFTA would be absolutely mammoth.

Taken together, the North American Free Trade Agreement (NAFTA) and EU states -- complete with the tightly affiliated economies of Central America, Iceland, Norway, Switzerland, the Balkans and Turkey that would likely be included as well -- make up the bulk of the world's economic heft. Even a "modest" agreement that utterly excluded touchy topics like agriculture would easily add 1 percent to the group's collective gross domestic product (GDP). That might not sound like much at all until you realize that that collective GDP of such a TAFTA grouping is roughly $24 trillion (out of a global total of approximately $43 trillion).

But the greater effect would be the changes such an agreement between two economic superpowers would impress upon the international system.

With Doha falling apart, the most likely course for the global economy would be its bifurcation into competing NAFTA- and EU-led trading blocs that aggressively attempt to induct other economies into their respective regimes. Under such a scenario, the threat would constantly be of a trans-Atlantic trade war that could only be mediated by an increasingly discredited WTO. Economic friction on a global scale would be palpable and permanent, while political tension between Washington and Brussels would likely mount.

TAFTA would obviously change that calculus. Instead of facing off, the United States and European Union would be partners in the most powerful economic grouping in history. Already the United States and European Union enjoy significant gravitas in negotiating bilateral trade deals with smaller -- which is to say, all other -- economies. With the two joined at the hip in TAFTA, their negotiating power would become nearly absolute, giving both players the ability to dictate terms to any state that sought to join their joint trade network.

The biggest losers in such an arrangement would be countries that have always attempted to play the world's major powers off one another or attempted to carve out regional economic groupings for themselves; India, China, Russia and Brazil come to mind. Instead of holding a trump card in their respective regions, these states would find that countries they had once sought to enter trade deals with would more likely flock to TAFTA -- and, in fact, the secondary powers would likely be tempted to follow. Aside from giving some bitter speeches, there is not much a power can do to prevent other parties from linking in an FTA.

That is particularly damning for those secondary powers when one considers that Merkel's interest in TAFTA spells doom for the Doha Round of WTO negotiations. The U.S. bureaucracy is truly only capable of negotiating one major trade deal at a time, and the political and economic benefits of going with TAFTA over Doha make deliberations in Washington unnecessary. Susan Schwab, the U.S. trade representative, has already come out enthusiastically in favor of reopening talks on TAFTA.

Copyright 2006 Strategic Forecasting Inc. All rights reserved.