The U.S. and the EU – A Step Closer to Free Trade?

As U.S. and EU policymakers press forward with consideration of a major Transatlantic trade initiative, the time is ripe for companies to evaluate how such a deal could advance their global commercial objectives and consider how to provide the most effective input to the policymakers in order to get concrete results.

On the margins of this week's G20 summit in Los Cabos, Mexico, U.S. and EU trade officials released an interim report of the EU-U.S. High Level Working Group on Jobs and Growth (HLWG). Co-chaired by EU Trade Commissioner Karel De Gucht and U.S. Trade Representative Ron Kirk, the HLWG has spent the past six months examining prospects for deeper economic integration across the Atlantic, notably through consideration of a comprehensive free trade agreement (FTA). This week's interim report represents a key step towards a final set of conclusions due towards the end of 2012.

The interim HLWG report reflects a growing convergence of dynamics pointing towards a "go" signal on Transatlantic free trade. Europe's dire economic circumstances are driving a fairly desperate search for any policy mechanism that can generate growth in the EU, and it is clear that policymakers in both Brussels and Washington view the prospect of free trade through this prism. Business groups on both sides of the Atlantic have been actively pushing for free trade. There is growing sentiment that a closer knitting up of the American and European economies is essential to meeting challenges presented by China and other emerging economies. Recent steps towards a mega-trade agreement among China, Korea, and Japan creates yet another incentive for the U.S. and EU to keep pace. And the difficult politics of trade policy are ameliorated in a U.S.-EU context, since both parties are high-wage economies, and so concerns about job displacement and worker rights issues are minimal. Indeed, the U.S. Congress and the European Parliament appear to share the general enthusiasm for an FTA.

At the same time, and as the interim report makes clear, negotiating a U.S.-EU FTA would be no easy feat. Policymakers – particularly on the American side – appear to want to develop stronger confidence that a negotiation would not become bogged down in longstanding, deep-seated differences in areas like agriculture, regulatory approaches, access to government procurement, and certain aspects of intellectual property rights. This week’s interim report makes clear that the achievability of comprehensive free trade is still an open question – one that will be the chief focus of the HLWG in the remainder of the year.

In the end, a final decision on launching a U.S.-EU free trade initiative is likely to be driven at least as much by political factors as by consideration of practicalities. And those political factors will likely be influenced considerably by twists and turns in the Euro zone crisis over the coming months.

As policymakers continue to work through this process, companies with a current or future stake in U.S.-EU trade should begin considering where a U.S.-EU FTA could advance their interests in tariff reduction, removal of regulatory barriers to trade, or other expansions of market access opportunities. If a formal FTA launch comes late this year or early next – a prospect that appears quite possible – an early identification of key market access objectives could have important payoffs.