By Mitch Yoshida, Research Fellow
In last year’s May/June edition ofForeign Affairs, Richard Rosecrance made a strong case for the creation of a transatlantic free trade area (TAFTA) in a piece titled “Bigger is Better.” Such an arrangement, he argued, would increase the scale of production in U.S. and European markets and consequently boost economic growth rates on both sides of the Atlantic. Although Rosecrance conceded that there are formidable political obstacles to this, he noted: “…the deal might become more popularly attractive should the United States confront a slow economic recovery or even dip back into recession.”
Now that the U.S. and Europe are facing a rocky recovery, we must give TAFTA, or at the very least freer transatlantic trade, another look. The recent downgrade of the U.S. government’s credit rating, combined with a worsening Eurozone debt crisis and fears of a new global recession, has driven wild market fluctuations over the past two weeks. This adds urgency to the question of how to deal with rising debt levels in the U.S. and troubled Eurozone states.
The fact is that the U.S. and Europe are running out of policy options to stimulate the economic growth needed to make their debt burdens more sustainable. In the U.S., fiscal stimulus is off the table given clear political obstacles to any increase in government spending and/or lower taxes. For Eurozone states with rapidly rising borrowing costs, the limits are both practical and political; they can’t embark on new rounds of borrowing and spending without incurring the wrath of bond markets. Nor can they turn to Eurobonds, which would lower their cost of borrowing, as this option is still a political non-starter in Germany.
What about monetary stimulus? Controversy surrounds the Federal Reserve’s policy of quantitative easing, but there could still be leeway for an additional round (dubbed QE3) aimed at lowering the cost of borrowing. As far as the European Central Bank is concerned, quantitative easing is, at least for the moment, out of the question. In any case, the use of this policy poses inflationary risks and its effectiveness is unclear.
Beyond these policy options, freer trade can boost economic growth and alleviate debt burdens in the U.S. and Europe. A global agreement in this direction would be ideal, but the dire state of the WTO’s Doha Round of trade negotiations points to the need for more geographically-limited arrangements. A TAFTA would be the next best outcome given the size of the U.S. and European markets and the existence of a ready-made institutional framework for achieving this goal: the Transatlantic Economic Council.
According to Daniel Hamilton and Joseph Quinlan at the Center for Transatlantic Relations, removing transatlantic tariffs and aligning half of existing non-tariff barriers and regulatory differences could boost U.S. and EU GDP by a total of1.78% and 1.08% respectively. It would take years after any agreement for these gains to materialize, and it probably wouldn’t enable the U.S. and troubled Eurozone states to completely outgrow their debt burdens. But it would relieve some of the economic and political strains on these countries that risk derailing their economies and the broader global economy.