Europe's Latest Infatuation

40 THE INTERNATIONAL ECONOMY FALL 2006
Europe’s
Latest
Infatuation
The idea of TAFTA, a trans-Atlantic
free trade area, is getting hot.
European trade politicians keen on “shaping globalization”
(alias protecting unskilled European workers against global
competition) are digging out an old idea: the establishment of
a Trans-Atlantic Free Trade Area (TAFTA). In Germany,
senior representatives of the Christian Democratic Union
(CDU) are pressing Chancellor Angela Merkel to make
TAFTA a key topic of her forthcoming EU presidency.
Politicians in other EU countries, members of the EU
Parliament, and part of the financial press have been echoing the idea.
The possibility of establishing a TAFTAhad been pondered intermittently in
Europe in the past, above all during the heydays of free trade during the 1970s
and 1980s. This time, the plan rests on defensive thinking: The mature western
market economies are at risk, it is argued, of becoming outmanoeuvred by the
state-directed economies of China and other Asian countries. These countries are
not willing to play by the rules. Through currency manipulation, product piracy,
violation of copyrights, and various forms of wage, social, and environmental
dumping, they were rolling up western markets, resulting in unemployment and
falling living standards. The democracies of North America and Europe could succeed
only by jointly protecting the interests of their citizens against the “economic
Stefan Schönberg is the former head of the International Relations Department
of the Deutsche Bundesbank.
BY STEFAN SCHÖNBERG
THE MAGAZINE OF
INTERNATIONAL ECONOMIC POLICY
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FALL 2006 THE INTERNATIONAL ECONOMY 41
SCHÖNBERG
attacker states” of Asia. Transatlantic political and
defense cooperation were not enough—it was also necessary
to align the economic strategies. The “New
Transatlantic Agenda,” established in 1995, had not
brought sufficient progress in this respect. The stumbling
blocks were the bureaucrats on both sides of the Atlantic.
Therefore, political guidance was needed in order to
achieve a breakthrough with the aim of establishing a
“transatlantic market” through 2015, for financial services
and capital markets even already until 2010. An
agreement would need to tackle tariff and non-tariff trade
barriers and also include anti-trust policies and coordination
in international trade policies without creating
new supranational institutions or new legal systems.
On an abstract level, the idea of a TAFTA is not
without charm: Both the United States and the European
Union have entered into economic partnership agreements
with the whole world, but not with each other, a
somewhat strange situation given the common economic
interests in many areas. Both are facing a range of similar
economic problems, from the uncertain supply of
energy to demographic developments. Through transatlantic
market integration, a counter-balancing force could
be established, large enough to stay in control of the
global regulatory principles and of technical standards.
Based on such considerations, German industry, and
probably industry in most other EU countries, has
favored a TAFTAfor many years.
The problem with the European position is that a
trade agreement with the United States is seen as an
instrument not for more, but rather for less free trade.
Together, the United States and Europe would be in a
better position to protect their markets against “unfair
competition” from Asia. In uncoded terms, TAFTA
would be an instrument for a new form of protectionism.
The European debate over “guided trade” is burdened
with questionable arguments. For instance, the 4.5
million unemployed in Germany are being directly
related to the 4.5 million jobs created by German industry
abroad over recent years, whereas numerous studies
indicate that investment abroad has benefited the German
economy.
The debate is also a reflection of the European inclination
to look for the culprits for economic problems
beyond its borders. In the 1960s it was Japan, in the
1970s it was Korea, whose rapidly growing exports were
interpreted as an attack on the economic position of
Europe. Meanwhile, Japan and Korea have proven that
global trade does not resemble David Ricardo’s famous
1817 comparison of Portuguese wine being exchanged
for English cloth. The majority of global trade takes place
among industrial countries as an exchange of goods produced
in the same sectors.
In the context presented, the TAFTA proposal is
largely a diversion from the insight that major groups of
society in Europe do not profit from global trade, because
sectoral adjustment is delayed by national governments.
There are still other reasons for being cautious, for
instance the question of why reaching agreement over
further opening agricultural markets, one of the major
The idea of a TAFTA is not without charm: Both the United States and the
European Union have entered into economic partnership agreements with the
whole world, but not with each other, a somewhat strange situation given the
common economic interests in many areas.
The European debate over
“guided trade” is burdened with
questionable arguments.
Continued on page 64
64 THE INTERNATIONAL ECONOMY FALL 2006
stumbling blocks in the Doha trade negotiations, would
be easier in a bilateral than in the multilateral context.
There is also the risk that a European initiative in favor
of trans-Atlantic free trade could be regarded as turning
away from the multilateral WTO.
As to be expected in the light of the institutional
self-interest of bureaucracies, the EU Commission has
promptly rejected the TAFTAproposal. That plan would
conflict with the efforts of the Commission to strengthen
trade with Asia, and to remove trade barriers with Korea,
India, and the Southeast Asian states. The European
Union lacks the resources to pursue both projects at the
same time. Finally, attempts to establish a TAFTAwould
be a slap into the face of developing countries.
According to a recent Goldman Sachs survey, on
balance, Europe is profiting from globalization. The
ascent of new markets, like those of the BRIC countries,
is stabilizing the European business cycle. Germany and
other Western and Northern European states have specialized
in sectors subject to comparatively low competition
from emerging market economies; 68 percent of
industry in the old EU member states and most of their
services industries were offering products complementing
the Asian range of production. In Germany and the
Scandinavian countries, the share of “winner branches”
was even higher due to their product mix. Southern
European countries, on the other hand, specialized
mainly in products such as textiles and leather goods,
competing with those made by the emerging market
economies. A TAFTA may constitute a proper instrument
for pushing forward trans-Atlantic economic integration
benefiting both sides. It would be a mistake,
however, to look at it mainly as an economic defense
mechanism against Asia. ◆
In uncoded terms, TAFTA
would be an instrument for
a new form of protectionism.
SCHÖNBERG
Continued from page 41