At the U.S.-EU Summit in late November U.S. President Barak Obama, EU Commission President Jose Manuel Barroso and EU Council President Herman Van Rompuy agreed to create a High-Level Working Group on Jobs and Growth. It is charged with identifying “policies and measures to increase U.S.-EU trade and investment to support mutually beneficial job creation, economic growth, and international competitiveness.” While their trade relationship could be considered “mature”, both economies need to innovate to maintain market share in each other’s economies and remain competitive in third country markets where competition is strong from companies in developing countries.

 

The U.S. and EU together account for 11 percent of the world’s population, almost half of economic output and nearly a third of world trade. In 2007 leaders of the two economies created the Transatlantic Economic Council to work on specific issues retarding trade. The Working Group will be part of the Council’s ongoing work. Issues to be addressed include tariffs and tariff-rate quotas, non-tariff barriers to trade in goods, services and investments, compatibility of regulations and standards, “behind the borders” barriers that slow trade, and cooperation on global issues of common concern. The Working Group will provide an interim update to the three leaders in June and final recommendations by the end of 2012.

U.S. agriculture could have a significant stake in this effort. According to the Foreign Agricultural Service of USDA, U.S. agricultural exports to the 27 countries of the EU were $10.2 billion in fiscal year (FY) 2011, and are forecast at $11.0 billion for FY2012, the year that began October 1. They are the fifth largest market after Canada, Mexico, China and Japan and a little larger than the North African and the Middle East regions combined. The EU will again be the third largest importer to the U.S. at a forecasted $16.8 billion in FY2012, behind Canada at $20.0 billion and Mexico at $18.0 billion.

In calendar year 2010, U.S. agricultural exports to the EU were$10.9 billion led by tree nuts at $1.5 billion and whole soybeans, meal and oil also at $1.5 billion. Fruits, vegetables and juices were the third largest category at $834 million, followed by tobacco at $441 million and wine and beer at $438 million. Soybeans and products enter the EU at a zero tariff, while tree nuts tariffs average about 5 percent. Fruits and vegetables have tariffs of 15-20 percent with juice up to 37 percent. Unmanufactured tobacco has tariffs of about 15 percent with manufactured products at 35 percent. Beer enters tariff free, while wines have an average ad valorem equivalent rate of 8.9 percent.

Imports to the U.S. from the EU were led by wine and beer at $4.7 billion, followed by essential oils at $2.0 billion and fruits, vegetables and juices at $942 million. Snack foods were fourth at $854 million, followed by vegetable oils other than soybean oil at $822 million and cheese at $744 million. As in the EU, beer enters tariff free, while wine has an average tariff of 4.3 percent. Essential oils enter with tariffs of 0-4 percent and snack foods at 5 percent or less. Fruit and vegetable tariffs are generally 10-20 percent with some higher rates for seasonal imports; others are tariff free all year. Cheese has import tariffs of generally 10-16 percent with quantity restrictions on yearly imports.

The U.S. Chamber of Commerce supports a plan called Transatlantic Zero under which tariffs on all goods would be reduced to zero; most non-agricultural tariffs are now 5-7 percent. Their analysis assumed that the plan would be implemented over five years from 2010 to 2015 with reductions in trade facilitation costs of 3.0 percent for non-commodity goods trade and dynamic affects from lower tariffs creating labor efficiency gains of 3.5 percent for industries with high levels of intra-industry trade and 2.0 percent gains for all other industries. EU GDP would increase in 2015 by $69 billion, 0.5 percent, and U.S. GDP would increase by $182 billion, 1.3 percent of GDP. EU exports to the U.S. would increase by 18 percent and U.S. exports to the EU would increase by 17 percent. EU agricultural exports to the U.S. would increase for horticultural products and livestock and meat products, while U.S. agricultural exports to the EU would increase for grains, horticultural products, livestock and meat products and dairy products.

The Chamber of Commerce analysis addresses two of the subject areas to be studies by the Working Group – tariffs and “behind the borders” trade facilitation issues. The biggest issues for agricultural products are compatibility of regulations and standards. Hormones in beef and biotech crops are constant irritants from the U.S. side, but other issues like pathogen reduction treatments on poultry meat have also been trade stoppers for years.

While it’s easy to find reasons that reductions in trade barriers will not be achieved, under the Transatlantic Zero or some other framework, the reality is that both the U.S. and the EU must innovate or fall behind in trade with other countries that are becoming increasingly competitive by adopting technology currently used in the U.S. and EU and developing new processes that can leap frog over existing technology. Some of the newer members in the EU will also improve rapidly in trade if they can access capital and put pressure on more established economies.

Business groups appear to be supportive of the effort. The TransAtlantic Business Dialogue, first convened in 1995 by the U.S. and EU to serve as a dialogue between American and European business leaders and U.S. cabinet secretaries and EU commissioners, sent a letter to the three leaders before the summit outlining a Transatlantic Economic and Trade Pact similar to the Working Group.

The EU is not a growth market for agricultural products like countries in Asia. The Chamber of Commerce analysis of the Transatlantic Zero proposal points out the importance of increasing efficiencies from trade for the U.S. and the EU. Politicians like to talk about trade creating jobs, but the real objective is to increase efficiencies to improve international competitiveness and increase wages, while driving down the cost of goods and improving the standard of living for consumers. That is how established economies and companies remain competitive. The High Level Working Group on Jobs and Growth is heading in the right direction.


Ross Korves is an Economic Policy Analyst with Truth About Trade and Technology