Thoughts From Across the Atlantic

This Time Might Indeed Be Different For World Trade

Since World War II, successive rounds of GATT/WTO negotiations have contributed to freer trade and prosperity globally, but the WTO has become too large and unwieldy to proceed, as shown by the impasse after 11 years of the Doha round of negotiations. A key trend in international trade during last decades has been regionalization. However, several bold proposals with respect to further liberalization of global trade have surfaced recently. If implemented, these proposals have the potential to significantly improve the medium term global economic outlook.

An EU-US High Level Working Group is expected in December to issue a report recommending the negotiation of a comprehensive transatlantic trade and investment agreement. At the same time negotiations of a Free Trade Agreement between the EU and Japan will likely be launched in the coming months following joint scoping exercises concluded earlier this year. Yukio Hatoyama, a former prime minister of Japan, has already called for it to be turned into a more comprehensive Economic Integration Agreement by covering areas such as regulatory convergence and approximation of legislation.

Agreement among the EU, the US and Japan would have the potential to significantly contribute to economic growth at a time when expressions such as „new normal” or „lost decade” are increasingly used to describe the medium term economic outlook. The European Commission estimates that medium term growth rates could be raised by as much as 2% and over 2 million jobs could be created by the EU pursuing an ambitious trade agenda. Similar benefits could accrue to the US and Japan. Freer trade would also allow the benefits from innovation to spread faster. Even non-participating  countries can be expected to receive some benefits from faster economic growth and higher incomes in the three. In the future the geographical scope could certainly be expanded with countries such as Canada or South Korea being logical candidates to join. If the broader Asia-Pacific Economic Cooperation group (APEC) participated in such a union, the resulting unit would include a very high percentage of world trade. It would be easy to dismiss the idea as unrealistic, but prior to the Treaty of Rome in 1957, many skeptics denounced the idea as unrealistic. In spite of current problems with the Euro, the single market features of the EU have benefitted members for more than half a century.

Despite the enormous potential and initial momentum, the obstacles faced by the proposals would certainly also be huge. While benefits would significantly exceed costs, the former are likely to be more dispersed and the latter more concentrated, in particular, because some of the benefits would also accrue to customers rather than businesses. This means that pressure against liberalization from interest groups in some industries will be significant. Tradeoffs between the scope covered and the speed with which the negotiations can move ahead will have to be made. For example, already before the start of negotiations it appears to be clear that the highly sensitive agricultural sector or at least large parts of it will have to be excluded from the agreements.

In the past, economic crises such as the Great Depression of the 1930s have often resulted in retrenchment and increased protectionism that included the infamous Smoot-Hawley tariff. The result was lose-lose outcomes. The current bold proposals show that some policymakers today realize that more trade, not less, is needed to improve the economic outlook. The obstacles faced will be significant, but the potential benefits are much larger.  Successful implementation of the above proposals could be the difference between a lost decade and one where economic growth is reignited.The benefits of innovation could be difused more widely and more productive jobs could be created by increasing trade and economic integration.


European Council, “18/19 October 2012. Conclusions”, October 19, 2012

Hatoyama, Yukio, “Free Trade Can Lift Japan and Europe”, The Wall Street Journal, October 19-21, 2012

Reuters, “EU, U.S. to negotiate free-trade deal from spring 2013: officials”, October 17, 2012

5 Responses to “This Time Might Indeed Be Different For World Trade”

lucad10October 29th, 2012 at 6:32 pm

Let's hope that western world agreements on job creation will be able to fix current increase in unemployment and relocation of production sites to low cost countries (i.e.: China, Turkey, Egipt and similar).

Shoudn't western world countries need also an agreement with low cost ones, which export similar products, on armonisation of job conditions and environmental rules ?

ThomasGrennesOctober 30th, 2012 at 9:06 am

The current discussion includes Japan, so it is not just the "Western World". The agreement would be more effective if it included other Asian countries, such as the APEC members. I would not attribute the severe unemployment problems in the U.S. and Europe to trade. In 2007, prior to the Great Recession the unemployment rate in the U.S.
was 4% and it was also below average in Europe. The severe recession and slow recovery were the main cause of unemployment and the sharp decrease in world trade. Harmonization of labor conditions can be discussed in the ILO. However, if trade is prohibited between countries with different wages, there will be no gains from trade and no trade.

Ed Dolan EdDolanOctober 31st, 2012 at 2:42 pm

Encouraging post. I was reading just the other day that we were going to get no more liberalization because the WTO has gotten too bit to get anything done. The proposals you cite here seem to be making an end run around the Full WTO

To follow up on Lucad10's comment, how would you reply to the argument about a race to the bottom on environmental rules? It seems to me that is quite different from the issue of wage differences. For example, you could not reword your response on wages to read "if trade is prohibited between countries with strong and weak environmental standards, there will be no gains to trade."

I can't draw pictures in this box, but you know what the diagram would look like on the blackboard–one country with a supply curve that captures externalities, the other does not. You cannot prove that the "welfare triangles" gained from trade are larger than the triangles lost from increased pollution.

That is theory, of course, and there are practical issues too. I have heard the argument that whatever the theoretical gains or losses, it is too risky to open the can of worms you would get into if you started imposing countervailing environme

ThomasGrennesOctober 31st, 2012 at 4:30 pm

Some current trade policies are harmful to the environment. Reducing protection for firms that use subsidized coal would benefit the environment. Large environmental benefits would come from freer trade in agricultural products that would substitute labor intensive
production in low income countries for more chemical and carbon-intensive production in higher income countries. Currently the European Union, the United States, Japan, and other rich countries have some of the highest rates of agricultural protection in the world.
Theoretical arguments about the possibility of liberalized trade harming the environment should be supplemented by empirical evidence.

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