Leaders on both sides of the Atlantic have given the green light to start negotiations for a free trade agreement establishing the largest economic alliance in the world, which already accounts for some €455bn in trade and millions of jobs.

“We are committed to making this relationship an even stronger driver of our prosperity,” US President Barack Obama, European Council President Herman Van Rompuy, and European Commission President José Manuel Barroso said in a joint statement.

“A future deal among the two most important economic powers will be a game changer. Together we will form the largest trade zone in the world,” added Barroso during a press conference in Brussels, presenting the recommendations of the high-level working group on growth and jobs, established at the EU-US summit in November 2011 to scope out the ambitious trade deal.

Brussels and Washington will initiate internal procedures to launch negotiations in the first half of the year, said Barroso.

The latest estimates show that a comprehensive trade agreement between the EU and the US could increase GDP by 0.5% in the EU and 0.4% in the US within 15 years. This would equate to €86 billion of added annual income to the EU economy. Eliminating tariffs only would boost transatlantic trade by more than $120 billion within five years.

The US and the EU already have the largest bilateral relationship in the world, worth nearly €2 billion per day. 

Businesses in Europe and the United States hailed the launch of the negotiations.

“The agreement  presents an unmatchable opportunity to boost competitiveness, jobs and growth that are needed in our economies,” Jürgen Thumann, the president of the association BusinessEurope, and US Chamber of Commerce President Thomas Donohue said in a joint statement.

A similar chorus has spread across the political arena.

"Breaking down the remaining trade barriers and securing a comprehensive deal will require hard work and bold decisions on both sides. But I am determined to use my chairmanship of the G8 to help achieve this and to help European and American businesses succeed in the global race," said UK Prime Minister David Cameron.

European Parliament President Martin Schulz conceded that such a deal could unleash the potential of the transatlantic economy, but that more importantly it could also contribute to the development of global standards through regulatory integration.

The deadlocked Doha multilateral trade talks have pushed countries to seek bilateral and regional agreements.

Leaders believe that the EU-US trade deal could establish new globally relevant rules, and open the door for strengthened global governance.

First building block, road blocks ahead

The decision to open negotiations is seen as the first building block of a transatlantic single market. There is, however, a sense that the two sides will need to be creative, flexible and open-minded if they want to achieve an ambitious trade agreement, according to one of the recommendations in the High-Level Working group report.

When the European Parliament gave the EU executive its approval to start negotiations in October, it underlined the difficulties inherent in such an agreement and pointed out that the divergent interests between the EU and the US over agriculture, maritime transport, GMOs and cloned animals, for example, might hamper rapid progress towards a deal.

Speaking at the press conference in Brussels, EU trade chief Karel de Gucht said he hoped the two sides could reach a deal within two years, before the end of the mandate of the current Barroso Commission. This would also coincide with the US mid-term elections.

But trade analysts see such a scenario as over-optimistic.

Differences over investment protection, agriculture, public procurement and intellectual property, particularly regarding pharmaceuticals, have marred trade negotiations with Canada since talks began in May 2009.

An ambitious transatlantic single market?

“An ambitious agreement would eliminate close to all tariffs, foster a good number of mutual recognition agreements and more generally converge (but not harmonize) regulations in many sectors, reduce direct market access restrictions in most service sectors, improve rules on subsidies and state-owned enterprises, and establish a framework for progressive improvements of the agreement,” said Frederik Erixon, from the European Centre for International Political Economy (ECIPE).

There is not a complete single market in the EU and many sectors in the US are fragmented by regulations by US states. Others take aim for regulatory harmonisation of a kind that simply is impossible, added Erixon.

The EU-US trade agreement could also face serious political obstacles.

“Ambition sometimes bites the nails of success. Or to put it differently: too grand ambitions will erode the chances of reaching an agreement. Negotiations should aim for an ambitious agreement, and it is important that the EU and the US move out of the depressing format of negotiations in the Transatlantic Economic Council, which clearly suffered from being too narrow and lacking context,” Erixon said.

Negotiators are well aware of the obstacles and seem to have anticipated a way out. The recommendations spell out the need for innovative approaches.

“The agreement should be designed to evolve over time,” read the report.

Even if a deal is surely reachable, the question will be how ambitious and comprehensive such an agreement would be, considering the challenge in persuading independent authorities in the US and EU member states to sign up to the necessary convergence of their regulatory regimes.