Is transatlantic trade back on the table?

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As the Russian invasion forces the EU to cut many economic ties with Russia, the US under president Biden presents itself as the obvious partner for the future.

For example, to reduce the European economy’s reliance on Russian energy, the US is shipping record amounts of liquified natural gas to Europe.

“Transatlantic unity is essential at this moment,” said Susan Danger, the CEO of the American Chamber of Commerce in the EU, in a press briefing this week.

With all the coordination around security, energy, and sanctions, some transatlantic Europeans are raising their hopes for a deepened trading relationship between the US and the EU.

Transatlantic virtue signalling

Chief among them is Germany’s finance minister Christian Lindner who called for a resumption of negotiations on a transatlantic free trade agreement, reminding Europe of the failed TTIP negotiations.

“Especially now in the (Ukraine) crisis, it is becoming clear how important free trade is with partners around the world who share our values,” Lindner told the German newspaper Handelsblatt.

However, the appetite for another highly political, multi-year negotiation seems low even among those who would have all the reasons to push for such a deal.

“Prospects for a TTIP type agreement are very low,” said Marjorie Chorlins of the US Chamber of Commerce, referring to the low appetite for large new trade deals in the US and the EU.

Also, European businesses are not taking the idea very seriously. The European association of the mechanical engineering industry VDMA, for example, issued a statement saying: “The EU and Germany should aim for small successes instead of chasing big dreams.”

Lindner was also repudiated by his green coalition partner, economy minister Robert Habeck, who said that there was no need for an “ideological debate” but that concrete results could be achieved by working together with the US in the Trade and Technology Council launched in 2021.

While Lindner’s proposal for another free trade agreement with the US might just have been an act of virtue signalling towards his centre-right voters, the new closeness to the US is real, as evidenced by the fact that Joe Biden will today become the first US president to join a formal European Council meeting.

Obstacles in the way

However, the current geopolitical collaboration will not automatically lead to increased trade. For example, the EU and the US are still trying to find a way to square the circle by inventing a way for data to flow freely across the Atlantic without infringing Europeans’ privacy rights.

Regarding certain critical metals and semiconductors, the EU and the US are in competition.

Moreover, in its drive for ‘strategic autonomy’, the EU seeks to diversify its markets to reduce its overall dependency. Increased trade with its biggest trading partner would not necessarily check this box.

Meanwhile, the EU also does not seem to be progressing on any other trade deals, for example, with Chile or New Zealand, partly due to French resistance. Furthermore, increasing trade with China is a non-starter, considering the lessons Russia taught the EU about making itself economically dependent on an authoritarian regime.

So, barring a real pivot towards a much more self-sufficient European economy, Uncle Sam’s embrace might be all that is left in the jittery hope that no Trump-like figure will turn the US into an authoritarian regime anytime soon.

Chart of the Week

When Joe Biden is in Brussels today, EU heads of state should maybe ask him for some advice on how to grow a highly developed economy. US economic growth has consistently outpaced growth in the EU area over the past years.

Graph by Esther Snippe

Of course, the data shown in the graph below is total GDP data, and the picture would look a little less disadvantageous for the EU if you took data on GDP per capita. However, the ability to grow the population through immigration is also part of what makes a vibrant economy.

It is also true that inequality is generally worse in the US than in the EU. Thus, the growing economic pie does not benefit everybody equally. However, a quickly growing economy is always better than a sluggish economy for workers as it increases their bargaining power over their employers.

What stands out in the graph is that the US seems to bounce back faster and more strongly after economic downturns, for example, in 2009 and 2020, which might be related to its ability to decide on strong fiscal support measures fast, while the EU member states are constrained by fiscal rules and by a currency they cannot directly control.

Literature Corner

How refugees’ need for cash exposes the limits of Euro sovereignty: Speaking of a currency that eurozone member states cannot control, the economic historian Adam Tooze explains why Eastern European countries can help Ukrainian refugees to change their cash faster than the eurozone countries. “Ought it not to be a matter of shame that it is central banks of EU members not yet in the Euro – Poland, Bulgaria, Romania – that can respond promptly to the needs of Ukraine’s refugees, whereas the far-richer eurozone members are paralysed?” Tooze writes.

Welcoming refugees from Afghanistan and Ukraine is also an economic investment: While the EU usually tends to focus on the costs of welcoming refugees, Cassandra Zimmer, Reva Resstack, and Michael Clemens from the centre for global development argue that refugees will grow the economy if you let them work. “This is because refugees typically work, adding value to the economy at similar rates to native workers. And that work does not take away any labour market opportunities for natives,” they write.

Russia is too small to win: In this article, Paul de Grauwe argues that the Russian economy is too small to win the war Putin launched in Ukraine. This is good news and leads to a big question: “What will Putin do when he realises he cannot win his war in Ukraine by conventional means?”

Major future economic challenges: Olivier Blanchard and Jean Tirole summarise their report on the big economic challenges for the future and on possible policy solutions that they drafted for the French president Emmanuel Macron. The advocated measures include more subsidies for research and development, a better design for inheritance taxes, more redistribution for low earners, and many more.

[Edited by Alice Taylor]

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