The Mother of All Trade Blocs

An earthquake just hit the world trading system. The proposed U.S.-EU Transatlantic Trade and Investment Partnership unveiled this week is not simply another trade bloc but the mother of all trade blocs – an exclusive alliance representing half the world economy purposely aimed at counter-balancing China and other fast-rising trade powers. The split between the West and the rest that has paralyzed the WTO for more than a decade just burst into the open.

Of course, this is not how the U.S.-EU deal is being sold to the world. In his State of the Union address on Tuesday, President Obama stressed its economic advantages, arguing that “free and fair trade across the Atlantic” will support “millions of good paying American jobs.” But behind the scenes, officials are more candid about their geo-economic ambitions. Speaking to the annual U.S. conference of mayors two weeks ago, João Vale de Almeida, the EU’s ambassador to Washington, portrayed a new transatlantic trade bloc as a powerful new lever to shape globalization “according to our principles.” By joining forces in a continent-spanning trade and investment bloc, he argued, the United States and Europe would “call the shots around the world.”

This nostalgia for calling the shots is understandable. For more than half a century after 1945, the industrialized West, especially the United States, dominated the world trading system, while the vast developing world largely stood on the sidelines. Even when China and other developing countries began their vertiginous rise two decades ago, the West confidently believed they could be seamlessly and painlessly absorbed into the global trade club. In the lead-up to China joining the World Trade Organization (WTO) in 2001, then-president Bill Clinton described China’s membership as a “hundred-to-nothing deal for America” that would “increase U.S. jobs and reduce our trade deficit.”

It has not worked out that way. Far from shrinking, the U.S. trade deficit with China has exploded to more than $550 billion – a 450-per-cent rise since China joined the WTO in 2001. China has just passed the U.S. as the world’s largest exporter, and Japan as the world’s second-largest economy. Meanwhile, U.S. efforts to rebalance global trade by convincing China and other emerging economies to match its tariff reductions in the WTO’s Doha Round of trade talks have been repeatedly rebuffed – which explains why the WTO has remained deadlocked for more than a decade. Similarly, attempts to pressure China to abandon its currency peg and allow the yuan to appreciate have run into a brick wall. The basic problem is that China is benefitting enormously from the status quo, while the U.S. brings a shrinking array of carrots and sticks to the table. Suddenly, it’s the BRICS that are calling the shots.

This is where the new U.S.-EU strategy comes in. By creating a preferential bloc encompassing 700 million people and a staggering $30 trillion in output, the U.S. and the EU hope to create a lever big enough to finally force open emerging markets – in the same way that EU enlargement in the 1960s and ’70s brought the U.S. to the negotiating table, and the creation of NAFTA in the early 1990s pushed the EU to accept the Uruguay Round outcome. José Manuel Barroso, the president of the European Commission, argues that such a massive deal will “set a standard, not only for our future bilateral trade and investment, including regulatory issues, but also for the development of global trade rules.”

The risk, however, is that a new transatlantic bloc will have the opposite effect. Instead of pushing the BRICS to negotiate, it may push them further away, encouraging the formation of rival trade blocs, marginalizing the WTO, and leaving the global system even more fragmented and divided. These are not new fears. The idea of a transatlantic trade bloc has surfaced innumerable times since the Second World War, but on each occasion it was rejected by the United States and Europe as being too globally divisive and exclusionary. Until now.

Canada faces a particularly ironic dilemma. In many ways, Canada laid the groundwork for the U.S.-EU initiative. Roy MacLaren, former minister of international trade, first called for a transatlantic free-trade agreement in 1995, and successive Canadian governments have doggedly pursued the idea ever since. Indeed, it was the prospect of an early Canada-EU preferential agreement that helped persuade the U.S. exporters of the need for their own deal with Europe. But now Canada faces the prospect of exclusion from the transatlantic bloc it has advocated. The question is whether to continue on a separate bilateral track – and risk being marginalized by the U.S. and EU juggernaut – or to attempt to trilateralize the negotiations, as Canada did with NAFTA.

One thing is certain: José Manuel Barroso is not exaggerating when he describes the proposed transatlantic trade bloc as a “game changer.” But what will be the result? The revitalization of global trade co-operation, or its end?