Foreign Policy Blogs

EU-U.S. Free Trade Agreement – Why the American Push Forward Now?

 

Photo Credit: Kevin Lamarque/Reuters

Photo Credit: Kevin Lamarque/Reuters

Not too long ago President Barack Obama announced in his State of the Union address in February the start of free trade negotiations with the European Union (EU). These negotiations are expected to take at least two years while any deal would have to be approved by the European Parliament.

On the surface, that seems like a splendid idea. According to the European Parliament Web Team’s blog on EU Affairs published by the Huffington Post, the EU and the U.S. already enjoy the world’s largest economic relationship finding its expression in “a trade volume of €700 billion and bilateral investment valued at nearly €2.4 trillion in 2011.” This transatlantic trade interdependence is complemented by our indispensable security alliance in the form of NATO, our cultural affinity and shared — more or less — economic interests. This trade interdependence — augmented over decades — has been crucial for Western Europe’s re-emergence after World War II. The Huffington Post goes on in its article and even starts dreaming: “If non-tariff barriers were removed, gross domestic product in the EU and the US could be boosted by €163billion by 2018. The agreement could add about 0.5% to the EU’s annual economic output.”

That’s great, but what makes us think that we will suddenly agree on contentious issues such as agricultural products among other things. Agricultural products form a major part of the cultural identity of Europe’s people and regions or in the words of the European Commission: “European Union farm products are unique in their quality and diversity. In an open global market, merely producing excellent food and drink is not enough. By explaining to consumers the standards and the quality of what EU agriculture puts on the table.” I think U.S. farmers might feel the same way about their products. And still, both depend on domestic subsidies — some might argue due to food security reasons while others might cite the global competitive environment with divergent standards as a reason.

So, I can see that a free trade agreement would add about 0.5 percent to the EU’s annual economic output while helping especially southern European countries like Greece, Spain, Portugal, Italy and even France. However, what is the benefit for the U.S.? Why now? Is this our best strategy to counter the rise of the Asian economies or perhaps a desperate attempt to keep both our status-quo standards of living while helping to keep the European periphery afloat? The latter is not our government’s job. The future is in Asia — the U.S. pivot toward Asia in the security realm needs to be complemented with a clear economic pivot towards Asia. We will not lose the Europeans unless they are willing to lose the U.S. market. The latter is very doubtful and would create a horrendous financial black hole on any European company’s balance sheet. Nevertheless, transpacific relations have to call the tune! Our government actually understands that as is reflected in its Trans-Pacific Partnership (TPP) initiative.

Thus, to answer the question how the U.S. could actually benefit from a EU-U.S. free trade agreement, I would like to steer you to the energy realm. This contemplated free trade agreement has to be viewed in the context of the consideration of licenses to export natural gas from the U.S. Due to the fact that export restrictions exist, permits are required to sell to countries that are not free-trade partners with the U.S. Besides Japan, the obvious LNG export market for U.S. shale gas is Europe and in particular the southern European countries starting, above all, with Spain and extending all the way to the Eastern Mediterranean where the U.S. could meet demand for cheaper natural gas in under-serviced regions (the Balkans) or in weaker economies exposed to regionally higher natural gas prices like in Greece. This would actually enhance European energy security and put further pressure on the still dominant Russian natural gas industry. That would also be the nexus between economy and security. And it is this why President Obama is pushing a free trade agreement with the EU now. This is a good strategy and will benefit the U.S. and its natural gas industry eventually if we do not “sell out” other U.S. industry sectors. We have the leverage and we should play it that way. Just consider the potential arbitrage. In this respect, Kurt Cobb provides in his article some numbers: “Europeans are paying close to $12 per thousand cubic feet for liquefied natural gas and the Japanese are paying more than $17. Compare that to the U.S. domestic pipeline price for natural gas of just $3.45 as of today (Henry Hub spot price).

 

Author

Roman Kilisek
Roman Kilisek

Roman Kilisek is a Global Energy & Natural Resources Analyst.
His research focuses on global energy politics, mining, infrastructure and trade, global political risk and macroeconomics. He is fond of using scenario development and analysis.

He has lived on three continents and traveled to over 40 countries around the world. He now lives and works in New York City.

Great Decisions Discussion group