October 7, 2013

U.S.-EU free trade pact could boost CT companies

Q&A talks about how Connecticut could benefit from a U.S.-European free trade agreement with Christopher Ball, director of the Central European Institute at Quinnipiac University.

Q: Talks have been ongoing about a proposed free trade agreement between the United States and Europe. What are the advantages to the U.S. to enter into a free trade agreement with the European Union, especially in light of some of the economic problems of some member countries?

A: The U.S. and EU together account for about half of the world gross domestic product and 30 percent of world trade. Even in these slower economic times, that's a lot of active business going on, and it indicates a tremendous amount of potential additional gains.

A free trade agreement will lower U.S. barriers to EU products sold in the U.S. The U.S. benefits in two ways from that. First, consumers may be able to get new products they couldn't buy before, or European products will be cheaper. Second, American firms that import parts from Europe will be able to get them at lower prices when tariffs, duties and regulatory costs are lowered.

Q: How would a free trade agreement benefit Connecticut? How will it help companies wanting to do business overseas?

A: In short, it lowers the tariffs charged on Connecticut products sold in Europe and also helps lower regulatory barriers these Connecticut companies face when selling to the European market.

In 2012, Connecticut exported approximately $5.5 billion worth of goods to European Union countries, constituting about 35 percent of our state's total exports. Lowering barriers will allow Connecticut companies to grow that business and allow new companies to enter as well.

Q: What does it mean not to have a free trade agreement? What hindrances are in place for businesses doing business overseas?

A: The are two main hindrances of not having a trade agreement: tariffs and duties and non-trade barriers (NTBs). Currently the EU charges tariffs/taxes on each American product sold to EU consumers and companies. Eliminating these tariffs would make U.S. goods cheaper to sell.

The United States also charges tariffs/taxes on each EU good that comes into the U.S. This makes it more expensive for U.S. companies and consumers to buy EU products.

The non-tariff barriers and regulatory differences are more difficult to see but also very important. Several years ago, for example, there was an issue over bananas in the EU. The EU has strict guidelines on the types of bananas that could be sold there. The regulations define the size, length, thickness and even color of a banana in such a way that only currently existing EU-produced bananas fit the definition. Free trade agreement negotiations are supposed to deal with such issues.

Q: There's also strong interest in the free trade agreement because the EU has strong property rights laws. Is copyright theft impugning trade on a widespread scale that impacts Connecticut businesses?

A: Copyrights and intellectual property in general are big problems for companies selling in Asia, specifically China. A few years ago Reuters reported that infringement just in China in 2009 was estimated to be around $48 billion.

Many smaller manufacturers are feeling increasing pressure to export because the Connecticut market has been shrinking for them, but they all consider selling products to China very dangerous. Yes, the immediate benefit is the extra sales they get initially, but the long-term cost is the risk that Chinese companies copy and produce their products and sell them at a cheaper cost. That would effectively drive the Connecticut company out of the market. It is the reason that trade talks between the U.S. and China always focus on intellectual property rights.

Increasing trade openness with the European Union would open markets for Connecticut producers to sell products without that worry because the Europeans are strict about protecting intellectual property.

Q: One benefit of the free trade agreement is similar educational and wage levels between the EU and the U.S., which supposedly allays fears of outsourcing of jobs. However, countries like Spain and Greece have high unemployment among their workers 25 and under. Wouldn't bad economic conditions create the temptation of stealing jobs?

A: No. They have high unemployment because their companies aren't doing well and because the labor restrictions in the EU make it costly to hire people. For example, it is difficult to fire someone in the EU. As a result, EU companies are loath to hire new workers unless they are very confident they will need them for a long time.

In addition, Spanish and Greek wages are many times higher than wages in most of the emerging market world. So, even if you were concerned about this effect, it's really smaller when talking about trading with Europe than it is with almost any other country in the world with the exceptions of maybe Canada and Japan.

Q: According to a Reuters article, approval of this agreement, possibly by the end of 2014, would dramatically increase two-way trade, which totaled more than $646 billion last year. What parts of the world are going to be hurt by this agreement? What trading partner of the U.S. will suffer negative consequences?

A: There is no reason that any trading partner of the U.S. will suffer. Trade is not a zero-sum game. Lowering the cost of trade with Europe lowers costs for U.S. companies and U.S. consumers, which in turn helps make the companies stronger and leaves American consumers with more disposable income to purchase goods and services.

It could very easily, even likely, increase trade with other countries.

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