Europe and the Americas: Toward a TAFTA-South?

Paper published in World Economy

June 1, 2001

Five years ago, European officials proposed the negotiation of a transatlantic free trade area (TAFTA) linking the United States and the European Union in the world’s largest free trade zone. Flush from their successful conclusion of extensive multilateral trade reforms in the Uruguay Round, it seemed logical that the two leaders of the world trading system could work together to resolve their remaining trade problems and in the process set powerful precedents for the rest of the world to follow. In so doing, they would accelerate progress toward the ultimate goal of “global free trade”.

Transatlantic free trade seemed such an easy task. Bilateral trade and investment was already large and largely unfettered (except in agriculture) and the proposals garnered support from both business and labor organizations. After the acrimonious debate over the ratification of the North American Free Trade Agreement (NAFTA), proponents felt that the TAFTA would not raise the same concerns about social and environmental dumping that nearly killed the North American pact. However, the initial fervor for such talks soon dissipated when it became clear that sharp differences in US and European regulatory policies, as well as agricultural support measures, made the negotiating task exceedingly difficult. Moreover, officials failed to assess the potential damage to the nascent World Trade Organization (WTO) that could result if the world’s most powerful trading nations struck a deal that discriminated against suppliers from the world’s developing countries. The grand vision of TAFTA was shelved and replaced by pragmatic and narrowly focused work on regulatory barriers and other “nuts and bolts” trade problems.

Even without a TAFTA, US-EU trade relations have grown significantly: bilateral merchandise trade totaled about $400 billion in 2000 and cross-border direct investment in each other’s market exceeds $1 trillion (on a historical cost basis). To be sure, major disputes continue to fester over bananas, beef hormones, aircraft and grain subsidies, genetically modified seeds and foods, and US subsidies provided under the Foreign Sales Corporation program. These problems demonstrate that TAFTA is more a vision than imminent reality for trade between Europe and North America.

Over the past few years, however, the European Union also has been quietly pursuing another TAFTA. New trade initiatives with its trading partners in Latin America and the Caribbean Basin presage the development of a free trade zone, or “TAFTASouth”, over the next decade. A comprehensive free trade agreement (FTA) is already in force with Mexico and negotiations initiated with the Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay) and with Chile. In addition, the recently minted “Partnership Agreement” (discussed later) between the European Union and its developing-country partners in Africa, the Caribbean, and the Pacific seeks to establish a more reciprocal relationship than existed under the previous Lomé accords that eventually transforms into a FTA. Unlike its previous free trade ventures in the postwar period, these European initiatives involve countries outside of the regional neighborhood and seek reciprocal rather than preferential trade deals.

To be sure, the European Union itself has not proposed a broad free trade pact with Latin America similar to the “Free Trade Area of the Americas” under negotiation between the United States and 33 other countries in the Western Hemisphere (see Schott and Hufbauer 1999). Given the diversity in size and level of economic development of Europe’s trading partners in Latin America and the Caribbean Basin, a TAFTA-South agreement would be a daunting task. In some respects, it is comparable to, though much less well defined than, the pursuit of an FTAA among Western Hemisphere countries. Indeed, like the United States, the European Union has started the process by taking small steps with individual countries and regional groups; unlike the United States, it has not yet integrated those initiatives into a single negotiation that over time could create a super-regional free trade zone.