FT.com / Comment & analysis / Columnists - Merkel’s misguided transatlantic trade notions

FT.com / Comment & analysis / Columnists - Merkel’s misguided transatlantic trade notions

Merkel’s misguided transatlantic trade notions
By Wolfgang Munchau

Published: January 7 2007 18:33 | Last updated: January 7 2007 18:33

Remember the Tobin tax on financial transactions? Someone on Europe’s political left proposes it about every 10 years. There is some fuss about it for a short period and then it disappears.

I was reminded of the permanently doomed Tobin tax when I first heard about German plans for a transatlantic free trade agreement last autumn. A decade ago, the European Commission endorsed such a proposal but the French unsurprisingly vetoed it. This year Angela Merkel, the German chancellor, wants to have another go at a transatlantic agreement to harmonise regulation as part of Germany’s presidency of the European Union.

There is nothing wrong with transatlantic free trade in theory, if it were to cut regulation and facilitate market access by third countries. But this is not the intention here. The EU and the US are talking about a treaty designed by lobbyists. Furthermore, it would suck out what little momentum is left in the Doha round of multilateral trade negotiations.

Free trade benefits consumers – and societies at large. But what consumer benefits should we expect from Ms Merkel’s desired transatlantic deal?

When it comes to manufactured imports, the EU is generally more protectionist than the US. It is much cheaper, for example, to buy a car in the US than in the EU. A 2003 study by Scott Bradford in the Review of Economics and Statistics found that for cars, average factory-gate prices in Belgium, the Netherlands, Germany and the UK were 69 per cent above world prices. Travellers from Europe to the US also find many retail prices in the US are about half of what they are in the EU.

Such huge price gaps cannot be explained away by currency movements or differences in sales taxes or retail distribution systems. Behind the bulk of these price differences lies regulatory red tape in the EU, aimed at protecting domestic manufacturers. If you want a rational explanation of why Italy and Germany have such large manufacturing sectors compared with other industrialised nations, this is surely part of the story.

Would mutual recognition of technical standards in the car industry, which Ms Merkel is calling for, lead to lower prices in the EU or to higher prices in the US? Probably neither.

So what are we going to get? Ms Merkel said herself that she hoped to make some headway on discussions about intellectual property rights and in facilitating the delisting of European companies that no longer wanted a US stock exchange quotation. The Germans are also pushing for the global regulation of hedge funds, which have attracted bad publicity in the German press.

Whatever agreement the US and the EU might come up with, it would serve the interest of at least some producer lobbies. I predict that the US and the EU will not be able to decide on a single measure that would benefit consumers. No prices will come down as a result of such a treaty. No new products will be made available. Can you really imagine a deal that would deliver US-style, 30-year, interest-only mortgages in Italy or Germany?

If Ms Merkel really wanted to benefit consumers, she would need no bilateral trade deal. The best policy would be to complete the EU’s own internal single market. The EU should cut regulation that is aimed purely at discriminating against outsiders. The problem is that Germany, France and Italy are not currently prepared to endorse such policies, either at home or at EU level.

Instead, Ms Merkel has overloaded Germany’s EU presidency with a whole series of big-ticket items – ranging from saving the EU constitution to energy market harmonisation.

As far as the constitution is concerned, Germany has not yet begun to develop an intelligent strategy to help the French and the Dutch to ratify the treaty without sacrificing the subtle political compromises that gave rise to the existing text. German efforts are mainly procedural so far. Sherpas are talking to sherpas. What we are likely to get by the end of the presidency in June is an agreement for the sherpas to continue talking and maybe for others to join in the conversation.

The creation of a single European market in energy would have been worthwhile but it faces formidable obstacles. From an economic point of view, energy is one of those markets best regulated at EU level – as opposed to agriculture, for example. Meaningful progress would, however, require a much bigger effort than Germany’s multi-theme EU presidency promises to deliver.

Indeed, Germany itself has been resisting both the centralisation of energy regulation and an unbundling of transmission networks and power production, while at the same pursuing its own cosy bilateral deals with Russia.

The EU’s persistent failure to solve its collective action problem in the area of energy is another example of the overwhelming power of producer interests – and, by failing to create an efficient energy market, has contributed to the rise in integration fatigue among European citizens.

Europe needs to wean itself off its producer lobbies. This is going to be the big challenge in the next few decades. It does not need a wrong-headed bilateral treaty. The good news is that such a rotten trade deal will prove elusive – just like the Tobin tax.

munchau@eurointelligence.com

Copyright The Financial Times Limited 2007