Free Trade Agreement Between EU and the USA Possible?

By Tom
Updated on

Free Trade Agreement Between EU and the USA Possible?

The crucial sentence in President Obama’s State of the Union Address has largely been ignored.


And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs.


For one thing this has been prepared thoroughly with the European Union. Certainly there remain a lot of working out the details – and it could get bogged down in details. Somehow that is not likely, as there is quite a lot of common interest involved. There is a heavy German accent to the statement however: It is classical German economic policy!

The message is to the business world: Either get competitive or get lost. On the other hand there will not be any wage rises without an increase in productivity. To the wage earners: If you want more money, then get a move on – on the other hand you’ll get cheap imports. The choice is the consumers!

The failure to remain competitive is seen most clearly in the American auto-industry where auto workers were overpaid producing cars that off the assembly line had a hard time passing a roadworthiness test. That is a striking contrast to Germany where the worst competitor to Volkswagen AG (PINK:VLKAY) (PINK:VLKPY) was last year’s model of Volkswagen – albeit produced in Spain or the Czech Republic with cheaper labour. So if the German production didn’t keep on its toes there was a splendid alternative in shops – even the spare parts matched in many cases – only the latest carried the VW logo! Brake liners etc. were the same: Where it was warranted new parts were introduced. The worst competitor is your own success of yesterday.

It does however mean that agricultural protectionism is a thing of the past. It won’t be abolished overnight, but it is worth noting that the French President Holland is a labour politician – what does he care about the farmers? Despite the claims of tree-huggers food has never been of such high quality and low price as it is today. Even the latest mincemeat scandal is testimony to that (the claim is that horseflesh has masqueraded as beef – not that it is unfit for human consumption) – it is a problem that will solve itself, as horses eat more per pound of meat than cows do.

But how does currency depreciation fit into that? Well it doesn’t!

The G-20 summit dispels the fear of a “currency war”. That is easy to promise. The reason is simple enough. Japan and China might debase their currency to stimulate exports. But there is a flipside to any coin! Both China and Japan are desperately dependent on imports – as are all modern economies. So if you cut prices by tampering with the currency – your imports will be that much dearer – the same imports that your export depends on. Any tradesman gets tired of selling below his own purchase price.

The interesting thing about the articles is that the Chinese apparently didn’t say anything. The attempts over the last two years to play the USD against the EUR must have hurt them quite a bit. That was expected, when you change over from being a net exporter to a net importer the perceived interest is reversed. Any CB intervention is not likely to be successful as prices will go up once China really starts importing – not only that, but spending all that money will inevitably mean a revaluation of your own currency. So there is a sound slap to both sides of the face.

The other big issue on the G20 was the deficit cuts, where only Germany has met its target (surprise, surprise), but here there was support from Russia. That is not surprising as the mainstay of the Russian budget is export customs on their energy export – so Russia really IS on a budget.  This also means that cutting taxes isn’t really an option. The next problem is from whom are the Russians actually going to borrow? And in what are they going to invest?

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