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Slaughter & Rees Report - Trading Ties

March 4, 2013 --
Welcome to the first edition of The Slaughter & Rees Report, a newsletter featuring business and policy analysis from Matthew Slaughter and Matthew Rees, brought to you by the Tuck School of Business at Dartmouth and Geonomica. The Slaughter & Rees Report is delivered to email boxes early every Monday morning. Subscription information here.

In his recent State of the Union address, President Obama announced that the United States would be launching negotiations with the European Union on a free-trade agreement. If the two sides can ultimately come to terms—a big “if”—it would create the world’s largest free-trade zone, covering more than 44 percent of the global gross domestic product.

An EU-U.S. free-trade agreement would be smart policy on several counts. It would deliver a much-needed boost to recessionary European Union economies. It would help stabilize the post-crisis global economy by re-balancing U.S. output away from high consumption. And with the total number of U.S. private-sector jobs stuck at nearly the same level it was 12 years ago, it would benefit struggling American workers. Exporting companies tend to generate about twice as many sales as non-exporting firms. They are also about 10-15 percent more productive per worker, and thus pay about 10-15 percent more in wages. Eliminating all tariffs could produce welfare gains of up to $86 billion for the EU and $82 billion for the U.S., according to one study.

This agreement would also be a welcome spur to U.S. policymaking in general, because America’s trade agenda has been adrift. In his 2010 State of the Union, President Obama introduced the laudable goal of doubling U.S. exports in five years, which he has since made the centerpiece of his National Export Initiative. But how many new U.S. free-trade agreements were negotiated and ratified during President Obama’s first term? Zero. How many new agreements look likely to be negotiated and ratified in 2013? Zero.

Trade negotiators on both sides will come under enormous pressure to exempt certain industries from liberalization. This pressure has stifled the global trade talks launched in 2001. But a bold EU-U.S. trade agreement should not be mercantilist; it should open U.S. borders to EU exports and foreign borders to U.S. exports. Exports “made in America” increasingly hinge on creative new ways to make goods and services in global supply networks. One recent study estimated that the foreign content of U.S. exports has tripled in the last 40 years, rising from about 7 percent in 1970 to 22 percent in the late 2000s. In 2011, fully 62 percent of America’s $2.2 trillion of goods imports were intermediate inputs used in America by American workers.

An EU-U.S. free-trade agreement is a fine idea. But translating this idea into reality will take a lot of work.

Related Articles
• For more on the trade-policy challenges facing America today, see Matthew Slaughter’s recent op-ed in The Wall Street Journal here

Articles © 2013 Matthew Slaughter and Matthew Rees.  All rights reserved.
Publication © 2013 Trustees of Dartmouth College.  All rights reserved.

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