Sunday, September 17, 2006

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Will there be a TAFTA?

This week the Economist has an excellent survey by Pam Woodall of the global economy, and the increasingly powerful effects that the developing world are exerting on prices, wages, and interest rates:

Last year the combined output of emerging economies reached an important milestone: it accounted for more than half of total world GDP (measured at purchasing-power parity). This means that the rich countries no longer dominate the global economy. The developing countries also have a far greater influence on the performance of the rich economies than is generally realised. Emerging economies are driving global growth and having a big impact on developed countries' inflation, interest rates, wages and profits. As these newcomers become more integrated into the global economy and their incomes catch up with the rich countries, they will provide the biggest boost to the world economy since the industrial revolution....

In particular, the new ascendancy of the emerging economies has changed the relative returns to labour and capital. Because these economies' global integration has made labour more abundant, workers in developed countries have lost some of their bargaining power, which has put downward pressure on real wages. Workers' share of national income in those countries has fallen to its lowest level for decades, whereas the share of profits has surged. It seems that Western workers are not getting their full share of the fruits of globalisation. This is true not just for the lowest-skilled ones but increasingly also for more highly qualified ones in, say, accountancy and computer programming.

If wages continue to disappoint, there could be a backlash from workers and demands for protection from low-cost competition. But countries that try to protect jobs and wages through import barriers or restrictions on offshoring will only hasten their relative decline. The challenge for governments in advanced economies is to find ways to spread the benefits of globalisation more fairly without reducing the size of those gains.

Be sure to check out the podcast interview with Woodall, conducted by the dulcet tones of one Megan McArdle. Woodall thinks what's happening now will be "bigger than the industrial revolution."

One obvious implication to draw from the survey is that the relative (though not absolute) economic power of the US and EU will decline over time.

How will Washington and Brussels respond? The Financial Times' Bertrand Benoit offers one intriguing answer:

Spurred by concern about China’s growing economic might, Germany is considering a plan for a free-trade zone between Europe and the US.

A senior aide to Angela Merkel said the chancellor was “interested” in promoting the idea as long as such a zone did not create “a fortress” but rather “a tool” to encourage free trade globally, “which she is persuaded is a condition of Germany’s future prosperity”....

News that the free trade zone, last pursued by Sir Leon Brittan, when European trade commissioner in 1998, is being debated in the German chancellery testifies to the rapprochement between Washington and Berlin since Ms Merkel’s election last November.

This convergence of views was underlined this week when Wen Jiabao, Chinese premier, was politely chided by Ms Merkel for China’s poor human rights record and recent restrictions on foreign news agencies, during an official visit to Berlin....

Ms Merkel’s aide said it was “far too early” to tell whether the project of a transatlantic free-trade zone would be part of Germany’s priorities when it assumes the six-month presidency of the European Union and chairs the G8 group of leading industrial nations from January.

Two of Ms Merkel’s most senior advisers, Jens Weidmann on economic policy and Christoph Heusgen on foreign policy, have warned her the initiative could be construed as protectionism.

Yet the notion has struck a chord with Ms Merkel, who has often called for “a global framework of rules” – minimum social, environmental and ethical standards – to prevent competition from sophisticated yet authoritarian low-wage economies eroding western achievements in these domains.

“The west needs to pull together,” Gabor Steingart, Berlin bureau chief for the Spiegel weekly, told the FT yesterday. His book, World-War for Prosperity, a warning about the dangers of globalisation published this week, is credited with influencing the debate in the chancellery.

“What Nato did for the west under the cold war, Tafta (Transatlantic free-trade area) can do in the current battle.”

When I was in Berlin this summer I met with a few Bundestag and industry officials who were quite keen on the idea. The fact that Merkel is considering this suggests that the idea has gotten more traction in recent months.

There are many reasons to believe that TAFTA will never get off the ground. What Europe thinks should go into a free trade agreement is a bit more modest than what the U.S. thinks should go into one. I simply can't see agriculture included into any TAFTA. I can't imagine that France would ever let it go forward. Anti-Americanism on the continent could be enough to scotch it.

And yet, the idea is very intriguing. Even if it takes ten years to negotiate, the combined weight of a TAFTA in terms of both market size and rule-setting behavior would be formidable.


posted by Dan on 09.17.06 at 02:21 PM


Please. I hope this happens, or at least the dialogue. Both Europe and America need to remember how much they rely on each other. It's not enough for them to dismess us as barbarians or us to dismiss them as fading away. We are too linked.

posted by: ElamBend on 09.17.06 at 02:21 PM [permalink]

Why do we still need bi-lateral and multi-lateral agreements since we already have WTO? Please illuminate. Thanks

posted by: c on 09.17.06 at 02:21 PM [permalink]

All very interesting - is it relevant / what does it mean that the 'absolute' power of the EU and US will not decline?

I'm an english economist working in Lesotho, which is full of Taiwanese-run textile factories. On the plane here yesterday, there was an old Taiwanese woman reading the Chinese version of Friedman's "The World is Flat." I asked her about it and she said it was one of the best and most important books she has ever read.

I dont know about flat, but the world never felt so small for me as in that moment...

posted by: George Lee, Lesotho on 09.17.06 at 02:21 PM [permalink]

The primary beneficiaries of reducing or eliminating import tariffs are the citizens of the country reducing the tariffs. The U. S. would benefit the most from reducing import tariffs regardless, yes, I said regardless, of what the other countries did! We have it within our own power to set up a unilateral free trade zone with the entire world! This would benefit our own citizens the most.

posted by: Tom Adams on 09.17.06 at 02:21 PM [permalink]

The condition for TAFTA to work is that it is an open club. The transatlantic zone can only be a nucleus, where other democratic market economies can associate.

There would be economic gains, to be sure.

But in essence its a political project - the liberal West reasserts its position vis-a-vis the challenge of autocratic state-centred economies like China and Russia, and invites others to join: India, Japan, Brasilia etc.

posted by: Ulrich Speck on 09.17.06 at 02:21 PM [permalink]

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