Reference no: EM133040759

In his February 12, 2013, State of the Union address, President Barack Obama committed the United States to negotiate a free trade deal with the European Union (EU). The proposed agreement is known as the Transatlantic Trade and Investment Partnership (TTIP). The United States and the 28 countries that are members of the EU already make up the world's largest and richest trading partnership, accounting for about 60 percent of global GDP, 33 percent of world trade in goods, and 42 percent of world trade in services. Some of this economic power and dynamic will change when the United Kingdom exits ("BREXIT") the EU, planned to happen on March 29, 2019. Moreover, both the United States and EU are members of the World Trade Organization, and many trade tariffs between the two economic blocs are already low. Nevertheless, the announcement was greeted with approval on both sides of the Atlantic and, unusually for President Obama, from both sides of the political divide in the United States. Though in the era of BREXIT and President Trump's focus on the United States, trade agreements will be much more scrutinized moving forward. At the origin, the reason for the enthusiasm for the proposed TTIP can be traced to acceptance of the key axiom of international trade theory-trade is a good thing for all countries involved in a free trade agreement. Free trade is a positive-sum game; it is equivalent to the rising tide that lifts all boats. Both the United States and the EU have struggled with low economic growth, persistently high unemployment, and large government deficits. A new free trade deal could help economies on both sides of the Atlantic grow faster, thereby reducing unemployment, without costing another dime in government spending. A trade deal is in effect a cost-free stimulus package. How big the economic impact will remain to be seen. For both the United States and the EU, average tariffs (taxes) on imported goods are currently close to 3 percent by most measures. Further reduction could nonetheless stimulate additional trade, and there are some areas where tariffs are much higher, notably on agricultural goods. Beyond tariff reductions, there are many nontariff barriers to international trade that could be reduced or eliminated as the result of a deal. One example is found in the automobile industry, where the EU and United States both employ equally strict but different safety standards. This means that to sell in both the EU and United States, automobile manufacturers must adhere to two different sets of regulations. Similarly, pharmaceutical firms currently have to submit new drugs to two sets of safety tests, one in the United States and one in the EU. Such regulatory requirements are functionally equivalent to an import tariff insofar as they raise the costs of business and international trade. By some calculations, non-tariff barriers such as these are equivalent to a traditional import tariff of 10 to 20 percent. Initial estimates suggest that a comprehensive and ambitious agreement that covers both tariff and non-tariff barriers to trade will boost annual GDP growth by about 0.5 percent per annum on both sides of the Atlantic, producing an additional $200 billion a year in economic activity. Talks on the TTIP began in July 2013 and were expected to be completed sometime in 2019 or 2020. However, the election of Donald Trump to the U.S. presidency in 2016 put the TTIP on the back burner. The negotiations were halted indefinitely following the election of President Trump. However, by April 2017, representatives of both the United States and the EU expressed willingness to resume the negotiations. These negotiations face tough rounds, most likely since Trump's rhetoric has been hostile to free trade deals like the TTIP. Indeed, within days of taking office, Trump had used his executive power to withdraw from the TTP and negotiations on the TTIP. However, signs are still favoring a reversal of course and seeing the Trump administration pushing forward with negotiations on the TTIP, although whether that comes to pass remains to be seen. Question: What are the opportunity costs of not pursuing the TTIP?