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Europe : international trade deals could boost GDP by 2 per cent

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As recent estimates show, deepening relationships between the EU and its key trading partners can contribute significantly to Europe’s recovery.

If the EU pursues its ambitious external trade agenda, this could boost the EU’s GDP by 2% or more than €250 billion. This is equivalent to adding an economy of the size of Austria or Denmark. An ambitious agenda could also help create more than 2 million jobs across the EU.

By 2015, 90% of economic growth will be generated outside Europe, with one third in China alone. Hence, tapping into the markets of our key trading partners will play an increasingly significant role for Europe’s growth in the future.

More than two-thirds of these gains in growth and jobs would materialise through trade agreements with the US and Japan. On 18 July the European Commission requested the EU’s Member States’ approval to open negotiations with Japan. In June 2012, the interim report of the EU-US High Level Working Group on growth and jobs underlined the benefits of a comprehensive trade agreement between the EU and the US. A recommendation should follow later this year on prospects for launching negotiations.

What are the prospects of the EU’s current trade negotiations?

This year, free trade agreements (FTAs) are within reach with Canada and Singapore. Both are important precedents for other potential agreements with similar or neighbouring countries. A positive dynamic with other member countries of the Association of South East Asian Nations (ASEAN) would reinforce the EU’s position in Asia.

On-going FTA negotiations with large emerging economies such as India or the Mercosur countries, albeit being very challenging, are important to prepare for the future. The key question for the EU remains whether we will be able to conclude these agreements within a realistic timetable and at an acceptable level of ambition.

All this would form an agenda of bilateral negotiations of an unprecedented scale – probably the most ambitious trade and investment agenda in the world today.

Despite difficulties in moving forward in the multilateral context of the World Trade Organisation (WTO), the EU has not stood still in the face of rapid changes in the global economy and is moving ahead to further connect to new global growth centres: FTAs covered less than a quarter of EU trade before 2006; concluding on-going negotiations with Canada, Singapore, India and other ASEAN states would bring this figure up to half; and moving forward with the US and Japan would bring it up to two-thirds.

Stepping up the pace of negotiation and ratification would be essential to reap the benefits of external trade.

How strong is the EU’s trade performance?

The EU remains the world’s largest exporter, importer, source and recipient of foreign direct investment. The EU has managed to hold on to its 20% share of total world exports despite the rise of China, whereas Japan and the US have seen significant declines in their shares.

The EU has a massive manufacturing trade surplus of €281 billion, a figure that has increased five-fold since 2000 and has more than compensated for the increase in the energy bill over the same period. The EU’s surplus in services has expanded by a factor of 17 in 10 years, to stand at €86 billion in 2010. On agricultural products, the balance has shifted from a deficit of €3.3 billion in 2000 to a surplus of about €7 billion in 2011.

About 30 million jobs in the EU, or more than 10% of the total workforce, depend on sales to the rest of the world, an increase of almost 50% since 1995.

What contribution can trade make to growth?

Robust external demand is the main source of growth for the moment, as domestic demand components (public or private) remain weak. Only the contribution of trade to GDP in 2012 (+0.7 percentage points) should enable the EU economy to avoid falling back into recession this year, as the contribution of domestic demand and inventories is expected to be negative (-0.4 and -0.3 points respectively, according to the European Commission’s Economic Spring Forecast 2012).

The contribution of external demand to economic growth is bound to increase in the future, as 90% of global economic growth by 2015 is expected to be generated outside Europe, a third of it in China alone1. To be sustainable, economic recovery will therefore need to be consolidated by stronger links with the new global growth centres.

More trade also benefits growth via the supply side of the economy. Trade liberalisation is a major structural reform in itself, creating new opportunities for innovation and stronger productivity growth. Trade and investment flows spread new ideas and innovation, new technologies and the best research, leading to improvements in the products and services that people and companies use. Long-term evidence from EU countries shows that a 1% increase in the openness of the economy leads to an increase of 0.6% in labour productivity2. Therefore deep and comprehensive, truly transformative agreements with our largest trading partners can be powerful catalysts for economic change.

By operating on both supply and demand at the same time, the leveraging of trade policy is a condition for the success and sustainability of any recovery strategy. It is an essential complement to other internal EU instruments such as industrial policy tools or financing instruments for investment. It is essential for jobs as well.

Concretely, how will the trade agreements currently negotiated impact on Europe’s economy?

The impact of all on-going and potential negotiations taken together could provide an increase of about 1.2 percentage points of GDP or some €150 billion to the EU economy in the short to medium term (table 1). Productivity gains stemming from trade integration further increase the impact of trade agreements by more than half. Once taken into account, the longer-term effect of all on-going and potential negotiations could amount to 2% of GDP or more than €250 billion.

On-going negotiations with the ASEAN countries, Canada, India, and Mercosur would generate almost a third of total potential GDP gains, while possible agreements with Japan and the US would account for more than two-thirds. This would of course depend on the actual outcome of the negotiations.