Monday, February 18, 2013

President in State of the Union Address Calls for Free Trade with European Union

In his State of the Union address on February 12, 2013, President Barack Obama announced that the Administration plans to notify Congress of its intent to launch negotiations on a Transatlantic Trade and Investment Partnership with the European Union ("EU").

If President Obama can negotiate a free trade agreement with the EU, it'll be a huge deal. According to information on the website of the United States Trade Representative, daily trade in goods and services between the U.S. and the EU totals $2.7 billion (€2.0 billion). Not only are the EU Member States, among our biggest trading partners, they also present substantial challenges if the goal is to increase U.S. exports.

Reconciling the differing regulatory regimes of the U.S. and the EU will be a huge undertaking. Currenly, many U.S. producers find it exceedly difficult, and in some cases impossible, to eport to the EU in compliance with the European Community law regarding Registration, Evaluation, Authorisation and Restriction of Chemical substances ("REACH"). The law entered into force on June 1, 2007, and has been viewed by some in the U.S. as more of a non-tariff barrier to keep out U.S. goods than a legitimate environmental protection or workplace or consumer product safety regulation.

Another huge barrier to U.S. exports to the EU that is unlikely to be addressed by the free trade negotiations is the Value Added Tax ("VAT") of the Member States of the EU. According the American Manufacturing Trade Action Coalition ("AMTAC"), a Washington-based group that advocates for policies favorable to domestic manufacturing, the Member States of the EU have a history of increasing their VATs as they reduce import duties, in that way maintaining the same level of protectionism while appearing to lower barriers. AMTAC has noted that in 1968 the average import tariff imposed by the Member States of the EU was 10% tariff and the average VAT was 14%, making for a combined cost of exporting to the EU of 24%. By 2006, after several rounds of reductions in import duties the combined tariff plus VAT was still 24% (4% average tariff and 20% average VAT). The U.S. charges no VAT, so if a free trade agreement is implemented with the EU, the 27 EU Member States will be able to export to the U.S. with no duty and no VAT. U.S. companies trying to export to the EU will still have to pay the VAT, even after tariffs are eliminated. The VAT is not trivial, averaging around 20%. And if history is an indicator, we can expect the VAT to rise if tariffs are reduced or eliminated.

The table below shows the current VAT for each of the EU Member States. (Source: European Commission VAT Rates Applied in the Member States of the European Union, Situation at 14 January 2013.)

Czech Republic21%
United Kingdom20%

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