Stars Align for a New U.S.-Europe Trade Pact

by Charles Sizemore | May 28, 2013 4:16 pm

What do you get when you have a second-term American president eager to secure a positive legacy and a European continent desperate for economic growth?

If all goes well, you’ll have a game-changing free trade agreement between the United States and the European Union.

The agreement — tentatively called the — will potentially be the biggest trade deal in history, covering half the world’s economic output and roughly a third of all global trade. It makes NAFTA and the (alas, defunct) attempt at the Free Trade Area of the Americas look puny by comparison. Negotiations are supposed to formally begin in July and might take as long as two years.

A free trade deal of this scale is no easy project; even small deals, such as recent pacts with Colombia and South Korea, have political stumbling blocks. What might be liberating for consumers in the form of lower prices and better selection is the protected turf of favored industry and labor groups.

Past attempts at comprehensive trade deals across the Atlantic have lost steam. Neither side was committed enough to challenge the subsidies given to their coddled farmers and some of their “national champion” industries — think American Boeing (BA[1]) vs. French Airbus.

France also has consistently insisted that there be “cultural exceptions” for French-language films, music and art … which gums up negotiations on media and intellectual property. And the United States government procurement market is much harder for foreign firms to break into than most European government markets. Congress tends to play the populist “Buy American” card when it comes to supplying the government … which, of course, jacks up expenditures for American taxpayers.

So, while Americans and Europeans both like the idea of free trade in theory, in practice the status quo has been too hard to overcome.

But today, the timing might finally be right. You have free-trading Republicans controlling Congress and a Democratic president who sees an opportunity to strengthen political and economic ties with “Old Europe.”

The Democratic Party — traditionally hostile to free trade for the perceived damage it does to American labor — has also been gradually getting more comfortable with it since the presidency of Bill Clinton, and the fact that European labor markets are regulated as high (or higher) than America’s makes a deal easier for them to swallow. This isn’t a giveaway to Big Business using cheap third-world labor; it is partnership between two large players with similar income levels.

For the geopolitical strategists and foreign policy hawks, uniting the Western world under a giant trade umbrella allows the West to effectively set the rules for the world economy for the next 50 years and waters down the influence of China, India and other emerging countries.

And on the European side, it amounts to one word: growth.

The eurozone crisis has stabilized in the sense that the breakup of the currency union is off the table, at least for now. But the entire continent is suffering from having too much debt and not enough growth to realistically pay it back … or even stop it from snowballing.

As the past two years have proven, Europe’s leaders will push through major reforms only when they have the bond market pointing a proverbial gun to their heads. But shaking up their protected industries, while politically hard, is easier than raising taxes and cutting spending in perpetuity.

The potential deal has broad support, but it also has two powerful enemies on both sides of the Atlantic: populism (of both the labor left and the isolationist right) and entrenched interests.

Let’s hope the voices of reason prevail.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.  As of this writing, he did not hold a position in any of the aforementioned securities. Click here[2] to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.

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