Tuesday, February 12, 2013

Transatlantic Free Trade Agreement

Transatlantic Free Trade Agreement

In the 1990s and in 2007 the United States and the now European Union had considered created a transatlantic free-trade agreement, TAFTA, that was seen as an effort to boost investment, growth and bilateral trade between the two trading blocks to strengthen their economic position in hopes to counter the rise of Southeast Asia and China[i].  The economist recently wrote an article http://www.economist.com/news/europe/21571195-why-america-and-europe-need-free-trade-dealand-why-they-might-fail-get-one-transatlantic describing the great benefits and potential risks and barriers to such a momentous trade agreement.  They noted that it could reduce the tariffs by a potential 3%, while low by global tariff standards, it could spur great cross investment and promote growth in two stagnating recoveries[ii].  It hinders on the specific regional specific restrictions of various items such as French wines to German cheeses.  Currently, the economist reports that it could very well depend on the leverage President Obama has over his European counterparts in reaching favorable terms.

From the article in this week’s reading “Time to Rethink Offshoring”, we can see a slow changing of tides from offshoring manufacturing to China and Southeast Asia back to the United States and Mexico as a result of increasing costs of warehousing, transportation and rising wages in Asia[iii].  These increases in supply costs have hindered the offshoring process and spurred investment in domestic and regional manufacturing in North America.  An agreement between the United States or potentially all of North America with the European Union resulting in a net reduction of 3% of tariffs is just the additional burst needed to continue to spur on regional investment in both North America and Europe shifting manufacturing back to the Western World and preventing further manufacturing from leaving.  In a global supply network tariffs and transportation costs are becoming an increasingly important component in total supply chain costs as companies have already focused on streamlining the supply chain and manufacturing processes.  This 3% reduction is an important change in the supply chain dynamic that will cause professionals to take heed.  A great deal of transatlantic trade is done between subsidiaries of single companies in the two regions and reducing or eliminating tariffs could strengthen their supply chain, reduce costs and allow these companies to remain more competitive with emerging market companies while keeping jobs in the West[iv].  This reduced tariff will strengthen competitiveness of the transatlantic supply chain and allow for growth between both regions.

Questions to Consider:  Will this deal go through?  Or will it be mired in the Political Process?  Is it more important for President Obama to focus his efforts on creating a Trans-Pacific Free Trade Agreement?  How else can the President improve the supply chain costs between Europe and America?

[i] Transatlantic Free trade Area. Wikipedia.  http://en.wikipedia.org/wiki/Transatlantic_Free_Trade_Area
[ii] Transatlantic Trading. Charlemagne. Feb 2nd 2013. The Economist. http://www.economist.com/news/europe/21571195-why-america-and-europe-need-free-trade-dealand-why-they-might-fail-get-one-transatlantic
[iii] Goel, Ajay et all. Time to Rethink Offshoring. McKinsey.
[iv] Heineman, Benjamin. High-Risk, High-Reward: Will Obama Seek a Free-Trade Pact With Europe?. The Atlantic. December 11th 2012. http://www.theatlantic.com/business/archive/2012/12/high-risk-high-reward-will-obama-seek-a-free-trade-pact-with-europe/266120/

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