Why a US-EU trade pact would be historic

China's model of state-run capitalism needs a massive challenge from the two giant market economies. Obama must win a US-EU trade pact in his second term.

President Barack Obama takes his seat for an East Asia summit last month in Cambodia. Next to him is China's outgoing premier, Wen Jiabao. Obama said there is a need to "establish clear rules of the road" for trade and investment.

Little is known of Barack Obama’s exact priorities for 2013. Yet US presidents usually make their strongest play for a historic legacy in their second term.

For Mr. Obama, one priority should be to ensure that the world’s nations adopt the ideal of openness in their economic ties.

That ideal, which the United States championed after World War II, is now being eroded as more developing nations look to China’s model of state-run capitalism for growth. The Chinese model relies heavily on protecting industries; government-guided banking; and manipulating markets, currency rates, and data.

If every nation practiced such economic nationalism, trade in goods, services, and ideas would grind to a near-halt. More broadly, the model undercuts a global desire for accountability and transparency, the very qualities needed for democracy.

During his first term, Obama achieved little to expand world trade other than to have Congress approve two Bush-era bilateral trade pacts (South Korea and Colombia). In the meantime, big developing countries were further drawn to the China model.

Still, some actions by the Obama administration hint that it may be ready to exert strong leadership on trade openness.

For starters, the State Department will make recommendations soon on how to deal with a resurgence of state-run capitalism in other countries. In a recent speech, Secretary of State Hillary Rodham Clinton spoke of the diplomatic challenges that arise “when states abuse their economic advantage to bully their neighbors or box out competitors.”

Obama has also begun talks with 10 other nations from Chile to Singapore to open up more trade through a grouping called the Trans-Pacific Partnership. The talks are a direct challenge to China, which is behind talks involving Asia-only countries called the Regional Comprehensive Economic Partnership. The two sets of negotiations represent a cold war-style contest between clashing values for the world economy.

Also possible in Obama’s second term is the start of talks on a free-trade pact with the 27-member European Union. The idea has been kicked around for decades, but the Great Recession and Europe’s debt woes have pushed both sides to now see an expansion of exports as a way around the political problems of budget austerity and more stimulus.

“If we get this right, an [EU-US] agreement that opens markets and liberalizes trade would shore up our global competitiveness for the next century, creating jobs and generating hundreds of billions of dollars for our economies,” Ms. Clinton said last month.

The European Commission estimates that trade would expand 50 percent with such a pact.

But the larger hope is more global in scope. “We should keep an eye on the bigger picture,” said European Trade Commissioner Karel De Gucht, “that liberal democracies should stick together despite the crisis that to some extent has undermined belief in liberal-democracy.”

Together, the US and EU economies are nearly half of the world’s gross domestic product and command about a third of its trade. A trade pact between the two would help cement a global ideal in trade openness.

Such a pact won’t be easy. While tariffs are low in EU-US trade, the two have very different regulations on products and services, reflecting deep cultural differences on, for example, food safety and privacy. Resolving those differences will require keeping the goal of trade openness firmly in mind.

Obama’s legacy in world affairs would be more certain if he quickly reached an agreement with the EU and got Congress to pass it. It would be the equivalent of setting up an economic NATO, a bulwark against a Chinese model that holds little promise for global progress based on universal values.

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