Eliminating US-EU tariffs fosters economic growth, eases inflation, and promotes democratic stability.

However, unfortunately, neither policymakers in the U.S. nor in the EU have so far publicly considered an additional policy measure which could solve several problems at once: to revive and complete an EU-U.S. free trade agreement, building on the Obama administration’s efforts to establish the Transatlantic Trade and Investment Partnership (TTIP). A TTIP successor would not only have the potential to significantly ease existing supply chain woes and reduce inflation in the medium-term but also increase economic growth on both sides of the Atlantic, thereby reducing the risk of a prolonged recession in the U.S. and the EU. While reviving an EU-U.S. free trade agreement will take some time, central bankers now expect that inflation pressures might last longer than expected and that we might not be returning to the low-inflation environment we faced before the pandemic. This underscores the importance of finding other policy measures that curb inflation but do not reduce economic growth. Moreover, an EU-U.S. free trade agreement would lead to greater integration between these two vital blocs, deepening economic and political ties in line with the existing close military ties, increasing regulatory harmonization, and building a more coherent counterweight to the increasingly assertive authoritarian alliance between Russia and China. Reviving a TTIP successor could help improve the economy, reduce inflation, and strengthen ties with our democratic allies.

President Biden would have a good basis to restart negotiations with the EU by building on the far-reaching efforts to implement TTIP by the Obama administration. Before the Trump administration scuttled TTIP and antagonized the EU by imposing tariffs on European goods, President Obama had made significant progress in negotiating an EU-U.S. free trade agreement after launching talks in 2013. The U.S. could pick up where it left off in 2016 by adopting the provisions settled by the initial 15 rounds of negotiations and renewing these talks.

TTIP would have effectively eliminated 98-100% of tariffs, reduced non-tariff barriers to trade with Europe by 10-25%, and been the largest trade deal in history (see Appendix Table 1 for an overview of tariff reductions). Based on estimates of the impact of TTIP on the U.S. economy, wages for high- and low-skilled U.S. workers would have increased, U.S. exports would have spiked, and millions of American jobs would have been created. The deal would have also spurred broad economic growth by increasing U.S. GDP an estimated 0.2-0.4%, or about $75 billion annually.1 For the EU, TTIP would have increased GDP by 0.3-0.5%, or about $64 billion annually.2

Importantly, an often-overlooked benefit of free trade agreements is that they can ease inflationary pressures by streamlining trade between nations, thus increasing the supply of goods and reducing prices. That is, rather than curb demand as interest rate increases do, free trade works through the supply side. Because the current inflation spike can at least partly be attributed to stresses on supply chains, a free trade agreement inducing greater supply would be one step to help ameliorate the magnitude of inflation. By bolstering supply chains, a new free trade agreement would also help relieve shortages of certain goods that have persisted since the pandemic, such as the recent baby formula shortage, and ensure greater access to essential products.