A U.S. Europe Trade Pact? Why Not?

First there was NAFTA. Now there is TAFTA--the Transatlantic Free Trade Agreement. Trial balloons are going up on both sides of the Atlantic on a proposed European-American deal between like-minded, free-market, free-trade economies. It is a proposal that deserves serious, but cautious, attention.

The argument for TAFTA goes like this: The U.S. and Europe basically have similar, open, economic systems compared with the more closed, mercantilist capitalism ef Asia. Unlike U.S.-Asian trade, the trade flowing across the Atlantic follows the ups and downs of currencies because markets are generally open. Movement of goods and capital are generally in balance over time, again unlike trade with Asia, where the U.S. deficit keeps growing no matter what. So why not formalize economic relations among countries where trade and investment are on a fairly level playing field?

No reason at all. For too long, U.S.-European relations have been defined mainly in terms of security needs. Now, economics is paramount. A long-standing romance with Asia may be blinding the U.S. to the realities of Asian commerce: limitations placed on foreign direct investment and unfair protectionist barriers to imports. The Japanese mercantilist economic model is popular from Korea to Malaysia. Most important, a grand Euro-American economic coalition of two continents based on free and open markets may be the only way to pressure Asians to act according to the free-trade principles from which they have benefited so much.

The danger would be if TAFTA becomes a country club of trade. Just as Malaysia talks of building an Asian economic bloc excluding the U.S., Australia, and New Zealand--a "caucus without caucasians"--some TAFTA proponents seem intent on creating a "caucus with only caucasians." It is troubling that TAFTA's provenance includes free-trade revisionists such as Sir James Goldsmith, who argue that globalization hurts European and American living standards. Their solution: limit trade with low-wage countries and build a kind of transatlantic economic fortress.

That would be a big mistake. However painful it may be at times, global economic integration is driving U.S. growth and productivity. Yet time may be running out for free trade. Sadly, Japan's mercantile policies and Asia's wish to follow them is beginning to push U.S. and European policymakers to think of free-market alternatives. Unless Asia starts to back away from mercantilism, the TAFTA idea, a second-best solution right now, may soon become a first choice.