Transatlantic squabbles about trade issues like bananas, beef, steel or aircraft subsidies capture media attention, but distort the nature of transatlantic economic relations. They distract attention from the real headline, which is that despite perennial hype about “big emerging markets” the transatlantic economic relationship remains the strongest, most interdependent economic partnership in the world – and these ties became stronger not weaker during President George W. Bush's first term.

 

Trade tensions represent a miniscule amount - only 1-2% - of overall transatlantic economic activity. Trade flows are themselves a misleading benchmark of economic interaction. It is foreign investment and foreign affiliate sales, not trade that drives transatlantic commerce, and contrary to conventional wisdom most US and European investments flow to each other rather than to developing nations and lower wage economies. And when US or European companies invest on the other side of the Atlantic, that investment usually generates greater transatlantic trade because the company’s home base and its overseas affiliates are connected through intra-firm production networks. Almost two-thirds of transatlantic trade is conducted through these networks, which also help companies hedge against currency fluctuations.

 

Trade frictions may indeed steal headlines, but the real story is that US and European companies are enjoying a profits bonanza in each other’s markets. European affiliates in the US earned a record $65.7bn in 2004, a 38.5% jump from what had also been record earnings in 2003. Since the US recession in 2001, earnings of European affiliates in the US have increased more than four-fold. Record US profits were posted in 2004 by Belgian, British, Dutch, Finnish, French, German, Irish, Norwegian and Spanish companies.

 

Europe accounts for nearly three-fourths of all foreign investment in the United States, and European economies have never been as exposed to the North American market as they are today. Healthy transatlantic commerce has literally become the economic lifeblood of both European companies and whole regions. The commercial relationship between the United States and such regions as Ile-de-France near Paris or south east England near London is greater than that between the US and most countries in the world. The three German powerhouse states of Hesse, Northrhine-Westphalia, and Baden-Württemberg invest more in the United States than they do in the rest of the EU.

 

Without the earnings growth they have enjoyed in the United States, the last few years would have been far more difficult for many European firms, and far more difficult for European policymakers, who would have confronted an even weaker macroeconomic backdrop had it not been for robust US demand.

 

The earnings of US affiliates in Europe have also soared, despite transatlantic acrimony over Iraq. They earned a record $100.8bn in 2004, with strong gains across the board. Earnings jumped over 23% from 2003, thanks largely to the weaker dollar. Between 2001 and 2004, US affiliates’ income (earnings) from Europe nearly doubled. To put transatlantic business into its global context, US affiliate income in China rose to a record $3.5bn in 2004), yet the $10.2bn earned by US affiliates in tiny Ireland was almost three times greater than that, and in such countries as the Netherlands ($18.2bn) or the UK ($19.7bn) more than five times. Last year, US affiliates posted record profits in France, Germany, Ireland, the Netherlands, Norway, Poland, Spain, Switzerland, Belgium, Finland, the Czech Republic and Greece.US companies rely on Europe for half their total annual foreign profits.

 

Europe thus remains the most attractive overseas destination for American foreign direct investment. Despite all the talk about US firms decamping for China and India, more than 60%of total US capital outflows of $609bn this decade - $373bn - has been sunk in Europe. Over the past decade US firms have ploughed ten times as much capital into the Netherlands as into China, and twice as much into the Netherlands as into Mexico. There is as much European investment in Texas as there is American investment in Japan and China put together.

 

Europe is, meanwhile, a key supplier of capital for the debt-stretched United States. In addition to strong foreign direct investment inflows to the US, European portfolio investors bought a record $84.4bn in US government agency bonds last year, helping to fund America’s massive savings gap.European companies are key sources of employment and wages for US workers, and essential sources of taxes for state and local governments.

 

All of these numbers add up to one simple conclusion: we literally cannot afford tit-for-tat trade battles that drain government attention, distract from efforts to reinvigorate multilateral trade negotiations, and suck the political energy out of transatlantic market-opening initiatives that promise real rewards for European and American citizens. Instead of portraying our commercial relationship as a zero-sum battle for global market share, leaders would do well to harness transatlantic potential to advance key shared interests.

 

During the Cold War, the US and Europe shared an interest in ensuring that economic disputes did not intrude on their core political-economic partnership. Today, the transatlantic partners still share an interest in preventing political disputes from intruding on the economic relationship.

 

Both sides also share an interest in promoting faster Europe’s growth. Weak growth in the EU means lost opportunities for Americans. A return to 3% growth in Europe would create a new market the size of Argentina. They also have an interest in resolving America’s $100bn-plus trade imbalance with the EU. Total transatlantic trade totaled a respectable $441bn in 2004, although the relatively balanced trade relationship of the past five decades has become a chronic US deficit.

 

America and Europe therefore have a mutual interest in grappling with the consequences not of drift but of “deep integration” the new closeness in which differing domestic regulatory mechanisms and standards rub up against each other. Deep integration poses qualitatively different challenges than the “shallow integration” model of the Bretton Woods-GATT system established during the Cold War.

 

These shared transatlantic interests cover an increasingly broad agenda. They include a successful WTO Doha Round, pressing China to stop managing its currency, and choking off sources of al-Qaeda terrorist funding.

 

There is also an important caveat: Unless the US and the EU each engage in substantial economic reforms to unleash the potential of the transatlantic marketplace, and commit to a new global partnership that accommodates the rise of new players, notably in Asia, the next five years could instead be the closing window for transatlantic leadership.