US President Barack Obama has called for talks on a far-reaching free trade agreement with the European Union, throwing his weight behind a deal that would encompass half the world's economic output.

The US and the EU already have the largest economic relationship in the world, and one of the most complicated.

"Tonight I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union because trade that is free and fair across the Atlantic supports millions of good-paying American jobs," Mr Obama said in his annual State of the Union speech.

A pact would unite the United States, the world's largest economy, with four other countries in the top ten: Germany, France, Britain and Italy.

Faced with slow growth on both sides of the Atlantic and rising competition from China and other emerging economies, the long-time allies began looking at ways to build on their existing relationship in late 2011.

Last week, EU leaders endorsed trade talks with the US, putting it at the top of a larger agenda that includes negotiations with Canada and Japan.

Two-way goods trade between the US and the EU now totals more than $600 billion annually.

Services trade, including sales by majority-owned US or EU companies in each other's market, adds about $1.2 billion.

US companies have invested around $1.9 trillion in production, distribution and other operations in the EU, far more than in China or anywhere else in the world.

EU companies have invested about $1.6 trillion in the US.

Since most tariffs between the United States and the EU are already low, reducing regulatory barriers to trade in areas like agriculture and chemicals is expected to be the most challenging aspect of the talks.

The EU recently lifted bans on imports of US live swine and beef washed with lactic acid to help build confidence that it can address US agricultural concerns.

However the EU-US talks also are expected to tackle new areas, such as setting rules to govern the free flow of information across borders.

That is an increasingly important priority for big US internet companies like Google, Facebook and Amazon but could be hard for EU members France and Germany to accept because of privacy concerns.

Meanwhile, the two sides are locked in a long-running battle at the World Trade Organization over government support for Boeing, the largest the US exporter, and its European rival, Airbus.

Obama calls for US tax code reform

Barack Obama also called for a revamp of the US tax code, a goal shared by his Republican rivals, but the bid to close tax breaks enjoyed by the wealthiest Americans and corporations face familiar roadblocks in Congress.

"Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit," Mr Obama said.

The ideas largely mirror those he pitched in his address a year ago.

Since then, Mr Obama has won re-election campaigning on what he has called tax fairness, while Republicans have lost congressional seats.

However even Mr Obama's backers say they face a tough road in the near term.

"Unless Republicans have a real 'come to Jesus moment,' it is difficult to imagine them supporting many or any of these provisions," said Jim Manley, a former top adviser to Senate Democratic leader Harry Reid.

Before Democrats and Republicans can get to the full-scale revamp of the US tax code that they say they want, they must put out several fiscal fires.

The latest stand-off between the White House and congressional Republicans is over automatic spending cuts set to kick in on 1 March.

Mr Obama and fellow Democrats back a mix of revenue and tailored spending cuts to avoid what is known as the "sequester," while Republicans oppose any tax increases.

Mr Obama also proposed raising the minimum wage to $9 per hour, investment in infrastructure and the creation of an ‘offshoring tax’ to set a minimum tax on offshore earnings to encourage domestic investment.