This Policy Brief discusses main contention points and arguments surrounding the on-going debate on the Trans-Atlantic Trade and Investment Partnership. It presents its strategic importance and argues that its expected benefits outweigh its (perceived) risks.
The economic relationship between the EU and the US is the largest in the world; it constitutes one third of global trade and half of the world’s output. EU countries make up the second largest export market for the US, while the US is EU’s largest trading partner. The vast size of the trade relationship between the two actors renders the trade partnership under negotiation of strategic importance by virtue of its economic and geopolitical implications. Consequently much attention has been directed at the potential negative and positive implications of the TTIP. So far three issues have emerged, a) market access (tariffs, services trade, and public procurement), b) rules (sustainable development, labour, energy) and c) regulations (technical barriers and sanitary issues).
The issue of regulations is particularly contentious. It is often argued that TTIP will lead to a race to the bottom by decreasing Europe’s high food safety- and chemicals standards. What is obscured is that in reality the TTIP negotiations focus on mutual recognition and equivalence of standards, not harmonization. In addition, as Professor Hanns Werner Sinn has pointed out, in the US consumer protection standards are often higher across the board; in contrast in the EU the minimum standard applicable to all States is set by the Member with the lowest standard. Focusing the debate on harmonization then is misleading. The importance of advancing the trade relationship with the US at this point lies in promoting the two actors’ mutual standards in the world. Such a move is significant in the arena of soft power, especially when considering emerging economic actors like China, Brazil and India, who strive to pursue their own trade interests and agreements. In addition the negotiation of the deal has come under greater pressure following the conclusion of the Trans-Pacific Partnership (TPP), which is heralded as a milestone. Mutually recognised standards between the EU and the US could lead the rest of the world to comply with them especially in the area of labour and human rights. Setting the rules of the game would go a long way towards cementing the two actors influence in global trade. The strategic importance of the deal as stressed by politicians and officials is reflected in repeated statements made by Chancellor A. Merkel and Commissioner C. Malmstrom (the latter aiming to advance similar issues in trade talks with New Zealand and Australia). Furthermore, focusing on rules instead of tariffs (as done in the TTIP too) is a major characteristic of the so-called ‘new-generation’ trade talks. The challenge of such deals is to overcome citizens’ suspicions over destroying regulations, jobs and welfare rights. Cutting tariffs to zero, eliminating non-tariff barriers by 25% and public procurement barriers by 50% is expected to increase EU GDP 0,5% by 2027 according to CEPR. Furthermore the potential job creation will not provide much relief vis-a-vis recessionary unemployment (25 million unemployed Europeans). Models that assess the economic impact of TTIP assume full employment anyway and a small GDP increase of 0,5% within 13 years. The effects may even be negative as stronger patent and copyright protection could lead to higher prices. ECORYS estimates that removing half the non-tariff barriers could add 150 billion to transatlantic GRP (0,5%). As such, recognizing different administrative procedures and regulations and liberalising trade in services could account for 80% of potential gains. According to the Commission though, only 50% of the non-tariff barriers suggested are within the reach of policy, i.e. realizable. Eliminating these seems very ambitious especially because of strong inter-sector linkages that mean that benefits will only result if liberalisation is carried out effectively in all segments. Dealing with unnecessary bureaucracy though remains a priority, as it often adds 10-20% to the price of products and alters the competitiveness of domestic producers and exporters in modern cost sensitive global value chains. As a result, mutual recognition could reduce production costs and increase competitiveness by eliminating costly regulations (e.g. incompatible food rules in the cake processing industry, car safety regulations increasing costs for EU and US manufacturers).
The obstacle of Investor-State Dispute Settlement (ISDS)
Another contested issue in the TTIP is the ISDS. ISDS clauses often serve the promotion of the rule of law globally, and safeguard the legitimate rights and expectations of investors, attracting investment. The need for ISDS provision is neither clear nor well established, as the two actors in question are advanced economies with well-functioning institutions and established rule of law. Accordingly, it could be argued that a complete trade and investment partnership that protects and benefits States as well as investors should include such provisions. In the case of TTIP, beyond being considered superfluous ISDS procedures are criticized for interfering with public interests and the regulating role of States. The process has been presented as a tool for corporate capture with real costs attached. In the US for example $400 million has been paid to foreign firms by taxpayers. The tobacco company Phillip Morris sued Australia for enforcing regulations on cigarette plain packaging, and Swedish investors brought claims against Germany for phasing out nuclear energy after the Fukushima disaster. Such cases were perceived as clashes between public and corporate interests. Interestingly, out of a total 514 known ISDS cases 24 % have been initiated by US investors and 26 % by European ones. Statistical evidence proves that respondent states consistently win more cases than the investors who make the claims. Moreover arbitration procedures involve effective control mechanisms with regards to impartiality and the EU has promoted public consultation proposals to ensure transparency and the independence of arbitrators. So far Member States have agreed that national investment treaties will remain in force until replaced by investment agreements concluded by the EU (like the TTIP). To avoid sticking points in the ensuing negotiations then, future agreements should refrain from providing greater rights to foreign investors than those allowed by EU law or by Member States to investors investing in the EU. As such the EUs financial responsibility could be confined to that stipulated by EU law.
Political implications of TTIP
The EU Commission obtained a mandate to negotiate with the US in 2013 and once a final document is drawn, it will be up to the MEPs and governments to make the ultimate decision. Such a decision needs to be made against the backdrop of the British referendum, and elections in the US, France and Germany. Failing to negotiate a trade deal would enhance anti-integration stance of the UK. It could signify that furthering trade integration within the context of the EU is not to the benefit of Member States. At the same time concluding the TTIP would have significant economic and political implications. It would signify that there is still a solid common European interest to promote in the global arena through the cooperation and coordination of EU Member States. It is often forgotten that trade integration was the EU’s raison d’etre.
Furthermore, it would reconstruct the image of European assertiveness taking up initiatives and processes at a time when both are challenged by economic and political adversities. Negotiating a trade deal with the US could mean that the EU is and can act as a single actor with the power to strike an agreement of global significance. The TTIP would further consolidate the alliance between two great democracies at a time of instability, forming some sort of ‘economic NATO’ and could provide an opportunity to revive Britain’s interest in integration by playing a part in negotiations under its terms.
Finally, the TTIP would advance an already existing trade relationship, only slightly affecting tariffs. This means trade diversion is a low possibility and multilateralism will be upheld. This is particularly true for countries that have concluded agreements involving a Most Favoured Nation (MFN) clause that automatically renders them eligible for the new preferences and rules within the TTIP.
In a nutshell, the TTIP involves more opportunities than threats and its conclusion is rendered important particularly on political and strategic grounds that will shape Europe's future global standing.