No Time for Mercantilist Posturing in Transatlantic Trade Talks

Pitched as a cure for Europe’s woes, salvation for the multilateral trading system, and the last best chance to restrain the Chinese juggernaut, the stakes are high for the upcoming Transatlantic Trade and Investment Partnership (TTIP) negotiations. Of course the primary objective of the TTIP is to reduce nagging impediments to commerce between the United States and the European Union. But success is far from a sure bet.

Given the numerous bilateral trade frictions that have eluded resolution for many years, the goal of a “comprehensive” agreement by the end of 2014 – the current target – is simply not credible. Success would require negotiators to lay down their calculators and spreadsheets, disavow the “exports good, imports bad” mantra of mercantilist doctrine on which they were raised, and act on behalf of their citizens instead of their domestic producer lobbies.

That outcome would be too good to be true, but there may be a certain genius to the tight timeframe: it will demand that negotiators forego excessive posturing and will limit the potential for ever-shifting political calculations to subvert progress. Regardless, success can only take the form of a less comprehensive agreement or, perhaps, a two-phased agreement where the first phase meets the 2014 deadline by achieving accord on relatively agreeable matters, while the tougher issues are relegated to a later train.

A recent paper co-published by the Atlantic Council and the Bertelsmann Foundation presented the results of a survey of American and European trade policy experts about the prospects for a successful TTIP agreement. More than half thought the negotiations would produce a “moderate agreement,” and most thought the agreement would take effect by the end of 2015 or 2016.

The relatively low hanging fruit – according to the Atlantic/Bertelsmann survey – includes the elimination or significant reduction of tariffs across multiple sectors. Averaging about 2 percent in the United States and 4 percent in Europe, tariffs are not huge impediments (on average), but their elimination would generate sizable gains because of the large volume of transatlantic trade. Agreeing to tariff cuts right away would inspire goodwill and inject momentum toward a successful outcome.

Ending restrictions on U.S. energy exports might also be among the terms of a 2014 agreement, but everything else that would reduce actual trade impediments is in the more-difficult-to-resolve category. “Regulatory process convergence across multiple sectors” and “significant convergence in regulatory regimes and standards for manufactured goods” were considered the most important issues in the Atlantic/Bertelsmann paper. But they were also viewed as among the most difficult to resolve.

To be meaningful, a 2014 agreement must include some form of regulatory coherence or mutual recognition of standards or processes. Overcoming regulatory divergences is presumed to be the source of the greatest potential gains, as it is enormously costly whenever businesses are compelled to meet different standards to participate in different markets. Many differences likely can be bridged through mutual recognition or convergence without any adverse impact on public health or safety and without crossing any red lines related to cultural preference or tradition.

Agreeing to a common standard for the length of electrical cords on household appliances (currently three feet in the U.S. and one meter in Europe), for example, would reduce production costs for appliance manufacturers and free up resources for other productive endeavors on both sides of the ocean without any public safety implications. Mutually recognizing the effective equivalence of each other’s drug approval processes would eliminate logistical redundancies, while saving industry excessive delays and billions of dollars, and reducing mortality and morbidity rates. There are hundreds, perhaps thousands, of similiar regulatory processes and standards that could be bridged through such mutual recognition or convergence.

To increase the probability of bridging these differences as part of a 2014 agreement, negotiators should consider a “negative list” approach, whereby all regulations and standards are considered candidates for reform unless and until specific exemptions are requested. This would give negotiators a better sense of the magnitude of the differences, and the public a better look at who is protecting what. One revelation is likely to be that U.S. and European regulators, seeking to preserve their bureaucratic fiefdoms, are the primary obstacles to reform.

Even in this globalized economy with transnational production and supply chains and growing import-dependent constituencies, trade negotiations are still conducted according to the mercantilist conception that improved foreign market access is the prize and conceded import market access is the cost of an agreement. The economic imperative of reform too often succumbs to the political objective of “winning” the negotiation – or avoiding the perception of having been outdueled. That’s a real shame because the real benefits of trade liberalization come from reducing your own barriers to trade and not from better access to foreign markets. Remember the AMC Pacer, the Ford Pinto, the Chrysler K-Car and other such “offerings” from Detroit in the 1970s before intensifying competition from Japan raised their game? Remember when the produce section of your grocery store was barrren in the winter? Remember when high-tech gadgets were luxury goods?

For real and enduring reform to take shape, the American and European publics must shed their complacency, challenge the status quo, and assert their rights to transact with whomever they choose, wherever they are located without having to contend with bureaucratic impediments designed to steer them to domestic sources. Success will have been achieved when the trade negotiator goes the way of the AMC Pacer.