The Economics and Security Benefits of a Successful TTIP Are a Package Deal

September 21, 2015 • Cato Online Forum
By Phil Levy

When is a trade deal really a security deal? At one level, the two realms are separate; there is a difference between phytosanitary regulation and the deployment of troops. But trade deals have frequently been used to tighten the bonds of friendship between countries, and the strength of alliances is certainly relevant for security. Further, if a commercial deal can strengthen its participants economically, that too can have an effect on security prospects.

The geopolitics of the Transatlantic Trade and Investment Partnership (TTIP) are somewhat challenging to assess because we ought to focus our analysis on the marginal effects. The agreement, if and when it is concluded, will complement both a long series of economic agreements between the United States and the European Union, but also a security agreement – the North Atlantic Treaty Organization (NATO) – with an imperfectly overlapping membership.

Nonetheless, the TTIP can make a significant positive contribution to European security. That, in turn, meets major security goals of the United States. Assuming it is concluded successfully, there are three principal ways in which the TTIP will have this bolstering effect:

  • It will demonstrate a renewed commitment to the transatlantic alliance;
  • It will have the direct effect of improving the signatories’ economic position;
  • It will help counter some of the centrifugal forces that have been pulling Europe apart in recent years.

Demonstration of Commitment
One might think that there is little need for the United States and the countries of the European Union to say how much they care about each other. On the security front, the 66‐​year old NATO alliance was a centerpiece of Cold War defense strategy, and was expanded to include former Eastern Bloc countries after 1989. On the economic front, the United States and a core set of European partners worked together to establish the General Agreement on Tariffs and Trade in 1947 and participated in eight successful rounds of multilateral trade liberalization through 1994. (The current, stalled round of global trade talks, the Doha Development Agenda, is the 9th such round.)

While those trade deals were not bilateral agreements between the United States and Europe, the major developed nations were the principal actors and the agreements heavily reflected their major concerns. Liberalization was generally greatest in those areas where the United States and Europe were most interested, such as reducing tariffs on industrial manufactures, and least in those areas where they were not, such as tropical agriculture. Beginning in 2007, there were also bilateral trade talks under the Transatlantic Economic Council (TEC). These policy moves helped facilitate a massive amount of transatlantic trade and investment. This is not a relationship that has gone untended.

Yet, there are reasons to doubt the extent to which the United States and Europe are committed to each other. The Obama administration launched its foreign policy in 2009 by proclaiming a “pivot” to Asia. The shift was later recharacterized as a “rebalance,” when pivot seemed to imply a turn away from other traditional regions of engagement, such as Europe.

Nor has the neglect been entirely one‐​sided. NATO calls for all of its member countries to contribute at least 2 percent of their GDP to defense spending. As of 2014, the only European countries meeting this commitment were Estonia, Greece, and the United Kingdom.

The TTIP can thus serve as a renewal of vows between the United States and Europe. It can reassure Europe that it has not been forgotten as the United States pursues the Trans‐​Pacific Partnership (TPP). As it is implemented, TTIP should enhance the degree of investment and trade. That deeper U.S. economic involvement, particularly in Eastern European countries, might serve as something of a tripwire should they be threatened. It was, in fact, just the prospect of such solidarity through a trade “association agreement” with the EU that served as a catalyst for the crisis in Ukraine. While that agreement did not have a security component, it was interpreted as a move by Ukraine into the EU orbit. Such are the security effects of trade agreements.

Direct Economic Effects
If the TTIP were to encourage a burst of trade and economic growth, this would have a fairly direct effect on geopolitics and security. Not only would an economically‐​strengthened Europe enjoy renewed confidence and esteem, but the additional economic strength could make it less painful for European countries to meet their defense spending commitments.

The question, then, is: To what extent can the TTIP be expected to deliver substantially enhanced trade and economic growth? There is no shortage of estimates that promise dramatic gains. But there are at least two reasons why the more optimistic estimates should be regarded with a degree of skepticism.

First, the estimates address an agreement that has not yet been concluded. Unlike many trade agreements, in which the final outcome is roughly predictable, the TTIP consists almost entirely of issues that have either proven intractable in multiple previous negotiations or of new issues. Those new issues, such as data privacy, have often proven no less contentious. Thus, there is substantially greater uncertainty regarding the likely outcome of the TTIP negotiations than there would be in the average trade agreement. This necessarily translates into uncertainty about economic impact.

The second problem is that many of the estimated gains are based on the removal of non‐​tariff barriers. Such gains may well be real, but they are generally not ones that economics estimates precisely. More commonly, a (gravity) model will be used to estimate what trade ought to be between the United States and Europe. Then there will be a guess about what fraction of that gap will be closed by TTIP. We can say with confidence that the magnitude of the economic gains should vary directly with the extent of liberalization that is ultimately agreed. There will be little reward for restating good intentions.

The principal exception to this caution on the economic front may lie in energy. A free trade agreement could open up trade in liquefied natural gas between the United States and Europe. Such an alternative source of energy could have a positive economic effect on Europe and an important geopolitical effect if the continent became less dependent on Russia as a major supplier.

Strengthening the European Union
A third channel through which the TTIP could have a geopolitical impact is by countering the centrifugal forces that are pulling the European Union apart. Whereas the European Union was formed on the basis of a shared vision of prosperity and peace, recent years have highlighted some of the difficult choices that close cooperation requires. Within the euro zone, there have been persistent crises involving troubled members such as Greece, laden with debt and suffering prolonged downturns. Rather than promoting peace, disagreements over the terms of bailout loans have often seemed to stoke tensions. Countries have been compelled to tackle topics such as banking union, in which they are simultaneously required to put up money for bailouts and yield some degree of control over their beloved domestic banks. Nor have the conflicts been limited to the euro zone. The crisis over accommodating an influx of migrants from the Middle East has fostered discord, and the United Kingdom is contemplating a vote on exit from the European Union.

Such a disintegration of the European project would have serious geopolitical consequences. If nothing else, the dissolution of the union would take the region from speaking with a single, if occasionally muffled, foreign policy voice to a chorus of multiple voices which might or might not be in harmony. A Europe in political and economic disarray would be much more limited as a U.S. security partner.

The TTIP would not directly counteract these centrifugal forces, but it would offer a joint project for EU members and a reminder of the value of the union. The countries have more negotiating heft operating together and they can draw on all members’ expertise in a consolidated way. As opposed to the more troubling crises facing the Union, the trade agreement offers the prospect of enhanced economic growth. It would also discourage disintegration, since it is unclear what market access rules would apply for any country that broke off from the European Union.

A successful TTIP would have a number of salutary effects on the geopolitical scene. The necessary corollary is that a failed TTIP effort could be costly— which may explain why there was substantial reluctance on the part of the Obama administration to embrace the undertaking. Were the effort to stall or be set aside, it would serve as one more example of dysfunction and failure. That would likely leave the alliance weaker than had the two sides never tried. It’s not always better to have loved and lost.

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Economics, Geopolitics, and Architecture of the Transatlantic Trade and Investment Partnership.

About the Author

Phil Levy is Senior Fellow on the Global Economy at The Chicago Council on Global Affairs and Adjunct Professor of Strategy, Northwestern University Kellogg School of Management.