The Politics and Economics of Transatlantic Trade: A Lay of the Land

September 17, 2015 • Cato Online Forum
By Jim Kolbe

The merits of a broadly based Transatlantic Trade and Investment Partnership (TTIP) seem obvious to most economists and policy makers who spend their lives studying the merits of free trade and open markets.

After all, it would merge the two largest economies in the world — the United States, and perhaps, eventually, all of North America, with the economy of the 28‐​nation‐​strong European Union. Together, they account for nearly half of global economic output, with trade in goods and services that exceeds $6.5 trillion annually. Tariffs are already low on both sides of the Atlantic, but even a modest average reduction of 4 percent to bring tariffs close to zero would add almost $300 billion annually in additional trade between the two continents. It would allow Europeans and North Americans to establish safety and environmental standards that are likely to cajole other trading partners into acceptance in order to more readily access both giant markets. Foreign direct investment (FDI) is already very high in both directions — $1.6 trillion EU investment in the United States, and $2.1 trillion by U.S. companies in Europe — forty times what the U.S. invests in China. Still, TTIP could simplify rules and regulations governing those investments and thus stimulate even more investment. The Bertelsmann Foundation has estimated that U.S. GDP could grow by 0.4 percent and real per capita income by 13.4 percent as a result of enacting a comprehensive TTIP.

While the economic benefits advanced for TTIP sound similar to the glowing predictions made to advance the cause of previous trade negotiations, it is on the political, or non‐​trade, side that the arguments appear fundamentally different. The politics of TTIP would appear to be simpler and more straightforward than the agonizing battles which have accompanied nearly every trade agreement concluded by the United States since the North American Free Trade Agreement (NAFTA) more than two decades ago.

The argument that a trade agreement would result in exporting jobs overseas to low wage countries has little merit. After all, wages and benefits in Europe are, if anything, higher than in the United States. Levels of environmental protection incorporated into manufacturing processes are on a par with the United States. Likewise, safety regulations are comparable. It would seem that an easy case could be made with negotiators and legislators for approval of an agreement with such far reaching consequences.

On closer examination, both trade and political differences begin to emerge. To some degree, the sheer scope of the agreement and its economic impact magnifies differences that in some other agreement of lesser size (for example, compared to the U.S.-Morocco FTA) would appear minor or of little consequence.

Going from the smaller to the larger and beginning strictly with the tariff provisions of an agreement, there are differences over the treatment of agricultural products, such as cotton in the United States and chicken parts in Europe. While overall tariffs average 4 percent on both sides of the Atlantic, for agricultural products the European tariffs average nearly 14 percent. That means a larger concession on the part of Europe to level the playing field in this one very important part of trade.

Much has been made about the issue of chlorinated chickens — a process long used in the United States for washing and sanitizing chicken parts, but a process equally abhorred and rejected in Europe. But chlorinated washing may be the least contentious issue when talking about chicken production. European regulations require a least one square meter of space for every nine hens, while American producers stack the chickens in cages from floor to ceiling in huge barns so that 23 hens occupy a single square meter of floor space. The result is lower costs for American producers and cries of unfair competition from European producers.

More broadly — and much more sensitive — is the issue of crops grown with seeds that have been genetically modified–GMOs. The U.S. side claims this is a process that has been on‐​going for decades and that the only reasonable rule that should apply for banning GMO products must be a scientifically based demonstration that the GMO modified product is not safe for consumption. Europe insists on adhering to the “precautionary principle” where products and processes can only be used once they are proven safe — essentially, the reverse of the scientific principle.

Public procurement is another area with fundamentally different approaches. Europe seeks a single standard governing procurement so that companies seeking to bid on contracts for construction or sale of products in one jurisdiction would be able to use the same bid in other jurisdictions. The United States has a two hundred‐​plus year history of a federal system which has permitted different states and even municipalities to adopt their own regulations governing procurement. The result is a checkerboard of different rules that make it difficult for foreign companies to enter such a fragmented market.

Harmonizing the standards used for safety inspections is an area of promising benefit that could amount to billions of dollars in savings for consumers. Hardly anyone suggests that the safety inspection for a European auto being sold in the United States adds anything to safety beyond the rigorous inspection already conducted to during its manufacture in Europe. And yet, the duplicate inspections add significant costs for consumers. It is estimated that U.S.-built automobiles sold in Europe cost 25 percent more as a result of the duplicate inspections. If agreement can be found to accept “comparable regulation” across broad swaths of manufacturing processes, the savings for consumers would be enormous.

Perhaps the most difficult issue to resolve is that of “Investor‐​State Dispute Settlement” system (ISDS). Both Brussels and Washington want to continue, and even expand, the current system of using private arbitration to settle disputes that arise when governments enact an environmental or consumer protection regulation that damages private companies that have contracts for goods or services. For example, when Germany decided to phase out nuclear energy, post‐​Fukushima, a Swedish energy company sued for Euro 4.7 billion in damages and has taken the case to arbitration court. There is an irony in this particular suit since it was the Germans who invented the procedure in the first place as a means to protect their investors in developing countries that lacked reliable legal safeguards. Now it is the Germans who most vehemently oppose arbitration proceedings, arguing that the panels that are established favor American investors. Although there is no real evidence to support this contention and although the EU Commission supports a similar mechanism for ISDS, German support for any TTIP is essential for its successful conclusion and enactment.

Apart from the trade issues that divide the two sides, there are potential roadblocks resulting from process or completely extraneous matters. Foremost among these is the issue of the telephonic surveillance activities conducted by the U.S. National Security Agency. This, too, brings Germany into play since no nation feels more slighted than Germany, whose Chancellor was the target of surveillance. The German media and public believe the United States has been insensitive to the concerns of Germans on this topic — a charge that has considerable merit. While anger over the surveillance has subsided in Europe in the last several months, the issue still has the potential for stalling the talks.

While the United States has largely resolved its major procedural hurdle with the adoption of Trade Promotion Authority allowing the President to complete the negotiations, the EU Parliament at almost the same time tabled a planned debate on the merits of TTIP, arguing that too many amendments had been proposed and they should first be considered by the committee before a full debate in the Parliament.

Finally, there is the issue of transparency. The United States insists that the negotiations should be treated like any contract negotiation — kept under wraps until a deal is completed. The European Parliament, on the other hand, insists they should have access to every memo and document that is exchanged between parties and should see each part of the agreement as it is finalized.

What are the prospects for resolving these issues and reaching agreement? There is growing sentiment on the European side for a “TTIP light” — an agreement that incorporates what the two sides can readily agree upon — mainly reduction of tariffs and harmonization of industry standards. Successfully concluding a more limited agreement, it is argued, would help build trust and make it possible to reach further agreement on such matters as a modified ISDS mechanism, GMOs and even surveillance limitations.

One thing both Europe and the United States can agree upon is the geostrategic implications of TTIP. Since the failure of the Doha round of multilateral talks, regional agreements such as TPP and TTIP constitute the only means for keeping the momentum moving forward on trade liberalization. Failure to reach agreement between the two largest trading blocs on the globe would send a clear signal to the rest of the world that the economic and political influence of Europe and the United States is waning. Countries such as China would almost certainly move to fill the gap left in the wake of such a failure.

It remains to be seen if leadership on both sides of the Atlantic will be there for TTIP. But rarely has there been a moment in the long and deep strategic relationship between the United States and Europe that has cried out more for such leadership.

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
Jim Kolbe