Cato Online Forum

The Effects of TTIP on Developing Countries

By Joakim Reiter
October 2015

Since the early 2000s, bilateral and regional trade agreements (FTAs) have been the main drivers of progress in international trade negotiations. The Transatlantic Trade and Investment Partnership is no exception. What differentiates it (and the Trans-Pacific Partnership, TPP) from the roughly 262 FTAs currently in force is its sheer size: The agreement would cover nearly half of global GDP and a third of global trade. Further, TTIP has high ambitions to exceed WTO rules in the area of regulatory cooperation. In this respect it is actually not unique per se, given that WTO-plus commitments and disciplines falling outside the current scope of WTO have been incorporated into other FTAs, including ASEAN, the P4 agreement, the EU-Korea FTA, KORUS, and CETA. But TTIP, it is sometimes claimed, will set a new — and higher — bar for deep and comprehensive FTAs with important ramifications not only for its parties, but also for developing countries and for the future of the global trading system. The latter concerns are in focus here.

In part, TTIP has stirred such concerns around the world because it has been oversold. Undoubtedly the agreement will have implications for the developing world and these need to be better understood. But the more shrill warnings are likely exaggerated. In any case, estimating TTIP’s impact on third parties remains something of a guessing game because the final content of the agreement is still unknown, but also because developing countries are not a monolithic block.

Still, from a broader perspective, how might we assess the effects of TTIP — and its risk factors — on the global trading system and its weakest members? And what might TTIP partners and developing countries do to mitigate these risk factors?

Overall Economic Consequences

Trade can be a relatively cheap tool to stimulate economic growth without relying on constrained fiscal resources. And indeed the financial crisis acted as a major impetus to explore new ways to stimulate much needed growth, which remains anemic across the Atlantic, especially in the Eurozone. While TTIP will be no panacea, its positive effects on trade and output for its parties are beyond dispute. And because the European Union and the United States remain the world’s leading importers of goods from developing countries, expanded economic activity in and between these two blocs would generate positive spillovers for many developing economies that have recently shown signs of deceleration.

General and Specific Effects of Tariff Adjustments

Primarily, TTIP would create new trade flows between the United States and the European Union. Nonetheless, one should also expect some trade diversion, i.e. exports siphoned off from third countries by less efficient EU and U.S. producers. The magnitudes of diversion will depend on, inter alia, the level of EU and U.S. tariffs, the level of their preferences extended to third countries, and the degree to which the European Union and the United States trade products with each other that they also import from third countries.

In the aggregate, trade diversion for poorer developing countries should be limited: “Most Favored Nation” (MFN) duties are already quite low — nearly 30 percent of EU tariff lines and over 45 percent of U.S. tariff lines are already bound at zero, and the trade-weighted tariff on EU (US) exports entering the US (EU) market is only 1.3 percent (1.8 percent). Moreover, many developing countries benefit from preferences on most tariff lines where EU and U.S. duties still apply. Finally, there is — overall — limited overlap of trade profiles between TTIP members and the majority of developing countries.

Nevertheless, trade diversion could still materialize in certain product segments for certain countries, notably in cases where European Union and United States agreed to eliminate tariffs within TTIP, while maintaining duties on imports from developing countries and in particular — albeit not exclusively — middle income countries. The agricultural sector could be a particular cause for concern, given that 27.5 percent of EU agricultural tariff lines are still bound at a level above fifteen percent. And while trade profiles vary overall, there are cases where EU and U.S. exporters compete, neck and neck, with developing countries’ exporters. By way of one illustration, Ghana’s fishing industry warrants closer inspection. Trade data at the HS 6-digit level indicates that the export profiles of the Ghanaian and U.S. industries partially overlap, which implies that reduced tariffs for American fish exporters granted through TTIP could result in damages for Ghanaian competitors.

To remedy the competitive disadvantages arising from TTIP in these cases, the United States and the European Union could expand their respective non-reciprocal preference schemes. While the EU already provides DFQF (duty-free, quota-free) treatment to LDCs, most lower middle-income countries fall under the GSP, which is far from all-encompassing. In the U.S. case, a number of products are excluded from duty elimination for LDCs (Least Developed Countries), and AGOA (Africa Growth and Opportunity Act) beneficiaries, for instance, receive duty-free access to 86 percent of U.S. products, but competitively produced goods — mainly textiles and clothing, some agricultural goods, as well as fish — are oftenexcluded.1 Lifting these remaining exclusions could increase African countries’ exports significantly and minimize the risks of displacements of developing countries’ exports following TTIP.2

To mitigate the risks of trade diversion, the European Union and the United States could also ensure that TTIP is designed to increase the likelihood of trade creation to the benefit of developing countries. In this respect, global value chains are key: Both EU and U.S. exports rely on imports from third countries, with the EU share of foreign value added in exports as high as 39 percent.3 What these figures imply is that expanded economic activity within TITP could increase demand for imports from developing countries. However, ensuring that the benefits accrue to third countries would require simplified and liberal rules of origin.4 If TTIP’s rules of origin set low thresholds for treating inputs from third countries as originating (for the purposes of assessing tariffs), EU and U.S. exporters could continue to source from developing countries without losing preferential access. Such an outcome would benefit both EU and U.S. firms that rely on foreign inputs, as well as developing countries’ suppliers more broadly.

Effects of Regulatory Cooperation

The most important potential effects of TTIP would stem not from the abolition of tariffs but from greater regulatory cooperation. But it is also at once the real unknown and the source of much hyperbole — even among negotiating parties.

For low- and middle-income country exports, NTMs (Non-Tariff Measures) are about three times more restrictive than tariffs (7.5 percent compared to 2.5 percent, respectively). NTMs are especially restrictive for products for which many developing countries have comparative advantages, such as agricultural goods, which contributes to trade diversion. Although legitimate and without any de jure discrimination, the proliferation and increased stringency of SPS (Sanitary and Phyto-Sanitary) measures, for instance, privileges exporters capable of compliance — large firms in middle and high-income countries — at the expense of poorer developing country competitors. A recent UNCTAD study has found that the trade distortionary impact of the EU’s SPS measures amounts to a loss of about US$3 billion for low-income country exports — about 14 percent of their agricultural trade with the EU.5

One often expressed fear is that TTIP may exacerbate these kinds of NTM obstacles by elevating standards for imports. If indeed higher standards were put in place, compliance costs would go up. But for this to happen, the European Union and the United States would have to harmonize their import regulations at a higher level than currently applies to either party. Nothing indicates that this is a realistic scenario; harmonization is not, for now, in the cards for TTIP.

On the contrary, if regulatory approximation is achieved, developing country exporters could actually benefit from a single regime in an enlarged market. This would reduce the high costs arising from the need to comply with two separate sets of rules. However, the benefits of approximation would hinge on its design, specifically whether mutual recognition, equivalence or other forms of approximation are in one way or another extended to third parties. Otherwise, the net result could be negative since non-TTIP exporters would have to continue dealing with separate sets of EU and U.S. standards, while TTIP exporters would merely have to satisfy one set of requirements.

Nonetheless, it seems increasingly unlikely that TTIP will soon deliver even regulatory approximation, at least with respect to the existing stock of standards. Opportunities for approximation pertaining to new standards may still materialize. If so, as it stands, the negotiations in this area would be a missed opportunity to minimize existing regulatory divergence among two global trading powerhouses and, thereby, to help reduce compliance costs for developing countries.

Effects on Global Trading Relations

The TTIP and the TPP are game changers. To some extent, the main effect seems to be psychological. These agreements have notified others that, absent progress on trade integration in multilateral fora, the European Union and the United States will pursue other avenues. They have reinforced the old notion that governments can advance their trade agendas simultaneously at the unilateral, bilateral, regional, interregional, plurilateral, and multilateral levels.6

The global trading system comprises all of these levels. And it always has. What varies — if anything — is the relative importance of these levels over time. Since the turn of the century, RTAs have been ascendant almost everywhere. TTIP has underscored this shift and infused it with political significance.

TTIP has triggered mitigation strategies among non-TTIP members. Africa, in particular — a marginal player in the RTA race that is neither part of TPP nor TTIP — has reacted by revisiting some of its own regional integration plans. What ensued was the acceleration of their trilateral initiative, which is a promising development, as Africa harbors a great deal of untapped potential for regional integration. Other countries and regions are considering similar mitigation strategies, and with good reason. And, overall, the result on developing countries at large should be positive from this greater sense of urgency to improve trading relations.

In the longer term, however, all countries need to think about how to address the growing gaps between domestic, regional, and interregional levels of trade integration, on the one hand, and the multilateral level, on the other. These growing gaps threaten to diminish the relevance of the WTO. This is in nobody’s interest but would be particularly damaging for the smallest, weakest and most vulnerable of nations. The solution here is not for countries to scale back their FTA ambitions or initiatives, nor would they be willing to. Instead, in order to mitigate the risk of an ever less relevant WTO, countries need to start bridging these gaps by allowing commensurate improvements in ambitions and initiatives in WTO.

A final TTIP risk relates not to what the agreement does, but to what it leaves undone: FTAs, including even mega-regionals as in the case of TTIP or TPP (or RCEP and the African Trilateral Initiative), cannot squarely address the much needed structural reforms in agricultural, fisheries and fossil fuel subsidies. By concentrating energies on market access issues, TTIP — like other FTA initiatives — could end up subtracting the incentives required to negotiate new multilateral subsidies frameworks in these fields. In order to ensure that developing countries are better integrated into the global economy and to fulfill the sustainable development goals, but also to maintain the relevance of WTO, it is the responsibility of all countries to ensure that this risk does not materialize.

Notes:
1 Williams, Brock. 2015. “AGOA: Background and Reauthorization.”
2 Mevel, Simon and Zenia Lewis, Mwangi Kimenyi, Stephen Karingi, and Anne Kamau. 2013. “AGOA: An Empirical Analysis of the Possibilities Post-2015.”
3 UNCTAD. 2013. “Global Value Chains and Development: Investment and Value Added Trade in the Global Economy.”
4 For practical purposes, preferential agreements — including TTIP — must distinguish between goods mainly produced in a member country and goods mainly produced in a non-member country.
5 Murina, Marina and Alessandro Nicita. 2014. “Trading with Conditions: The Effects of Sanitary and Phytosnitary Measures on Lower Income Countries’ Agricultural Exports.”
6 A similar “notification” took place in the early 90´s when the multilateral talks in the Uruguay Round were stalling and the U.S in a milestone change of its trade policy, started bilateral negotiations with Israel, Canada and then NAFTA.

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.

Joakim Reiter is the Deputy Secretary-General of the United Nations Conference on Trade and Development.