Cato Online Forum

TTIP Aims to Set New Global Trade Rules, But Much Depends on How Others Respond

By Vinod K. Aggarwal
September 2015

World trade has rapidly expanded since the end of the Second World War, leading to greater efficiency and growth in the global economy.  The General Agreement on Tariffs and Trade (GATT), founded in 1947 along with the International Monetary Fund (IMF) and the World Bank (WB), was a key element of the US-led, post-WWII, global political-economic order and the bedrock of the global trading system. Under its auspices, eight multilateral rounds of global trade liberalization were concluded successfully between 1947 and 1994. The successor organization to the GATT, the World Trade Organization (WTO)—created in 1995 as a result of the Uruguay Round negotiations—has mostly failed at the task of further liberalizing trade. The Doha Round, initiated in 2001 under WTO auspices, has not come to fruition.

Absent progress in the Doha Round, countries have increasingly sought alternatives, including bilateral free trade agreements (FTAs), “minilateral” regional accords, and more recently, so called mega-FTAs that link countries across regions. Two of the prominent mega-FTAs involve countries in the Asia-Pacific—the Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). Negotiations for a third arrangement, the Transatlantic Trade and Investment Partnership (TTIP), are also underway.  Although the concept of creating a free trade area of the Atlantic goes back at least 25 years, the TTIP negotiations between the United States and European Union commenced in June 2013. Since then there have been 10 formal rounds of negotiations and a missed deadline for completing the deal in 2014. With a new target completion date of late 2015, a number of disputes between the parties continue to hamper the talks.

Negotiations have been organized into three broad categories: Market access for goods and services; regulatory issues and procedures; and rules concerning investment, intellectual property, labor, the environment, and “new issues,” such as state-owned enterprises and localization requirements.

This paper briefly addresses the evolution of mega-FTAs before turning specifically to consideration of a TTIP agreement, and its relationship to third countries.[1]

Moving Away from Multilateralism

Despite repeated efforts to bring the Doha Round to a conclusion, little progress has been made toward that end. An agreement on trade facilitation, which was an original component of the Doha Round agenda, was reached in December 2013, as part of the so-called Bali Package, but countries have been slow to sign up to this accord.  Meanwhile, there has been some progress in plurilateral negotiations at the WTO. Specifically, WTO members were able to update the 1996 Information Technology Agreement by expanding the list of products covered in an agreement reached in July 2015—although the agreement has not yet been implemented and some work remains. As a result of this limited progress, WTO members have been pursuing alternative paths to trade liberalization.

One alternative has been regional trade agreements. These arrangements have a long history and include entities, such as the European Union (and its many predecessors going back to 1951), the ASEAN Free trade Agreement in 1992, the North America Free Trade Agreement in 1994, and a host of similar accords around the world.  Yet with some exceptions, these deals have failed to promote significantly deeper economic integration.

A second avenue that has become increasingly popular since the late 1990s is bilateral FTAs. While there were only 47 FTAs in 1994, today there are 262 agreements in force, as multilateral negotiations continue to drag on. Major economic powers such as the U.S., EU, China, and Japan, and medium-sized economies, such as South Korea, Chile, Mexico, and Singapore, all have negotiated an array of bilateral FTAs with differing terms and provisions, often with strategic and political objectives in mind.  This growing complexity is a key motive for countries to turn to “mega” FTAs—multilateral FTAs that involve a large number of participants across vast distances. The goal of these agreements has been to overcome the “noodle bowl” or “spaghetti bowl” by rationalizing the multiplicity of bilateral FTAs.  Put differently, as some analysts have suggested, we might be able to make lasagna from spaghetti.

The shift in U.S. negotiation focus toward mega-FTAs in both the Pacific and Atlantic can be seen as a key turning point in global trade negotiations. By attempting to set the rules and regulations of trade with key Asian countries as well as the EU, the U.S. has put itself in the driver’s seat for a new trading order based on its preferences.  In doing so, it has posed a challenge to countries not party to these accords, which include key countries such as China, Brazil, Russia, South Africa, and India, among others.  Put differently, the US has simply decided to bypass the BRICS.

How Will TTIP Impact Third Countries?

In light of US efforts to move forward on both a Pacific and Atlantic front, a key issue is how third countries will be affected by TTIP (and by TPP).  The focus here is on TTIP, but the two accords are clearly inter-related in terms of their goals and challenges.

Both the U.S. and EU have explicitly ruled out the participation of other members. Former EU Trade Commissioner Karel De Gucht, for example, referencing TTIP’s breadth and complexity, told the Swiss-American Chamber of Commerce in November 2013: “That is why it is important that the TTIP negotiations themselves cannot be opened up to others. They are simply too complicated to bring in outside partners – no matter how close. Switzerland has made a choice about membership of the European Union.”

Indeed, rather than encouraging other members to join, the EU and U.S. have argued that TTIP should be seen as a template for future global negotiations.  He went on to note that the EU views “TTIP… as a nucleus and laboratory for the next stage of rulemaking at the global level….” These sentiments are shared, it seems, on the American side. In a speech in May 2014, United States Trade Representative Michael Froman said of TTIP: “It’s about shaping a global system—one with our shared values at the core.”

This leaves open six potential ways in which third countries might seek to join or benefit from TTIP.  First, one strategy is for these countries to seek to join the accord, as some have done, even in the face of initial opposition, with the TPP. Despite claims that TPP would not accept new members, the existing negotiating countries allowed Canada, Mexico, and Japan to accede to the negotiations.  In the case of TTIP, however, this does not currently appear to be a viable strategy.

Second, countries could simply wait until the negotiations have concluded and then seek to join that accord.  This has the obvious disadvantage that countries eager to join TTIP, such as Canada (or Korea, in the case of TPP), will not be able to influence the agenda or the final provisions—although they could conceivably push for changes.  The move from the 1989 Canada-U.S. FTA agreement to NAFTA illustrates this possibility.

A third option is that countries may respond to TTIP by seeking to sign a FTA with the EU but not the U.S.—or by augmenting any FTA they already have with the EU. From the perspective of the U.S., any such FTA between the third party and the EU might see TTIP’s standards spread to the third party, but then they might not. Moreover, since the U.S. and EU do not have identical commercial interests, any subsequent FTA between the EU and the third party will not address the same matters as if the third party had sought to join TTIP. To date, nothing in the TTIP negotiations suggests that the U.S. and EU are willing to commit to jointly negotiate FTAs with third parties after TTIP comes into force or to include TTIP provisions in FTAs subsequently negotiated with third parties.

A fourth option is for third parties to wait for the U.S. and EU to seek to multilateralize TTIP at the WTO. The logic here might be that if the U.S. and EU were to become demandeurs of TTIP disciplines at the WTO, then in the apparent logic of that organization’s negotiations, the EU and U.S. would have to ‘pay’ for those demands and the third party would benefit from such payment. A third party might argue: why not wait and be paid to take on TTIP’s provisions? Yet given the difficulties in negotiating the Doha Round and in defining a new work program for the WTO, the likelihood of multilateral trade accords being employed to adopt TTIP provisions as global standards may be many years in the future. 

A fifth option is to negotiate with the TTIP signatories and possibly with other interested nations on an accord whose scope is confined to the implementation of a narrower set of rules or regulations than the full scope of TTIP. This accord need not be a binding accord, or even a WTO accord.

Finally, a sixth option is for a third party to unilaterally adopt regulatory standards equivalent to those in TTIP and then seek mutual recognition from regulators in the EU and U.S. Regulators often prefer dealing with “their own kind” rather than trade negotiators and may find either of these latter two options appealing.

Conclusion

Because of problems with the WTO negotiations, countries are pursuing alternative trade arrangements. These include bilateral agreements and, more recently, mega-FTAs.  In the latter case, the U.S. has proved to be leader, with negotiations being conducted both across the Pacific in the form of the TPP and across the Atlantic with the EU.

With many countries excluded as charter members in these emerging mega-FTAs, how they choose to respond is critically important to the future of the trading system, as the rules and procedures being created will influence their competitive position in the global economy for years to come.


[1] The discussion of third country options draws heavily on my work with Simon Evenett (2015).

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.

Vinod K. Aggarwal is Professor of Political Science at the University of California at Berkeley and Director of the Berkeley Asia Pacific Economic Cooperation Study Center (BASC).