Negotiations for the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union were launched on February 13, 2013. This followed a year of preliminary scoping for the negotiations, conducted under the auspices of the US-EU High Level Working Group on Jobs and Growth. At the launch, the benefits of the potential agreement were described primarily in terms of jobs and growth. A moderately ambitious and successful TTIP was expected to add €214 billion per year to the US and EU economies combined, and could increase global income by almost €100 billion.1
At the time, both the United States and the EU suffered from slow economic growth and persistently high unemployment. Although the European economy was significantly worse, the looming U.S. presidential election of 2012 made the Obama administration especially aware of the need for economic improvement. While the initial emphasis was on jobs and growth, TTIP was also clearly a very strategic agreement.
The size of the U.S. and EU economies alone ensured that any partnership would have an impact on the global economy. While the Trans-Pacific Partnership involves countries representing 36 percent of global GDP, the TTIP agreement brings together the two largest economies in the world, representing 46 percent of global GDP.2 Of course, the U.S. and European economies are already well connected — they are each other’s largest trading partners when exports and imports are taken into account. Investment is also a major element of the transatlantic economy: the United States received almost 40 percent of EU external investment in 2012 and U.S. investments represented almost the share of total inward investment in the EU.
TTIP is intended to remove the remaining barriers to transatlantic trade: tariffs are relatively low — on average 2-3 percent — so the focus for TTIP has been on removing non-tariff barriers to trade and investment, including regulatory barriers. If this trade pact is to achieve its ambitions, it should create a transatlantic regulatory framework that eases handling of goods and services on both sides of the Atlantic. Such a huge single market would effectively create global standards that corporations will use throughout their business and supply chains. The United States and European Union would effectively become global regulators — an undeniably strategic position to hold.
TTIP’s Strategic Aims
The strategic nature of TTIP becomes even more apparent when looking ahead even a few years. The United States and the European Union will not always hold such a dominant position in the global economy. Indeed, in late 2014, the International Monetary Fund identified China as the leading economy in the world, when GDP is measured by purchasing power parity.3 The United States and European Union, by further integrating their economies and by making their standards dominant in the global economy, can preserve their leading role in the world economy even when their share of global GDP has declined. This in turn will help preserve the open liberal trading order, which has been a foundation for U.S. and European prosperity for many decades.
This is not the first time that a trade agreement has been seen as fulfilling a strategic purpose. There is a long history of analysts arguing that countries with strong economic ties are less likely to go to war, and may even be political partners. Norman Angell’s The Great Illusion is perhaps the most notable example, arguing in 1913 that the European economy was so integrated that war between those countries was futile. This idea is also central to interdependence theory, which examines the impact of economic and other interactions across state borders. It is even fundamental to the EU itself, which has its origins in the European Coal and Steel Community. In 1999, Tom Friedman observed in The Lexus and the Olive Tree that no two countries with MacDonald’s franchises had gone to war. Although it was quickly proven false when NATO bombed Serbia, this demonstrates the persistence of the idea that economic ties lead to better political relations. The United States has long used FTAs to indicate political support for particular governments. The rationales for the U.S.-Colombia FTA and the U.S.-Morocco FTAs can hardly be economic in the sense that they were motivated by some imperative to upgrade relations with major trading partners. Rather, these agreements served to indicate political support for key regional U.S. partners.
As Secretary of State John Kerry said in April at the Atlantic Council, speaking about the need for Trade Promotion Authority: “The right kind of trade agreements are actually critical because they create habits of cooperation that help us not only economically but in everything else that we are not only determined to do, but that we need to do in order to reduce the instability and address the challenges of the future.”
The peculiar nature of TTIP also makes it a more strategic undertaking than many other trade agreements. Given the deep integration of the transatlantic economy, it is very unlikely that the conclusion of a TTIP agreement will constitute the end of U.S.-EU negotiations. Instead, TTIP will become a platform for further negotiations, especially on services and new technologies. The on-going nature of such negotiations will bind the United States and European Union together as new sectors of their economies develop and new products and technologies emerge. This in itself adds a strategic dimension to TTIP, as it provides the basis for ongoing further integration of these two major economies. For all these reasons, TTIP should be viewed as a strategic accord as well as an economically beneficial agreement.
Geopolitics and Security
In today’s foreign policy environment, TTIP serves another important strategic objective. Since the launch of TTIP, the strategic environment for Europe has become decidedly more challenging, if not hostile. Russia’s aggression is not simply against Ukraine and the idea that it might move closer to the European Union; it is also aimed at the European Union itself. The Russian leadership now recognizes that the European Union- after under-estimating it for many years — can significantly redirect trade and investment flows and influence others in its orbit to undertake reforms aimed at reducing corruption and money laundering. TTIP is a prime symbol both of Europe’s competence and influence, and of the strength of the transatlantic partnership. Thus, TTIP’s success is essential.
A failure of the negotiations would be one of the best indications possible to Vladimir Putin and others that the U.S.-European partnership is just rhetoric without the capacity for action. The credibility of the transatlantic partnership would dissolve, not just in Russia, but among other major actors in the global economy. The reverberations would be felt in disparate ways, possibly affecting the selection of the next IMF and World Bank heads, and other issues related to global economic governance. Putin clearly recognizes the strategic nature of TTIP. Russia certainly has strong ties, including in some cases financial support, for groups on the left and right of European politics who are anti-TTIP. Thus, as we think about the future of TTIP, we only have to consider the impact of its failure to appreciate its strategic importance.
A successful conclusion of the TTIP negotiations would also present a new set of strategic opportunities. Those opportunities are most immediate in Europe — and at its borders. Clearly, a successfully concluded TTIP — one that has received the required legislative approvals on both sides of the Atlantic — would be a strong signal within the European Union itself of the continuing relevance of the relationship with the United States. That is not something that can be taken for granted, especially in the wake of the NSA revelations, the financial crisis, and the Iraq war.
TTIP also presents opportunities to more closely tie non-EU European countries to the Euro-Atlantic community at a time when they are facing great external pressures. In the Balkans, the EU already has trade agreements with Albania, Montenegro, Macedonia, Serbia, and Bosnia and Herzegovina, mostly in the form of Stabilization and Association agreements. With the exception of B&H, each has achieved candidate-country status, and is thus on the long and difficult road to EU membership. As part of this process, they will all engage in trade negotiations to bring their economies and trading systems to EU standards. EU and U.S. officials should reach out to these countries and begin a discussion of how and when TTIP might apply to them, even prior to their accessions to the European Union. This might happen, for example, when the candidate countries have successfully closed the chapter on free movement of goods, or other relevant chapters, in their accession negotiations. Speeding up the accession of these countries to TTIP — and announcing that in a joint U.S.-EU declaration — would provide a solid incentive to move forward with the negotiations, and more importantly, would signal U.S. and EU willingness to support these countries at a time when some of them are under pressure to stay close to old allies.
TTIP also provides an excellent opportunity to show solidarity with Ukraine, Moldova, and Georgia. All three countries have signed a deep and comprehensive free trade agreement (DCFTA) with the European Union. The Moldovan and Georgian agreements are now in effect, and the Ukrainian one will become effective on January 1, 2016. Whether these countries proceed toward EU membership or not, including them as potential partners in TTIP could do much to reassure them and reinforce their connections to the transatlantic community. Clearly, they would not be ready to be a full party to TTIP for some time, and initially, they may only be part of the market access provisions, rather than the more complicated regulatory frameworks expected to be part of TTIP. Nevertheless, the simple announcement that integration of these countries into the TTIP is a shared objective of the United States and European Union would be a significant strategic step toward including these countries in the transatlantic community.
Finally, successful conclusion of TTIP will open the door to creation of a larger framework of trade agreements, with the United States and European Union at its hub. Today, the United States and European Union have multiple free trade agreements (or similar arrangements) with many countries. In fact, they both have free trade agreements with Chile, Colombia, Costa Rica, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru, and South Korea. The United States also has free trade agreements with Canada and Morocco, while the European Union is close to completing agreements with both. The European Union has recently completed an agreement with Vietnam and is negotiating with Malaysia and Japan — these three countries are also part of the Trans-Pacific Partnership, which was recently completed between the United States and 11 other Pacific-rim countries.
With such significant overlap in trading partners, the obvious question is whether these countries can also become associated with TTIP in some way. And what will be the relationship between TTIP and the TPP? Clearly there would be rule-of-origin issues to be worked out, as well as other specific terms. But at least for the market access components of TTIP and TPP, life for everyone might be much simpler if the shared bilateral FTAs could be integrated into the TTIP structure. The strategic implications of linking a network of FTAs could be substantial, especially in the absence of any viable multilateral path toward that end.
TTIP is certainly an economic opportunity for the United States and the European Union. But it is also strategically important. Indeed, TTIP presents some valuable strategic opportunities, including a chance to bring the western Balkans, as well as Ukraine, Georgia, and Moldova, closer to the transatlantic community. And TTIP could possibly serve as the foundation for a much larger network of trade agreements that integrate the not only the U.S. and EU economies, but also those of their important partners. On the other hand, the strategic cost of failure — lost credibility and influence around the world, for example — would be huge. Let’s hope policymakers and negotiators are well aware of the stakes.
1 Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment by Joseph Francois (project leader) Centre for Economic Policy Research, London, March 2013 http://trade.ec.europa.eu/doclib/docs/2013/march/tradoc_150737.pdf
2 World Bank statistics
3 See, among others, “China’s Leap Forward: Overtaking the US as the World’s Biggest Economy,” Financial Times, October 8, 2014; http://blogs.ft.com/ftdata/2014/10/08/chinas-leap-forward-overtaking-the-us-as-worlds-biggest-economy/
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.