Commentary

One Year into the TTIP Negotiations: Is the Momentum Gone?

In early 2013, the Transatlantic Trade and Investment Partnership (TTIP) negotiations were introduced with great fanfare in President Obama’s State of the Union Address. The EU and the US as the world’s two largest economic zones would be united in a trade and investment pact, which would generate new economic growth at a time when it was desperately needed. Negotiations began in July last year, with promises that they would not drag on endlessly, as other trade talks have.

We are now more than a year into the process, with the seventh round[1] of talks having just taken place inearly October. It is time for an evaluation of what has been achieved. Are the talks progressing as rapidly as hoped? Are the hurdles surmountable? Will this giant free trade zone actually come to fruition?

The bold beginning

When the TTIP was announced, there was great excitement. Typically, US trade negotiations face domestic opposition from those worried about competition with cheap labor. But with Europe’s high wages, that would not be an issue here. With good reason, then, many observers felt that the TTIP would have an easier time in the domestic political process than some other trade agreements.

Will this giant free trade zone actually come to fruition?

Wary of trade initiatives that had dragged on for years, government officials on both sides proclaimed that this initiative would move quickly, to be completed on “one tank of gas”. Given the common ground of the EU and US on many issues, it seemed plausible that the TTIP could avoid some of the more contentious points that had held up other talks. Projections were offered that the agreement could be finished before the end of 2014.

In terms of its substance, the report of the US-EU working group examining a potential agreement set out the following scope:

“A comprehensive agreement would include ambitious reciprocal market opening in goods, services, and investment, and would address the challenges and opportunities of modernising trade rules and enhancing the compatibility of regulatory regimes. An agreement of this kind could generate new business and employment by significantly expanding trade and investment opportunities in both economies; pioneer rules and disciplines that address challenges to global trade and investment that have grown in importance in recent years; and further strengthen the extraordinarily close strategic partnership between the United States and Europe.”

As to its potential economic impact, according to UK Prime Minister David Cameron, the deal “could add as much as a £100 billion to the EU economy, £80 billion to the US economy, and as much as £85 billion to the rest of the world,” as well as create “2 million extra jobs.”

Beyond these specific economic gains, there was also a broader goal. As EU Trade Commissioner Karel de Gucht put it, the TTIP “will be an important way for us to shape regulations, norms, including on investment, and ultimately values that govern economic exchange worldwide.” Thus, the TTIP was about laying out a framework for a new, modernised vision of the world trading system.

Reality sets in

The reality of a US-EU trade negotiation is much more complex and difficult than the early cheerleading suggested. A number of problem areas quickly arose. Even before negotiations started, there were some issues where everyone knew that no progress would be made. For example, US food producers and government officials continued their efforts to attack strict EU rules on approval of genetically modified (GM) foods, but the EU made clear it would not change its stance and maintained its long-standing position that “cultural” products should be excluded from the negotiations. In addition, some important issues were excluded from the outset by mutual agreement, including agricultural and aircraft subsidies, which have been the source of long-running trade disputes.

Other contentious issues arose after negotiations began:

  • The EU pushed for the US to liberalise its financial services markets, but the US (led by the Department of Treasury) resisted, on the grounds that it needed to maintain strong domestic regulation.
  • The EU argued for stronger protections for its geographical indications (GIs), such as champagne, while US groups objected to the EU demands.
  • US efforts to contest EU data privacy protections were undermined by the National Security Agency (NSA) spying scandals, which caused resentment throughout the EU and threatened to derail the talks entirely.
  • The investor-state dispute settlement (ISDS) mechanism caught fire as an issue in the EU, forcing the Commission to begin an internal public consultations process.

Regulatory hurdles

Beyond these specific disputes, the major issue everyone talked about in the TTIP was its effort to address “regulatory” or “non-tariff” trade barriers. This, people said, was where the real gains from a US-EU trade deal lie. One widely cited study suggests that in a scenario where around 50 percent of non-tariff measures and regulatory divergences were dealt with, EU GDP could be 0.7 percent higher in 2018, representing an annual potential gain of €122 billion (US$158 billion); and US GDP could see a 0.3 percent gain per year in 2018, representing an annual potential gain of €41 billion (US$53 billion).

What they did not say, though, was how these barriers could be addressed. As it turned out, the US and EU negotiators seemed to have different ideas in mind. For the EU, this was mostly about “regulatory cooperation,” in which existing and new regulations are made more compatible. For example, car producers in both countries could be subject to the same safety tests, rather than different tests for each market. The EU proposed an institutional mechanism to address these issues. By contrast, the US negotiators focused more on improvements to the regulatory process, such as having the EU adopting a “notice and comment” procedure for draft regulations, as used in the US.

This clash of visions has left some doubt as to whether anything can actually be achieved. It is no doubt true that there are large possible economic gains from addressing regulatory trade barriers. But before any progress can be made, both sides need to agree on a focus and assess what can realistically be achieved. The EU is right to point out inefficiencies from regulatory divergence, and to propose institutions to address these problems going forward. But certain US regulators have voiced objections, and not all may be willing to go along. And the US makes strong arguments for more transparency in the EU system. But expecting one-sided change from the EU in this area may be too much. As a result, a middle ground is hard to find in all of this. Nonetheless, the potential gains are there, and negotiators should strive for a solution.

Prospects for the future of the TTIP and the world trading system

Focusing on the narrow issue of whether the TTIP will be completed, the process is certainly going to take longer than originally predicted. Current projections are now for the end of 2015. Experienced trade observers may see such an extension of the deadline as similar to the delays in the WTO’s Doha Round. But despite the longer timeframe, we should not consider the TTIP a failure at this point. There are substantial hurdles, but they can be resolved. On some issues, compromise might be in order. Other issues may need to be excluded in order for the TTIP to be completed. For example, on ISDS, supporters may need to face the reality that a TTIP with ISDS in it might not make it through the EU process. Also, for both GM foods and geographical indications, the two sides are so far apart that there may be no acceptable middle ground.Finally, if the highly touted area of regulation is to see any success, regulators in each country need to get on board with the idea of cooperating with their foreign counterparts. At this point, it is not clear that they are.

But the TTIP is not just about US-EU trade issues. It is also about the functioning of the world trading system as a whole. If the US and EU go their own way, what are the implications for everyone else? If the US and EU set the new standard, what happens to the existing standard?

Developing countries in particular might be nervous about their prospects in a new system shaped by the US and EU, who may not always take development interests into account. The developing world may find itself on the sidelines as the US and EU shape the field of global trade policy. Efforts by developing countries to construct an alternative system, or to influence the existing system, would come up against many obstacles.

More generally, one view is that a successful TTIP might be bad for multilateralism, as it would lead to trade diversion and fragmentation. In this view, bilateral trade liberalisation undermines the multilateral system. To illustrate this point, we need to look no further than the complex rules of origin chapters that are developed to restrict liberalisation benefits to the signatories of any free trade agreement (FTA). Agreements that are ostensibly about free trade will result in new restrictions that divert trade from its natural patterns.

Conversely, a TTIP failure might provide a jump-start for governments to take WTO talks more seriously. Having looked for an easy way out with bilateral and regional talks, and not finding one, governments might be forced to turn back to the WTO and make tough choices, such as cutting agriculture subsidies.

Another view, though, is that success in the TTIP could pave the wave for expanding this model beyond the US and the EU. In this way, it could provide the impetus for multilateral trade liberalisation, as the TTIP and other FTAs get folded into the WTO system. FTAs can serve as a testing ground for new rules, with the best and most successful rules eventually incorporated into the WTO.

Ultimately, the impact of the TTIP on the WTO is hard to predict, but it is something the negotiations need to take into account. The WTO provides a solid framework for global, non-discriminatory trade rules, and that should not be undermined. No doubt developing countries are watching the process carefully, and considering their own options as the two biggest economies try to push their own agenda forward.

Conclusion

In the trade community, many people are looking at the US trade agenda, and prospects for trade liberalisation generally, with a good deal of skepticism these days. After the recent mid-term elections, Congress could now act on Trade Promotion Authority, i.e. the authority for the executive to negotiate international trade agreements that Congress can vote up or down but cannot amend or filibuster. However, there are doubts about how serious the Obama administration is with regard to trade policy. It is conceivable that trade negotiations of all types will mostly stagnate until the next administration.

To avoid such a fate for the TTIP, US and EU trade negotiators need to identify a reasonable agenda and push hard to conclude it. This means making choices about what can and cannot be accomplished; and for those issues that will be addressed, making concessions and finding a middle ground. This could include removing ISDS from the agenda; the EU scaling back its ambitions on GIs; and setting smaller, more realistic goals for dealing with regulatory trade barriers.

Simon Lester, Trade policy analyst with the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, Washington, D.C., USA.