A Transatlantic Game Changer

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by Mitch Yoshida and Alessia Rossi

eu-us-flagAfter years of economic uncertainty and stalled multilateral trade negotiations under the WTO, U.S. and EU leaders have decided to negotiate a comprehensive trade and investment agreement – formally known as the Transatlantic Trade and Investment Partnership (TTIP) – by the end of 2014. By removing barriers between the world’s two largest and most intertwined economies, they aim to boost economic growth, spur job creation, and deepen and extend the reach of liberal international economic rules.

Policymakers, business leaders, and scholars have repeatedly called for the removal of barriers to transatlantic trade and investment during the past 20 years. In 1995, the New Transatlantic Agenda stated the intent to create a “New Transatlantic Marketplace” to “expand trade and investment opportunities and multiply jobs on both sides of the Atlantic” and “contribute to the dynamism of the global economy.” The next major step in this direction came in 2007, when the Transatlantic Economic Council was established to oversee and accelerate transatlantic economic integration. Despite progress in some sectors, liberalizing the broader transatlantic economy has proven easier said than done. Differences over agriculture, subsidies, regulations, and other issues were too difficult to overcome.

But the prospects for an agreement have improved markedly in recent years. Within the U.S. and the EU, persistently weak growth and high levels of unemployment and debt are driving senior policymakers to invest substantial political capital in concluding an agreement. After all, a freer transatlantic market would lead to more competition and larger economies of scale, spurring growth and job creation. Such an agreement would, in effect, provide a much-needed stimulus to both economies without the need for additional government spending. And interests that typically raise major objections to free trade agreements – labor and environmental groups, in particular – have relatively less to argue about since U.S. and EU labor and environmental standards are among the most stringent in the world.

While U.S. and EU tariffs are already low – around 3-4% on average – lowering them further would yield enormous benefits as they apply to a large volume of trade. Estimates vary, but according to Daniel Hamilton and Joseph Quinlan at the Center for Transatlantic Relations, a zero-tariff agreement on goods alone could boost annual U.S. and EU GDP by 1.48% and 0.48% respectively. When it comes to lowering non-tariff or “behind the border” barriers, the potential gains are much larger. According to the U.S. Chamber of Commerce, halving non-tariff barriers could provide a GDP boost of 3% to both sides of the Atlantic. A comprehensive agreement on both types of barriers could create 7 million new jobs. Although these estimates are on the higher side, they illustrate the benefits of concluding an agreement of the TTIP’s depth and breadth.

U.S. and European policymakers are also being driven toward an agreement by developments elsewhere. The WTO’s stalled Doha Round of multilateral trade negotiations is holding back global economic growth, and could in time undermine the liberal economic rules that have constituted an important pillar of the international order since the end of the Second World War. A freer transatlantic market would help push the Doha Round toward a conclusion by enabling the U.S. and the EU to deepen the liberal economic rules of the road, incentivize their broader adoption, and improve the competitiveness of their companies. It could also be leveraged to promote further reforms within and beyond the scope of the WTO, including those that strengthen market disciplines for state-owned enterprises, democratic governance, respect for human rights, and the rule of law.

Despite the strong incentives driving policymakers toward an agreement, hurdles remain. Agricultural interests are likely to pose a challenge despite budgetary pressures and high commodity prices; in fact, they have already adopted positions that will make for challenging negotiations. We can also expect disagreements over issues that are important to a broader range of interests, including divergent regulations and health, safety, and environmental standards. And therein could lie the biggest challenge facing U.S. and EU negotiators since they must, at least to some degree, forge consensus among national regulatory authorities if the final agreement is to have a significant impact. In this way, the TTIP requires a step beyond “negative integration” – that is, beyond the simple removal of barriers that are typical of free trade agreements – and toward the creation of common rules and standards that “positive integration” entails.  

This would be an ambitious step toward a more integrated transatlantic market – one that is necessary to revitalize the American and European economies and steer the future of the international order in a liberal direction. When it comes to market size, it has long been recognized that “bigger is better.” This still holds true today, and the stakes are too high not to act. 

Mitch Yoshida is a Mayme and Herb Frank Research Fellow at the Streit Council. Alessia Rossi is an Intern at the Streit Council. 

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