Toward a Transatlantic Free Trade Agreement: What Impact on World Trade?

In Issue Briefs by editor0 Comments

by Johann Benson

eu-us-flagsWith negotiations now officially underway, the proposed Transatlantic Trade and Investment Partnership (TTIP) is taking its first steps toward becoming reality. Questions remain, however; not only about what form the final agreement may take, but also what effect it could have on international trade. 

In its initial assessment of the TTIP, the OECD notes that while multilateral arrangements are preferable, bilateral and plurilateral agreements like the proposed TTIP “can be supportive of an effective multilateral trading system.” One of the primary ways in which these agreements can promote trade at the global level is by addressing issues that currently lie outside the scope of WTO regulations. Richard Baldwin, of the Graduate Institute in Geneva and the Centre for Economic Policy Research, has laid out the shortcomings of current WTO regulations and how post-2000 trade agreements are fundamentally different from those of the 1990s.

Baldwin argues that the rise of global supply chains has elevated the importance of removing non-tariff barriers, while tariffs (with some notable exceptions) have largely fallen by the wayside. Current WTO regulations (as well as agenda items of the stalled Doha Round) are not adequate for addressing the most pressing issues of international commerce and investment, such as competition (or antitrust) policy, the movement of capital, intellectual property rights, and investment assurances. These issues can and often have been addressed through recent bilateral trade and investment agreements. Critically, Baldwin also notes that there is a feedback effect from increased trade liberalization that makes future liberalization even more likely. It is for this reason, if no other, that an EU-U.S. free trade agreement is a step in the right direction.

Economic gains from the TTIP would mainly come from the harmonization of regulations and the removal of other non-tariff barriers. While the agreement is expected to lead to trade diversion among EU members (in the case of an ambitious agreement, for example, total trade between the UK and Spain would decrease by about 45%), it is projected that the TTIP would benefit the struggling economies of southern Europe even more than the EU as a whole. It would also drive trade creation between the EU and the U.S., and between the transatlantic area and third parties. For example, if car safety standards are harmonized in the European and American markets, it lowers costs not only for U.S. and EU automakers, but also for any other company that exports to both markets. In fact, the third parties with the largest expected gains from the TTIP are ASEAN countries, due to their very high trade to GDP ratios. Unfortunately, the fact that third parties often benefit from the removal of non-tariff barriers can also act as an obstacle to bilateral agreements. For instance, Jagdish Bhagwati has noted that getting rid of production subsidies requires a multilateral agreement because “you cannot – bilaterally – say that if the U.S. reduces or relaxes production subsidies, it will be only for New Zealand. Or only for Brazil.” This may, in some respects, limit the breadth and depth of the TTIP.

One of Bhagwati’s other worries about preferential trade agreements is that they create dispute settlement mechanisms that favor the stronger trading partner and undermine the WTO’s own dispute settlement mechanism. If the TTIP is eventually opened to newcomers on a take-it-or-leave-it basis, any country wishing to join the agreement – for which there would be strong incentives – would be strictly a rule-taker, with absolutely no say in the drafting of existing regulations. While numerous commentators argue that the primary objective of the TTIP is to ensure that “the United States and Europe remain standard makers, rather than standard takers, in the global economy,” there is a risk that China and other emerging economies will attempt to erect trading blocs amongst themselves and create their own rules.

Completing the Doha Round may still be an uphill battle after the TTIP is concluded. The agreement is not likely to seriously threaten the multilateral trading system for the simple fact that bilateral deals – no matter how large – are themselves unable to address a longer list of the world’s most pressing trade issues. Resource and food security, exchange rate policy, and efforts to limit carbon emissions all demand multilateral solutions. But the TTIP could provide a launching pad to address these and other issues.

Johann Benson is an intern at the Streit Council. Photo credit: Delegation of the European Union to the United States 

Share this on:

Leave a Comment