What the Trans-Pacific Partnership (TPP) Means for the EU

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by Alex Tilatti

eu-china-flagsIf, and when, the Trans-Pacific Partnership (TPP) is concluded, it will impact trade and economies far beyond the boundaries of countries included in the agreement. The trade deal spans four continents and is the latest in a wave of free trade agreements (FTAs) to emerge in the wake of the World Trade Organization’s stalled Doha Round. Yet the EU has been left out of the negotiations. While the EU has FTAs with a few countries involved in the trade talks, it risks ceding market share, access, and billions of euros in exports to many countries tied to the TPP.

The EU is not a party to the TPP due to its own geopolitical and trade interests. The EU’s approach to China is far more accommodative than that of the United States, as demonstrated by many EU states’ recent move to join China’s new Asian Infrastructure Investment Bank despite U.S. opposition. Through the TPP, the U.S. seeks to incentivize China’s adherence to liberal economic standards and prevent it from rewriting international trade and investment rules that make China, and East and South Asia as a whole, less economically open. As a signatory to the TPP, the EU would risk closing the door on a broader trade agreement with ASEAN, which China and several Southeast Asian countries are a part of. Negotiations for an EU-ASEAN FTA have stalled in recent years, but officials from both sides plan to meet at the end of the year to reopen talks.

The importance of the TPP cannot be understated. The global economic center of gravity is shifting toward East and Southeast Asia, and the region will outpace growth in many developed and developing economies for years to come. Besides its large scale, the TPP will tackle thorny trade and investment issues such as labor and environmental standards, intellectual property, e-commerce, agriculture and data privacy that were punted or non-existent in previous trade deals. The U.S., for example, stands to benefit significantly from an agreement that harmonizes and enforces regulation in the aforementioned areas. According to the United States Trade Representative’s (USTR) office, IP-intensive industries support 40 million American jobs and comprise 60% of U.S. merchandise exports. The U.S. is hoping that the TPP will protect firms from copyright and patent infringement and piracy, and allow companies whose business models center on research and innovation to fully realize the gains associated with their investments and products.

Despite the EU’s absence from the TPP negotiations, it has completed or is in the process of finalizing trade agreements with nearly all participating countries. It is not absent economically or politically from East and Southeast Asia, and understands its importance and increasing economic dynamism and strength. However, these trade agreements have been referred to as “old fashioned as they largely ignore higher-growth goods and services that are more pertinent to today’s global economic and trade system. These free trade agreements have also created a “noodle bowl effect,resulting in higher costs for European businesses as they are forced to navigate across the different requirements of the EU’s individual trade deals in the Asia-Pacific region.

The EU will mostly likely suffer from adverse discriminatory effects because of its exclusion from the overall TPP agreement. In agricultural trade, Patrick Messerlin at the European Centre for International Political Economy estimates that higher tariff and non-tariff barriers in Europe will result in a vast majority of TPP signatories discriminating against EU agricultural products. On the issue of intellectual property rights, companies in the EU would not gain the same protections as firms under the TPP agreement and could become targets for patent or copyright infringement and piracy, especially in the pharmaceutical sector. Overall, until a final agreement is reached, it is difficult to accurately assess the TPP’s effects on trade creation and diversion. However, in theory, should the EU fail to pursue or sign bilateral FTAs with TPP signatories or ASEAN, trade will be diverted away from the bloc.

Although it is not involved in the TPP negotiations, there have been positive developments for the EU in global trade. It is engaged in talks for ambitious trade deals with India, Canada and the United States, and regional groupings MERCOSUR and ASEAN. The ongoing Canadian trade deal, in particular, has been lauded for its liberalization of the public procurement process and a refinement of the Investor-State Dispute Settlement (ISDS) mechanism that will afford states more freedom to enforce environmental and labor standards. It is also pursuing bilateral FTAs with several countries in East and Southeast Asia. Furthermore, because of its amicable relationship with China, the EU may be able to negotiate a free trade agreement with Taiwan, whose connections to the mainland could be a boon for EU corporations.

Before it can make greater strides on the trade front, the EU would need to settle its internal issues. The European Parliament is fractious as elections have sent anti-EU and anti-trade advocates to Brussels since the start of the Great Recession. This is problematic as the European Parliament must pass legislation similar to the U.S.’s fast track authority in order to finalize prospective trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP). Many members of parliament have expressed concerns over the ISDS mechanism and vowed to vote against any deal that includes it.

Furthermore, the acrimonious debt negotiations between Greece and its creditors have weakened the image of the EU’s fiscal and political cohesion, and exposed the deficiencies of the institutional frameworks created under the Maastricht Treaty. If Greece defaults on its debt and exits the Eurozone, counterparties to any FTA with the EU may be reluctant to pursue or advance negotiations with the bloc. Bank of Japan Governor Haruhiko Kuroda has warned about the dangerous precedent that a Greek default could set for the Eurozone and financial markets. For the bloc to seriously pursue FTAs around the world, a debt agreement would have reached that keeps Greece in the Eurozone.

While the TPP promises to yield significant economic gains for signatories, it is important to take the forecasts made by economists and policymakers with a grain of salt. Projections for the North American Free Trade Agreement, for example, exaggerated the actual gains that accrued to American, Canadian and Mexican firms in the years after the deal was implemented. Furthermore, without a finalized deal, it is impossible to predict how stringent or loose the regulations are in areas like intellectual property rights or labor, which may fall short of expectations and reduce the economic advantages of the deal. Although its exclusion from the TPP is noteworthy, the EU’s negotiations and agreements with various East and Southeast Asian countries and ASEAN could lead to trade deals that rival or surpass the TPP framework on scale. In order to accomplish this, however, the EU would have to overcome internal issues and seek agreements that encompass trade areas in goods and services that are high-growth and therefore relevant to an increasingly integrated global economy.

Alex Tilatti is a transatlantic economy analyst at the Streit Council. Photo credit: Friends of Europe

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