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

June 16, 2015

by Alex Tilatti

EU China Flags

If, 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

Disagreeing to Agree: Why the more contentious aspects of the TTIP negotiations might not be as intractable as you think

May 1, 2014

by Nicholas Hager

TTIP

In the shadow of major international crises and other Western foreign policy priorities, the Transatlantic Trade and Investment Partnership (TTIP) has been lumbering steadily toward completion. The benefits of this putative agreement have been repeated, and largely accepted, by both sides and opposition to it typically only offers critiques that amount to either speculative worst-case scenarios or empty populist nattering which equates “secrecy…[with] tyranny” and “cooperation” with the loss of individual freedoms. The former criticism, which largely comes from a place of legitimate concern, is misguided but is at least issue-focused and attempts to improve rather than impugn the agreement. The latter is, unfortunately, largely the result of the visceral ideological biases of a few groups and individuals who oppose the TTIP simply for what they think it represents.

A key goal of the TTIP, according to the Office of the United States Trade Representative, is to “eliminate…non-tariff barriers that decrease opportunities for U.S. exports [and EU imports], [including] restrictions that are not based on science, unjustified technical barriers…[or] restrictive…quotas…which impose unnecessary costs.” At least one estimate indicates that removing tariff barriers alone could “boost economic growth in the United States by $180 billion over five years.” Reducing non-tariff barriers, however, could yield far larger economic and political benefits – it is over these that the most contentious debates about the form and utility of the TTIP rage. Both sides find it difficult to find common regulatory ground in the shadow of a “Doha Round [that] stalled in 2008 as a result of highly visible disagreements between the U.S. and EU…regarding many of [these] same issues.”

A recent Pew Research poll has shown that, even at the public level, there is a strong base of public support for the TTIP in principle among U.S. and German respondents, but “when it comes to specifics, both…oppose many details of [the TTIP and] disagree with one another on [whether to make] transatlantic regulatory standards similar.” This can partly be attributed to the fallout from last year’s NSA spying revelations, and some suggest that cultural differences are to blame. At the same time, Douglas J. Elliott, a fellow in economics at the Brookings Institution, notes that the TTIP faces resistance from “deeply entrenched interests on both sides of the Atlantic [that]…will always fight harder to keep what they have rather than get something new.” Whatever the case, these issues present real obstacles that confound efforts to reach a deal.

The financial sector has the potential be central to the final TTIP agreement, with the deal encompassing two of the world’s foremost financial hubs in New York and London, but there are a number of hurdles that prevent smooth harmonization. One issue is the “Volcker Rule” that was passed in the wake of the global financial crisis to restrict banks from making speculative investments with the money of their clients. Michel Barnier, the EU’s financial services chief, has expressed European concerns that the Volcker Rule will impact EU banks in the U.S. by restricting their operations. There are exceptions for banks which deal with “U.S. sovereign debt,” Barnier says, but “banks that…deal with the sovereign debt of other countries” are not excepted, which “could [expose them to] systemic risk.” For a number of reasons, the Obama administration is hesitant to include financial regulation convergence in TTIP negotiations, and Europe, according to a recent European Commission report, appears to grudgingly accept this, saying: “[The] aim of the EU proposal is not to negotiate within the TTIP on the substance of…international standards or on other elements of on-going regulatory reforms,” including the Volcker Rule, but is predicated on the mutual belief that “both jurisdictions have equally robust financial regulation in place.” This would appear to obviate any meaningful discussion on the Volcker Rule, and other similar regulatory issues, in the context of TTIP negotiations.

One issue that is on the table, however, is public procurement. The EU “[insists] on access to U.S. state and local procurement markets,” but this will be problematic because of “Buy American” clauses which exclude international firms from bidding and the fact that the federal government cannot constitutionally require individual states to comply—indeed, thirteen states have yet to sign the revised General Agreement on Procurement. Solutions to this may include build-operate-transfer (BOT) and/or public works concessions contracts, which the U.S. agreed to in recent free trade agreements—including one with South Korea, the text of which is identical to that of the EU’s BOT provisions in its free trade agreement with South Korea—and which might conceivably provide some common ground upon which both sides work toward agreement on other, less tractable, market access issues.

Also at issue is the much maligned investor-state dispute settlement (ISDS) mechanism of the TTIP. Yannick Jadot, a Green Party European Parliamentarian, has called the ISDS “a massive Trojan horse, which could be used by multinational corporations to whittle away EU standards,” and it has been the target of analyses that attack its motives and claim it will “distort competition [by providing] foreign investors with [a] judicial remedy…not available to domestic competitors.” These arguments are predicated on a fundamental misperception, however.

They assume that such a mechanism would allow cupidinous U.S. corporations to undermine EU rules and regulations for the sake of profit, but this is a very shallow understanding of what the ISDS mechanism would do. EU Environment Commissioner Janez Potocnik has dismissed such fears, noting that ISDS is only really needed when “you have [a] deal between two areas where there is a real worry that the legal system would not deliver properly. That worry between the United States and Europe is not so obvious…” Both regions have strong, roughly equivalent, business protections, so there’s no guarantee that this mechanism would be used much at all, let alone abused. And even if it were invoked, it is important for opponents of the ISDS (and the TTIP more broadly) to appreciate that the ISDS is not an American assault on EU laws; it would afford European corporations the same privileges in the U.S. market as U.S. corporations would enjoy in Europe. While this may or may not be desirable in the abstract, it is a crucial point that is often lost because of the way the debate has been framed, with certain parties stoking populist fears in an attempt to create victims and villains where there are none. As long as the processes are “transparent [and] have an appellate body, [allow you to] refuse arbitrators, and [don’t allow you to] litigate from place where you only have a post box” EU Trade Commissioner Karel De Gucht says, including an ISDS agreement is useful.

Another area of contention is the perceived disagreement between U.S. and EU standards for food and pharmaceutical safety. Genetically Modified Organisms (GMOs) and hormone-infused beef have borne the brunt of criticism, despite vigorous reassurances that EU laws would have to be observed “because otherwise we will not have an agreement.” The former issue is perhaps the most salient “tough issue” of the entire negotiation process, but, when examined, there does not appear to be much to it. For one thing, this European Commission report plainly states that “the basic EU law on GMOs will not be part of the [TTIP] negotiations,” so the safety standards would likely remain unaffected in this area, especially considering that 52 GMOs have already been authorized “to be sold in the EU as…food, animal feed or for sowing.”

These are but a few of the obstacles that stymie the progress of the TTIP, as there are many issues such as data security and pharmaceutical standards that still need to be addressed. That said, the aforementioned issues are widely perceived as major sticking points in the negotiations.  But there is ample room for convergence on them because there is already substantial overlap. Both sides “are generally pleased” with the progress that has already been achieved, but understand that narrowing the gaps simply means that “the going will inevitably get tougher.” The negotiations must now focus on building on currently-existing points of convergence and attempt to limit the influence of unhelpful, ambiguous political narratives. 

Nicholas Hager is an intern at the Streit Council. Photo credit: European Commission

Is the U.S. Falling Behind on Trade?

July 21, 2011

by Christine Hilt

Recently, Senator Orrin Hatch (R-Utah) addressed the American Enterprise Institute (AEI) in Washington, DC at an event titled, “Are We Falling Behind on Trade?” His talk, which focused on the domestic politics of trade liberalization, included a condemnation of the Obama administration’s attempt to pass the updated Trade Adjustment Assistance (TAA) program by attaching it to the popular U.S.-South Korea Free Trade Agreement.

TAA is essentially a job training and adjustment program for workers who lose their jobs to trade liberalization. The program has divided Congress; Democrats are pushing for the continuation of a new version of TAA, while Republicans think it is a costly and unsuccessful part of the NAFTA deal that should be eliminated. Now, the Obama administration has entered the fight by adding it as an amendment to the U.S.-South Korea FTA – putting strong bipartisan support behind the agreement in jeopardy.

Sen. Hatch’s comments on the TAA were followed by a debate over the merits and drawbacks of the program. The speakers addressed issues of discrimination, government’s role as a provider of services, effectiveness, and cost. Finally, each speaker, including Sen. Hatch, had a different opinion on the domestic effects of free trade. While everyone agreed that globalization has benefitted the nation as a whole, there is still a highly protective attitude toward a number of American industries and unwillingness to allow foreigners to fill American jobs. The intense debate over the domestic effects of trade liberalization prevented any mention of international issues, highlighting the mood of the United States toward the issue; difficult economic times and partisan politics  have brought domestic considerations to the fore.

Are we in fact falling behind on trade? Yes – but it is at least partly our fault. Prominent American trade groups have expressed concerns about the slow pace of American trade policy. Tami Overby, Vice President of Asia for the U.S. Chamber of Commerce, explained that “while America has taken a time out on trade, the rest of the world has moved forward. We need to get [the free trade agreements] all done, and we need to get them all done yesterday.” The BRIC countries and the EU are prime examples of expanding economies that are collecting trade agreements. But in the United States, three new FTAs (Panama, Colombia, and South Korea) have languished for years after being signed without ratification because of political differences. According to the WTO, 230 FTAs were active around the world in 2010, but only 17 involved the United States

Christine Hilt is an Intern at the Streit Council. Photo credit: Ingrid Taylar (http://www.flickr.com/photos/taylar/2819323498/)

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