Issues and Key Perspectives at the Start of the Negotiations
On July 8, 2013, the negotiations on the Transatlantic Trade and Investment Partnership (TTIP) began in Washington, DC. This marks the start for trade and investment liberalization that could generate considerable benefits for both the U.S. and the EU. Within the European Union, Germany, as the community’s greatest exporter, has strongly supported this initiative, whose start has not been postponed by the U.S.’ NSA leak. The strategic field of trade and investment liberalization is too important to put off after the World Trade Organization’s Doha Round failed, and the benefits that TTIP could generate are too important to lose. Estimates from a study for the European Commission suggest that reductions of tariff and—even more important—non-tariff barriers to trade and better investment rules could raise gross domestic product by roughly 0.5 percent in the European Union and by 0.4 percent in the U.S. (this is a conservative approach not referring to a full liberalization). France and Germany already have indicated their unwillingness to fully open up the media industry, and other sectors will prove equally difficult.
Key challenges will concern rules of origin, which specify the minimum share of value-added in the EU that would qualify as an EU product and that can be imported duty-free into the U.S. Similarly, rules of origin have to be defined for U.S. products that should qualify for customs-free imports into the EU. Reduction of non-tariff barriers will be a crucial element in the negotiations. Also of particular concern is the field of common or compatible standards of products. While mutual recognition of technical standards is the standard procedure in the EU— saying that any product legally produced in any EU country can be sold in all EU countries—the U.S. has no experience with mutual recognition and thus might refuse to accept this principle. This issue may be further exacerbated by the field of regulations, which in the U.S. is organized mainly by government-independent organizations, while in Europe governments often have delegated certifications. Thus, it would be useful to at least develop common procedures to serve as the basis for “jointly accepted regulations” or to establish some joint bodies for adopting certain special regulations.
A new element in the TTIP negotiations is the focus on investment. The U.S., as well as other countries, has implemented international investment agreements on a bilateral basis with many nations; in addition to such bilateral investment treaties (BIT) there are BIT-like chapters in free trade agreements. The basic idea of such international investment agreements is to provide non-discriminatory treatment to private investment, help facilitation of market-oriented policies in partner countries, and promote trade. Investment protection is the key interest for advanced countries. Yet, investment promotion could also play a role and one could certainly expect that better rules for foreign direct investment will generate additional transatlantic foreign direct investment, which often goes along with technology transfer and productivity growth in the host countries, respectively.
From a transatlantic perspective, one may also anticipate an increase of asset-seeking foreign direct investment, e.g., EU biotech firms engaged in transatlantic mergers and acquisitions with the goal to benefit from an enhanced flow of innovation and knowledge. The number of bilateral investment treaties has increased as the role of foreign direct investment in economic globalization has grown over time. By the end of the 1980s, 385 BITS had been signed; by the end of 2011, some 2,800 BITs had been concluded worldwide. If one adds the relevant chapters on investment provisions in treaties on free trade areas, the total number of international investment treaties is slightly above 3,000 according to the UNCTAD 2012 World Investment Report. At the same time one may notice that the number of investment dispute cases is growing over time. Only rarely do BITs provide for investor-state dispute resolution mechanisms. Following the success of BITs of some European countries in the 1960s, the U.S. adopted a BIT program in 1977 for which there is a joint administration by the Department of State and the United States Trade Representative. For international investment treaty negotiations, the U.S. typically will use a “model BIT,” which has been revised several times, most recently in 2004 and 2012.
Investment aspects are part of the transatlantic negotiations but to some extent also an element in the Trans-Pacific Partnership (TPP), a regional free trade agreement being negotiated among the U.S., Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and Japan. The latter came on board the negotiation process only in spring 2013. The key outline of TPP was expressed on the occasion of the Asia-Pacific Economic Cooperation ministerial meeting in November 2011, in Honolulu, HI. The broad group of Asian countries—representing considerable economic heterogeneity—will not make the conclusion of an agreement easy. However, all three North American Free Trade Area (NAFTA) countries (the U.S., Canada, and Mexico) are at the negotiation table, whereas only four out of ten ASEAN (Association of Southeast Asian Nations) countries are participating.
The EU concluded a free trade agreement with Singapore in 2013 and will seek bilateral trade liberalization with Thailand next. Rather than these bilateral agreements it would, in principle, be easier to negotiate an agreement between NAFTA, the EU, and ASEAN. However, this option has not been explored by policymakers. Within the transatlantic sphere, the EU and Canada are about to conclude a bilateral liberalization treaty—partly showing solutions to be explored in TTIP—demonstrating that the option to launch a comprehensive EU-NAFTA trade liberalization approach has not been seriously considered. Instead, the three NAFTA countries want to realize individual deals with the EU and the European Commission. For Germany, France, and other EU countries, such bilateralism is excluded from international trade negotiations since the European Union is a so-called customs union, which stands for an integration with common external tariffs and in which the supranational policy layer is responsible for trade negotiations. By contrast, NAFTA is a free trade area in which each member country adopts individual import tariffs and also has full competences in international trade negotiations.
TTIP concerns two global heavyweights of international trade and investment. Transatlantic trade in goods between the U.S. and the EU reached €455 billion in 2011—with a positive balance for the EU of slightly above €72 billion (only minor changes were observed in 2012 as preliminary data show). The U.S. is the European Union’s third largest supplier, with sales reaching €192 billion—equivalent to 11 percent of total EU imports. The U.S. is also the EU’s most important export market, representing about 17 percent of total EU exports. Commercial services in 2011 were roughly one half of trade in goods: trade in services was €282 billion in 2011. The U.S. is the EU’s number one partner for trade in commercial services, with imports worth around €138.4 billion (approximately 29 percent of total EU imports) and exports of €143.9 billion (roughly 24 percent of total EU exports). Roughly five million jobs across the EU were supported by exports of goods and services to the U.S. market. About one million jobs in Germany are related to exports to the U.S. and a similar number is represented by U.S. companies operating in America. In regard to foreign direct investment, there are also big stakes for the EU and the U.S.: In 2011, U.S. companies invested around €150 billion in the EU and EU firms about €123 billion in the U.S. America’s stock of investment in the EU reached more than €1.3 trillion, while the total EU stock of investment in the U.S. topped out at over €1.4 trillion. The sales of EU foreign subsidiaries in the United States is about three times as large as EU exports to the U.S.; sales of U.S. subsidiaries in Europe also account for sales which are about three times as high as U.S. exports to the EU.
Non-tariff barriers that concern both industry and services are considerable, as the study for the European Commission (Francois, J. et al. (2013)) shows. The automotive industry and the chemical industry are two important examples here: EU chemical exports to the U.S. face a modest tariff of 1.2 percent, but non-tariff barriers are an equivalent of a 19.1 percent U.S. import duty. In the automotive industry, European non-tariff barriers are estimated to stand for an extra 25.5 percent duty on top of the 8 percent tariff faced by U.S. car exporters shipping goods to the EU. If all tariffs and non-tariff barriers would be eliminated with TTIP negotiations, output could increase by 0.9 percent and 0.8 percent in the EU and U.S., respectively. With the combined annual output of the U.S. and the EU currently at about $30 trillion, the direct economic gain for both sides could be close to $300 billion (this would be more than 10 percent of Germany’s annual GDP).
Adopting a cautious and conservative approach on the progress of TTIP, one can still find considerable benefits for both sides of the Atlantic. For example, household disposable income could increase up to 0.5 percent in the EU27 and 0.35 percent in the U.S. Also noteworthy is that U.S. exports to the EU could rise by 37 percent, while EU27 exports to the U.S. could increase by 28 percent. Since there is strong transatlantic foreign direct investment, U.S. subsidiaries in Europe will benefit from the induced economic expansion in the EU, while at the same time EU multinational companies with subsidiaries in the U.S. should benefit to the tune of slightly higher profits. In the EU, wages for low and high skilled workers increase by .29 percent and .30 percent, respectively; for the U.S., wages would increase by .21 percent and .22 percent, respectively.
There is further need to explore the economic consequence of TTIP. Five key results can be anticipated:
- It will create more transatlantic trade and investment. This is good for business, jobs, and economic growth on both sides of the Atlantic—a welcome impulse after the transatlantic banking crisis and the euro crisis.
- It will cause transitory trade diversion at the expense of outsider countries, including countries in Asia. To the extent that TPP and parallel EU-Asian trade liberalization negotiations could be concluded, the trade diversion effects would be rather small. Hence, there would be every reason to assume that TTIP and TPP create positive global welfare gains. Here the EU lacks a broader approach, since only negotiating with Singapore and Thailand is too restricted to really have a strong impact on EU-ASEAN trade and investment liberalization. It seems that the euro crisis has undermined the EU’s ability to derive a consistent comprehensive international liberalization approach. A natural approach would involve the EU integration club developing a cooperation scheme with another integration club (e.g., ASEAN). Such connection between integration clubs should become a new topic of the EU’s future international policy agenda and Franco-German leadership should indeed push for this—not least by pointing to the American approach of TPP for Asia.
- The ability of the U.S. and EU to reduce non-tariff barriers could become a model for further global liberalization in the field of trade in services. Trade in services—according to most recent data published by the OECD—accounts for almost 50 percent of global trade, and its role will increase in the context of ongoing global digital modernization and the expansion of the internet.
- Successful conclusion of TTIP and TPP could help to jumpstart the stalled Doha Round for trade liberalization. The solutions developed in TTIP could become a template for broader global liberalization efforts. It is also noteworthy that pressure for protectionism in the EU is likely to mount along with an ongoing recession in the southern part of the euro area.
- There could be an increase in transatlantic and global foreign direct investment, which will increase location-based competition in Europe. This will be to the disadvantage of countries that suffer from inadequate infrastructure, strong government bureaucracy, and poor innovation systems. Indeed, those countries with substantial red tape and inadequate labor regulations—such as Italy, Spain, Portugal, and Greece—could feel a greater incentive to adopt adequate reforms. However, political instability could undermine prospects to adopt adequate institutional reforms. If these crisis countries fail to accelerate structural reforms, then Germany, Austria, the Netherlands, Belgium, and France would be the likely beneficiaries from increasing U.S. investment flows to Europe. However, there is a caveat: since TTIP would create a more integrated transatlantic market, enhanced access to EU markets could indeed reduce U.S. foreign investment in the EU and lead U.S. firms to raise investment at home. This scenario is, however, not very likely since the EU countries are aware that under TTIP there will be an increased transatlantic quest for mobile capital and most countries will be ready to adopt adequate policy reforms.
It should not be overlooked that there are some thorny issues in transatlantic negotiations. Liberalization of trade in agriculture—with EU countries being rather restrictive with respect to genetically modified food—and the field of data protection could become difficult topics for the negotiators. Elimination of non-tariff barriers to a large extent will require that the U.S. and EU follow either the principle of mutual recognition or develop joint product standards. It should also not be overlooked that the banking industry could become an issue in the negotiations: The U.S. wants to keep the banking sector out of the negotiations while the EU countries would like to see that sector largely included.
Germany, as the EU’s biggest trading power, along with France, the UK, Italy, and Spain, as other influential players at the negotiating table, will have a strong interest in successful TTIP discussions, as it will be instrumental in stimulating output and employment. TTIP, alongside adequate domestic policy reforms, could indeed stimulate the expansion of production and jobs. However, one may anticipate that the enhanced transatlantic—and global—specialization will reinforce the demand for skilled labor. This in turn suggests that governments might want to encourage training and retraining schemes for unskilled workers. For Germany, there is evidence that the yield on the retraining of unskilled workers is almost similar to the yield of retraining skilled workers, but apparently the motivation for unskilled workers to engage in retraining is rather modest. Taking this issue of worker training into account will be a key challenge in the EU, where politicians will want to avoid growing income inequalities.
If TTIP could be combined with TPP and successful EU-Asian liberalization talks, then the benefits for Europe, the U.S. and Asia could be considerable. Since dealing with non-tariff barriers, which are most relevant in the services and automotive industries (with rather different standards used in the U.S., Europe, and Asia), presents a difficult negotiation topic, one may argue that any progress achieved under TTIP carries a double dividend: the negotiations with Asia could benefit along similar liberalization approaches adopted within TTIP. The fact that both the EU and the U.S. (a few years before the European Union) concluded a liberalization agreement with Singapore, a strong regional services power, shows that progress in the field of reducing non-tariff trade barriers is possible and that the economic benefits will be considerable.
The U.S. started with regional free trade agreements in 1994 when NAFTA was created as a project between the U.S., Canada, and Mexico. By 2012, the U.S. had concluded eleven treaties on free trade areas; the TTIP could add yet another very important cornerstone of trade and investment liberalization. During the difficult negotiations, the key partners on both sides should consistently push for progress in liberalization. Industry on both sides of the Atlantic is obviously interested in cutting trading costs and in creating a new joint framework for more trade and higher economic growth. Higher real income and more employment certainly would be quite welcome by the U.S., the UK, and the continental euro countries eager to reduce their deficit-GDP ratios.
With regard to China, one may anticipate that firms from China will have a stronger incentive to invest in the U.S. and Europe once the TTIP is concluded. There is a double motivation for Chinese firms to become more active in both the U.S. and Europe: first, Chinese foreign direct investment is a good way to avoid negative trade diversion effects on the outsider countries of a TTIP agreement; second, the positive output effects associated with TTIP in the U.S. and Europe reinforces the attractiveness of producing locally in the world’s two biggest fully integrated markets. In the EU, Germany, France, and the Netherlands are likely to benefit strongly from increasing Chinese foreign direct investment flows to Europe. While EU foreign direct investment flows in 2011 were about ten times as large as Chinese investment flows to the European Union, the dynamics of TTIP could indeed gradually change the picture in favor of China in the medium term. As the U.S. is expected to raise central bank interest rates in 2014/2015—while interest rates in the EU are expected to remain for a few more years—one may anticipate an appreciation of the U.S. dollar. This in turn is likely to stimulate more Chinese investment in Europe, since a depreciation of the Chinese currency will make international mergers and acquisitions with the U.S. more expensive and more difficult.
A successful TTIP will allow firms on both sides of the Atlantic to more easily exploit economies of scale and split up the value-added chain in an international way. This will also bring about new opportunities to create bigger firms in the U.S. and Europe. Economic policymakers thus should have a careful eye on competition issues in the future. Here there will not only be a need for better cooperation between the U.S. and the EU, but also for the need to create joint agencies that could form the nucleus of a global anti-trust institution that will be necessary for successful economic globalization in the long run. The industry that is closest to becoming a fully global sector is the digital economy—telecommunications, the internet, and software markets will become truly global markets by 2020, and the creation of a transatlantic joint policy framework would be quite adequate here. The fact that the principles of regulations in telecommunication and the internet differ between the U.S. and Europe means that the market integration is underdeveloped and potential efficiency gains for consumers and the business community cannot fully be exploited. It should not be overlooked that roughly two-thirds of investment in the information and communication technology sector is in the business community. Therefore, more competitive transatlantic digital markets bring about expectations for both reduced transaction costs for the business sector as well as more digital innovations for industry and consumers. There is every reason to expect that a successful deal on TTIP will bring benefits not only to both sides of the Atlantic, but also to crucial long-run welfare gain for the global economy. In the end, the combined benefit of TTIP and TPP could be more than 2 percent of global output, with an additional bonus element if the Doha Round could be revitalized.
– Francois, J. et al. (2013), Reducing Transatlantic Barriers to Trade and Investment, London: CEPR (for the European Commission)
Prof. Dr. Paul J.J. Welfens, Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and President of the European Institute for International Economic Relations