The Transatlantic Trade and Investment Partnership: towards a common EU-US free trade area?

By Giorgio Buttironi

The High Level Working Group on Jobs and Growth – established in November 2011 following a bilateral summit between representative of the European Union and the United States – paved the way for a wide-ranging trade agreement between the two economic powers. What exactly does this mean for the future of bilateral trade between the EU and US?

After two years of intense scrutiny, the High Level Working Group on Jobs and Growth delivered – on 11 February 2013 – its conclusions on how to improve the efficiency of bilateral trade between the US and the EU. The final report recommended the launch of negotiations between these two parties on “a comprehensive, ambitious agreement that addresses a broad range of bilateral trade and investment issues, including regulatory issues, and contributes to the development of global rules”. Two rounds of talks have hitherto taken place on the matter respectively in Washington DC (8-12 July 2013) and Brussels (10-15 November 2013), with a third round planned in the American capital starting on 16th December 2013. The United States and the European Union represent the two largest economies in the world, accounting for almost 50% of the world’s GDP and 30% of trade. An encompassing agreement bringing down all barriers to free trade would be unprecedented. EU Commission President Barroso expressed most vigorously the innovative nature of this deal and, likewise, US President Obama announced his support by underlining the beneficial consequences that successful negotiations could have on the American economy.

Status Quo

Total EU-US trade amounted to €497.6 billion in 2012, according to the EU Directorate-General for Trade. Exports to the US totalled €291.8 billion, while imports made €205.7 billion, leaving trade with a positive balance for the EU of approximately €86.1 billion. The United States remains one of the EU’s top commercial partners both as export market (17.3% of total EU Exports) and supplier (11.5% of total EU Imports).

Potential Benefits of the TTIP

On instruction of the EU Directorate-General for Trade, the Centre of Economic Policy Research (CEPR) in London produced a study describing the effects of a comprehensive free-trade deal, once implemented. A comprehensive free-trade agreement of such magnitude would generate annually €119 billion for the EU (increasing by 0.5% its annual GDP) and €95 billion for the US. Additionally this agreement would increase the global GDP by €100 billion and overall EU and US exports by respectively 6% (€220 billion) and 8% (€240 billion). The sectors that would stand to gain the most in terms of exports would be metal products, processed foods, and motor vehicles. In the latter category, EU exports are estimated to go up by 42% to the rest of the world and – most surprisingly – by 149% to the United States.

Reality Check

Looking at the Working Group’s and the CEPR’s conclusions, cautious optimism is fostered by encouraging statistics and hopeful economic forecast. And yet scepticism reigns as to the real tangibility of a free-trade agreement, as envisaged in these terms. It is hardly surprising that, given the broad remit of negotiating items on the table (e.g. agriculture, chemicals, motor vehicles, etc.), the hopes for a truly “comprehensive” free-trade agreement grow thin.

 

Tariff and Non-Tariff Barriers

The first issue concerns the reciprocal elimination of tariffs on imports. Although relatively low (floating between 3% and 5%) direct tariffs are the first hurdle to remove on the path to a successful TTIP. According to the European Centre for International Political Economy, removing tariff barriers completely would certainly cause a drop in goods’ prices and increased competition between firms, and – most importantly – could bring gains of €33-50 billion for the EU and €99-133 billion for the US. Nevertheless, that by itself would not be enough. The most urging problem concerns the so-called “non-tariff barriers” (NTBs), which typically constitute a significant obstacle to free trade. These hurdles include everything, from regulatory and bureaucratic standards to special government schemes and import quotas, impairing the ability of firms to do business abroad. Karel De Gucht (EU Commissioner for Trade) stated that non-tariff barriers bear the same effect as import tariffs of 10%-20%. Moreover, the CEPR’s specialist study acknowledges that “as much as 80% of the total potential gains come from cutting costs imposed by bureaucracy and regulations, as well as from liberalizing trade n services and public procurement”.

Cultural Differences

Cultural differences must not be neglected either from the complex equation that the TTIP has become. Americans and Europeans have different views on issues such as genetically modified organisms (GMOs) in agriculture, car emission standards, and privacy rules. These cultural differences end up forming a considerable divide in the abovementioned fields because the respective stances taken by both negotiating parties is bound to influence, one way or another, the outcome of negotiations on regulatory standards over a determinate policy area.

EU privacy and data protection regulations are not only stricter than their American equivalent, but also substantially different. Large firms such as Google or Facebook may find it challenging to operate in a free-trade area governed by stricter rules, rather than retaining the status quo where they are governed by more relaxed regulation in the US. Privacy and data protection becomes also an issue in light of the recent revelations about US spying allegations, which many European member states have certainly not taken well. The mixture of scepticism between negotiating partners and the active influence that big firms will inevitably is a recipe that makes the drafting of rule harmonization – and the consequent removal of NTBs – very challenging.

What outcome for the TTIP?

Having equally weighed benefits and complications regarding the implementation of a comprehensive TTIP, it is worth asking how long negotiations will take and how effective their outcome will actually be. Despite the European Commission’s optimistic forecast to close negotiations by the end of 2014, when the current college’s term expires, it might very well take at least until 2015 to reach a final agreement. Considering the large amount of items under discussion and the cultural differences between the two negotiating parties in some sensitive areas, it might already be complicated to reach an agreement reached by the end of 2015.

In my opinion, the problem does not concern whether or not there will be an agreement on the TTIP, but how coherent it will be with the High Level Working Group’s auspices of “a comprehensive agreement”. It is true that the TTIP’s benefits significantly outweigh its pitfalls. If implemented, the EU will receive economic gains to the tune of €119 billion a year, which translates on an individual annual gain of €545 “in disposable income each year for a family of four in the EU”.  However the final shape of the TTIP will ultimately depend on the following factors: the influence exercised by big firms and large corporations over negotiations which entail the harmonization or – in a compromised scenario – the mutual recognition of different regulatory standards on either side of the Atlantic; the equal ground for the two negotiating parties in terms of both technical expertise and economic prowess in a determinate policy area; and the unforeseen impact of external events on the global landscape.