TTIP: The End of Multilateralism?

Date: October 29, 2013

TTIP: The End of Multilateralism?

The long-awaited US-EU free trade agreement, recently launched under the name “Transatlantic Trade and Investment Partnership,” promises to be the mother of all regional free trade agreements. But what will it mean for the future of the WTO and the G-20’s call for strengthening the multilateral trading system? Will it sound the death knell for multilateralism, or will it serve as a much-needed shot in the arm to get the global trading system back on track?

TTIP: unprecedented in scope and magnitude

The TTIP is one of a trifecta of major free trade agreements that President Obama is betting his legacy on. Together, the three represent the most ambitious trade agenda pursued by any US administration in recent memory. They include: (1) negotiations for the Transpacific Partnership (TPP) with key Asian and South American countries, including Canada, Mexico and Japan; (2) the TTIP, negotiations on which have just been launched with the EU; and (3) negotiations in Geneva on the International Services Agreement and expansion of the Information Technology Agreement.

The good news is that, of the three, the TTIP is likely to garner the most bipartisan support from the US Congress. This is because EU nations have at least as high, if not higher, labor standards and environmental protections as the US. Moreover, unlike other trading relationships, US trade with the EU is largely balanced, with $463 billion in US exports to the EU in 2012 and $534 billion imports from EU member countries, according to the US Mission to the EU. 

Never has there been such an attempt to negotiate so ambitious a free trade agreement of this magnitude. According to USTR, European Commission, and US Congressional hearing figures, the TTIP will dwarf any previous trade agreement. Together, the US and EU account for almost half of the global output of goods and services and almost a third of global trade, reaching roughly $1 trillion annually. Two-way foreign direct investment between the US and the EU’s 28 member countries has reached $3.7 billion. Importantly, 70% of job-creating foreign investment in the US is from Europe, and US exports to the EU support more than 2.2 million American jobs. EU affiliates in the US employ more than 3 million jobs. As an example, American companies invest more in Ireland than in China, India, Russia, and Brazil combined, according to the Irish Investment Board. So the stakes are enormous.

Trade experts agree that the TTIP’s agenda is the most ambitious of its kind, as it will cover the most sensitive remaining barriers to free trade between the EU and US: tariffs, services, investment reforms and protection, government procurement, strengthened rules on sanitary and phyto-sanitary issues, intellectual property rights, trade facilitation, competition policy, labor, and the environment.

Another unique aspect of the TTIP is the high degree of integration that already exists between the US and EU. This is seen in the high intra-firm trade between US and EU parent companies and their subsidiaries, accounting for some 40% of trade between the two trading partners. Annual transatlantic sales between foreign affiliates in US and EU markets exceed $4 trillion per year, according to the US Chamber of Commerce in Washington DC. 

Rebalancing the US pivot to Asia

Beyond trade, US and EU officials stress the geopolitical significance of the TTIP. At a time when many in the EU worry that the US pivot to Asia will diminish the importance of the transatlantic relationship, the launch of the TTIP sends a clear message that the US wants to reinvigorate relations with the EU with which it shares such core values as democracy, free speech, respect for human rights, and the rule of law. 

In a speech last year, the former EU High Representative for Common and Security Policy worryingly pointed to a US National Intelligence Council report entitled, “Global Trends 2030: Alternative Worlds,” in which the authors wrote that, if current trends continued, Asia could soon surpass North America and Europe in global power. The report estimated that Asia would have a higher GDP, larger population, higher military spending, and more technological investment. In such a geopolitical context, the EU and US need each other more than ever, the argument goes, making transatlantic cooperation even more crucial.

Proponents argue that the US and EU need such a major project to remind them of the importance of the transatlantic relationship and of their shared capacity to shape events. The TTIP is that something, which supporters hope will replace the glue that was lost at the end of the Cold War. It may also serve as a symbol to help persuade electorates and businesses on both sides of the Atlantic that their governments are doing something to restart their economies.

Devil in the details

Despite both the economic and political importance of the TTIP, negotiations are expected to take years, as trade officials will have to tackle a range of tough issues that have stymied other attempts in the past. But they are optimistic these can be resolved.

Take tariffs, for starters. The US-EU High Level Working Group that did the groundwork for the TTIP recommended “substantial elimination of tariffs upon entry into force, and phasing out all but the most sensitive tariffs, within a short time frame.” Tariffs between the US and EU now average only around 3%, which means there will be a large payoff if tariffs are reduced further because the volumes of trade are so huge. Reducing even small tariff barriers can yield significant gains. According to a 2010 European Centre for International Political Economy study, “A Transatlantic Zero Agreement, Estimating the Gains from Transatlantic Free Trade,” eliminating transatlantic tariffs would boost EU exports by 17% and US exports by roughly the same amount within five years, adding some $180 billion to their combined GDPs.

While the average tariff level in transatlantic trade is low, those on agricultural products are still relatively high, and even in the manufacturing sector there are high tariffs on some products, e.g., automobiles and apparel, which is why tariff reduction is being seen as low hanging fruit. A November 2012 Bloomberg Government Study estimated that US firms pay some $6.4 billion in tariffs to the EU, money that could be used for investment and jobs. One former US trade official has stated that substantial tariff elimination would provide as much benefit to US companies as the entire deal tabled at the Doha Round1.

Another area of challenge will be in services. The US-EU High Level Working Group agreed that both sides shared a common commitment to “bind the highest level of liberalization that each has achieved in trade agreements to date.” As both the EU and US are increasingly service-oriented economies, a major focus of the TTIP will be on creating new market access opportunities and harmonizing regulatory policies across different sectors, such as finance, insurance, and telecommunications. The transatlantic business community is giving high priority to services, given the need, especially, to avoid fragmentation of US and EU financial services markets and to buttress similar efforts in the G-20.

Companies on both sides of the Atlantic are also pressing for a strong intellectual property chapter in the TTIP, one with positive commitments on patents, copyright, trade secrets, and other forms of IP in light of its criticality to economic expansion, innovation, and competitiveness. According to the Atlantic Business Council, IP-intensive industries are linked to roughly 35% of US GDP and 30% of all US employment. The EU is no less reliant. An IP agreement in the TTIP would also strengthen IP standards globally. 

Public procurement is a key area of potential enormous gain. The Washington DC-based Peterson Institute for International Economics has recommended that the US should liberalize its federal “Buy American” preference as part of a broader effort to expand coverage of federal, state, and local procurement. The WTO Government Procurement Agreement currently covers only 3.2% of US government procurement, while the EU has opened about 15% of its government procurement market, according to a 2011 European Commission report.  

Big challenges lie ahead

While both sides want to capture the enormous gains by concluding the TTIP, trade officials are under no illusion that this will be an easy road. The sheer complexity and breadth of the issues, combined with the different regulatory approaches in several key areas, mean a lengthy set of negotiations before reaching a truly comprehensive agreement. Three major issues could be deal breakers or cause the negotiations to drag on.

The first relates to the different structural or political systems governing both sides of the Atlantic. For example, negotiations with the EU involve not only the European Commission, but also have to factor in the individual interests of each of the EU member states. On the US side, the continued lack of Trade Promotion Authority could make agreement difficult and perhaps impossible to conclude. The EU will simply not want to renegotiate a complex agreement all over again with the US Congress. At some point, sooner rather than later, the EU will need to see that its agreements with the executive branch will also be accepted by the US Congress.  Only renewal of Trade Promotion Authority can do that, and it will need to encompass all of the Obama Administration’s trade initiatives, not just TTIP.

Another challenge will be in agriculture. This has been a difficult issue for years, at times intractable, but there is cause for optimism. For example, during the Doha Round trade negotiations, the US and EU reached tentative agreement on eliminating export subsidies, and domestic agricultural subsidies have also been significantly reduced in recent years due to budget pressures. The EU has already moved away from product-based subsidies to income support for farmers. While this is expensive and not related to production, it is not trade distorting.

A larger benefit is that, if the US and EU were to agree to agricultural subsidy reductions, their agreements and concessions could be taken to the WTO and offered on a multilateral basis to all WTO members. If other countries refused to sign on, they would end up at a competitive disadvantage for their agricultural products in the two largest markets in the world.

Perhaps the biggest challenge the TTIP faces is in harmonizing differing regulatory approaches. In a 2009 study, “Non-tariff Measures in EU-US Trade and Investment,” the EU estimated that aligning and rationalizing transatlantic non-tariff measures would create $158 billion in additional GDP and an additional 2% in exports to the US. It estimated that the US would gain over $450 million in annual GDP and 6% more in annual exports to the EU in electrical goods, chemicals, pharmaceuticals, financial services, and insurance. 

But both sides have had only minor successes in negotiating regulatory issues in the past. In the 1990s, the US and EU concluded a number of Mutual Recognition Agreements, but found that doing these on a sector-by-sector basis was time-consuming, with small payoffs. To succeed, US and EU regulators will need to have confidence that each side’s regulatory standards are adequate to protect their publics and therefore should be accepted.

At the end of the day, however, it is highly probable that not all regulatory issues will be resolved during the initial negotiations. But this should not derail the larger TTIP from going forward. What the agreement should aim for is reducing regulatory disagreements, duplication, and contradictions. This is an area that is likely to remain imperfect and one that will require continued attention to ensure further progress and cooperation.

Is the TTIP the end of multilateralism? 

If the WTO Doha Round is already dead, then the TTIP is simply putting a nail in the coffin. Such is the view of a number of economists and trade experts. They see the TTIP as a reflection of a changing landscape in global trade, where the US and EU will have more leeway to set rules of the road for industries that matter most to them, such as intellectual property and services. Emerging markets such as India and China will simply have to respect the new trade regime if they want access.

For some, the TTIP is another barometer that we may be seeing the end of the movement toward truly global free trade. With Doha effectively dead, the TTIP, together with the TPP, is signaling that bilateral trade deals will be the norm. The TTIP is also demonstrating that the BRICs may not be quite as influential as many had thought. A US-EU trade deal of this magnitude is essentially a way to ignore countries like Brazil and India, while crafting rules that govern some of the high-tech industries and information-based services that play a growing role in transatlantic trade and trade between other advanced nations. Once the rules are set, the BRICs could be hard pressed to avoid signing onto them down the road.

But not everyone is convinced that the TTIP deal can be pulled off. The former Director for International Trade at the World Bank said in March that he was “skeptical” that a deal could be reached, citing the complicated nature of the negotiations and the divided political forces on both sides of the Atlantic. He predicted that, even if a deal were to be reached, it would not happen before the end of the Obama Administration and that it would deliver a lot less than it is promising. He lamented, nonetheless, that if negotiations succeeded, the TTIP would “drive a stake in the heart of the moribund Doha process, and leave the WTO – the core of the multilateral trading system – still searching for relevance.”

The TTIP, in such as case, would then hold several important systemic implications for world trade. One would move the world toward adopting a common US-EU standard. Developing countries might strongly resist, but there will naturally come a point when every country converges toward the TTIP. Countries will be faced with the simple fact that if they want to export their products and services to the largest free trade area in the world, they will have to meet its common standard.

A contrarian view, however, believes that the TTIP could, in fact, resuscitate WTO negotiations by creating an impetus for countries to make further concessions, rather than be locked out of big trade agreements. A Doha agreement based on US and EU interests and standards may contradict its ostensible purpose as a “development round,” but developing countries would not benefit from being excluded from preferential access to the world’s largest markets either.

The larger emerging markets, in particular, could feel added pressure to make headway on new trade initiatives, whether in the WTO or outside it. For example, the TTIP could inspire them to seek new bilateral trade deals with the US and EU, or force a shift in their stances on the Doha Round, making them more accommodating and supportive of a multilateral deal. Some experts say that, if the political will is there, the TTIP could become a template to restart global trade talks in several difficult areas, from agriculture to cross-border rules on services, investment, and regulations.

G-20 calls for strong outcome at WTO talks, but is anyone listening?

The joke going around the recent St. Petersburg G-20 Summit was that while leaders were delivering eloquent speeches calling for the reinvigoration of  multilateral trade talks, the real work was going on in back rooms where trade officials were busy discussing the latest bilateral free trade agreements. 

As is its usual custom, the G-20 Declaration, together with statements from both the US and EU delegations, all reiterated their support for a strong outcome at the next WTO Ministerial to be held in Bali in December. Both the White House and EU statements stressed the importance of the WTO’s work on trade facilitation and a standstill on new protectionist measures. Their respective statements were brief and not more than two short paragraphs dealing with trade. And while the G-20 called for a better understanding of regional free trade agreements, it is unlikely to have any impact on their popularity. Critics of the G-20 say leaders again missed an opportunity to make clear commitments or propose concrete policies and better ways of cooperation.

TTIP: model for democracies

Whether you are a supporter or detractor of regional free trade agreements, there is no denying that the US and EU have just embarked on a truly historic effort. Much is at stake economically and politically. The TTIP’s advocates proclaim that the agreement will stand as both a landmark and a model for what democratic economies can achieve to foster greater job-creating trade and investment around the world.


1The Doha Round

The WTO aims to help trade flow more smoothly and predictably. Its work is two-pronged: lowering trade barriers and writing rules for maintaining trade barriers and for other trade policies. Both are the result of rounds of negotiations among governments since the 1940s. The Doha Round is the latest round of trade negotiations among the WTO membership. Its aim is to achieve major reform of the international trading system through the introduction of lower trade barriers and revised trade rules. The work program covers about 20 areas of trade. The Round is also known semi-officially as the “Doha Development Agenda,” as a fundamental objective is to improve the trading prospects of developing countries. The Round was officially launched at the WTO’s Fourth Ministerial Conference in Doha, Qatar in November 2001. Key issues include agriculture, services, market access, trade facilitation, rules (e.g., subsidies), intellectual property rights, and dispute settlement. Decisions are by consensus, which means any agreement must be a “single undertaking.” The next WTO Doha Round Ministerial will be held in Bali December 3-6, 2013.

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