by Michelle Egan,
American University of Washington (AU)
March 20, 2013
The long-heralded effort for a US-EU free trade agreement (FTA), furthering trade and investment ties between the world’s two major economic partners, made a major step forward with President Barack Obama’s State of the Union speech. Obama announced that he would seek negotiations for a comprehensive Transatlantic Trade and Investment Partnership (TTIP) with the European Union. European Council President Herman Van Rompuy and European Commission President José Manuel Barroso issued similar statements the next day. This is both a major initiative for EU-US relations and an upgrading of perceptions of the EU within the US, following a 2012 US election campaign that featured more than a few disparaging remarks on the euro crisis and the EU’s ‘socialist’ regulatory model.
It does not, however, assure that a TTIP will ultimately be realized. Nor is it a departure from Obama’s longstanding trade agenda. The announcement comes on the heels of the North and Central American Free Trade Agreements (NAFTA and CAFTA, respectively) with Mexico and the small Central American countries, as well as continuing negotiations over a Trans-Pacific Partnership (TPP) The US has signalled its interest in these regional arrangements as the World Trade Organization (WTO) Doha round on global trade liberalization has all but stalemated. Recent steps by other countries, including China, Singapore, and South Korea, to move forward with regional and bilateral trade agreements places even more pressure on the US and Europe to follow suit.
Talks between the US and EU began in November 2011 after leaders on both sides asked a High-Level Working Group on Jobs and Growth, co-chaired by EU Trade Commissioner Karel De Gucht and US Trade Representative Ron Kirk, to produce an assessment of the potential for a transatlantic free trade agreement A final report in February 2013 advocated for a comprehensive agreement to support growth, competitiveness and general improvement in the performance of their respective economies through reduction in tariffs, increased regulatory cooperation, and reduction of non-tariff barriers in goods, services and investment. A US Chamber of Commerce report indicated that a trade pact removing half of nontariff measures would add 2-3 percent of gross domestic product (GDP) growth on either side of the Atlantic. While the sovereign debt crisis in Europe and sluggish economic conditions in America have weakened transatlantic cross-border trade and investment flows in the last few years, the economic relationship still remains the most significant in the world. In terms of trade in goods and services, a Center for Transatlantic Relations study indicates that the US-EU economic relationship generates 5 trillion dollar commercial sales per year, and accounts for unrivalled foreign investment ties. In 2011 Europe still absorbed 55 percent of US foreign direct investment (FDI), although EU FDI to the US recorded a 28 percent drop in early 2011, impacting trade, investment and corporate earnings.
Obama’s address and subsequent administration statements make clear that the TTIP will be pursued even as the US moves forward with the TPP agreement as part of a broader geopolitical goal of creating a counterweight to China in the region through a major trade bloc with its Pacific partners. The TPP negotiation could have a significant spill-over effect on the prospective transatlantic negotiations. The US is pushing for market access in services to be as substantial as that in goods, and promoting significant trade and investment rules in the TPP. US agricultural groups are also pushing the administration on ensuring dispute settlement measures in TPP to address potential problems in the sanitary and phytosanitary (SPS) area which is likely to reoccur in any subsequent US-EU trade deal, as there are deep differences between Europe and the US on the issue. The scope of the TPP is therefore an important indication of what is to be expected in negotiating a transatlantic trade agreement, as well as of the difficulties the US and the EU are likely to confront
That said, the political climate seems today more forthcoming than in the past, as key European leaders such as German Chancellor Angela Merkel and British Prime Minister David Cameron have indicated strong support for the TTIP. Cameron has also signalled that the launch of trade negotiations between the US and the EU will be a priority during Britain’s tenure as chair of G8. A recent meeting of the Transatlantic Legislative Dialogue, which comprises members of the European Parliament (EP) and the US Congress, saw the EP delegation making a strong pitch to their Congressional counterparts for moving forward with negotiations. The US Chamber of Commerce and Business Europe have also stressed the benefits that would come from such an agreement in terms of growth and investment. Even the AFL-CIO, the powerful US trade union federation, which has historically not been fond of trade deals, has come out in favour, since the relative homogeneity of US and EU economies implies that a trade agreement would be unlikely to trigger downward wage pressures on US workers. A Business Coalition for Transatlantic Trade has been recently established to bolster support for pursuing negotiations.
At the same time, several groups have expressed concern about the scope of the agreement. Richard Stallman, the American Farm Bureau president, said that “We are willing to tell the [US] administration we’ll go see, but understand that the EU has to have their agriculture, their SPS rules on the table.” While the US farm lobby can be expected to push for the inclusion of agriculture in the deal, the Obama administration has signalled that more needs to be done on the part of the EU on sanitary and phytosanitary (SPS) issues to alleviate the concerns of important stakeholders in the agricultural community. Several prominent US Senators including Finance Committee Chair Max Baucus (D-Montana) have echoed these concerns. The EU has also identified measures it wants to promote in any negotiations, most notably the liberalization of American government procurement contracts, especially since the US has put public infrastructure spending at the centre of its economic stimulus packages. The EU wants to ensure that domestic suppliers are not favoured unfairly over foreign bidders through specific ‘Buy American’ provisions.
A pessimistic observer of US-EU relations might note that earlier agreements have failed to substantially deliver improved market access. Europe and the US have been trying to improve regulatory cooperation for almost twenty years, with a host of initiatives and proposals that have often highlighted sensitive differences from genetically modified food to electronic data flows. Yet as globalization advances, the transaction costs related to border controls, and regulatory differences continue to restrict market access and hinder trade. With the growth of global logistics and supply chains, firms on both sides of the Atlantic are seeking broader trade deals that go far beyond traditional trade agendas. If Europe and the US can move forward in fostering cooperation on information and network security, as well as addressing issues ranging from counterfeiting to piracy and intellectual property rights protection, they could lay the groundwork for new rules that address an expanding set of trade issues that have not yet been fully exploited.
An ambitious deal would include several elements that have long been on the transatlantic agenda but never fully implemented. Liberalization of trade in services in telecommunications, utilities, insurance, advertising, computers and finance would be globally significant. Services account for around 70 percent of both the US and EU economies. This might also push further liberalization within the European single market where the potential for services liberalization has not yet been fully harnessed. One option would be to extend the EU regime where such cross-border provision would be on a national basis and therefore subject to domestic regulatory requirements of the jurisdiction where the service is consumed. Given the huge amount of trade between the US and the EU, reduction of tariffs on goods, even if they are historically very low, would still produce a substantial increase in terms of annual GDP: by almost 1.5 percent in the US and by almost 0.5 percent in Europe, according to ECIPE estimates. There are sizeable gains from tackling existing tariffs, but negotiations for a zero tariff agreement will be difficult, as there are a handful of sensitive agricultural products on both sides, as well as steel and textiles in the US, that will be contentious. Simplification of customs procedures would also ease market access.
Mutual recognition of standards and regulations would aid businesses in avoiding duplicative certification and licensing approvals. Divergent regulations and standards can result in market entry barriers due to differences in process and production standards. Addressing the market distortions due to differences in regulatory and administrative procedures would yield substantive benefits not only in terms of bilateral trade but also in shaping global rules, especially in new areas such as nanotechnologies, green technologies, cyber security, and electronic commerce. This is not easy as responsibility for regulation is often divided between EU and national levels, and between the federal and state governments in US.
While the US and the EU may agree on core issues such as zero tariffs, and liberalization of services and investment in principle, they are still far apart on other issues. Since tariffs on goods are already low, we can expect to see reductions going as far as to eliminate tariffs altogether to yield some substantial gains. But the real benefits for business would accrue from promoting regulatory cooperation with early consultations on significant regulations, impact assessment, upstream regulatory cooperation, and good regulatory practices. However, Europeans should heed the lessons drawn from the TPP, where after three years of negotiations the lack of progress is viewed by some as the result of the US tough negotiating stance on regulatory issues. The US has preferred to export its own regulatory model to third countries in many of the trade agreements it has concluded. The launch of transatlantic trade negotiations will be a key test in this respect as Europe has also followed a similar trade promotion strategy. What is clear is that prospective negotiations will not be the same as the transatlantic free trade area (TAFTA) proposed in the 1990s (and never realized), as both sides realize that this will be a more limited sector-by-sector deal. One thing is clear though, addressing the prevailing deep-seated variation in regulatory policies may be a very powerful instrument for domestic reforms. This is where the largest potential growth and trade benefits exist, but also where striking a deal will take much longer time, given that it will require bringing regulatory agencies on board as there are significant legal and political factors involved in administrative law and rule-making that impact regulatory cooperation efforts.
Despite the opportunity to boost sluggish growth through a new trade initiative, the need for Congressional ratification will require any US-EU agreement to be passed by either a regular legislative procedure if there is sufficient political support or through fast track authority which is potentially more difficult, but prevents additional amendments being added during Congressional ratification. Though both sides reportedly hope to begin formal negotiations as early as possible in 2013, previous negotiations suggest that they will be long and difficult and could also be impacted by the US electoral calendar.
Speaking to his Export Council on 12 March 2013, President Obama said that he is “modestly optimistic that we can get this done” due primarily to greater European recognition of the need for growth measures at a time of fiscal austerity in the euro zone. He said this made the Europeans ‘hungrier’ for a deal. But Obama also acknowledged the longstanding agricultural and other national interests that, from the US perspective, have prevented agreement in the past, and added that ultimately the negotiations will be a “hard slog.” He did not mention the agricultural, SPS, and other concerns on the US side.
Still, prospects for a US-EU transatlantic trade and investment deal are more realistic today than at any time in the past decade, with high profile political support and a clearer path to approval in both the US and EU political systems. In principle it is a winner for both sides. The question is whether the same level of political support will be maintained as the details are hammered out. Can it survive the hard slog?