The problem with TTIP

L Alan Winters 22 May 2014

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Much attention has been focused on the Trans-Atlantic Trade and Investment Partnership (TTIP) that the EU is currently negotiating with the US. Most economists cheer this development, but I regret it – it is a pity that it has emerged.

  • Plausible estimates suggest that a realistic agreement might add about 0.025% to EU GDP; an ‘ambitious’ agreement might add 0.05%.
  • Gains to the US are around the same level.

These benefits, which are probably understated, are not to be sniffed at, but they are not to be sought at any risk. And the risks associated with the TTIP are substantial.

TTIP, TPP and US foreign and economic policy

The EU has made most of the running in seeking TTIP – for reasons I shall come to below. But I believe that one has to view it primarily in the context of a particular US foreign and economic policy package.

  • The most visible and advanced element of this US package is the Trans-Pacific Partnership (TPP).

The TPP is a deep international integration arrangement between the US and 11 other Pacific states, which would cover 40% of world GDP and over 30% of world trade. It seeks to address as series of issues that 21st century commerce, but arguably its most obvious feature is that it excludes China – the world’s largest international trader and before long the world’s largest economy. There are, of course, the ritual genuflections towards ‘open regionalism’ – China can join if only it will agree to the necessary policy requirements – but this is about as much use as saying the Chief Rabbi can dine with you while insisting that the menu contains pork.

In my estimation, the risks of (deliberately or otherwise) excluding China are too great for a maximum expected return of perhaps 1% of GDP – nine months’ normal European economic growth.

  • By signing TTIP Europe would be tying itself to a static rather than a dynamic part of the world economy and substantially reinforcing the US’s exclusionary policies.

TPP alone is a threat to the multilateral world trading system, which has served the world so well over six decades, but coupled with TTIP the threat is much stronger – indeed existential. This note spells out why this is and makes some suggestions about what else Europe might do that would be more constructive.

The Origins of TTIP

Trans-Atlantic free trade has been talked about since the 1960s and has proceeded on and off since then, with, for example, the Trans-Atlantic Economic Council, established in 2007 to consider regulatory issues such as energy efficiency and nanotechnology. But it became an important priority for the EU in 2012 for two sets of reasons.

  • First, with the slow recovery from the financial crisis thoughts returned to the 1980s when, faced with similar worries, the European Commission proposed the Single Market Programme, as an imaginative way of stimulating economic activity.

While complete proof is difficult to provide, it is widely accepted that the deeper intra-European integration fostered by the Single Market initiative was a major contributor to European prosperity between 1992 and 2007. Deeper integration with the US, it is argued, might offer the same in the 2010s.

  • Second, with the US’s ‘pivot’ towards Asia and the huge TPP in the offing, Europe suddenly feared being left on the side-lines of global political and economic affairs.

Negotiating a trade agreement, which in principle could go further than the heterogeneous TPP, seemed to offer a partial solution – and besides, trade agreements are almost the only tool over which the European Commission holds undisputed sway.

For the US, TTIP offered two attractions. It would:

  • reinforce the TPP and ensure that global opposition to it was muted; and
  • offer a chance, perhaps, to open some sensitive EU markets such as for genetically modified foods or hormone-treated beef.

However, it is generally accepted that TTIP is more important to Europe than to the US, which greatly strengthens the US’s hand in negotiations.

TTIP as a child of TPP

Given that TTIP is essentially the child of the TPP, we need to consider what the latter entails. Of course, we cannot know for certain, partly because negotiations are not complete, but mainly because the negotiations have been pretty effectively kept secret. One can identify several possible motives for the US proposing the enlargement of the Pacific-4 Agreement into TPP in 2008 and for its particular structure. For example, it may have been an attempt to revive the flagging Doha Round in the WTO; or an attempt to re-interest US business in international trade policy, which was necessary because it had expressed next to no interest in the Doha Round; to some, the TPP would counter China’s growing influence on East Asian countries within the world trading system; and for others it was a way for President Bush to embarrass the Democratic Party because they would have to choose between a pro-business position (supporting TPP) or a pro-labour one (opposing it). Virtually all Americans agreed, however, that it was a chance to bind a significant number of partners in to the US conception of economic policy.

Petri et al. (2011) show how the trade agreements signed by the US are far deeper than the more traditional shallow agreements already signed by various Asian countries and the proposed Regional Comprehensive Economic Partnership under negotiation by sixteen Asian including China. For example, US agreements provide for stronger liberalisation of agriculture, government procurement and e-commerce, much stronger intellectual property protections, significant labour clauses and significant restraints on state-owned enterprises. Progress in these dimensions is necessary if the TPP is to offer significant economic benefits because much of the trade it would cover is already subject to tariff and often other preferences (e.g. via US agreements with Australia, Canada, Chile, Mexico, Peru and Singapore, ASEAN, P-4). But they are also very strongly in the US’s image and interest.

Most of what the US model entails is actually sound policy and many TPP countries will benefit considerably by adopting it. So what is the problem? In the areas that are sound, it is mainly that TPP members will probably have to approach the US norms faster than desirable, and possibly faster than they can effectively administer. But there are also areas in which the TPP is not in the interests of most non-US members. Reports are that TPP intellectual property protections will be even stronger than in the US-Korean Free Trade Agreement, which is well beyond the WTO’s TRIPs. They give considerable advantages to the current owners of intellectual property and probably hinder the development of alternative loci of innovation. The US has strongly promoted Investor-State Dispute Arbitration in which foreign-owned private firms can seek settlements against governments for taking actions that are not prohibited by the agreements but which reduce the value of investments that the firms have made in member countries. This offers such firms more rights than local firms have and compromises the policy sovereignty of member states. For states that do not have a lot of, say, social or environmental legislation at the time TPP is signed, Investor-State Arbitration threatens to make progress in these dimensions difficult.

TPP, TTIP and the world trading system

Once the members of TPP have accepted these norms, they will naturally press, along with the US, for other countries to adopt them. If the TPP is signed – as the proponents hope will occur this year – it will become very hard for countries to sign agreements with the members that do not go so far. If China, India or Brazil felt that these disciplines were too arduous or just did not fit, the world trading system would be effectively be split with arguably the most dynamic areas excluded. And given that the TPP would be attractive to smaller economies and that the latter would probably be offered quite accommodating terms, the split would probably deepen rather than the opposite.

All of these effects would be even more marked if the other current locus of economic weight - Europe – were part of the coalition, and that in my view is essentially what TTIP implies. The agenda of TTIP has many parallels with that of the TPP and seeks to go further with deeper agreement on regulatory issues. In addition an avowed aim is ‘contribute to the development of global rules that can strengthen the multilateral trading system’ (USTR 2013) and ‘to enshrine Europe and America's role as the world's standard-setters’ (White House 2013). This reads very much like an agreement to cooperate to make sure that outcomes in the trading system are as the US and EU want them – and with around half of world GDP between them and a further 15% in the rest of TPP, it suggests that the choice facing other will be capitulation vs. exclusion. I fear the latter.

The rhetoric surrounding TTIP is to create a framework for the gradual harmonisation of regulations, first across the Atlantic and then generalising out for the global good; this view is accepted by many of my colleagues and indeed sounds quite benign. The problem is that, while a benign outcome cannot be guaranteed, one can guarantee that the countries that are outside the club will perceive it quite differently and may act accordingly. It is also true that neither TPP nor TTIP faces an easy ride; for example, plenty of Europeans are worried that TTIP will undermine European regulatory traditions (such as a fairly heavy reliance on the precautionary principle). I would rate the chances of their being created in any effective form as less than half. Thus maybe all this discussion is moot. But, just in case, let me re-iterate that the estimated economic returns of TTIP to Europe are not large, and I, for one, am not convinced that they are worth dicing with the multilateral system for – even in its current rather sickly and compromised form.

So what should we do?

There are alternatives to TTIP. Three things that can and should be done are:

  • Champions of the multilateral system must be much more explicit about its virtues and value – and among these I include Europe (middle-sized countries with a strong belief in negotiated outcomes and order) and China (which has been a massive beneficiary of open markets and non-discrimination to date).

This may involve making a few more compromises in the multilateral context, for example offering more to finish off the Doha Round, but so be it.

  • Europe had better get on with an internally driven liberalisation, especially of services and utilities markets, to stimulate the recovery quite independent of the outside pressures of a trade negotiation; and
  • While I do not like discriminatory arrangements much in principle, let Europe and China discuss a trading arrangement seriously while TPP and TTIP remain uncompleted.

They are already discussing a Bilateral Investment Treaty – although perversely these negotiations have a very low public profile in Europe – and it would be easy to enlarge that effort if only Europe’s strategists would recognise the need.

Note: The author is grateful to Joe Francois, Bernard Hoekman, Jim Rollo, Andre Sapir and Zhen Kun Wang for comments, but do not implicate them in any of the arguments presented here.

References

Petri, Peter A., Michael G. Plummer, and Fan Zhai. (2011), "The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment", East-West Center Working Paper Economics Series ; no. 119.

USTR (2013), Statement from United States President Barack Obama, European Council President Herman Van Rompuy and European Commission President José Manuel Barroso, United States Trade Representative, 13 February.

White House (2013), Remarks by President Obama, U.K. Prime Minister Cameron, European Commission President Barroso, and European Council President Van Rompuy on the Transatlantic Trade and Investment Partnership, Lough Erne, Northern Ireland, 17 June.

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Topics:  International trade

Tags:  US, EU, trade agreements, TPP, TTIP

Professor of Economics at the University of Sussex and CEPR Research Fellow