Are we ready for a transatlantic marketplace? Patphelan1; Rock Cohen

With the rising importance of global production chains and international firms, the logic for a transatlantic agreement seems compelling. The EU and the US enjoy the most integrated economic relationship in the world, and both account together for about half (47%) the entire world GDP and for nearly a third of world trade flows. Both countries need new sources of grow, and see the Agreement as an incentive for their economies. 

Although the EU and the US are relatively open towards each other in terms of investment and trade (as reflected in relatively low levels for tariffs), there are several forms of domestic regulations on both sides of the Atlantic that still constitute important impediments to transatlantic trade. Whereas Europe champions openness, the US and other commercial partners are increasingly passing protectionist laws at home, like the American Recovery and Reinvestment Act of 2009,  which generates a protectionist-like outcome. 

Back in autumn 2012, the EU and the US initiated a formal dialogue in order to deepen transatlantic trade relations. On the 13th February 2013, they both agreed to launch negotiations on a Transatlantic Trade and Investment Partnership (TTIP), presented as the largest bilateral trade agreement ever negotiated. 

Both economies are big, and bilateral trade is to a large degree composed of intra-firm trade, but tariff barriers for both regions are now an average of 4%. Although in some areas like textiles, sugar and agriculture are much higher, for these sectors are submitted to special regimes, encompassing a variety of political instruments. If negotiations would be successful, this EU-US agreement would be the biggest bilateral trade deal ever, and it could add around 0.5% to the EU's annual economic output (the static effect on GDP from a transatlantic zero-tariff agreement is estimated to be 0.01 percent for the EU, while dynamic gains are estimated to be 0.40 percent for the EU (according to this report from 2010)). 

What is the logic behind this Partnership?

This is not the first time this economic project is being put forward. Clinton launched the New Transatlantic Agenda in 1995 to create mutual recognition agreements to establish a free trade area. Bush, in 2007, worked to create the Transatlantic Economic Council together with Germany in order to gradually break down the regulatory barriers between the two markets. Obama has also made his political will clear. What makes the transatlantic deal difficult is that the Americans and Europeans collide in terms of regulatory policies. 

While in the United States the cost-benefit analysis prevails, in Europe product's safety and consumer rights are more relevant, meaning that the EU puts the emphasis on the process. This is clear in the agricultural policies (for example the restrictive EU regulations for genetically modified food), in online contents, cybersecurity and data protection (see, for example, the recent Google and facebook conflicts), emissions standards, and investment protections and investor-state dispute settlement. These are highly politicized issues. So the logic behind the deal is not just economic, but also political. 

A big issue is the cross-recognition of standards, and we will see whether the US negotiators will agree to provide an equivalent level of protection for their consumers. US Organic Industry has already praised US-EU Partnership in organic trade, for it will recognize the two organic programs as equivalent and allow access to each other’s market. 

In spite of this, in light of the eurocrisis, some EU leaders are more prone to adopt market-based stimulus and are working to overcome the mistakes that had prevented past deals. In order to reach a deal, all the Member States should agree on the terms. How well this process works remains to be seen, keeping in mind there are strong national interests in key sectors, like agriculture and energy. 

What can we really expect from this deal?

Another question is whether this agreement will be good from the point of view of the development of the EU single market, bearing in mind the EU is the most open commercial area in the world. An agreement with the US should not be used to justify public aids to economic sectors. And most of all, it should end the bilateral agreements between the United States and the different Member States, which are based on national preferences, and undermine the Single Market project and the prospect of the EU as a single voice. The harmonization of rules and standards is another crucial issue to deal with, so that the EU will be legally able to oppose subsidies and disguised protectionism in the American industrial sectors. The answer for Europe should not be to carbon copy the American protectionist acts to protect the interests of their businesses. Big issues are at stake, like how the EU could cope with a Community market flooded with imported products. 

The elimination of tariffs alone could remove impediments to transatlantic trade, but beyond free trade, the real gains from the deal would come from regulatory cooperation. Transatlantic business would flourish, for example, if German cars that passed safety inspections in Europe also met standards appropriate for American drivers.

Global relevance: Towards a new era in global trade?

Recently the United States has shown interest in creating a strong western trading area to counterbalance Asia. Washington is negotiating a separate Asia-focused free trade pact, the Trans-Pacific Partnership (TPP) in order set rules on behind-the-border barriers to trade. The EU is facing geopolitical problems particularly with Russia; despite it signing a Partnership Agreement with the EU in 1997 (the EU is the most important investor in Russia). After the Russia–Ukraine gas dispute of 2009, Russia has threatened to review the fundamentals of its relations with the EU, because it considers Ukraine as a threat to Moscow's interests. Moreover, Russia has recently banned live imports of EU animals, and applies a recycling fee on imported cars. In this context, the EU sees a transatlantic pact as a geo-political counter-balance to the American-Asia Alliance.

Some may argue that a successful deal would give the US and the EU greater influence in the international order, now, that the OECD predicts hat China will become the largest global economy by 2016. So it has to be seen who keeps the capacity to set the terms of global trade, meaning who will be able to take the lead in terms of global economic governance. However, it is difficult to predict if this will mean the end of the Doha rounds, which have not delivered as expected, with important gaps in terms of harmonisation. One of the main ideas behind the EU-US Trade Agreement is to assert European leadership in standard setting and rule making.

Promises and pitfalls of the deal

Now the Commission has requested the Member States’ green light to open negotiations to expand transatlantic trade and investment as soon as possible. The ideas suggested by the Commission include: a) elimination or reduction of conventional and non-tariff barriers to trade in goods, services and investment; b) enhanced compatibility of regulations/standards; c) enhanced cooperation for the development of rules and principles on global issues.

But are these realistic measures in order to build a transatlantic union? Some argue that these developments may put the EU single market and the collective security at risk. Negotiators in the United States and Europe aspire to make the TTIP the most advanced economic agreement in the world, including alignment of their regulations regarding manufacturing and services (online intellectual property as well) and elimination of almost all barriers to foreign direct investment. 

Undoubtedly, an ambitious and comprehensive trade agreement could bring significant economic gains as a whole for the EU and US (around €100 billion a year). Liberalising trade between the EU and the US would have a positive impact, as long as rules place a cost on trade. As much as 80% of the total potential gains come from cutting costs imposed by regulations, as well as from liberalising trade in services and public procurement. 

The most likely scenario is that some tariffs will be removed, but it is not realistic to assume that all barriers and costs from regulatory divergence will be removed. There are narrow and comprehensive scenarios regarding elimination of tariffs, the regulatory convergence and spill-overs. Direct spill-over is based on the assumption that the streamlining of regulations and reduction in regulatory burdens benefit other exporters to the EU and US. On the other hand, indirect spill-over is meant to gauge the economic implications of third countries adopting the common standards agreed between the EU and the US. There is a strong possibility to influence on third countries, given that the EU-US will be the biggest trading bloc in the world. The bloc may act as a regulatory hegemon. However, there is also scope for some diversion of trade away from the US and EU and toward intra-third country trade. There will be other impacts, still unknown, in the field of the market access to new products. 

Finally, there is no doubt that liberalising trade would imply some significant increases in EU-US trade. According to a report by the Irish Presidency of the EU, in the less ambitious scenario, EU exports to the US will increase by 16 per cent, while US exports to the EU increase by 23 per cent. On the other hand, aside from political costs of removing regulations, lowering of tariffs naturally implies that tariff revenues in the EU will somewhat decrease. 

Europe faces the pitfalls of an ageing population and the hollowing-out of medium-skilled jobs due to technological change and competition from emerging markets. The increased level of economic activity attached to the Partnership has the potential to increase overall wages and create new job opportunities for high and low skilled workers.

Different approaches to the same regulatory challenges may have the unintended consequence of increasing costs for firms, and so dragging down labour productivity. So, the real impact depends on many of the elements that have been mentioned here, and the direction is unknown a priori. Negotiations provide the opportunity to pursue a policy-mix particularly in the field of regulatory convergence that will reduce barriers to trade, pointing to substantial gains, including a rising demand for labour, which has the potential to promote economic growth and welfare in both sides of the Atlantic. But this is not an easy challenge. The negotiations are due to start next June. Official sources point at two years as a reasonable minimum timeline to close the negotiations.

Photo credits: USA flag by Patphelan1 via flickr and European flag by Rock Cohen via flickr  blended together