Transatlantic Trade-Offs

LONDON – Almost two decades after the idea was first mooted, the United States and the European Union agreed last week to begin negotiating a Transatlantic Trade and Investment Partnership (TTIP). The partnership’s launch – which should occur at the beginning of 2015 – has been presented as a much-needed “deficit-free stimulus” that would boost US and EU GDP by 0.5% annually, while helping to increase employment on both sides of the Atlantic.

While both parties aim to eliminate remaining tariffs on bilateral trade, they are particularly eager to reduce the thicket of non-tariff barriers – mainly competing technical and sanitary standards and regulations – that have stifled development of the bilateral economic relationship. Closer regulatory cooperation may also help the US and the EU to confront what business leaders’ view as increasingly unfair competition from China both at home and abroad.

But can the TTIP live up to the hype? Tellingly, the High-Level Working Group on Jobs and Growth, which was tasked with identifying the policies and measures that should define the negotiations, has recommended a more conservative approach.

Indeed, the Group’s final report, released earlier this month, states that the agreement “should be designed to evolve over time,” moving “progressively toward a more integrated transatlantic marketplace.” Specifically, the group recommends establishing “an on-going mechanism for improved dialogue and cooperation” on regulatory issues and non-tariff barriers, as well as a “framework for identifying opportunities for…future regulatory cooperation.”

Such caution is warranted, given that some of the main principles that drive the two parties’ regulatory approaches are vastly different – and sometimes at odds with one another. For example, the EU has long been committed to the “precautionary principle,” which prevents products that may harm human health from entering the EU market – even if the scientific evidence is not yet conclusive.

This principle underpins the EU’s refusal to import genetically modified (GM) foods from the US, where they are widely consumed. But senior members of the US Congress have stressed that a successful agreement must include opening the EU market to all US agricultural products.

Another potential area of contention – conflicting notions of personal privacy – could inhibit the two sides’ ability to accomplish their shared goal of opening up the digital market. In recent weeks, major US technology companies, including Google and Facebook, have been accused of aggressively lobbying the European Parliament to suspend plans to intensify privacy rules in the EU.

A third challenge is rooted in Europe’s deeply held skepticism of financial markets. The day after US President Barack Obama announced the launch of the TTIP negotiations, the European Commission released its blueprint for a Eurozone Financial Transaction Tax that would impose new costs on US banks operating in EU markets.

Other cases in which barriers to transatlantic trade and investment conceal conflicting objectives and deep-rooted attitudes include France’s protection of its cherished audiovisual sector and America’s desire to continue to block European penetration of its iconic airline industry.

Negotiators will also have to overcome significant structural obstacles. As the European Commission struggles to secure a clear negotiating mandate from all 27 member states, the US will face its own internal coordination problems.

European countries succeeded in creating the Single Market in 1992 not by harmonizing all of their standards and regulations, but by agreeing to recognize one another’s. If a product is approved for sale in one EU member state, it is considered safe enough to be sold in another. A similar policy of “mutual recognition” could be the key to successful US-EU trade negotiations, but only if both parties can overcome the biases that are built into their regulatory and political systems.

Such barriers are particularly pronounced in the US, where Congress oversees the legal framework within which federal regulatory agencies – such as the Environmental Protection Agency and the Food and Drug Administration – operate. Not only do the US administration and its federal agencies have to accept that a safety standard established and tested in Frankfurt or Athens is equivalent to its US counterpart; congressional committees must agree. For its part, the EU would have to reconsider, for example, its policy on GM foods.

The EU overcame national biases to establish the Single Market by instituting a process of legally binding qualified majority voting, whereby individual member states could be outvoted on specific regulations. But such an approach cannot be replicated to break the inevitable logjams of transatlantic regulatory negotiations.

Faced with such significant obstacles, it is not surprising that the High-Level Working Group has settled on a more modest measure of success for TTIP negotiations. But this does not negate the partnership’s value.

Although transatlantic tariffs average only 3-5% (with higher peaks for some sensitive products), tariff elimination would have a significant impact, given that bilateral trade totals $650 billion annually. Simplifying customs procedures and opening up markets for public procurement could bring further benefits. And establishing a formal mechanism for transatlantic regulatory consultation will eventually pay off, one sector at a time.

The TTIP that is signed in 2015 may not be the revolutionary and comprehensive agreement for which many observers are hoping. But it remains a crucial step toward a more integrated transatlantic marketplace.

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