After watching their economies stagnate and sputter forward, two economic titans are sitting down to talk about a trade agreement. Currently in the early stages of negotiation between the US and European Union, the Transatlantic Trade and Investment Partnership (TTIP) could be critically important (and positive) for the future of both economies. Already critical markets for one another, the EU and US trade relationship accounts for about 30 percent of global trade, and $1.5 trillion in current-account transactions. This relationship may become much cozier soon.
Normally, free-trade agreements (FTAs) would break down the barriers to trade by lowering and removing tariffs, but tariffs are already low between the world’s two largest economies.
Lowering nontariff barriers to trade (NTBs) is the true prize here. NTBs make up most of the actual impediments to trade between the US and EU, and include everything from technical requirements on goods to health and agricultural standards. Mutual recognition of standards—the EU recognizing the FDA stamp of approval in drug development, for example—is an area in which agreement could create a meaningful positive feedback to both economies. For the TTIP to have a pronounced economic impact, regulatory standards will need to be integrated significantly. With the US and EU together constituting 50 percent of the world’s economy, setting firm, mutually recognized standards could spur a de facto global standards regime.
Because they are imperative, NTBs also run the risk of sidelining the TTIP as lobbies and interest groups apply political pressure. Externalities are already disturbing the trade talks. The recent U.S. government shutdown caused U.S. Trade Representative Michael Froman to cancel the second round of negotiations which had been scheduled for October 7—not the best way to begin an already delicate process.
The recent NSA spying fiasco is stoking concerns over data privacy and lessening already tenuous trust in US institutions. Needless to say, there is a skeptical undertone to the intellectual-property portion of the talks. The French recently summoned the US ambassador with questions about the NSA’s activities, and President Obama was forced to call Angela Merkel to tell her the US was not tapping her phone. But while these may be embarrassing instances, the rewards for removing even a portion of the NTBs are too great to ignore.
The EU will fight for the inclusion of language surrounding the protection of geographical indications (GIs). GIs—designations on goods indicating a specific geographical origin or a certain quality—are potentially very valuable. The US would argue that words like Parmesan and Pilsner indicate broad product categories, not specific places. A strengthening of GIs would benefit Europe, and some global marketing by US firms with certain products would have to change. Thus far, the US has not supported GIs as a global standard, but this may change if the EU concedes some controversial point(s) on their side.
Genetically modified organisms (GMOs) are a potential flashpoint. Opposition to GMOs is strong in the EU, where all GMOs must be labeled. Part of the EU’s distrust of a potential settlement around GMOs is a broader threat to their perceived high level of consumer-protection standards. The EU’s “precautionary principle” requires the producer to prove that a product is not harmful to consumers, but the US adheres to a “science-based approach” where the product must be shown to be detrimental to health before its removal. The GMO issue is important for both sides. Europeans want to know about their food, and majorities of key US crops are genetically engineered. The EU already imports more agricultural goods from the US than any other country except Brazil, and the US is the largest importer of EU agricultural products.
The US and EU need the TTIP, not only to compete more favorably with the emerging world, but to spur growth in a time of stagnation on both sides of the Atlantic. The OECD has estimated that the TTIP could boost the EU economy 3-3.5 percent. More than a million jobs could be created in the US. Spain and Italy could see 140,000, and the UK more than 400,000. And per capita income could rise more than 6 percent in Spain, 10 percent in the UK, and 13 percent in the US.
Not everyone will be so thrilled. A successful TTIP would erode the value of trade agreements already in place. Some countries that have long been trade partners with the US and EU will suffer. The US’s NAFTA neighbors, Mexico and Canada, will suffer relative trade losses as their trade treatment loses its exclusivity. (This likely explains the recent push by Mexico’s ambassador to the United States, Eduardo Medina Mora, for Mexico’s inclusion in TTIP.)
The BRICs (Brazil, Russia, India, China and South Africa) will find their long-standing advantages of low-cost labor and production slipping. In the case of a comprehensive agreement between the US and EU that includes the removal of at least some NTBs, the Bertelsmann Foundation estimates the BRICs loss of export and import trade at more than 30% to the US and EU.
The TTIP is not the only FTA currently being negotiated by the EU or the US. The EU currently has 11 such negotiations underway. And they are set to discuss an investment agreement with China (though not an FTA). The EU estimates that if all their agreements were concluded and effected today, then 2.2 million jobs could be created and 2.2 percent added to the EU’s GDP. The US is involved in the Trans-Pacific Partnership (TPP) which completed its 19th round of talks and includes a host of countries from Asia and the Americas. Again, no BRIC countries are involved, and it would be the second largest FTA to the TTIP. The nations involved in the TTP comprise 38 percent of the world’s GDP, but US participation in the discussions is mainly political—a piece of the “Asian pivot”.
However, the success of the TTIP is not guaranteed. France, which has little to gain from the TTIP and therefore little incentive to bargain, has already managed to exclude “cultural exceptions” from the talks. Meanwhile Germany and the UK, which have the most to gain, are looking for the most comprehensive TTIP possible. The TTIP could, in fact, be a reason the UK has stayed in the EU.
The TTIP is not a silver bullet. Its potential economic benefits should be met with at least some skepticism. The predicted gains are almost too good to be true. Consider this: If the US were to gain the entirety of its 1.1 million potential jobs today, it would reduce the unemployment rate to the Fed’s target of about 6.5 percent from 7.2 (assuming all else equal). It is probable the expectations for the negotiation will prove to be somewhat optimistic, and leave many NTBs untouched and mutual regulatory standards undetermined.
The US and EU are in desperate need of growth and job generators at the moment. A bold TTIP alters the global playing field, tipping the trading field in favor of the developed world. While politically difficult, its ultimate outcome has significant ramifications for the future of global trade and regulatory standards. The economic benefits, sorely sought by both sides of the Atlantic, outweigh some of the differences in regulatory thought. With the prospect for meaningful GDP and job gains in the US, maybe the TTIP is just the push the U.S. economy needs to attain escape velocity and for the EU to begin to reduce unemployment and reaccelerate growth. It is time for the West to regain its place of leadership and prominence in the global economy.
Samuel Rines is an economist with Chilton Capital Management in Houston, TX.
Image: Flickr/Daniel Ramirez. CC BY 2.0.