Goodbye WTO, hello TTIP — United States and Europe hope to create world’s largest free trade zone

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Guest post by Michael J. Geary

The United States and the European Union expect to begin negotiations next month on the Transatlantic Trade and Investment Partnership (TTIP) in Washington, DC.  Their ambitious aim is to create the world’s largest trade and investment bloc that covers a combined consumer population of over 800 million people.  If the U.S.-E.U. talks prove successful, TTIP will become the biggest trade deal in history.USflagEuropean_Union

U.S. president Barack Obama announced, to mild surprise, in his February 2013 state of the union address before the U.S. Congress that the United States would begin TTIP talks with the European Union.  His announcement followed the publication of a report from the High Level Working Group, which had spent a year examining  various options for expanding transatlantic trade and investment.  The HLWG concluded that any deal between the United States and the European Union, in order to capture the most gains, would have to be comprehensive and include sensitive issues such as government procurement, a reduction in non-tariff barriers (NTBs), intellectual property rights, and employment and labour sectors.  In May, Obama nominated his close economic advisor and free trade proponent, Michael Froman, to become the next U.S. trade representative.  Froman’s selection was, therefore, an important sign that the Obama administration is serious about completing not only TTIP, but the Trans-Pacific Partnership (TPP) as quickly as possible.

The trade and investment pact features a number of ambitious goals.  At the most fundamental level, U.S. and European leaders hope to reduce the existing transatlantic tariffs and other barriers that amount to approximately 3.5%or less on a range of goods.  That will be by far the easiest element of TTIP to negotiate.  A recent report from the Bertelsmann Foundation showed that a 3.5% reduction in tariffs would increase German exports to the United States by 1.13% and increase German imports, respectively, by 1.65%.  Deeper trade liberalisation, including a reduction in NTBs would lead to even greater economic benefits in for U.S.-German trade.  That, in turn, will significantly affect traditional intra-European trade flows, such that trade between Germany and other member states will decline significantly upon the completion of a comprehensive TTIP accord. The Bertelsmann report showed that, in the long term, French exports to Germany would fall by 23%, Italian exports to Germany would decline by 30% and British exports to Germany would drop by fully 41%. Such a comprehensive transatlantic deal would therefore mark a major realignment of traditional European trading patterns, offset by access to a wider US market.  That pattern, moreover, is likewise is reflected in Bertelsmann’s assessment.  For example, exports from Ireland, Italy, Greece, Portugal, and Spain to the U.S. increase by an average of 86%, which presents a major boost to those European countries most adversely affected by the ongoing sovereign debt crisis. Aside from the potential boost to transatlantic trade, the European Commission argues that TTIP will generate close to 2 million additional jobs, half of which would be created in the United States.

Securing a comprehensive transatlantic trade agreement, however, will not be easy.  

As the HLWG report made clear:

A significant portion of the benefit of a potential transatlantic agreement turns on the ability of the United States and EU to pursue new and innovative approaches to reduce the adverse impact on trade and investment of non-tariff barriers, with the aim of moving progressively toward a more integrated transatlantic marketplace.

That means the deal has to be comprehensive — otherwise, the results will be negligible.  This will lead to protracted negotiations.  The European Union will expect the United States to open domestic flight routes to European airlines like Ryanair, Europe’s low-cost airline, which might well push at least one of the major U.S. airlines towards bankruptcy.  Similarly, Brussels will also expect Washington to reduce or abolish regulations on the export of apples and most cheeses to the Unites States.  Other thorny issues on the negotiating table are sure to include common policies on food safety, patents, and procurement.

The U.S. wants the negotiations to conclude before Congressional elections in November 2014, while the European Union hopes to reach an agreement before the European Commission’s term of office expires in September next year.  Most commentators seem to think  these deadlines are too ambitious — though it’s worth remembering that the North America Free Trade Agreement (NAFTA) was negotiated in less than 24 months. With Froman at the helm of USTR and with negotiations about to open in Washington, it’s possible that serious and speedy progress can be made within the next 18 months.  A comprehensive transatlantic trade deal will not only provide a major and long-term boost to a stagnant European economy, but it will also lead to significant changes in international trade, especially in regard of regulatory barriers to trade and other standards, which have serious implications for third countries like India and China.

If an agreement is reached, both the European Parliament and the U.S. Congress must ratify the deal. The European Parliament can only issue an up-or-down vote without amendments.  Across the Atlantic, the picture looks different.  Presidential ‘fast-track’ authority expired in 2007 under U.S. president George W. Bush, so any new free-trade agreement (with the European Union or otherwise) would be subject to amendment by the U.S.Congress, unless Obama can win back his fast track negotiating authority from a less-than-friendly Congress, where the opposing Republican Party controls the lower house, the U.S. House of Representatives. For Europeans, TTIP is likely to meet a smoother ride because TTIP is the only show in town — it will boost growth and help reduce soaring unemployment numbers.  Moreover, TTIP has the potential to strengthen one of the world’s most important bilateral relationships, with attendant security and diplomatic benefits.  From the European perspective, the failure to secure as comprehensive agreement as possible might cause irreparable damage for transatlantic relations at a time when Washington is increasingly shifting its attention to the Asia-Pacific region.

Dr Michael J. Geary is a Global Europe Fellow at the Wilson Center in Washington, DC and Assistant Professor of Modern Europe and the European Union at Maastricht University in The Netherlands. His recent op-ed on President Obama’s USTR and Commerce nominees was published in The Hill’s Congress Blog.

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