The Transatlantic Trade and Investment Partnership: Transatlantic Relations Reloaded

stein savannahSpeech of Hans H. Stein, Director International Political Dialogue, European Institutions and North America at the  FNF Conference “The Current State of Transatlantic Relations: An Assessment” in Savannah GA, May 30 – June 2, 2013

Imagine for a second, you were an innovative entrepreneur educated at one of the best engineering schools – Aachen, Germany. You are specialized in the automotive sector and come up with this brand new & stylish, efficient & clean, family oriented but also sporty car: it is THE all-in-one-solution or as we say in German “eierlegende Wollmilchsau”. Being an entrepreneur you also enjoy competition. Thus you want to rock the US-market. The production costs are 30’000 $. Now the first that increases the price is a 2,5% tariff barrier. Not much, but… Even though you have complied with all the high European standards (e.g. security, noise reduction, environment) now you will have to make a whole new set of tests that differ from the European regulations. You will even have to change the seat belts and the bumper. All that adds up to costs equivalent to a further tariff of at least 26,8%. Therefore, the cost of your car would rise from 30’000 $ to 39’000 $ – not even including the costs for transportation and distribution.

Is that fair and reasonable for businesses and consumers? Does that lead to more growth and job?

In February this year, the EU and President Obama announced the opening of negotiations on a transatlantic trade and investment partnership. This announcement followed the recommendations of the US-EU High Level Working Group on Jobs and Growth that had been established at the US-EU Summit in November 2011. Thus, the idea of a free trade agreement between the EU and the US is not new – but this time it was applauded on both sides of the Atlantic. Maybe, the economic downturn has brought along a political momentum that makes it effectively possible to reach an agreement.

The trade relations between both economies show that they form already the largest market in the world. The EU and US account for one third of world trade. That means that one out of three goods and one out of two services traded worldwide are exchanged between the EU and the US. Every single day, goods and services worth of 1,7 billion $ are crossing the Atlantic.

Furthermore, already today the reciprocal investment flows make out half of the world’s foreign direct investment. Investment from the EU in the US accounts for 71% of total FDI stock in the United States, while investment from the US in Europe still accounts for more than 50% of overall FDI.

But still there are barriers: Tariff barriers are at an average of 3-5% between the EU and US, which is low compared with countries in the world. But both economies maintain tariff peaks for certain goods:

  • In the EU these are concentrated on the agricultural side with tariffs of more than 20%.
  • In the US tariff peaks can be found in mostly for industrial products such as textiles (40%) and clothing (32%).

However, to have a real impact, the free trade agreement must seek to eliminate as many non-tariff barriers as possible. The transatlantic trade and investment partnership must not only target the hurdles at the border, but also eliminate the hurdles behind the borders. The partnership must address regulatory differences by identifying equivalent or very similar regulations for mutual recognition.

And, for the EU-US partnership to be successful, it must focus on removing remaining barriers to mutual investment. European and American businesses are literally in each other’s business. Thus, a trade-only approach would be one sided and not have the expected effects on economic growth on both sides of the Atlantic.

In order to assess the impact of a comprehensive trade and investment agreement, impact studies have been carried out that try to show the effects on growth under different scenarios.

  • A relatively conservative trade and investment partnership that would succeed to reduce tariff barriers by 98% and non-tariff barriers by 10% would lead to an increase in exports of 16,16% from the EU and 23,2% from the US. GDP would increase by 0,27% in the EU and 0,21% in the US.
  • A more ambitious agreement which would aim at reducing 100% of all tariff barriers and reducing non-tariff barriers by 25% would boost exports by 28,03% for the EU and 36,57% for the US. GDP would grow by 0,48% and 0,39% respectively.

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These data are only projections, but what is sure, is that both economies would profit immensely from a comprehensive free trade and investment agreement. And that would have a positive impact on the job market meaning the electorate, and for that reason it is attractive for politicians on both sides of the Atlantic.

Looking at all the data, especially the benefits of liberalization for businesses, employees and consumers, one may ask why we have not yet been able to reach a deal on a FTA.

Already in the 1990ies the EU and US tried to reach a deal, however, some EU member states had strong reservations. Especially France blocked the trade negotiations out of fear of a strong American dominance in the agricultural, the cultural and media sector.

20 years later, the European Parliament backed the start of the trade talks with 460 votes in favour. We are awaiting the Council meeting on 14 June for European leaders to give the European Commission, the Trade Commissioner Karel De Gucht, the definitive negotiation mandate. The German foreign minister Guido Westerwelle and the economics minister Philipp Rösler are very strong on a comprehensive mandate. Philipp Rösler underlined this recently in Washington DC.

So, can we sigh with relief? Unfortunately not – first opposition is again coming from France. The French minister of cultural affairs backed by 13 member states submitted a letter to the presidency of the Council of the European Union asking to exclude the cultural and media services from the negotiations. Even more troublesome, the European Parliament, on 23 May, voted to exclude culture from trade talks by 381 votes to 191.

The internal dissonance within the EU about the cultural exception exemplifies a further complication. Responsibility for regulation is split between different supranational, national and regional bodies, both in the EU and US. In Europe, the EU, the member states and in some of them also subnational entities, as for example the Länder in Germany, have competences on regulations in certain sectors. They will thus have to be involved in the trade talks and to be “on board”.

Tariff peaks, especially in the agricultural sector, reflect politically difficult domestic issues on both sides of the Atlantic. People on both sides of the ocean feel strongly about issues of food safety and environmental standards, they are thus very sensitive in the domestic political arena. Lobbies in the agricultural sector on both side of the ocean often push policy makers towards protectionist policies and high subsidies. The US administration requested that all subjects need to be discussed at the negotiation table; however, European health and environmental safety considerations might block talks on agricultural exports from the US to the EU. If a compromise on labeling of genetically modified goods and other agricultural products from the US can be reached remains to be seen.

It is not only the French – but also the US especially with regard to the public procurement market. Currently, only 32% of the US procurement market is open to EU businesses. Although the access of EU businesses to the US procurement market is in principle guaranteed by the WTO Agreement on Government Procurement, some significant federal entities, such as the Federal Aviation Agency, are not covered and a significant share of government procurement are closed for European businesses due to “Buy American” provisions. Furthermore, 13 US-States are still not covered by the WTO agreement and cities in the other 37 states are exempted. This situation affects European businesses especially in the sectors of transport infrastructures and construction.

We do worry about data protection, intellectual property rights, the risks for health and national security as well as for the environment on both sides of the Atlantic. Security, environmental and consumer protection standards are high on both sides.  But  technical regulations in key sectors such as automotive, chemicals and pharmaceuticals are very different in the EU and US. Either we should try to harmonize standards or at least recognize each others regulations as the stringency of risk-reducing standards in the EU and US are about the same.

Let me briefly summarize what we should aim at:

  • Eliminating 100% of the remaining tariff barriers.
  • Liberalizing the service market, as the protected services market accounts for about 20% of combined EU-US GDP, which is more than the protected agricultural and industrial goods combined.
  • Reducing non-tariff barriers as far as possible through eliminating unnecessary regulatory differences. Harmonization of regulations and standards can be reached through mutual recognition of existing standards and mutual regulation for new technologies.
  • Using trade liberalization between the EU and US to set global trade standards and liberalize trade worldwide.

Although we should have no illusions about the difficulties involved in negotiating a comprehensive agreement, the political momentum has never been as good as now.

Trade and investment liberalization is an important driver for economic and social gains. Especially, in times of economic downturn, growth and job creation should be targeted by all means. Studies indicate that a comprehensive agreement could promote the creation of up to 10 million jobs by 2020 (c.f. Daniel S. Hamilton, John Hopkins University).

The trade and investment partnership would not only benefit businesses and indirectly through tax revenues the indebted states, it will foremost favor consumers in the EU and the US. You and I will benefit from lower prices thanks to lower tariff and non-tariff barriers and more competition in both markets. We will also benefit from a broader choice of goods, thanks to the opening on both sides of the Atlantic.

If the comprehensive partnership between the EU and US is able to set standards for global trade liberalization and succeeds in involving other partners, a new era of trade liberalization could be initiated. Turkey has already asked to be part of the game. Let us not forget that the more our economies are interrelated, the lower the chances of political conflict. Thus, the Transatlantic Trade and Investment Partnership could work as an economic counterpart to NATO in strengthening peace and stability.

So, let’s go for it. And let’s get it right this time.