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The Transatlantic Trade and Investment Partnership: Origins, Objectives and Impact

CIIS Time: Nov 7, 2013 Writer: Cui Hongjian Editor: Li Xiaoyu

By Cui Hongjian

  

Still under the influence of the financial, economic and debt crises and facing considerable pressure from competitive emerging economies, Europe and the United States are preparing to revive the “Transatlantic Common Market” and initiate a “Transatlantic Trade and Investment Partnership” (TTIP). The initiative signals an attempt to integrate trade and investment structures and further coordinate policies so as to mutually cut economic and trade costs, stimulate growth and preserve the two sides’ respective positions in the global economy and trade system. The TTIP is a product of the current interplay between the European and American economies, as well as changes in world economics and trade, and it is expected to have a far-reaching impact on future global economic development and trade. Given the strengthening ties between China and the West, as well as China’s elevated status in global economics and trade, the TTIP will similarly have an enormous impact on China.

 

I. From the “New Transatlantic Marketplace” to the TTIP

 

1. The Aborted New Transatlantic Marketplace

High-level consultations between Europe and the United States have long emphasized efforts to enhance economic ties between the European Union and the United States and construct a EU-US common marketplace. The “New Transatlantic Marketplace” was proposed for the first time in Madrid at the signing of the New Transatlantic Agenda EU-US summit. To strengthen economic ties in the EU-US “Transatlantic Relationship”, the two sides will need to overcome major trade barriers and forge closer economic cooperation through extensive consultations between government and non-governmental parties.[1] The Mutual Recognition Agreement, signed in 1997, foresaw the possibility of “comparable standards” and testing for six products. Largely owing to the efforts of Leon Brittan, the former EU Trade Commissioner, the European Commission published a document entitled the “New Transatlantic Marketplace” (NTM) in 1998 in which it called for better “economic integration” between the two partners and proposed specific objectives. These objectives included the complete elimination of industrial tariffs by 2010 and the creation of bilateral free trade areas in the service sector.[2] Despite these common objectives, the EU nonetheless insisted that resolving long-standing disputes with the United States over Helms-Burton and the Iran-Libya Sanctions (ILSA) were a “precondition” for moving forward with the NTM. Meanwhile, several EU member states opposed the NTM out of their own interests. Former French President Jacques Chirac said that the NTM proposal went against the interests of his country in the communications, agricultural and intellectual creativity sectors. France has also voiced concerns that the proposed bilateral mechanism could undermine the WTO multilateral mechanism and that Sir Leon might start to prioritize coordination with the United States rather than with European Union member states. The Netherlands, on the other hand, was opposed to the proposal because the NTM did not include agriculture, thus dampening the chances of pushing forward a common EU agricultural policy reform. In addition, both Germany and Belgium were lukewarm on the NTM proposal for various reasons. As such, the European Commission’s ambition was thwarted and the “Transatlantic Economic Partnership” that the EU and the United States eventually reached was only of symbolic significance.[3] Despite the 2005 “Initiative to Enhance Transatlantic Economic Integration and Growth” and the establishment in 2007 of the “Transatlantic Economic Council”,[4] where promotion of “regulatory cooperation” in specific fields is high on agenda, EU-US economic and trade policy integration and coordination remained slow to progress.

 

2. TTIP: a byproduct of the current economic crisis

After the outbreak of the financial and debt crises, both the EU and the United States faced enormous challenges from their economic recessions and rising unemployment situations. As such, they were both compelled to find “new ways to stimulate growth”. At the same time, the EU and the United States have been losing patience with multilateral mechanisms, as the WTO Doha Round talks have lost momentum. There is growing demand on both sides of the Atlantic to “rejuvenate” trade and investment resources through a bilateral mechanism. As a result, the two sides have greatly accelerated their efforts to coordinate economic and trade actions. In November 2011, at the EU-US Summit meeting, leaders from the two sides established a High-Level Working Group on Jobs and Growth (HLWG), an effort that was spearheaded by US Trade Representative Ron Kirk and EU Trade Commissioner Karel De Gucht. The working group was widely endorsed by Germany, France and the United Kingdom, and it has been entrusted with “identifying new ways of strengthening the economic relationship and developing its full potential”, including evaluating and eliminating existing bilateral trade barriers.[5]

In June 2012, the EU and the United States called upon each other to negotiate an “ambitious” and comprehensive agreement that would include “reciprocal market opening in goods, services and investment, and address the challenges of modernizing trade rules and enhancing the compatibility of regulatory regimes”. The stated objective was “eliminating all barriers in bilateral trade and reducing regulatory differences and cost”.[6] The “Final Report” issued in February 2013 officially recommended that both sides launch negotiations on a comprehensive agreement, one that would include the “elimination or reduction of conventional barriers to trade in goods, such as tariffs”, the “elimination, reduction, or prevention of barriers to trade in goods, services, and investment”, the “enhanced compatibility of regulations and standards”, the “elimination, reduction, or prevention of unnecessary “behind the border” non-tariff barriers (henceforth NTB) to trade in all categories”, and the “enhanced cooperation for the development of rules and principles on global issues of common concern”. The final report also put forward the structure and contents of the three agreements: market access, regulatory issues and non-tariff barriers.[7]

One day after the issuing of the “Final Report”, President Obama announced in his State of the Union Address that the United States would “launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union”.[8] Subsequently, both the EU and the United States began initiating the internal procedures necessary to launch negotiations on this partnership.[9] On June 14, the EU trade ministers mandated that the European Commission negotiate with the United States on the TTIP and three days later, at a G8 summit in Lough Erne, the EU and United States officially announced the launch of negotiations that they intend to wrap up by the end of 2014. After nearly a decade of twists and turns that began with the “New Transatlantic Marketplace”, the TTIP marks a groundbreaking moment in EU-US “Transatlantic Economic Integration”.

 

II. TTIP: Expected Gains and Strategic Objectives

 

1. Expected Economic and Social Benefits of the TTIP

The broadly shared conviction that cooperation will bring direct economic and social benefits, shared on both sides of the Atlantic, is the strong driver for the TTIP negotiations. The EU and United States authorities both regard the TTIP as a golden opportunity.[10] An official EU report illustrates that once the TTIP negotiations are successfully concluded and all measures are fully implemented, both parties will gain substantially.

First of all, the Partnership will stimulate GDP growth. The TTIP will likely bring significant economic gains to the EU (€68.2 billion to €119.2 billion a year) and the United States (€49.5billion to €94.9 billion a year). According to the most optimistic estimates, this will translate to an extra €545 in disposable income each year for EU families and an extra €655 per family in the United States.

Secondly, the two parties will push to stimulate trade growth. European Union exports to the United States are projected to rise by 28 percent, equivalent to an additional €187 billion worth of exports. United States exports to Europe will increase by 36.57 percent, equivalent to €159 billion worth of exports of goods and services. The EU and United States exports to the rest of the world will also increase by an estimated €33 billion. Overall total exports will increase by 6 percent in the EU and 8 percent in the United States, equivalent to growth of €220 billion and €240 billion for the EU and the United States respectively.[11] Approximately 80 percent of the above-mentioned economic gains will result from a reduction in NTBs, such as cutting costs imposed by bureaucracies and regulations, liberalizing trade in services and opening the market for public procurement.

Thirdly, the partnership will create jobs and stabilize the labor market. In addition to direct economic gains, the TTIP will bring social gains to the labor market in the EU and the United States. An early estimate shows that the TTIP could directly add jobs,[12] and the Obama administration highlighted this speculation, saying that “trade that is fair and free across the Atlantic supports millions of good-paying American jobs.”[13] Once fully implemented, the TTIP will lead to increases in economic activity and productivity, boosting overall salaries and creating new jobs. Labor displacement will be well within normal labor market parameters and economic trends and fluctuation and risks in the labor market will be reduced. As a result, the EU and United States labor markets will become more stable and orderly.

Fourthly, both sides hope to gain benefits across various economic sectors. As the TTIP will affect almost all sectors in the European Union and the United States, winning support from various sectors of the economy depends on whether these sectors believe that they will reap the benefits of the partnership. For the EU, estimates now predict that a boost in exports and output will be particularly significant in the motor vehicles sector (EU exports to the rest of the world are expected to go up by nearly 42 percent and EU exports to the United States are projected to increase by 149 percent). This will also be accompanied by an expansion in the sector’s output (1.5%) in the EU. In addition, the following sectors are expected to see significant benefits: metal products (12%), processed foods and chemicals (9%), and other manufactured goods and other transport equipment (6%).[14] On the United States side, the TTIP will benefit the motor vehicles sector (59%), metal products (22%), chemicals (11%), machinery (8.8%) and other transport equipment (8.6%). The motor vehicles sector, which has long been subject to high tariffs and NTBs (such as differences in safety standards), will benefit most from the TTIP.[15]

However, the economic and social gains outlined above are only ideal estimates that are based on the “full success and implementation of TTIP”. This scenario assumes the elimination of 25 percent of costs linked to trade NTBs, 50 percent of procurement-related NTBs together with full tariff elimination. However, if there are any compromises in negotiations or if the agreement is not fully implemented, the estimated gains will shrink significantly. In a less ambitious scenario which includes a 10 percent reduction in trade costs from NTBs, 25 percent procurement-related NTBs and 98 percent tariff removal, the TTIP’s contribution to GDP will go down by €51 billion in the EU and €45.4 billion in the United States, and the TTIP’s contribution to trade will decrease by €79.1 billion in the EU and €58.1 billion in the United States.[16]

Both the EU and the United States have publicly stated that the ultimate goal of the TTIP is to maximize economic and social gains. The first round of talks was concluded in July 2013 and the second round is scheduled to begin in October 2013. Despite their “smooth start”, the history of EU-US strategic coordination has at times been rocky, and whether the negotiations lead to actual results largely depends on domestic politics, economics and other social factors on both sides of the Atlantic. Nevertheless, because the TTIP is largely considered to be a display of EU-US solidarity and confidence at a time of crisis, all concerned governments have helped set the tone for a successful TTIP outcome.

 

2. Strategic Intent of the TTIP

Given the current strength of the EU and the United States economies, the TTIP is by no means a bilateral FTA in its usual sense. Rather, it has the strategic intent of enhancing EU-US coordination “geopolitically, geo-strategically, politically and economically”.[17] According to existing studies, the strategic intent of the TTIP is as follows:

First and foremost, it is aimed at activating the EU-US economic potential and deepening mutual economic dependence so as to preserve preeminence in the global economy. Europe and the United States, as major representatives of the world’s developed economies, account for half of the world’s GDP, one third of global trade and one fifth of global direct investment. However, the European and American economies were greatly damaged by the financial and economic crises. According to the IMF, from 2009 to 2012, the average annual GDP growth across the 27 EU member states was negative 0.485 percent and the economic aggregates decreased from USD 18.35 trillion to USD 16.41 trillion.[18] Despite the fact that the United States economy is performing better than the EU economy, its annual GDP growth from 2008 to 2012 was only 0.327 percent and its economic aggregates only climbed from USD 14.29 trillion to USD 15.60 trillion. EU-US economic growth lags far behind the rest of the world, particularly when compared to emerging economies. While global GDP increased from USD 61.22 trillion to USD 71.28 trillion from 2008 to 2012, the share of the EU-US in the global economy dropped from 53 percent (29.9+23.3) to 44.9 percent (23+21.9).[19] Once the TTIP is fully implemented, the EU and the United States will grow by 0.7 percent and 0.6 percent respectively, registering a huge increase in two-way trade and investment. Therefore, the primary strategic intent of the TTIP is to harness closer economic cooperation to tap economic potential, stimulate GDP growth and turn the current recession around. Only by doing this can both sides prevent a further hit to their share in global economy while preserving their economic primacy.

Second, the TTIP seeks to drive multilateral mechanisms forward through bilateral approaches, dominate future global two-way trade and investment arrangements, and establish new rules and mechanisms for global trade and investment. For a long time, the United States and the EU prioritized trade and investment “liberalization” at a multilateral level. However, given the stagnation of the WTO multilateral talks and the rapid development of global two-way trade and investment arrangements, the EU gradually shifted towards a strategy of “driving multilateral mechanism forward through bilateral approaches”. Given the enormity and depth of cooperation, as well as the range of impacts of the European and American economies, the TTIP negotiations have surpassed all existing FTAs in terms of breadth and depth. The TTIP talks will without a doubt go beyond previous FTA negotiation levels and dominate the future development of global FTAs.

In addition, because the two sides already have relatively low tariff rates at 3-3.5 percent, eliminating tariffs will likely provide short-term rather than long-term benefits.[20] It is estimated that the elimination of NTBs will have the same effect as further reducing 15-20 percent of tariffs between the EU and the United States; therefore this will have more long-term effects. Judged from the TTIP negotiation goals, the following goals are the long-term and major strategic aims of the EU and United States: “eliminate, reduce and prevent trade and investment barriers”; “enhance coordination in rules and standards”; “eliminate, reduce and prevent non-tariff behind the border barriers”; and “establish global rules and principles” in market access framework.

Last but not least, the TTIP is intended to enrich the “Transatlantic Partnership” and help coordinate EU-US geo-strategy. The “Transatlantic Partnership,” built after World War Two to contain European socialist countries and established upon the pillars of the Marshall Plan and NATO, has become sluggish in the aftermath of the Cold War. NATO, as a major medium of the Transatlantic Partnership, has long been subject to questions and criticism for failing to adapt to a new world in which development is the primary goal. The EU and the United States have fiercely argued over questions of United States unilateralism, defense contributions and Europe’s own development issues. The recent United States “rebalance to the Asia-Pacific” aroused deep concerns in Europe that “the United States would abandon its European allies.” Thus, the EU-US strategic coordination, embodied in the Transatlantic Partnership, has reached a difficult stage – there is a lack of growth points and motivation and mutual trust is ebbing. The TTIP, partly reflecting the United States’ consideration of “pacifying Europe” and “balancing the Atlantic and Pacific”, is in line with the post-Cold War history of the EU-US creating “common markets” and strengthening alliances. Under the TTIP, EU-US economic coordination and an upgraded version of the FTA will provide new growth points and opportunities. Finding a common response to challenges brought by economic globalization serve as an impetus for the “Transatlantic Partnership”. In addition, if EU countries keep their national defense budgets unchanged, at a current level of 1.5 percent of GDP, the TTIP will bring an extra USD 2-2.5 billion of annual defense budget to Europe. This will promote the EU’s capability to contribute to defense and further boost the EU-US common security and defense cooperation.[21] Therefore, from the perspective of the EU-US strategic coordination, the TTIP functions somewhat like an economic version of NATO.[22]

 

III. TTIP: Impact on International Trade Patterns and China

 

Given the size of the combined EU and United States economies, the enormous expected gains from the TTIP and its ambitious strategic intent, the TTIP has already had a strong “spillover” effect on international trade patterns, thus deeply affecting China. In short, even though the future of the TTIP is still uncertain, its effects are already being widely felt.

 

1. Multiple effects of TTIP on international trade patterns

The TTIP will have both positive and negative effects on international trade patterns.

First, from an objective standpoint, the TTIP is advantageous to the expansion of global trade and investment, as well as the reduction of market liquidity barriers. Market liberalization measures, such as eliminating tariffs and NTBs between the EU and the United States, will facilitate to worldwide trade and investment and income growth. According to a European Union report, by eliminating barriers and smoothing standards between the EU and the United States, the TTIP will contribute €100 billion to GDP growth in the rest of the world.[23] EU products invested by a third country are entitled to the benefits of tariff reduction and NTS reduction in the United States and vice-versa. These products will be granted easy access to the EU-US markets due to the two parties’ harmonized standards and simplification. As a result, costs will be lowered. For example, once the EU and the United States automobile standards are harmonized, vehicles from a third country that enter the European market will automatically reach American safety standards. In such cases, the cost of product design, manufacturing and marketing will be reduced. Given the fact that the EU and the United States are major markets in global trade, the facilitation of a low-cost market environment brought by the TTIP will provide a huge pull for third country products and investment.

Secondly, judging from the content and objectives of the negotiations, it can be seen that the TTIP is intended to preserve some international economic and trade rules while rewriting and establishing others. The primary objective of the TTIP is to rewrite and establish international rules on the basis of the bilateral agreement that will eventually be reached. It can be inferred from Europe and the United States’ history of dominating the establishment of international rules that the two parties will start by harmonizing mutual trade and investment rules, and then, facilitated by their superior position in the world economy and its various institutions, expand these rules onto multilateral and institutional levels and platforms. This will lead to their continued dominance over the global economic governance structure. Based on current negotiation objectives, the establishment of rules can mainly take two paths. The first is to set rules concerning “IPR protection”, “government subsidies” and “state-owned enterprises” in traditional industries, while safeguarding domestic and international trade patterns and policies in the name of “liberalization” so as to cripple the competitiveness of “non-liberal economies”. And the second path is to set rules in e-commerce, new energy and the environment so as to claim rule-making authority in important emerging industries.[24] These are the real connotations of the EU and United States’ catchphrase of “driving the multilateral mechanism forward through bilateral approaches”, which they have promoted since the stagnation of the WTO Doha talks. At present, the TTIP has gained huge attention from other countries, largely due to its implications for global economic governance level. Countries such as Turkey have expressed interest in joining the TTIP and the EU, the United States and other parties have demonstrated an inclination to include the new TTIP rules on the G20 St. Petersburg Summit agenda.[25] Furthermore, high standards and new rules established in the TTIP will no doubt provide examples for other bilateral FTAs. To maintain market attractiveness and competitiveness, other FTAs and investment arrangements will have to follow in the TTIP’s footsteps or seek to converge with the TTIP’s standards and rules.[26]

Thirdly, from a strategic perspective, it is clear that the TTIP will be instrumental for the EU and the United States to stabilize their dominant positions in international trade patterns and gain more bargaining chips when dealing with emerging economies. During the economic crisis, in an effort to prevent their economies from sliding any further, the EU and the United States put forth a theory that claims that the crisis originated from an economic structural imbalance between emerging and developed economies in production capacity and consumption, as well as trade import and export. After making this claim, the EU and United States proceeded to highlight “rebalancing” the world economy as their policy objectives. As a preemptive measure in a passive situation, the TTIP represents an important “rebalancing” measure to push against changing international trade patterns. Despite the fact that some claim that the TTIP will not be “at the cost of the rest of the world,”[27] the exclusive, enclosed and mutually beneficial nature of the “Transatlantic Partnership” will greatly outweigh the “benefits and facilitation” that it presents to the rest of the world. That is to say, even if the TTIP will objectively contribute to the world economy, such contributions are merely “spillover” effects and were never intended by the EU or the United States. Given the fact that both the EU and the United States are in high economic and industrial positions and are highly inter-dependent in trade and investment, their mutual tariffs and standards will naturally form a high entry barrier for third countries. In addition, competition, investment and subsidy policies that are included in the TTIP negotiations are clearly targeted at emerging economies; these efforts are intended to alter the disadvantageous positions of the EU and the United States when competing against emerging countries. Conservatives in the EU and the United States argue that BRICS countries are growing by an average of twice the rate of Europe and the United States – this provides the major impetus for the two parties to strengthen strategic coordination and initiate the TTIP. Some of these conservatives even acclaim that the TTIP is “a must for the free world” from a political perspective.[28] EU and United States attempts to improve their own competitiveness by setting new rules will greatly curb the growth potential and development space for emerging economies; they will also naturally heighten the competition over rules between developed and emerging economies.

 

2. Impact of the TTIP on China

The TTIP is a bilateral trade and investment agreement between China’s first and second largest trading partners and as a result it naturally has strong implications for China. China’s interests are closely linked to the contents, objectives and ultimate outcome of the TTIP, and the agreement will become a major external factor affecting China’s economy, trade structure and future development.

First of all, to better serve the “rebalancing” objective, the TTIP will further curb China’s exports to European and American markets, boost EU and United States exports to China and reduce trade barriers between the EU and the United States via harmonized standards, a development that will also stimulate Chinese investment in both the EU and the United States. Currently, as a result of the American and European efforts to “protect markets and expand exports” and China’s trade structure adjustment, China’s exports to the EU and the United States have slowed down while its imports from these two economies have spiked. China has become the fastest growing market for EU and American exports, prompting a remarkable decrease in China’s trade surplus with the two economies.[29] The TTIP, by reducing or eliminating trade barriers between the two sides, will be instrumental for European and American enterprises to cut costs, increase efficiency and heighten the competitiveness of their products in third country markets that include China. Furthermore, the EU and the United States will upgrade their trade protection and product standards against third countries, a development that will inevitably usher in higher market access thresholds for these third countries. Any talk during the negotiations related to government subsidies and SOEs are clearly targeted at Chinese enterprises and products. With regards to investment, given the reduction of trade barriers between the two sides, the EU products made by Chinese-funded manufacturers are entitled to certain benefits. Chinese investors will find investments in the EU-US real economy attractive regardless of Sino-American or Sino-European trade barriers.

Secondly, by stabilizing the EU and the United States’ advantageous positions in the global industrial chain and international division of labor, the TTIP will curb China’s upward momentum in these two spheres. China’s recent efforts to increase R&D investment and promote competitiveness have drawn great attention from European and American counterparts. Europe and the United States judged that “China is moving upward in the global industrial chain and value chain,” which implies that China will produce and export products similar to those already manufactured by the EU and the United States. This change will have a direct impact on international trade patterns: the Sino-American and Sino-European trade structure is experiencing a transition from simply being “complementary” to being “complementary while also being competitive”. The primary objective of the TTIP is to harmonize rules and standards in trade and investment, and its nature is to forge rules and standards that will help stabilize their preeminent positions in the global industrial chain and labor division system. Naturally, this will directly affect China’s position and role in the global economic system. For example, China, the EU and the United States have different standards in the mobile communications sector. Once the EU and United States standards become compatible or harmonized, the market adaptability and competitiveness of their mobile products will be greatly enhanced. The R&D, upgrading and marketing of Chinese standards will be negatively affected. Chinese standards will be marginalized in the global market and China will have to accept that it must produce equipment and products that meet the EU-US standards.

Thirdly, in addition to tariffs, rules and competition over standards, the TTIP has raised major questions concerning trade, investment and even competition between different development models. As an advocate for “liberalising market economy” and “forming bloc”, the TTIP represents rules and policies that will pose challenges to China’s existing trade, investment and even development models. The status of SOEs, government subsidies, government procurement and ownership and market transparency are questions that the TTIP focuses on that will directly affect China. China’s current economic structure and development model believe that government should play an important role in trade, investment and the market. In addition, SOEs are an important part of the Chinese economy and the main actor in foreign trade and investment. The EU and the United States view China’s government and its SOEs as the major source of Chinese competitiveness, but also view them as violating the “laws of economics,” which uphold free competition and push against government interference. European countries – where medium and small-sized enterprises comprise the primary economic actors – are especially suspicious of government interference and large state-owned capital. They harbor concerns that the current government-business relationship in China “severely distorts competition and harms EU and United States businesses”.[30] Based on this logic, the TTIP is intended to set global standards regarding SOEs, government subsidies and procurement and standardize Chinese government and business behaviors with their favorite tool: anti-trust, anti-subsidy laws and merger and acquisition regulations. The frequent use of anti-subsidy laws by the EU and the United States against China in trade settlements is a rehearsal for the TTIP.

Fourth, the TTIP will stall China’s development into the world’s largest trading nation and the EU and United States’ largest trading partner. By affecting the trilateral relationship between China, the EU and the United States, it will further complicate China’s development. China’s foreign trade is developing rapidly and it is already the largest trading partner for 123 countries in the world. China is the world’s number one exporter and is expected to replace the United States as the world’s largest trading nation. The EU-US competition with China has been interpreted as “how to fight for 90 percent of the world’s consumers and 70 percent of the purchasing power outside of the EU and the US”. The TTIP is a strategy and counter-measure to form an exclusive alliance and increase trade and investment with the aim of limiting or stifling China’s foreign trade and investment growth.[31] Currently, China is the EU and the United States’ second largest trading partner and it is quite close to becoming the first. However, once the TTIP is implemented, as two-way trade between the EU and the United States further expands, it will become very difficult for China to achieve this goal. In addition, the TTIP will have a direct impact on future relations between China, the EU and the United States, further complicating the international situation that China is facing. The EU-US partnership will be greatly strengthened by the TTIP, while Sino-American relations and the Sino-European strategic partnership, which are also based on economic and trade relations, will be weakened. As a result, the momentum of multi-polarity in world politics will no doubt be undermined. The TTIP seeks to function in a similar fashion as the TPP in determining the United States’ global strategy. Once it is implemented, China will have to face the pressure of the TPP and TTIP both regionally and globally.

 

Source: China International Studies, September/October 2013 p.100-118


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