What will be gained from a United States-EU trade and investment agreement (TTIP) and how significant is the impact for the EU?
The EU and United States together produce 45 percent of the world’s GDP. The United States is Europe’s number one trading partner, accounting for almost 17 percent of the EU's total share in exports in 2013. Half of the US foreign direct investment (FDI) goes to EU countries, whereas the EU has 60 percent of its FDI invested in the US. With such strong ties, it is obvious that the free movement of goods and services would significantly decrease the direct and indirect costs that come with tariffs and non-tariff barriers (NTBs) to trade. Lower cost would lead to a deeper integration of both markets and would increase competitiveness. This would, in turn, mean job creation and increased productivity, effects that trigger economic growth, especially for countries that are still suffering from the aftermath of the economic crisis.
Many industries, especially sectors important for the German market like the automotive or the pharmaceutical industries, are trading heavily within their industry or subsidiary companies and have to face the costs of multiple tariff payments as well as double requirements for testing and certification. A reduction in the imposed tariffs and a recognition or harmonization of standards would lead to considerably higher income for these companies. But companies would not be the only winners in this scenario. Lower costs for companies and an enhanced environment for investments can in turn create more jobs and increase wages. Consumers would have the benefit of less expensive products.
Studies are currently trying to predict the outcomes of such a trade agreement. A study from the ifo Institute (Munich) shows that a successful completion of TTIP (including the complete elimination of tariffs and the comprehensive liberalization of NTBs) could increase the real wages for German workers by as much as 2 percent compared to 2010. In another scenario, based on a study by the Centre for Economic Policy Research (CEPR), a successful completion of TTIP could increase exports from the EU to the United States by 28 percent and raise the EU’s GDP by up to 0.5 percent by 2027. The CEPR findings are based on an ambitious scenario that includes the elimination of 25 percent of NTB related costs and 100 percent of tariffs.
The advantages of such a trade agreement are not only visible from the economic perspective, however. There are also geopolitical aspects to consider. The trade agreement would send a strong signal of transatlantic security and partnership, in addition to strengthening both regions in the face of growing competition from Asia.
Will agreeing on TTIP mean consenting to lower consumer, environmental, and health standards?
TTIP will focus on the harmonization and mutual recognition of technical standards in certain areas – if both standards retain the same level of safety. In May 2014, the European Commission published negotiating positions on five sectors. The papers include proposals for improving the compatibility of existing rules and regulations, reducing unnecessary duplication of product testing or plant inspections, and aligning procedures for approving or registering new products in areas such as chemicals, cosmetics, motor vehicles, pharmaceuticals, and textiles and clothing. Hence, the main focus in the harmonization of standards in TTIP lies in reducing technical barriers to trade. For many producing industries, this would have the most significant impact on cost. Moreover, making regulations more compatible does not mean that the lowest common denominator would prevai. Rather, it would make it possible to see where they differ unnecessarily.
With regard to sanitary and phytosanitary standards, representatives from both negotiating parties have stated that their regulatory independence would be retained in TTIP and the regulations themselves would not be the subject of the negotiations. On its website, the European Commission emphasizes that “basic laws, like those relating to GMOs [genetically modified organisms] or which are there to protect human life and health, animal health and welfare, or environment and consumer interests will not be part of the negotiations.”
In the public debate it is often feared that an agreement will force Europe into adapting American standards, which are wrongly perceived as lower standards. American standards in many industries like pharmaceuticals or even the health and hygiene standards in food industries are more comprehensive than European standards. Hence, the United States is also not keen on consenting to "lower" EU standards and levels of protection in some industries.
In addition, previous trade agreements like the free trade agreement with Canada (CETA), which is similar to TTIP, show that the existing hygiene and health standards can be preserved. For example, Canada is not allowed to export any hormone-treated beef to the EU, as this does not comply with EU standards. It is therefore unlikely that the United States would be able to do so under TTIP. The same is true for chlorine-washed poultry or unlabeled GMOs.
Why are only so few documents of the negotiation rounds made public?
Trade negotiations and similar international discussions isarecommonly held under a certain degree of confidentiality. This does not mean, however, that the negotiation process is undemocratic.
The European Commission, which holds the negotiating mandate, informs the European Parliament and all EU member states in frequent meetings before and after every negotiating round. In these discussions, representatives are informed on the European positions on the negotiated and forthcoming topics. Similarly the United States Congress is regularly advised on US positions. The alleged lack of transparency therefore only applies to information on the opinions of the other side in the negotiations.
To strengthen public participation in the discussion, the European Commission has appointed a TTIP Advisory Group. This consists of consumer organizations, industry, and other representatives of civil society. The advisory group also has partial insight into documents and can counsel the Commission on relevant topics.
Nevertheless, the transparency of the negotiations remains a much criticized issue. As the public debate around the negotiations continues to grow and remains heated, a broader insight into and more open discussion of the actual documents and opinions of both parties could help clear doubts and prevent the texts from being misunderstood.
Why do the negotiating parties want to include Investor to State Dispute Settlement in the agreement?
The TTIP negotiations place a strong emphasis on creating new rules and improving the framework for foreign investment. The European Commission and the United States believe that Investor-State Dispute Settlement (ISDS) is an important instrument for protecting investors abroad and for setting new global standards in this area.
Investor protection clauses are the most controversial part of the TTIP negotiations, however, as they allow corporations to sue states in international arbitration courts if they incur losses caused by government acts. ISDS would mean that if a government were to expropriate an investor, for example, or legislate regulations that discriminate against its products, the government would be forced to pay compensation to the company for lost revenue.
Germany opposes the ISDS clause in TTIP. German Minister for Economic Affairs and Energy Sigmar Gabriel (SPD) has publicly expressed doubts on the clause: The EU and the United States are developed nations with transparent, independent and advanced legal systems that ought to be just and fair. The ISDS mechanism was initially conceived to protect firms that invest in economies with fragile or not independent legal systems – places, in short, where just treatment could not be guaranteed. A government should not be hindered from passing laws – like environmental or consumer regulations – that might be beneficial for the public. A trade agreement like TTIP should not lead to lawsuits and compensation claims after democratically legislated regulations have been passed.
The European Commission has announced that ISDS should only be introduced with appropriate safeguards to guarantee that a government’s right to regulate is not affected. Hence, ISDS would not include compensations for revenue lost after a government introduces legislation relating to topics like consumer, environment, and health standards. It remains to be seen how negotiators will ultimately settle this issue.
Nevertheless, even with the amendments to the ISDS clause, such a mechanism seems unnecessary. If firms invest in a region, the same rules should apply to all investors – be they foreign or domestic. If expropriations occur and the need for lawsuits arises, foreign investors should not receive beneficial treatment by formulating complaints in arbitration courts when domestic investors cannot do so. All complaints should be disputed in national courts to ensure an equal treatment.
Why is the EU focusing on bilateral trade agreements instead of taking multilateral trade talks further?
The fact that the EU is now negotiating bilaterally does not mean that it has given up on the idea of a multilateral trading system. The EU is very much committed to a multilateral approach and has participated actively. The EU has always argued intensively for multilateral trade liberalization, as shown by its active involvement in the Doha Round and its approval of the WTO agreement in Bali last year.
Unfortunately, the multilateral negotiations are progressing very slowly. The Bali Package takes the Doha Round a step further, but a comprehensive conclusion of the round is still far off. There are many topics on which there is no consensus, particularly on market access for agricultural and industrial goods. Solutions on a bilateral or plurilateral level can build a framework and be a role model for future multilateral agreements.
Hence, TTIP can encourage WTO negotiations. If the EU and the United States are able to recognize or harmonize many of their regulations, a basis for creating a global set of standards might be set. The path to a multilateral free trading system will be less rocky if two of the strongest economies and major trading partner already undertake their transactions on similar terms.
