TTIP: What are the implications for emerging powers and the international order?

1 December 2014

The Transatlantic Trade and Investment Partnership (TTIP) currently under negotiation by the United States (US) and the European Union (EU) promises to unleash significant opportunities to generate jobs, trade and investment across the Atlantic. An independent study by the Centre for Economic Policy Research forecasts that an ambitious and comprehensive TTIP agreement could generate US$159 billion in annual economic gains for the EU, US$127 billion a year for the U.S., and boost global income by almost US$134 billion.TTIP would generate greater economic gains than would the deal on the table in the Doha Development Round.

TTIP at its core is an economic negotiation seeking agreement in three pillars. The first pillar addresses such market access issues as tariffs and rules of origin. It could result in clearer, more straightforward and transparent rules of origin arrangements that could serve as the basis for future preferential rules of origin. Clear, simple and aligned rules of origin would facilitate global trade and thus serve as a public good.

The second pillar seeks to reduce, where feasible, non-tariff barriers and to find coherence, convergence or recognition of substantial equivalence between US and EU approaches to specific regulatory issues. It could pioneer new ways for countries to ensure high standards for consumers, workers, companies and the environment while sustaining the benefits of an open global economy. Mutual recognition of essentially equivalent norms and regulatory coherence across the transatlantic space not only promise economic benefits at home but could form the core of broader international norms and standards.

The third pillar seeks common agreement on a range of norms and standards regarding such issues as investment, intellectual property rights, discriminatory industrial policies and state-owned enterprises. Some of these standards are likely to extend prevailing WTO standards (WTO-plus); others could go beyond existing multilateral norms (WTO-extra). Agreement on such issues as intellectual property, services, discriminatory industrial policies or state-owned enterprises could strengthen the normative underpinnings of the multilateral system by creating benchmarks for possible future multilateral liberalisation in the WTO. US-EU agreement on such principles, and agreement to act together to advance such norms globally, could not only take the international trading system further but establish broader political principles regarding the rule of law, human rights, labour, environmental and consumer standards.

In addition, the TTIP will not necessarily be concluded with a final document; negotiators seek a ''living agreement'' that is likely to consist of new consultative mechanisms regarding regulatory and non-tariff issues that can anticipate or respond to evolving innovation, economic friction due to changing legislation, or other developments in trade and technology.

Taken together, these elements underscore that TTIP is not just another trade agreement, it is a new-generation negotiation aimed at repositioning the US and European economies for a more diffuse world of intensified global competition. TTIP is about creating a more strategic, dynamic and holistic US-EU relationship that can generate jobs and growth, engage third countries more effectively, and strengthen the ground rules of the international order.

U.S. and European governments would prefer a global agreement on more open trade, but the multilateral system administered by the WTO is under challenge, especially by a number of countries that show little interest in new market-opening initiatives and do not share the core principles or basic structures that underpin open rules-based commerce.

In addition, even if the Doha Round were concluded tomorrow, it would still not address a host of non-tariff and regulatory issues related to the distinctive deep economic integration that binds the US and European economies. These non-tariff and regulatory issues, not trade, are at the heart of the TTIP. In short, TTIP is a means to energise the multilateral system while addressing issues particular to the transatlantic economy.

TTIP and rising powers

TTIP is important in terms of how the transatlantic partners together relate to rising powers, especially the emerging growth markets. Whether those powers choose to challenge the current international order and its rules or promote themselves within it depends significantly on how the United States and Europe engage, not only with them but also with each other. The stronger the bonds among core democratic market economies, the better their chances of being able to include rising partners as responsible stakeholders in the international system. The more united, integrated, interconnected and dynamic the international liberal order – shaped in large part by the United States and Europe –, the greater the likelihood that emerging powers will rise within this order and adhere to its rules. The looser or weaker those bonds are, the greater the likelihood that rising powers will challenge this order.

TTIP clearly puts pressure on countries that choose to stand apart from international market-opening initiatives. According to Vera Thorstensen and Lucas Ferraz, a TTIP agreement that goes beyond simple tariff reductions could result in a 5-10 percent decline in Brazilian exports to the United States and the EU and a 4-8 percent decline in Brazilian imports from the United States and the EU. In addition, since a TTIP agreement is likely to boost US and EU competitiveness and spark additional US and EU exports, Brazil's overall share of world trade is likely to decline. In contrast, if Brazil adhered to TTIP provisions in a scenario of a 50 percent reduction of EU and US agricultural tariffs, a 50 percent reduction of Brazilian industrial tariffs and a 50 percent reduction of non-tariff barriers for all partners, Thorstensen and Ferraz calculate that Brazilian exports to the United States and the EU would increase by 67.6 percent, corresponding to US$51.1 billion, and Brazilian imports from the United States and the EU would increase by 52.9 percent, a gain of US$42.3 billion.

Additionally, North-South American commercial ties are burgeoning, and Europe's commercial ties to Latin America are substantial. Latin American and Caribbean countries export more than twice as much to their Atlantic partners as to the rest of the world. Latin American exports to the eurozone are 40 percent more than to China. Brazil is the single biggest exporter of agricultural products to the EU. Countries that decide to lift their standards to access the world's largest and richest market are likely to see significant increases in commercial interaction; those that do not are likely to encounter significant hurdles to growth and jobs.

There are already signs that TTIP is affecting third countries. TTIP was the elephant in the room at the 2013 EU-Brazil summit; it is causing Brazilian leaders to reframe how they think of their evolving role and position. Japan's decision to join the Trans-Pacific Partnership (TPP) arguably was due as much to the start of TTIP negotiations as to inner-Asian dynamics. With the EU now also negotiating a bilateral trade agreement with Japan, both the United States and the EU are in direct talks with Tokyo about opening the Japanese market – a goal that for decades seemed unattainable.

TTIP is lazily portrayed as an effort to confront and isolate China. Yet it is less about containing China than about the terms and principles guiding China's integration and participation in the global economy. China's burgeoning trade with both the United States and Europe attests to US and EU interest in engaging China, not isolating it. Yet Beijing has yet to embrace some basic tenets of the international rules-based order, and has sought to translate its economic clout into military, diplomatic and political influence, for instance by holding down the value of its currency to boost its companies, leveraging its near-monopoly on rare earths to advance its strategic objectives, or directing state-owned companies not just to generate profits but to wield power on its behalf. TTIP and related initiatives such as the TPP are important instruments to help frame Beijing's choices – by underscoring China's own interests in an open, stable international system as well as the types of norms and standards necessary for such a system to be sustained. China itself has changed its position and signalled a willingness to join plurilateral talks on services. Its motivations remain unclear, but there is no denying that TTIP and related initiatives are injecting new movement and energy into efforts to open markets and strengthen global rules.

Since TTIP is not just about achieving greater regulatory coherence across the Atlantic, but also about setting global benchmarks, it is more ambitious than TPP or ASEAN's Regional Comprehensive Economic Partnership, known as the RCEP. In fact, a successful TTIP would be a TPP-plus or RCEP-plus agreement with regard to regulatory coherence and potentially with regard to WTO-plus and WTO-extra norms. In this sense, TTIP is likely to have more impact on Asian economies than TPP or RCEP are likely to have on European economies.

Despite TTIP’s inherent potential to leverage US-EU efforts to engage rising powers on the terms of their integration into the international rules-based order, governments have not stated whether and how the eventual TTIP agreement, once concluded, might be open to others willing and able to commit to similar goals and ground rules. Framing the TTIP as an element of 'open architecture' accessible to others could give the United States and the EU tremendous leverage in terms of ensuring ever broader commitments to the high standards and basic principles governing modern open economies.

Long live the TTIP?

Getting a TTIP deal will be tough. Remaining transatlantic tariff barriers, especially in agriculture, often reflect the most politically difficult cases. Long phase-in periods may be needed to eliminate tariff and quota barriers completely. Some of the most intense transatlantic disagreements have arisen over differences in regulatory policy. Issues such as food safety or environmental standards have strong public constituencies and are often extremely sensitive in the domestic political arena. Responsibility for regulation is split in the EU between Brussels and the member states, and in the United States between the federal and state governments. Investment barriers, especially in terms of infrastructure and transport sector ownership, will be very difficult to change. There is considerable debate how and whether to include financial services. Also, it is questionable whether either side is prepared to gore its sacred cows on the TTIP altar –for example the Jones Act on merchant marine for the United States. The EU has already taken audiovisual services off the negotiating table. Defense trade also seems off limits. Finally, investor-state dispute settlement mechanisms envisaged under TTIP are contentious.

Nonetheless, TTIP's potential payoff is high. The geostrategic impact of such an agreement could be as profound as the direct economic benefits. If leaders on both sides of the Atlantic grasp the moment, America's first ‘Pacific President’ and his EU partners may well become best known for having re-founded the Atlantic partnership. If they do not, then issues of failing trust and confidence, so visible today, will continue to eat away at the relationship like termites in the woodwork.

Author: Daniel S. Hamilton, Austrian Marshall Plan Foundation Professor and Executive Director of the Center for Transatlantic Relations, Johns Hopkins University School of Advanced International Studies, Washington, D.C., USA.


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