TTIP: The Economic and Strategic Effects

TTIP: The Economic and Strategic Effects

Jiang Yang& Wang Yiwei

After the outbreak of global financial crisis, the United States has been making great efforts, as its strategy, to push forward the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) in an attempt to continue its dominating role in the world economic system by leading higherstandard globalization. Out of their interests on the sensitive issue of U.S. rebalancing strategy to Asia, the Chinese academia focuses more on the TPP and has not given enough attention to the TTIP. However, the TTIP is actually more exclusive in nature to China. Strategically China should pay more attention to the TTIP and its impacts on China, and engage in serious study on how to deepen trade and investment reform and reactivate multilateral trade negotiations.

Progress and Obstacles in TTIP Negotiations

Early in the time of the Kennedy administration, the United States had the idea of forming a common market with Europe. As the major promoter, the U.S. worked hard to strengthen the Transatlanticrelations in order to reverse its disadvantages in confrontation with the Soviet Union. The European Union, through post-Cold-War enlargement, has surpassed the U.S. in its total economic output. The EU, striving for equality with the U.S., proposed the New Atlantic Agenda and New Transatlantic Market in order to shape an EU-U.S. economic and trade relations. In recent years, prompted by the U.S. rebalancing strategy as well as the financial crisis and disappointed by the current multilateral world trade mechanism, the EU has made greater efforts to push forward a free trade arrangement between Europe and the U.S., with the purpose of roping in the U.S. At the U.S.-EU summit in November 2011, a high-level working group on jobs and growth was set up to explore new paths to tap full potentials concerning transatlantic partnership, which eventually evolved to be the TTIP talks.

In June 2013, the EU and the U.S. proclaimed the start of the TTIP talks at the G8 summit in Ireland. The TTIP negotiations focus on the following fields: first of all the market access including lower tariffs, wider-open service market and larger-scale access to government procurement; secondly regulatory coordination between company and industry so as to reduce transaction costs; and thirdly future world trade and investment rules including rules and regulations concerning energy and raw materials, investment protection and sustainable development.

So far, the TTIP negotiations are by no means smooth-going, since sharp contradictions concerning energy export license mechanisms, dispute settlement mechanism and agro-products safety and subsidies have been brought to light. And voices against the TTIP from respective countries have been getting louder and louder. The opposition from Europe is worried that the TTIP objective relates more to corporate profits instead of free trade, therefore as a result, the European standard for safety in food, chemical, agriculturaland energy fields would be weakened. Europe has been carrying out preventive principles for a long time to guard against the access of any products which might be harmful to human health to the European market, and hold presumption of guilt on genetically modified products. The U.S., for a long time, has worked hard to enter the European market, and brought lawsuits to WTO against the EU on disputes of agricultural products. Although agriculturerelated trade volume accounts for only 5% across the Atlantic, both sides have influential hardliners. Agricultural subsidy is another tough issue, when the U.S. subsidizes farmers’ income while the EU subsidizes agricultural product price. Opposition from Europe also think that the globalization has caused loss of state and regional identity, and they are worried that American companies would pull down the European defensive line and challenge the EU state policies by making use of regulations concerning investors’ disputes.

Confronted with strong opposition at home, the TTIP negotiators eventually take steps to work out exemption clauses. During the 4th round of talks, the topic on “mechanism for dispute settlement between investors and the state” was temporarily shelved upon Germany’s request. And as requested by the United States prior to the 5th round of talks, the financial and service sectors are not included in negotiations. Concerned over the TTIP threats to the food and environment and irritated by reports of U.S. espionage activities, Germany resisted publicly the 6th round of talks.

Although high-level officials from both EU and the U.S. expressed their willingness to reach agreement on the TTIP prior to 2016 U.S. presidential election, yet it is by no means optimistic for them to realize the objective because they are very much subjected to constraints.

First constraint comes from the mechanism. The European Commission makes efforts to promote the TTIP negotiations, however, the EC will not be able to sign any agreements without the consent from France, Germany and the United Kingdom since they could overrule in talks. The European countries are concerned about American competitive edge especially in innovative industries like finance, service and IT sectors, so that all agreements reached have to be approved by the European Parliament. The U.S. worries about European competitiveness in particular in sectors of automobile, light and heavy industries and luxury goods. Without a trade promotion authority with the Congressional mandate, the U.S. final approval of the TTIP remains uncertain.

Second constraint relates to politics. Intensive TTIP talks will be getting tougher, since the EU and the U.S. will find it more difficult to make compromise owing to strong pressures from interest groups in favor of protection at home. During the European Parliament election in May 2014, the Euro-skeptic Parties grow in strength, thus challenging the TTIP talks with more resistance. The National Frontof France expressed its opposition against any EU-U.S. agreement. The Independent Party of Britain asked the EU to “hand back” the trade talk authority to respective European governments. At the same time, mainstream Parties in EU find themselves more vulnerable in the face with the EU-skeptic Parties so that they are more prudent in trade talks. The EC is confronted with greater difficulties in promoting the TTIP to its members.

Mutual trust and confidence constitute the third constraint. Differences between the U.S. and the EU and among the EU member states are exposed during the TTIP talks. The TTIP negotiations were started at the time when the Prism Scandal broke out. Although American surveillance activities against Europe were not touched upon in talks, European misgivings thus incurred remain intact and the mutual trusts between Washington and Brussels have been badly undermined. The EU countries hold different attitudes on the TTIP according to their consequential benefits and losses. IFO, a German think tank stationed in Munich, reported right before the 1st round of the TTIP talks that Britain would be the largest beneficiary; it was followed by Sweden, Ireland and Finland; Germany would be somewhere in between while France would benefit less.

Soon after his nomination as the EC President, Mr. Jean-Claude Junker made a speech at the European Parliament, expressing his hope that he wants to reach a fair and balanced trade agreement with the U.S. and would never give up European safety, health, social and digital protection standard or diversified cultures in exchange for a free trade. On the issue of digital markets, the French Government holds very harsh attitudes on opening-up of its domestic digital market, and urges the EU to conduct judicial investigation on Google, Facebook and other transnational internet corporations in view of suspected violation of privacy. To formulate common regulations and standards of supervision makes the TTIP negotiations very complicated andtedious.

The last constraint relates to different models. Both the U.S. and Europe are developed capitalist countries, however, the U.S. belongs to the Anglo-Saxon model of capitalism while the EU represents the Rhineland capitalism. The TTIP negotiations intend to converge way of production, style of life and way of thinking from two major capitalist models, and its difficulties are imaginable. With their core interests being affected as the talks intensify, regional and sectoral backlash and resistance from both Europe and the U.S. are expected to burst.

Economic and Strategic Considerations for TTIP

After the global financial crisis, especially after the debt crisis in Europe, both economic factor (enterprise behavior focusing on coordinated supervision among enterprises) and strategic factor (government action focusing on rules-regulations-setting) are taken into consideration while formulating a free trade agreement, and rules and regulations on investment are also added to free trade negotiation agenda. It is against this historical background that the TTIP was initiated and promoted with force.

Economic consideration and enterprise behavior constitute the basic content for the TTIP. The TTIP is a natural outcome of strengthened internal market integration between the first and the second largest economies in a new stage of globalization, focusing on behind-the-border regulation coherence, and the removal of non-technical barriers to trade and quarantine-related trade barriers. It is expected that 2/3 up to 4/5 of returns will come from reducing bureaucratic and regulation costs, cutting down duplicated verification and opening-up trade service and government procurement. According to the Report on the Transatlantic Economy2013 by the Centre for Transatlantic Relations of the John Hopkins University in the United States, of U.S. imports from the EU, 61% are related-party trade, surpassing by a big margin the global average of 48.3%. Of U.S. exports to the EU, 31.3% are related-party trade. This means that the impetus for the TTIP comes, first of all, from European and American enterprises. The TTIP intends to accomplish goal of avoiding cross-recognition of standards through regulatory coordination, thus realizing nontariff barriers reduction, trade and investment liberation and facilitation, and cost cutting and reduction of duplicated verification.

Since the debt crisis erupted in Europe, 51% of the EU economic growth has come from export. Therefore, Brussels is more in favor of free trade arrangement, and in particular is keen to reaching free trade agreement with Washington, its largest trading partner. Taking into full consideration of national and sectoral interests, the EU has spared no efforts in its bargain with the U.S. which has made Washington feel uncomfortable. However, Brussels acknowledges that no other arrangement rather than the TTIP will help Europe achieve its economic growth.

The EU goal in the talks is to increase bilateral trade and investment and promote employment and economic growth through market access, regulatory coordination and global standards-setting. To put it in specific, the purpose of Brussels are three-folds: firstly to remove tariffs on commodity trade and other restrictions, seek more access to business and service sectors, provide high-standard protection to EU investors, and give favorable procurement opportunities to EU enterprises in the U.S.; secondly to make the removal of unnecessaryrules and regulations as its pivotal objective of the talks, and to settle problems concerning geographical indication, customs clearance facilitation and competition policies; and finally to commit to sustainable development and emphasize international environment and labor standard.

To make concerted efforts and to achieve growth in relying on accumulative strength is a major economic factor for the TTIP. The EU-U.S. accumulative advantages lie in their 500 billion Euros of trade volume, 280 billion Euros of service trade, and 3.7 trillion Euros of bilateral investments in 2012. However, suffered from heavy blows by the Wall Street financial tsunami and the debt crisis in Europe, Europe and America, in order to stimulate their economic growth and increase employment opportunities, have to give up consumption and pay more attention to investment and export. Optimistic analysis estimates that, with the TTIP completed, American exports to Europe could increase by 17%, and EU exports to the U.S. by 18%, and 1 million jobs more could be created on each side of the Atlantic.

The TTIP Economic Effect Assessment Report published on the EC website on September 30, 2013 pointed out that, at the time when the TTIP is agreed on, the total economic volume of Europe will be upgraded by 120 billion Euros (about 0.5% of its GDP), with average family earnings increasing by 545 Euros while the U.S. economic volume will increase by 95 billion Euros (about 0.4% of its GDP). So this is the most beneficial economic stimulus formula at the moment. The sectors in Europe which benefit most are metal materials (+12%), processed food industry (+ 9%), chemical products (+9%), other manufacturing industries (+6%) and transportation (+6%). The European auto export in particular is expected to grow by 40%, agriculture, forestry and fisheries industry will have a 0.06% increase in their total production, and the salary for both skilled andnon-skilled workers will be raised by 0.5%.

The transatlantic economic growth is bound to bring about consumption level. Therefore, the TTIP is not only beneficial to Europe and the U.S., but also to other trading partners with an economic payoff of 99 billion Euros. If agreement is reached between Europe and the U.S. on supervision issue, 20% of gains will belong to other trading partners.

Another factor which should not be neglected is the strategic consideration for the TTIP. The EU intends to keep Americans in through the TTIP, and to play the role of super-partner in the rules-setting for global trade and investment so as to reshape the West. Washington wants to upgrade world trade and investment rules through the TPP and TTIP talks to make Chinese competitiveness weakened and Chinese markets less attractive, and to strengthen its geopolitical dominance in the Asia-Pacific and across the Atlantic. As for the EU-U.S. government actions, the TTIP focuses on the formulation of international regulations, and, in particular, it adds rules for investment to FTA, which serves the purpose of exploring a new and higher-standard way of regional integration.

The first strategic consideration is to form an “economic NATO”in order to re-energize the Western world. The TTIP has been called the largest bilateral FTA in history, and the TTIP might invigorate the post-Cold-War Transatlantic relations. German weeklyDer Spiegeland the America’s Atlantic Council carried articles, saying that the TTIP is not merely an FTA. Through the TTIP, a mechanism for coordination will be established between the EU and the U.S., which serves their final goal of forming an interest community, or so-calledeconomic NATO, in order to meet new challenges in an evolving world economic environment.

Anne-Marie Slaughter, former Director of Policy Planning of the U.S. State Department, pointed out that Washington, by starting the TTIP talks, intended to show that Europe remains a corner stone for the U.S. participation in the world. She said further that the highlevel economic integration between the two sides helps boost their cooperation in other fields in the world political arena, and together the two will make the Atlantic Century belonging to the U.S. and the EU. President Jose Manuel Barroso of the European Commission regards the TTIP talks an event significant enough to turn the tide and usher in a new era for FTA in the 21st century.

The second strategic consideration relates to efforts made across the Atlantic to prevent them from being sidelined in the global rulesmaking. The objective for the TTIP talks is to formulate principles featuring Transatlantic economic principles (market-oriented and regulation-based market economy) and a new global trading system based on the value of freedom and democracy. Such a trading system will be a model for other economies in the world in the rulessetting, supervision and economic relations, and serve the purpose of consolidating the U.S.-EU leadership in global economic and trading system and preventing other players from taking over the leadership. Mr. Karel De Gucht, EU Commissioner of Trade, said in his open speech that the TTIP has the bearing on the importance of the Western free world in world economic and political affairs, with a pivotal goal of preventing the leadership from passing over to other hands.1Robin Emmott, “EU Trade Chief Hopes to Clinch U.S. Trade by Late 2014,” Reuters, February 27, 2013.

Spillovers From TTIP Talks

The U.S. and the EU are the largest economies in the world, accounting for half of the world GDP and 1/3 of world trade volume. At the same time, they are major rules-makers in the world. As the negotiations proceed, more crucial and sensitive fields will be touched upon with more difficulties. The agreement will have to be ratified by a 2/3 majority of the U.S. Congress, and approved by a simple majority of the European Parliament as well as by a simple majority of each Parliament of 28 member states. However, both sides think that the TTIP talks are too big to fail. That’s why the TTIP will produce spillovers before the TPP process, thus affecting world trade rules, standards as well as the world strategic landscape.

Setting precedence on reduction of non-tariff barriers

The trade liberation after the World War II focused on lowering tariff. Since the average tariffs between the U.S. and Europe is less than 3% and no hurts will be expected by further tariff cuts, the TTIP negotiations, at the initial step, are dealing with non-tariff barriers, including import quota, discriminatory measures like “buying American”, management and safety standards, inspection procedure and the favorable treatment to domestic companies. According to estimates, non-tariff barriers, rules and regulations or behind-theborder measures account for 10-20% of tariff, and the reduction of these barriers will lower costs for more transatlantic business.

Setting a world standard for state-owned enterprises

A document worked out by 28 EU member states for the TTIP negotiations shows that the European Commission intends to set in the talks global standard for subsidy transparency and related rules for state-owned enterprises. It said that a global standard, whichwill restrict state interference and affect state-owned and private enterprises, will become a model for other bilateral agreements as well as the contents in future multilateral agreements. In the WTO Doha Round talks, the EU made efforts to incorporate principle on competition and investment into multilateral agreement, however, it was resolutely opposed by developing countries. Taking the TTIP talks as an opportunity, EU negotiators would like to achieve this long-delayed objective, to include policy of competition in future trade agreements ( in particular in the agreements with China), and to bring back once again to world trade talks issues concerning subsidies, anti-monopoly and merger clauses. The EU thinks that, as state-owned enterprises become major competitors in the world, it is all the more necessary to clarify relevant issues and to discuss how government subsidies and other favorable treatments to state-owned enterprises could twist competition and hurt U.S.-EU enterprises so as to prevent them from evading anti-monopoly and merger laws for private companies. Some critics think that its final objective is same principles are applied in the world, including transparency on ownership, prevention of unequal treatment, measures taken to address twisted state subsidies, so as to ensure SOE’s performance according to market-oriented rules.2Shayerah Ilias Akhtar and Vivian C. Jones, “TTIP Negotiations,” CRS Report, Congressional Research Service, February 4, 2014.

Leading new rules in world economic liberalization

By discussing new fields the WHO has not touched upon, the TTIP negotiations has shown its efforts to play a leading role in world economic liberalization. For instance, owing to the fact that different safety standards and inspection procedures on consumer goods tend to increase costs for enterprises, the EU and the U.S. prioritize basic legal standard and independent medicine approval procedure in theirtalks. The talks also put stress on coordinated supervision, especially in the field of new technologies, a new arrangement will tackle current and future issues the industries will face. So Washington agrees to include financial service, national defense, tobacco, government procurement and other sensitive sectors into negotiations.

Brussels holds a more enthusiastic attitude on the TTIP than Washington because the latter has the following advantages: First of all, the U.S. has a better economic situation with a more stable recovery; secondly, the EU has felt pressures from Washington by its TPP drive in the Asia-Pacific region. The EU is also carrying out FTA talks with some Asian countries, however, these negotiations are on bilateral level, and they are not on a par with the TPP so far as the standards are concerned.

The debt-hit EU regards the TTIP as an effective formula which will help it out of economic and strategic plight, and the TTIP talks across the Atlantic signify that the EU has opted to cooperate with the U.S. in the face of challenges from newly emerging countries. In order to increase the legitimacy of the TTIP and seek supports from member states for the TTIP, the EU leaders picked up newly emerging countries, and China in particular, as a pretext for strengthening Transatlantic cooperation. Although the talks will weaken the EU identity and bring about divergence among its member states, yet France, who very much concerns the U.S. open market and in particular American film and TV culture impacts, did not stop the TTIP talks as people expected. Some people pointed out that the reason for France to take part in the TTIP talks lies in its greater fear of China than its hatred of the U.S. The EU has reached FTA with the ROK and Singapore in Asia and started FTA talks with Japan and India. By so doing, Brussels has objectively associated itself with Washington’s rebalancing strategy, showing the incorporation of EU economic interests into America’s strategic consideration.

TTIP’s Impacts on China

Of late, there are three trends in the globalized rules-making: To strategize free trade agreement so as to make the WTO impracticable; to increase EU-U.S. strategic ad-vantages by binding investment with trade arrangement in now FTAs; and to develop regional integration in a comprehensive and overall way. The three trends find their expressions in the TTIP talks. In addition to tariff reduction, the TTIP talks focus on three key issues: market access and regulations of supervision, nontariff barriers and market rules. If agreed, the TTIP will constitute a new basis for international trade and investment rules, thus affecting the making of the globalized rules and regulations and, together with the TPP, increasing by a big margin the cost of China’s participation in globalization.

Compared with the TPP which could not exclude China in theory, the TTIP is totally exclusive of China since China cannot take part directly in the TTIP talks. A European scholar said that TPP+TTIP = EBC (everyone but China). Since America and Europe do not have a wide economic gap, it is easier to reach the TTIP than TPP. In this respect, therefore it exerts stronger strategic pressures against China. The TTIP’s negotiation process and outcome will produce strategic spillover effect by leading in a new round of globalization, thus affecting directly or indirectly China’s advantage in comparative competitiveness, market access and its voice in the rules-making.

The TTIP talks are defensive in nature in dealing with the rising of non-Western world, but are offensive in leading higher standardglobalization. All of these will effect directly or indirectly China’s national competitiveness. Over the past decades, China, making full use of its advantages in labor-intensive manufacturing and huge domestic market, has achieved its double-digit economic growth for a long time. Furthermore, in concerted efforts with Brazil, India and other newly emerging economies, China has skillfully resorted to WTO dispute settlement mechanism as well as its appeal procedures to defend its own interests.

However, both Washington and Brussels regard China largest beneficiary in multilateral trading system and a “free-rider” in globalization. China, instead of being led into Western strategic orbit, has become the biggest winner of globalization by free-riding and China has gained increasingly competitive advantages in upgrading its markets, technologies and capitals. If China is not contained through rules and standards, the U.S. and EU can do nothing but watching emergence of a “China Century”.

Therefore, the U.S. and Europe would like to change rules of game through the TTIP, offset China’s international competitiveness by urging China to carry out economic transformation, increasing its environmental and social costs, and pushing China to change its export-oriented economic mode. When Washington and Brussels reach agreement on trade and investment rules, new international standards will come into being, thus bringing effects to the whole world and raising technical barriers for China to enter into American and European markets.

In conclusion, talks on free trade and investment agreement are by no means driven by pure corporate action and economic interests, their strategic significance and geopolitical impacts are looming large. In dealing with a re-shaping West and in coping with higherstandard globalization, China’s strategic wisdom is being tested.

Jiang Yang is an associate professor at the Tongji University School of Law; Wang Yiwei is Professor and PhD Supervisor, School of International Studies, Renmin University of China, and Director of European Research Center, Renmin University.