STANFORD – Negotiations have now commenced between the United States and the European Union on the Transatlantic Trade and Investment Partnership (TTIP), potentially the largest regional free-trade agreement in history. If successful, it would cover more than 40% of global GDP and account for large shares of world trade and foreign direct investment. The US and EU have set an ambitious goal of completing negotiations by the end of 2014. Historically, however, most trade agreements have taken much longer to complete.
The scale of the TTIP is enormous. With Croatia’s accession at the beginning of July, the EU now consists of 28 member states, each of which has its own particular set of special interests pressing for trade promotion or protection, based on comparative advantage, history, and raw domestic political power.
Moreover, the desired scope of the agreement is vast, complicating the process further. The TTIP would eliminate all trade tariffs and reduce non-tariff barriers, including in agriculture; expand market access in services trade; bring about closer regulatory harmonization; strengthen intellectual-property protection; restrict subsidies to state-owned enterprises; and more. This all but guarantees difficult talks ahead; indeed, France has already demanded and received a “cultural exception” for film and TV.
Expanding trade boosts income, on average, in all the countries involved. Economists estimate that global free trade, enabled by many successful rounds of multilateral talks (most recently the Uruguay Round, culminating in the establishment of the World Trade Organization), has boosted worldwide income substantially.
Regional free-trade agreements (FTAs), such as the TTIP, do so as well, but some of the gains may come at the expense of other trade partners. Within each country, despite net gains, there are also some losers. The best way to deal with the economic, political, and humanitarian concerns raised by trade agreements is via transition rules, temporary income support, and retraining, as opposed to maintaining protectionist barriers.
The gains from such pacts stem from a variety of factors, the most important of which is comparative advantage: countries specialize in producing the goods and services that they are relatively most efficient at producing, and trade these goods and services for others. Economies of scale and other factors are also important.
As the scope of trade liberalization shrinks, so do the benefits – more than proportionally. Estimates of the annual gains from a fully realized TTIP are $160 billion for the EU and $128 billion for the US. British Prime Minister David Cameron predicts two million new jobs. And a non-inflationary boost to growth in a weak global economy would be particularly timely.
But the devil is in the details. Tariffs are generally modest already, so gains from their further reduction would be modest as well. It is vital to remove non-tariff barriers, such as localized rules and restrictions not based on scientifically legitimate safety or health concerns, despite political pressure to maintain or tighten them. Limiting the scope of trade and investment covered by the TTIP would likewise reduce the benefits.
Trade negotiations become either broad and deep or narrow and limited. NAFTA, for example, followed the former route, greatly boosting trade among the US, Canada, and Mexico. Its copycat, SAFTA (the South Asian Free Trade Agreement), moved slowly to reduce tariffs and the list of excluded items, so India signed separate bilateral FTAs with Bangladesh and Sri Lanka.
The TTIP is being divided into 15 specific working groups. While the negotiations are new, the issues separating the two sides are long-standing and widely known. One of the most difficult is the EU’s limitation of imports of genetically modified foods, which presents a major problem for US agriculture. Another is financial regulation, with US banks preferring EU rules to the more stringent framework emerging at home (such as the much higher capital standards for large banks recently proposed by America’s financial regulators).
Several other serious disagreements also stand in the way of a comprehensive deal. For example, US pharmaceutical companies have stronger intellectual-property protection at home than in the EU. Entertainment will become increasingly contentious with online distribution of films. And the anachronistic 1920 Jones Act requires cargo carried between US ports to be shipped only on American ships (recall the confusion about the possibility of foreign ships coming to help during the BP Gulf oil spill). Safety regulations and restrictions on foreign control of companies in sensitive industries are further points of contention.
The TTIP is not just about the US and the EU. Mexico already has an FTA with the EU, and Canada is negotiating one. At some point, NAFTA and TTIP will need to be harmonized.
Meanwhile, the world’s other countries – still accounting for more than half of world GDP and the bulk of global trade and FDI – are wondering how the TTIP would affect each of them. One possibility, suggested by my ex-colleague, former US Trade Representative Carla Hills, is that a successful TTIP would be a major impetus for rekindling the moribund Doha Round of global free-trade talks. The Uruguay Round received a similar boost soon after NAFTA was signed.
Everyone everywhere has an interest in how the TTIP talks develop and in what ultimately results from them. To take a simple example, more reasonable EU rules on genetically modified agricultural imports from North America, if translated with appropriately careful monitoring to Africa, could be a tremendous boon to African agriculture. Failure to make any inroads on this score in the TTIP negotiations would almost certainly block genetically modified food in Africa.
Analogous issues arise in sector after sector, and in one regulation after another. We can hope, but in no way guarantee, that the details agreed at the end of the TTIP negotiations justify the enthusiasm at their start.