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Transatlantic Trade for All

WASHINGTON, DC – The negotiations to create a Transatlantic Trade and Investment Partnership between the European Union and the United States are being widely welcomed. British Prime Minister David Cameron has called the TTIP a “once-in-a-generation prize,” citing potential gains of £80 billion ($125.5 billion) each for the EU and the US and £85 billion for the rest of the world.

For a world weary of waiting for the World Trade Organization’s interminable Doha trade round to conclude, even a bilateral trade initiative may seem like a boon, especially when, as a recent Financial Times editorial pointed out, “bilateral” covers half of the world’s economy. But there is a serious downside: The deal could hurt developing-country exporters, unless the EU and the US make a concerted effort to protect these actors’ interests.

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The feature of the proposed pact that elicits the most excitement – its focus on regulatory barriers like mandatory product standards – should actually incite the greatest concern. Given low tariffs in the EU and the US – less than 5%, on average – further preferential reductions will not seriously handicap outsiders. But, when it comes to standards – such as those governing safety, health, and the environment – the market-access requirements are brutal and binary: either you meet the established standard or you do not sell.

As a result, third-country firms’ options will depend on how TTIP standards are established: through harmonization (adoption of a common standard) or mutual recognition (acceptance of goods that meet one another’s established standards). The first option would enable producers everywhere to take advantage of economies of scale. But, in some cases, the harmonized standard could be more stringent than some countries’ original standards.

Even though new standards would apply to suppliers from all exporting countries, compliance costs usually vary, meaning that those less equipped to meet higher standards could suffer. In the late 1990’s, when the EU decided to harmonize standards for aflatoxins (a group of toxic compounds produced by certain molds), eight member states – including Italy, the Netherlands, and Spain – raised their national standards substantially, which is likely to have caused African exports of cereals, dried fruits, and nuts to Europe to decline by as much as $670 million.

With mutual recognition, the EU and the US would accept each other’s standards or conformity-assessment procedures, allowing firms to adhere to the less stringent requirements in each area. If the policy were extended to third-country firms, it would have a powerful liberalizing impact. For example, Malaysian television producers could choose to comply with, say, America’s easier-to-meet safety standards, then sell the same product in both markets, reaping the benefits of economies of scale while lowering compliance costs.

If, however, the TTIP excluded third-country firms from the mutual recognition policy, their competitiveness vis-à-vis European and American companies would diminish substantially. Indeed, our research shows that when mutual-recognition agreements include restrictive rules of origin, intra-regional trade increases – at the expense of trade with other countries – and that developing countries tend to suffer most.

In fact, excessively constraining rules of origin have proved problematic for some of the EU’s previous recognition agreements, such as those governing professional-services standards. While a Brazilian orange admitted for sale in Portugal can be sold throughout the EU, a Brazilian engineer or accountant licensed in Portugal must fulfill separate licensing requirements to work elsewhere in the EU, hampering much-needed labor mobility by forcing non-European workers to endure costly and inefficient bureaucratic procedures.

Furthermore, when it comes to tariffs and standards, WTO rules are not created equal. While they protect countries excluded from bilateral or regional tariff agreements, thereby ensuring that integrated markets do not receive additional advantages, few safeguards exist to shield third countries from the fallout of agreements on mandatory standards.

Even in the absence of international rules, the EU and the US could take two actions to ensure that the TTIP does not have adverse consequences for developing economies. First, they could allow all countries to reap the benefits of a bilateral mutual-recognition deal by agreeing not to impose restrictive rules of origin. Second, where they do consider harmonization, they could favor the less stringent of the original standards, unless there is credible evidence that it would not support the relevant regulatory objective. This is akin to a WTO test for departures from established international standards.

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If the EU and the US made these two commitments, the rest of the world could follow the TTIP negotiations with hope, rather than trepidation.

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