In February 2013, the European Union (EU) and the United States (U.S.) commenced negotiations for a Transatlantic Trade and Investment Partnership (TTIP). The proposed pact would create the world’s biggest free trade area.
Both the EU and U.S. are firmly anchored to the multilateral system of the World Trade Organization (WTO), whose trade liberalisation and dispute resolution mechanisms have strengthened transatlantic commercial ties. But there remains significant scope for growth of trade and investment as the EU and U.S. continue their slow recovery from the global downturn.
Trends in transatlantic trade
From a steep decline in 2008-09, transatlantic trade displayed steady, if modest, growth in 2010-2012. But trade between the EU and U.S. then stagnated. In 2013, merchandise and commercial trade reached $484.4 billion and $304.9 billion respectively; below the levels of 2012.
The recent ebbing of transatlantic trade reflects: (1) weak GDP growth rates that depress import demand, a development that is especially pronounced in the Euro area where real GDP growth turned negative in 2012-13 and; (2) persistent barriers to trade between the EU and U.S. that remain after the G-20’s “standstill” declaration on protectionism issued at the London Summit in April 2009.
Machinery, chemicals, and fuels comprise the largest shares of transatlantic trade in merchandise goods (totalling 72.6 percent). Among these merchandise trade categories, fuels exhibit the strongest rate of growth of EU/U.S. trade. That trend will likely continue if the anticipated expansion of transatlantic trade in liquified natural gas (accelerated by geopolitical tensions in Russia and Ukraine) materialises.
Trade in services, which represents nearly 40 percent of aggregate trade between the EU and U.S., exhibits a relatively low growth rate (19.9 percent increase in 2009-13). This suggests there is a wide scope for growth of trade in services (communication, consulting, education, engineering, tourism, transport, etc.) via the lowering of barriers to service-related trade.
Trends in transatlantic investment
While foreign trade constitutes a vital component of EU/U.S. economic ties, the fulcrum of transatlantic commercial relations is foreign direct investment (FDI). By 2012, FDI stock by the United States in the European Union surpassed $2.2 trillion. Three EU countries (Netherlands, United Kingdom and Luxembourg) capture over 70 percent of inbound investment from the U.S. EU FDI stock in the U.S. exceeds $1.6 trillion, of which five member states (U.K., Netherlands, France, Luxembourg and Germany) represent over 80 percent.
To illustrate the centrality of FDI in the transatlantic commercial arena - the U.S. represents 29 percent of global outbound FDI stock by the European Union and 41 percent of inbound FDI stock in the EU. By contrast, the U.S. accounts for just 11 percent of imported goods and services entering the EU and 17 percent of total EU exports. Host country and intra-regional sales of the EU subsidiaries of American multinational corporations well surpass the transatlantic exports of their U.S.-based parent companies. Similarly, the domestic sales of the U.S. subsidiaries of European-based multinational corporations exceed the volume of EU-originating exports across the Atlantic.
Foreign direct investment between the EU and U.S. has held steady despite the weak recovery from the Great Recession. Between 2008 and 2013, FDI stock of EU investors in the U.S. increased 29 percent. During the same period, FDI stock of American investors in the EU grew by 40 percent. Among the EU-28 countries, Ireland, Luxembourg, Netherlands and the United Kingdom are the most active participants in transatlantic investment activities.
Objectives of TTIP
Against these trends, authorities in Brussels and Washington seek a bilateral accord that would lower barriers to trade and investment between the EU and United States. Such a pact would include the following elements:
Average WTO-bound tariffs in the EU and U.S. are already quite low (5.2 percent and 3.5 percent respectively). But TTIP negotiators regard further tariff cuts as a core objective for the following reasons:
- The sheer volume of transatlantic trade means that even low tariffs impose non-negligible costs on European and American exporters
- Tariffs remain high in particular product categories (notably processed foods and motor vehicles), inhibiting transatlantic trade
- Recently completed free trade agreements with other countries (e.g., EU-Canada, U.S.-South Korea) generate competitive pressure to eliminate tariffs on EU/U.S. trade
- The rising importance of global value chains (through which multinational corporations disperse specialised manufacturing and R&D activities in separate geographic locations) heightens the impact of marginal differences in tariffs
Variations in the regulatory structures of the EU and U.S. erect Non-Tariff Barriers (NTBs) that impede transatlantic trade. Companies active in transatlantic commerce must meet regulatory standards in both jurisdictions, boosting compliance costs and spawning duplicative administrative procedures. These “behind the border” trade restrictions are particularly onerous for small and medium enterprises, which often lack the internal capacity to meet dual regulatory standards.
The costs of NTBs vary widely by industry. A March 2013 study by the Centre for Economic Policy Research (“Reducing Transatlantic Barriers to Trade and Investment”) found that NTBs in the U.S. food and beverage industry impose the equivalent of a 73.3 percent tariff on EU exports. NTB costs are also high in chemicals, cosmetics, motor vehicles and financial services.
The proposed bilateral pact would harmonise, align, and mutually recognise EU and U.S. regulations governing health, consumer safety, environmental protection, product registration, and related areas. The challenge facing TTIP negotiators is to mitigate trade-impeding NTBs while preserving regulatory conventions vital to local cultural traditions (e.g., the EU’s prohibition of hormone-treated beef).
In addition to tariffs and NTBs, TTIP aims to lower barriers to transatlantic trade and investment in the following areas:
- Competition policy
- Dispute settlement
- Intellectual property
- Investor protection
- Public procurement
- Sustainable development
- Technical barriers to trade
Economic benefits of TTIP
The CEPR study estimates that a comprehensive Transatlantic Trade and Investment Partnership would deliver the following benefits:
- Increase annual GDP by €119 billion in the EU and €95 billion in the U.S.
- Boost yearly EU exports to the U.S. by €187 billion
- Raise U.S. exports to the EU by €159 billion
Among tradable goods industries, TTIP would generate the greatest gains for motor vehicles, chemicals and processed foods. The pact would also improve the welfare of European and American consumers (who would enjoy increased access to a broader range of products and services) and heighten the global competitiveness of EU and U.S. companies (which would reap scale and scope economies in an expanded transatlantic theater).
The benefits of TTIP would not be limited to the EU and United States. According to CEPR, a transatlantic pact would boost global GDP by €100 billion a year as external trading countries exploit the growth opportunities arising from the harmonisation and streamlining of EU/U.S. regulatory standards.
Conclusion: Political obstacles to TTIP
Notwithstanding the manifest economic benefits of TTIP, the transatlantic pact faces a number of political obstacles:
- TTIP raises complications regarding the status of external parties such as Turkey, which as a member of the EU Customs Union would be subject to a zero common tariff on U.S. exports, but as a non-EU country would not enjoy reciprocal access to the U.S. market
- The Obama Administration is conducting parallel negotiations for a Trans-Pacific Partnership (TPP) that may deplete the political capital necessary to consummate TTIP
- The recent U.S. Congressional elections strengthened the standing of the Republican Party, whose willingness to grant President Obama “fast track” authority (critical for the negotiation of international trade treaties) remains uncertain
This article is written by David Bartlett
Executive in Residence
Director of Global and Strategic Projects
Kogod School of Business
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