February 15, 2017
Keeping TTIP Alive By Any Other Name!
By Andrea Montanino and Dante Roscini
As indicated by Trump’s rhetoric, the new US administration seems ready to give up the principles of openness, not just in the sphere of economics, that have greatly benefited the entire world. Future generations of Europeans and Americans will pay for this mistake if leaders on both sides of the Atlantic do not pave the way for an alternative agreement, keeping the talks alive. The new reality calls for a rethinking of TTIP, not its abandonment.
The economic arguments for free trade are overwhelming. Besides economic magnitudes, free trade creates a channel of communication that promotes the exchange of ideas, cultural understanding, and international cooperation necessary for solving global problems. In the words of Frédéric Bastiat, a nineteenth-century French economist, “When goods do not cross borders, soldiers will.”
Isolationism and protectionism, on the other hand, favor the concentrated interests of a few at the expense of the diffuse interests of everyone else. The cost of subsidizing those who are “protected” by nationalist economic policies accrues to taxpayers and consumers. History demonstrates that protectionist measures may indeed provide temporary—if costly—employment protection in some areas but, eventually, the price-distorting, artificial barriers they create succumb to the market forces that inexorably dominate trade flows over the long term.
For example, the United States had a disastrous experience with protectionism in the 1930s with the Smoot-Hawley Tariff, an act that introduced tariffs in an attempt to shift demand to domestic producers in the midst of plummeting employment. The ensuing retaliatory trade war that erupted plunged the world’s commercial exchange down a rapidly shrinking spiral that severely compounded the Great Depression. Following the end of World War II, the United States and twenty-two other countries came together to design a system that would lower tariffs, facilitate trade, and prevent a repeat of such policy mistakes. Out of that effort emerged the General Agreement on Tariffs and Trade (GATT).
Since then, multilateral and bilateral agreements have helped global trade to grow rapidly: from 1960 to the onset of the global financial crisis in 2007, global trade grew from 25 percent to 60 percent of the world’s gross domestic product (GDP).
Of the many structural shifts that transformed the landscape of globalization in the last quarter century, none was bigger than the speed of China’s rise. China’s share of world manufacturing exports soared from 2 percent in 1991 to 19 percent by 2013—with a material acceleration since its accession to the World Trade Organization (WTO) in 2001—turning the country into the United States’ single-largest trading partner. This “China shock” and the associated rearrangement of entire supply chains exposed weaknesses in US and European economies with wages and employment suffering disproportionately in certain sectors. The change negatively affected large pockets of the middle and working classes in those sectors and the adjustment has been very slow.
The resulting backlash against globalization became evident in 2016 both in the United Kingdom’s decision to leave the European Union and in the US presidential election. TTIP may well be a casualty of this growing discontent. However, the key features of TTIP remain valid even in the new political landscape and can inform the negotiation of an alternative trade agreement.
First and foremost, any agreement with EU countries must be a multilateral agreement: EU member states cannot negotiate any bilateral agreements and in fact, all the competencies are concentrated in Brussels that negotiate under a mandate of the member states.
Second, free trade is already a reality among the two sides of the Atlantic since tariffs are only around 3 per cent on average. In its current form, TTIP wants to take this arrangement a step further, helping mainly small businesses to trade through a reduction of non-tariff barriers, regulation in services, public procurement, geographical indications, and investor protection. In particular, a novel understanding of trade regulations, stipulated in the agreement, would allow for the liberalization of services, eliminate the need to make different products for different markets, and create sizeable reductions in regulatory burdens. The draft agreement also seeks to facilitate the ever more important cross-border e-commerce by reducing barriers to digital trade while finding the right balance between the free flow of information and privacy issues. If implemented, TTIP can serve as a new model for the next phase of globalization by becoming the reference treaty for international best practices in a rules-based economic partnership, focused on establishing global minimum standards and harmonizing approaches.
Third, a trade agreement with the European Union would provide a sizeable and yet untapped economic stimulus: even a small percentage increase in the $5.5 trillion in annual commerce between the transatlantic markets would be a meaningful inducement to growth.
Fourth, the benefits of an agreement would go beyond the EU and the United States. Both trading partners hold a significant number of bilateral treaties, as a result, an EU-US agreement would create a geographically expanded platform for third countries. Adherence to global standards and streamlined regulations would encourage greater foreign investment flows to those countries.
The recent political developments in the United States and the United Kingdom, as well as the uncertainty about the outcome of elections this year in major European countries—France, Germany, and the Netherlands—suggest that a new trade deal will have to be negotiated. That deal should be based on TTIP’s original premise.
Policy-makers should send a political signal by rebranding the future deal, abandoning negotiations on the most controversial issues, and focusing on regulations where there is a clear mutual benefit. In negotiations, it would be best to keep a door open for future amendments.
While much smaller, the recently approved Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU could be the basis for renewed negotiations between the EU and the United States. Moreover, it is now possible that a bilateral agreement between the United States and the United Kingdom might precede the one with the rest of the EU. Negotiations between the United States and the United Kingdom can only start after the United Kingdom leaves the EU—a process that could take at least two years to complete. A deal with the EU will likely materialize after the current term of President Trump and under a new European Commission. Nevertheless, even with a different name, negotiations for a deal should start now.
Andrea Montanino is the director of the Atlantic Council’s Global Business and Economics Program.
Dante Roscini is a nonresident senior fellow with the Global Business and Economics Program at the Atlantic Council and Professor of Management Practice at Harvard Business School.