Towards a new global economic order – what does TTIP mean? Prof. Dr Henning Vöpel is Director of the Hamburg Institute of International Economics (HWWI), and Dr Jörn Quitzau is Head of Economic Trend Research at Berenberg What is the Transatlantic Trade and Investment Partnership TTIP? Through the TTIP the European Union and the United States of America intend to create the world’s biggest free trade zone. The trade agreement would reduce tariffs and other barriers to trade, and harmonize technical regulations, standards, and permitting procedures on both sides of the Atlantic, with the overarching goal of creating additional prosperity and jobs. The TTIP is meant to strengthen the shared values of Europe and America, bolster their positions of economic dominance, and thus establish a counter-weight to dynamically emergent economies such as China, for example. In some quarters, the TTIP is dismissed as a ‘cheap economic stimulus program.’ However, the effects of the agreement would go far beyond purely economic concerns. It has the potential to set worldwide standards. The successful conclusion of TTIP negotiations would be regarded as a benchmark for future free trade agreements. The TTIP is not just a trade agreement, but also an investment agreement. Besides the extensive reduction of tariffs, the TTIP would also seek to lower non-tariff barriers to trade (such as technical requirements and standards, for example). This would make it easier for European and American companies to invest in the other economic zone, respectively. Time plan Concrete negotiations on the TTIP commenced on 16 July 2013. Originally, the negotiations were considered to be a no-brainer, and therefore ratification was initially expected in October 2014. However, resistance to the trade agreement has grown with every round of negotiations. At the present time, a ratifiable agreement is expected to be ready at the end of 2015, but even this date is now considered to be ambitious. German Finance Minister Wolfgang Schäuble (CDU) is only one of many who no longer believe that a final agreement can be reached by the end of 2015. However, the negotiating parties are pushing for a speedier agreement, in view of the US Presidential elections in 2016, following shortly thereafter by the federal parliamentary elections in Germany, among others. No one wants to conduct negotiations against the backdrop of national elections because the sought-after agreement is too controversial politically. In the meantime, however, even this time plan is no longer considered to be realistic (as of early December 2014). Criticisms Many critics are particularly worried about the intended investment protection, as they believe that it would effectively circumvent democracy and the rule of law, because claims asserted by foreign companies against national governments would be settled by international arbitration tribunals, beyond the jurisdiction of European courts. As a result, so the critics claim, national governments would cede their sovereignty to industrial enterprises, at the expense of their citizens. If the agreement is found to have been breached, so they claim, the affected nation could be sentenced to pay high amounts of damages, which would be borne by taxpayers. Another issue besides investment protection that provokes great anxiety is the food sector. Chlorinated chicken, genetically modified maize, and hormone-treated meat are only some of the sensitive topics that are invariably raised in press coverage of the TTIP. Such negative headlines have thrown some European and US citizens into a full-blown panic over the TTIP. Naturally, the highly sceptical nature of public debate has had the effect of slowing the negotiation process. The failure of this project would be a political disaster. Therefore, we will take a somewhat closer look at the various criticisms. Another point of criticism involves the (insufficient) transparency of the negotiations. Critics feel that the exclusion of the public and the strict secrecy of the negotiation contents are undemocratic. In this regard, it certainly does not help that the EU Commission has praised the trade agreement as the most transparent in history. Furthermore, critics take little comfort in the fact that a number of EU parliamentary delegates are allowed to view transcripts in reading rooms, or that position papers are published on the internet prior to each meeting of negotiating partners. Associations, companies, and NGOs have taken advantage of the opportunity to meet with the lead negotiators of both sides after each round of negotiations to learn more about the current status. But critics are not placated by such arrangements. Although some details have leaked out in response to the growing public protest, the exact status of negotiations is supposed to be kept secret until ratification. However, the EU Commission has announced that the negotiating process will be made more transparent in the future, in that minutes of negotiation sessions will be made available to all EU parliament members and their aides. On the subject of potentially weakened quality standards, the positions have hardened of late. The Europeans have no trust in the US food hygiene regulations, and the Americans do not trust the European standards for medical products. While it is true that the EU standards are stricter than the US standards in many respects, there are also areas in which the opposite is true. Nonetheless, critics maintain that history has shown that the harmonisation that accompanies free trade agreements typically involves a weakening of standards. If the weakest or business-friendliest standard of any given country is adopted as the binding standard under the free trade agreement, that could unleash a downward spiral. The result would be cheaper, simpler, faster, but not necessarily better processes. Therefore, TTIP opponents are demanding the incorporation of a clause that guarantees the continued application of the highest standard in every case. The so-called ‘precautionary principle’ is applicable in Europe. It states that no technology may be used if potentially harmful consequences cannot be ruled out with certainty. In the United States, the opposite principle applies: a product may be banned only if harmful consequences can be proven. Critics fear grave economic and environmental damage in Europe if this principle is weakened, because European consumer protection laws are naturally much more restrictive than those in the United States. Trade between the European Union and the United States In order to assess the significance and potential effects of a free trade agreement between the EU and the USA, the economic roles and current trade ties of these two regions should first be considered. The EU and the USA are the two biggest economic regions in the world. Although their relative importance is diminishing somewhat as a consequence of the growing economic strength of other nations (such as China, for example), they still account for nearly half the world’s economic output. Their proportional shares of global trade reflect the size of these economies. In 2013, the EU accounted for approximately 15%, and the USA for approximately 12.9% of total world trade. Furthermore, the EU is the most important trading partner of the USA, and vice versa. In 2013, 16.8% of the foreign trade of the United States (including both exports and imports) was conducted with the EU, followed by Canada (16.4%) and China (14.6%). Conversely, trade with the USA accounted for 14% of the total extra-EU foreign trade of EU countries. The other important trading partners of the EU were likewise China, which accounted for 12.5% of extra-EU trade, followed by Russia and Switzerland (9.6% and 7.7%, respectively). In terms of absolute numbers, the EU exported goods and services worth about €447 billion to the USA in 2013, and imported goods and services worth about €342 billion from the United States. Thus, the EU generates a substantial trade surplus with the USA. The USA is also an important trading partner for Germany. Exports to the USA amounted to roughly € 90 billion in 2013, representing about 8% of the country’s total exports. US imports to Germany amounted to nearly €49 billion. Structure of trade In terms of sectors, industrial goods accounted for the lion’s share of traded goods between the EU and the USA. In 2013, more than 80% of total exports amounting to €288 billion were industrial goods, leaving a relatively small share of agricultural goods. Exported services in the amount of approximately €159 billion were less than half as much as exported goods. Services are more important for the USA, accounting for €146 billion worth of exports to the EU, as compared to €196 billion worth of exported goods. Furthermore, the proportion of agricultural exports is somewhat higher for the USA. Considering the most important types of goods traded between the EU and the USA, one quickly notices that most trade is conducted in the same categories of products, which also represent similar proportions of the respective trade figures. Machinery and Transport Equipment are the biggest category by far, accounting for about 40% of the bilateral exports of the EU and USA in 2013. The second-biggest category is chemical products, accounting for about 22% of bilateral exports in both cases, followed by other industrial goods and manufactured goods, and mineral fuels. The same ranking applies also to categories of goods traded between the USA and Germany, except that Machinery and Transport Equipment represent about 60% of German exports (USA slightly less than 50%). Chemicals represent 17% of the bilateral exports of both countries. Openness of markets and barriers to trade The currently high level of openness to trade is mainly reflected in the generally low tariff rates. In terms of sectors, both the EU and the USA levy the highest tariffs on agricultural products. The average tariff rate in the EU is 4.9% for agricultural products from the USA, while in the opposite direction the average tariff rate is 7.9%. However, if one weights the average tariff rates by the volumes of traded goods, the tariff rate levied on agricultural products from the USA is only 3.9%, and the tariff rate levied on products from the EU is only 2.6%. The difference between the weighted and unweighted tariff rates can be seen at least partially as an indication of the trade-steering effects of tariffs. For industrial goods, the weighted average tariff rate is 2.8% for both the EU and the USA. The difference between the weighted and unweighted averages is less than in the agricultural sector. In this case, the tariff rates of around 3.5% are approximately the same. Higher tariff rates are levied on certain product categories, where they can have an even greater influence on trade. For example, the tariff rate for small trucks exported from the EU to the USA is very high, at 25%. In the opposite direction, the EU levies 22% on the same type of product. Furthermore, tariffs on specific agricultural products exported to the EU can range as high as 25%. The USA levies particularly high tariffs on clothing, textiles, and leather goods; these can be as high as 56%. In such cases, a free trade agreement between the EU and the USA would make imported goods considerably cheaper. However, this particular detail could hardly be expected to appreciably stimulate trade, given the comparatively small quantities involved. Non-tariff barriers to trade lead to higher costs, whether through the distortion of market prices or the necessity of maintaining duplicate organisations in manufacturing or permitting. However, it is difficult to estimate exactly what effects the elimination of some of these trade barriers and the related cost reductions would have on the overall volume of trade conducted between the EU and the USA. Furthermore, previous estimates related to the TTIP are often subject to criticism. General assessment of the TTIP and conclusions Abstracted from the technical and methodical details, therefore, the following statements can be made in relation to the economic assessment of the TTIP: • The magnitude of macroeconomic effects will depend on the level of trade liberalization. Given the fact that trade is already highly liberalized, the marginal effect of further reductions of tariff-based and non-tariff barriers to trade would be minor, whereas the marginal costs in the form of modified standards that no longer completely satisfy specific social preferences can be expected to increase. Because trade between the USA and the European Union is already highly liberalized, the macroeconomic effects of the TTIP would be minor. The considerable openness of markets in both economic zones today already allows for the rapid transfer of technology advances. Thus, the dynamic growth effect would be somewhat weak. • The lower transaction costs that would result from the reduction of non-tariff barriers to trade would be equally advantageous for businesses and consumers, due to lowered market entry barriers, increased competition, and lower prices. A careful distinction must be drawn between the sensible reduction of genuine non-tariff trade barriers that represent a hidden form of protectionism, on the one hand, and the justifiable protection of consumer preferences by specific norms and standards, on the other hand. • Rarely have the negotiations for a free trade agreement drawn as much public attention as in the case of the TTIP. That is good insofar as it has stimulated a broad public debate on the drafting of trade agreements and the negotiation process. The critical question involves the entity vested with the mandate to conduct the negotiations, and legitimacy of this decision. This question is particularly relevant within the EU, due to the perception that the legitimacy of decisions made in Brussels is very indirect, to say the least. After all, the transparency of the negotiations was enhanced and the influence of lobbyists was reduced only as a reaction to focused public attention. • Besides the direct economic effects of the TTIP, proponents sometimes argue that the integration of these two economic zones to create a single trading block could strengthen the relative positions of the USA and Europe as the global economy evolves in the direction of a multipolar world order. In general, the creation of a single market encompassing the USA and Europe could play an important role in the development of norms and standards for the rest of the world, probably making it easier to enforce them, as opposed to weaker standards in a ‘race-to-the- bottom’ scenario.

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The successful conclusion of TTIP negotiations would be regarded as a benchmark for future free trade agreements

THE GLOBAL TRADE PLATFORM