Regulatory cooperation in TTIP Jan Teresiński is an economist at CASE - Center for Social and Economic Research. CASE is an independent non-profit economic and public policy research institution founded on the idea that evidence-based policy making is vital to the economic welfare of societies The Transatlantic Trade and Investment Partnership (TTIP), a free trade agreement currently being negotiated between the US and the EU, raises concerns among societies and has both devoted supporters and strong opponents. We would like to examine one aspect of TTIP that is of crucial importance, namely regulatory cooperation. The importance and economic benefits of TTIP TTIP is aimed at fostering economic growth and job creation in the US and EU via greater trade liberalization. It will be one of the largest free trade agreements ever implemented. As the US and the EU account for more than 40% of world trade, the impact of TTIP on the world economy will be enormous. The creation of transatlantic free trade area will lead to greater integration of the West, which will counterbalance the strength of other economic powers, first and foremost growing Asia. Despite these geopolitical reasons, the TTIP agreement is mostly promoted to the public for its economic benefits. Their estimated scope measured by different institutions vary due to discrepancies in the assumptions. It is true that the final outcome of the agreement is not entirely certain, thus it is difficult to develop proper assumptions for ex ante evaluation. However, the majority of studies foresee positive economic effects of TTIP, which goes along with theoretical arguments. Economic models show that trade liberalization is always beneficial, as it enables better allocation of economic resources. Liberalized trade allows countries to specialize in production of goods in which they have comparative advantage (for these goods the opportunity cost of production is lower). Eventually, more consumption opportunities become available and final prices decrease. Moreover, the new trade theory shows that even if countries do not specialize in particular production, free trade brings them a wider variety of available goods. Of course trade liberalization, even if beneficial for the economy as a whole, has both winners and losers. If you are representative of a sector that do not have a comparative advantage, you will be a part of the latter. But this group is small comparing to the winners: all that benefit from a variety of goods and lower prices. Usually workers in sectors that lose are the loudest group that opposes trade agreements. It is true that we can expect wage falls in some sectors and rises in others; this discord refers in particular to highly skilled and unskilled workers. However, this does not have to occur in case of TTIP. Various studies show that in the long run wages will rise for both skilled and unskilled workforce. The opponents also raise the issue, that the usual consequence of trade liberalization are labour reallocations between sectors. Nevertheless, it is estimated that after the implementation of TTIP only 0.7% of the labour force will shift between sectors. The study on the effects of TTIP prepared for the European Commission by the Centre for Economic Policy Research shows that TTIP will result in considerable economic gains for both the EU and the US. The EUs GDP should rise by €119 billion a year, while the US GDP should increase by €95 billion. This figures translate into €545 and €655 rise in disposable income per household in the EU and the US respectively. At micro level it might not seem much, notwithstanding these are gains that would not be available without trade liberalization. The essence of TTIP – regulatory cooperation Studies show that 80% of the above-mentioned economic gains will come from reducing regulatory barriers to trade. This is a crucial issue, as TTIP is not an ordinary trade agreement which is solely based on tariff reduction. Certainly the removal of tariffs is an important part of the agreement – taking into account no progress in the Doha Round – as they are substantial in certain cases, for instance cars, textiles and agricultural products. However, on average tariffs are already low – under 3%, so it is clear that this cannot be the major motivation for trade negotiations. The main obstacle to the transatlantic trade are non-tariff barriers to trade, related to incoherent regulations in force in the US and the EU. The differences in definitions, norms and standards on both sides of the Atlantic prevent the unconstrained flow of goods and services, as they imply redundant transaction costs for producers. Notable examples of such varying regulations include medical devices that follow different systems for identification and traceability (so called unique device identifiers), safety regulations of motor vehicles (especially concerning new technologies) and fire safety requirement of fabrics in clothing. The necessity to respect diverging norms and standards constraints the activities of firms on global market. This is especially important in case of small and medium enterprises (SMEs) which do not have enough resources to follow different regulations. If there was no regulatory divergence between the EU and the US, it would be easier for European and American firms to sell their products on new markets. This should lead to increase in trade and, as a consequence, economic growth and job creation. Moreover, because of lower transaction costs for exporters, domestic firms would be able to buy cheaper intermediate inputs from abroad and thus become more competitive. The overall effect of regulatory harmonization ought to be economic prosperity; the thought behind it is to stimulate economies experiencing stagnation through reduction of non-tariff barriers to trade. Besides further tariff reduction, a cooperation in terms of regulatory harmonization is necessary. An important part of the TTIP will be dedicated to the removal of non-tariff barriers. The agreement will include sections related to regulatory coherence, technical barriers to trade, food safety, and animal and plant health, as well as industry-specific regulations. Regulatory coherence should result from better cooperation between regulators on both sides of the Atlantic. They should work together much more closely than they do now – both in developing new regulations and in reviewing the existing ones – and exchange information and best practices. This should lead to a gradual convergence of the rules governing markets across the Atlantic. The regulatory systems prevailing in the US and the EU differ particularly in terms of technical standards and procedures for verifying their compliance. Due to that, the section of the agreement related to technical barriers to trade is of crucial importance. TTIP aims at reducing unnecessary repetition and costs of procedures like product testing, inspection, certification, and easing access to information on rules applicable to products. Another important aspect of the agreement is related to sanitary and phytosanitary standards. TTIP should reduce the time necessary for the imported food from one economy to be approved in the other, while respecting each other food safety standards and specific goals to protect human, animal and plant health. Regulatory cooperation and other countries Is there a possibility for third countries to benefit from regulatory cooperation in the West as well? The answer is ‘yes’, from the same reasons as above. Nowadays, producers outside the US and the EU need to face different standards in different Western states. Once those standards are harmonized, it will become easier and cheaper for third countries to sell their products both in Europe and the US. Hence, regulatory cooperation may double the market for some producers, while reducing transaction costs for those who already sell in both markets. Regulatory cooperation also has another effect on countries outside the TTIP agreement. Thanks to regulatory cooperation the West will become a standard-maker for the world. When more countries have the same regulatory framework there is a higher chance that it will be adopted by other countries due to network effects. That is why it is beneficial for a country to engage in regulatory cooperation, as then it is more likely its views will be taken into account in world regulation. In this way a country does not have to adopt standards created by others and be a standard-taker. Instead, it can contribute to the development of a common regulatory framework. This is another motivation for regulatory cooperation under TTIP. There is a high possibility that countries outside the TTIP agreement will adapt similar rules and standards to those developed under transatlantic regulatory cooperation, taking into account the scope of the agreement and the role of TTIP-countries in global economy. Because of that TTIP will allow the promotion of Western values and international best practices in standard-setting around the world, especially those concerning social welfare and working conditions. For sure this will ensure maintaining the significance of the West in global order and will counterbalance other economic powers. Myths and concerns related to regulatory cooperation Regulatory cooperation, although unquestionably beneficial from the economic point of view, raises many doubts and concerns. This is because ordinary people are afraid of a race to the bottom in regulations, especially those related to labour standards, food safety and environmental protection. In fact those standards are not subject to negotiation and TTIP will uphold them all. It is worth to explain why the agreement is unlikely to affect these areas. Labour markets in the EU feature higher levels of regulation concerning safeguarding security of employment and income than those of the US. Workers’ rights are more protected in the EU and that is why the American labour unions do not oppose TTIP similarly strong as they do in case of other free trade agreements. The US workers hope to enjoy similar levels of protection after TTIP is concluded. If it comes to the EU, it has ratified all core labour conventions of the International Labour Organization (ILO), while the US have ratified only two of them. It is unlikely that the EU will withdraw from its ILO obligations or remove work regulations approved and adapted by its member states. Food safety is another area that raises concerns about harmonization of norms to the lowest common denominator. It is true that food safety standards on both sides of the Atlantic differ. A notable example is the production and sale of genetically modified organisms (GMOs) – restricted in Europe and liberalized in the US. Lowering the protection of consumers in terms of food safety is not the goal of transatlantic trade liberalization; instead TTIP is an attempt to make it easier to export food products, while maintaining the rules of food safety. For instance, when nowadays food exported from one economy to another needs to pass equivalent tests both at home and abroad, the aim of TTIP is to remove the necessity of this duplicative testing. While removing redundant barriers to trade, TTIP will fully uphold food safety standards. Finally, there are also some concerns that TTIP will jeopardize environmental protection, especially the ambitious climate policy of the EU, and will worsen animal welfare in Europe. In reality the EU climate policy is not a part of the TTIP negotiations. The EU wants to promote its climate targets through TTIP, for instance by promoting trade and investment in environmentally friendly goods and services. It is true that the US food producers do not have to meet the same animal welfare standards as their counterparts in the EU and strive to eliminate the EU restrictions. However, TTIP is not intended to affect animal welfare laws in Europe. The EU wants to promote the highest possible standards of animal welfare in the US. Conclusions To sum up, TTIP will be one of the largest free trade agreements that should bring considerable economic benefits. The majority of them will result from regulatory cooperation, which is the essence of the TTIP agreement. Regulatory cooperation is crucial, as diverging regulations constitute the main obstacle in transatlantic trade due to redundant transaction costs for exporters. Once regulations are harmonized it will be easier and cheaper to export, both for intra- and outside-TTIP zone producers. This will lead to lower prices for consumers, productivity gains, wage rises, higher incomes and, as a result, economic prosperity. Regulatory cooperation will also allow to uphold high Western standards in force and promote them around the world. TTIP will allow the promotion of Western values and international best practices in standard-setting around the world, especially those concerning social welfare and working conditions