Why the TAFTA | TTIP will not Live Up to its Promises

Abstract: Negotiations on a Transatlantic Free Trade Area, also known as the Transatlantic Trade and Investment Partnership (TAFTA | TTIP) have been officially launched in July 2013. This TAFTA | TTIP is sold by the European Commission with two main arguments and two additional points to reassure potential opponents. In the first category there are the tremendous positive consequences for jobs and growth that are expected from the agreement and that it will set global rules for the 21st century. Furthermore, the agreement will not lower safety, environmental and health standards and will not harm but bring significant benefits for the rest of the world. A critical deconstruction of this rationale shows that these benefits could only be achieved if the agreement succeeded in harmonising a large share of divergent EU-US standards. This, however, is not to be expected based on historical experience and statements by the Commission itself. This article shows that the alternative regulatory convergence strategy that will be pursued: mutual recognition, might contribute to more trade, but will not result in global standards. Instead, it will lead to deregulation and will have no positive effects on the rest of the world.

The Transatlantic Free Trade Area or Transatlantic Trade and Investment Partnership (TAFTA | TTIP) that was announced in February 2013 has been proclaimed with great fanfare, especially on the European side of the Atlantic. To quote from one of the speeches from Trade Commissioner De Gucht (2013a) on the Agreement:

A future deal between the world’s two most important economic powers will be a game-changer. Together, we will form the largest free trade zone in the world. This deal will set the standard – not only for our future bilateral trade and investment but also for the development of global rules. It will create a tremendous impact on jobs and growth on both sides of the Atlantic. It is estimated that when this agreement is up and running, the EU’s GDP will get a half a per cent boost – which translates into tens of billions of euros every year. [… ] It is probably the cheapest stimulus package that can be imagined (emphasis added).

The ‘tremendous impact’ that is mentioned here has been translated to the ‘average European household’ that would gain ‘an extra €545’ – as we can all read on the special page dedicated to the TAFTA | TTIP on the Directorate General for Trade of the European Commission’s (2013) website.

In the following weeks, reservations and even resistance vis-à-vis the negotiations were growing among some member states, members of the European Parliament and civil society. The European Commission tried to assuage these fears, while retaining its absolute autonomy to negotiate on all issues, as follows (De Gucht 2013b, 2):

Our objectives for the negotiating directives are to have a broad text that gives us the necessary negotiating flexibility. […] But let me be clear: this does not mean that there will be no red-lines during the negotiations. No fundamental EU policy is up for being traded away! […] If we add to this the fact that safety, health and environmental standards will under no circumstances be lowered, we should have what it takes to convince those who may still have doubts.

In yet another speech, on the topic of the global impacts of the TAFTA | TTIP, the Commissioner also emphasized that this agreement will not compromise the European Union’s priority to the multilateral world trading system governed within the WTO and the eventual conclusion of the Doha Development Round (De Gucht 2013c). He also stated that it will not lead the EU and the US to benefit bilaterally to the detriment of the rest of the world, but that it will boost income in every region as well.

In this article, I will critically review those arguments that are used by – especially – the European Commission to sell this agreement. It will be shown that a more realistic view of the TAFTA | TTIP negotiations unravels the ultra-optimistic story that is told by the European Commission. Expectations should be that, besides a few uncontroversial sectors, the EU and US will not succeed in agreeing to common standards and rules, while mutual recognition will be the chosen approach towards regulatory convergence, the core goal of this agreement. While this might assure the projected bilateral trade gains, it jeopardizes the other proclaimed benefits of the agreement: global standards, regulatory race-to-the-top, and gains for the rest of the world. These more realistic expectations are tentatively acknowledged in the important much-quoted Impact Assessment Report on the TAFTA | TTIP, but not the inevitable conclusions that flow from them (Commission Staff 2013).

“Scania chassis assembly” – Photo: Scania Group, published on Flickr under a CC BY-NC-ND 2.0 license.

Why Mutual Recognition Will not Provide the Panacea

It is not the first time that the US and the EU seek to overcome regulatory differences. Regulatory cooperation dates back to the 1990s with the 1990 Transatlantic Declaration and the 1995 New Transatlantic Agenda. The most ambitious attempt was the 1999 Mutual Recognition Agreement. However, regulatory cooperation until now has been very cumbersome and largely unsuccessful. Based on recent history, it is wise to be realistic in our expectations on regulatory convergence in the TAFTA | TTIP. I explain the consequences of this realistic perspective below.

The intention to pursue a transatlantic trade agreement has been officially conveyed at a Summit in November 2011 between Presidents Obama and Van Rompuy. They set up a High Level Working Group on Jobs and Growth (HLWG), led by the European Commission’s DG Trade and the United States Trade Representative (USTR), tasked with identifying the right policy to increase trade and investment contributing to job creation, economic growth and competitiveness. Its final report concluded that “a comprehensive agreement, which addresses a broad range of bilateral trade and investment issues, including regulatory issues, and contributes to the development of global rules, would provide the most significant mutual benefit of the various options considered” (ibid., 5).

The preferred comprehensive scenario is divided into a conservative and ambitious variant (ibid.). The conservative variant assumes 98% tariff elimination, 10% reduction of barriers to trade in services, 25% reduction of barriers to cross-border government procurement and a reduction of 10% of non-tariff measures (NTM) for goods. The ambitious option estimates a 100% duty elimination, 25% reduction of NTM barriers to goods, 25% reduction of services barriers and 50% of liberalisation of government procurement. The economic impact of the different scenarios has subsequently been estimated. It includes ‘spillover effects’, relating to the fact that some of the NTMs resulting from differences in regulations and procedures cannot be altered on a purely bilateral basis. Most importantly, when regulatory convergence is realized by alignment of domestic standards with international standards, this also benefits third countries’ exporters as they only have to comply with one standard to access several markets. This spillover effect has been estimated to amount to 20%.

In the conservative comprehensive scenario projected extra Gross Domestic Product (GDP) growth is 0.27% for the EU. This increases to 0.48% in the ambitious scenario, and it is this figure (rounded up to a half per cent) that is always mentioned in EU speeches and communication on the TAFTA | TTIP (ibid.).

Besides the macro-economic analysis, the assessment also estimates the sectoral impacts of a projected agreement. It is interesting to give the most important conclusions (ibid.): As a comprehensive agreement has been launched, I will limit myself to reviewing only the comprehensive options. In case of the conservative variant, the sectors in the EU that will see the largest increase in output are the processed food (0.3%), motor vehicles (0.24%), other machinery (0.4%), other manufactures (0.69%), water transport (0.55%), air transport (0.3%), finance (0.23%), insurance (0.44%) and construction (0.31%) sectors. Decreases in output would be suffered by electrical machinery (3.74%), other transport equipment (0.17%) and the metal and metal product sector (0.71%). In an ambitious free trade agreement (FTA), increases in total production in the EU are expected in processed food (0.57%), chemicals (0.37%), motor vehicles (1.54%), other machinery (0.37%) other manufactures (0.79%), water transport (0.99%), air transport (0.44%), finance (0.42%), insurance (0.83%), business services (0.25%), construction (0.53%), personal services (0.26%) and in other services sectors (0.28%). Decline, on the other hand, is expected for electrical machinery (7.28 %), other transport equipment (0.08%) and metal and metal product (1.5%) sectors.

The impact assessment then looks into detail into some of these sectors, especially the electrical machinery sector where the greatest losses are projected. It concludes that ‘the model reveals that regulatory alignment is harmful to EU industry because third countries would also benefit from the bilateral liberalisation in light of their comparative advantages’ (ibid., 41). The report then tries to take away the fears of the sector. In light of the arguments of this article, it is enlightening to quote the passage in full:

For modelling purposes, a horizontal spillover has been assumed across all sectors. However, in the reality of negotiations, the spillover of reduction of NTMs itself is up for negotiations, depending on the agreed implementation (i.e. bilateral vs. erga omnes elimination of NTMs). In the view of the different concepts of international standards between the EU and the US, it is not expected that the approach followed would necessarily involve in any case the acceptance of international standards or other measures, which are more likely to have some type of MFN effect and therefore entail spillover effects to third countries. Instead, the expected approach to be followed in the negotiations with the US would focus on regulatory coherence and a degree of mutual recognition between the EU and the US standards, particularly in the field of safety regulation relevant for electrical and electronic equipment (ibid., 41).

Here, the Commission staff is downplaying the fear of losses in the electrical and electronic equipment sector by acknowledging that the approach that will be followed particularly in (but hence not limited to) this sector will be mutual recognition and not the (more ambitious) harmonisation approach. Indeed, this is also what the European Commission has put forward in its 2004 assessment of EU regulatory cooperation activities: ‘the “enhanced” type MRA […] is the one offering the best prospects of implementation and trade facilitation’ (Commission Staff 2004, 3).

The reasoning is reiterated for the motor vehicle sector, the largest beneficiary of an ambitious comprehensive agreement, where it is stated that “it can reasonably be assumed that in reality the outcome of negotiations on the NTMs in certain sectors would rather result in bilateral than in erga omnes recognition of safety standards which are also of particular relevant (sic) for the motor vehicles sector [… in that case] the positive effect on output in the car sector could eventually be even bigger” (Commission Staff 2013, 43).

What I want to argue is that there is an incompatibility between the different proclaimed benefits with which this agreement is sold, to reiterate: tremendous impact on growth and jobs; setting the standard for global rules; the upholding and ratcheting up of safety, health and environmental standards; and large economic gains for the rest of the world.

Certainly, at least theoretically, the combination of these gains is possible. However, they can only be achieved by harmonisation of a large share of standards across the Atlantic. This would, first, eliminate the costly diverging standards that force companies to set up different production lines to manufacture goods that comply with different standards, do away with double testing procedures, and result in advantages of scale, efficiency and, consequently, economic growth. Second, one standard covering one third of the global economy and half of global trade would indeed become a de facto global standard. Companies with a global marketing strategy would: be compelled to adopt this standard to retain access to the transatlantic market; for reasons of efficiency, harmonise their total production with this standard; and, subsequently have strong incentives to lobby with their home government to adopt this standard so that the playing field would be levelled with domestic firms on the home market. Third, with harmonisation, a principle could be used in the negotiations to adopt case-by-case the standard (EU, US or international) that most efficiently attains the highest level of protection. Finally, the proclaimed economic gains for third countries via the spillover effect would be limited unless the EU and the US adopt a common standard.

Notwithstanding, instead of harmonisation, the strategy for regulatory convergence that is to be expected is mutual recognition. This becomes clear from the quoted passages in the Commission Staff Impact Assessment (IA) and is, as has been said, the approach that has been advocated in the 2004 review of EU regulatory cooperation instruments. Through enhanced type mutual recognition, the same economic benefits for EU and US companies can be reached. Mutual recognition of substantial standards and testing procedures eliminate double standards and conformity assessment proceedings for exporters at both sides of the Atlantic no less than harmonisation does. And yet, the effect on the other touted benefits is different. First, with mutual recognition, no transatlantic standard is established. Unless specific arrangements are made that once a product of a third country has been approved in one of the entities it can be marketed in the other (but based on the quotes above this is not to be expected), for the rest of the world no positive effects arise – to the contrary, they are competitively disadvantaged on the transatlantic marketplace by the bilateral regulatory liberalisation between the EU and the US. When a third country firm wants to export to the EU and the US, it will have to comply with different standards, and as the spillover effect does not occur in this case, also domestically (as well as in other third countries) different standards will keep existing. Second, ‘pure’ mutual recognition tends to lead to a race-to-the-bottom, since it institutionalizes regulatory competition. Without minimum requirements, firms profit from the least economically costly standard as they have, through the mutual recognition principle, automatic access to the full transatlantic market. Governments at both sides will therefore have an incentive to adopt the least-burdensome standard.

Moreover, one can even question the feasibility of comprehensive mutual recognition of non-tariff measures. The ambitious scenario assumes that 25% of all NTMs will be reduced. As only half of NTMs are actionable (ibid., 6f.), this means that 50% of all trade barriers that can be affected by policy would be effectively reduced. Keeping in mind the lack of success in earlier attempts at regulatory cooperation between the EU and the US, this seems a very ambitious (and probably unrealistic) goal. Of course, if even mutual recognition would not be attainable in all but a limited number of sectors, also the economic gains for the EU of 0.5% GDP, €545 per household and hundreds of thousands of jobs, the selling point for the agreement, would collapse. The IA does anticipate such a more modest agreement. For example, it states:

[I]n order to be able to adapt to future evolutions, an ambitious agreement with regard to regulatory coherence would have to be of a “living nature”. Regulatory obstacles to trade that cannot be eliminated or reduced in a first phase should continue to be discussed under clear time lines following an institutionalised mechanism. This mechanism could also include disciplines on strengthened upstream cooperation (ibid., 28).

Indeed, in a number of areas, differences in standards or conformity testing between the EU and the US could be uncontroversial, simply resulting from different historical practices. An example is the safety standards for motor vehicles. While it is reasonable to assume that the level of protection in the US and the EU is equivalent, the exact standards differ as do the procedures for conformity assessment. The EU requires third-party certification (assessment by an independent body), while in the US cars can be lawfully marketed based on a self-declaration of conformity with the standards. In other areas, such as safety of electrical products or machinery, it is the other way around. In these instances, it can be assumed that mutual recognition (and costless conformity assessment procedures as self-declaration of conformity) should be feasible, without touching on the respective levels of protection and with significant economic benefits. But for many other sectors, regulatory philosophies and measures and levels of protection are further apart and divergence on the appropriate level of protection (or about what constitutes the highest level of protection) and the efficient tool for reaching this might be irreconcilable.

Conclusion

This article has critically reviewed the arguments that are used by the European Commission to promote the negotiations on a TAFTA | TTIP. In each and every communication, the enormous impact on growth and jobs, estimated to contribute to an extra 0.5% of GDP growth, an extra €545 income per household and hundreds of thousands of jobs, as well as the setting of global standards that will ensure the dominance of western standards in the 21st century are emphasized. To assuage the fears of opponents within the EU as well as without the transatlantic area, the official communication also emphasizes consistently that the FTA would not lead to a lowering of safety, environmental and social standards, and that the gains of the agreement would not be limited to the EU and the US, but that also the rest of the world would benefit to the tune of €100 billion.

However, this ultra-optimistic branding is only possible due to the upholding of a significant degree of ‘constructive ambiguity’, namely on the exact approach that will be followed in the negotiations, especially as regards to regulatory convergence. As this article has shown, the combination of the four touted benefits is only (theoretically) possible when a large share of regulations on both sides of the Atlantic are harmonised. However, such vertical transfer of competences (leading to transatlantic supranationalism) is not realistic, as is apparent from previous attempts at regulatory cooperation between the EU and the US, as recognized by the European Commission’s own evaluation in 2004, and as repeatedly acknowledged in the Impact Assessment Report on the TAFTA | TTIP, partly to reassure those sectors that stand to lose most from (the spillover effects of) the agreement. But the mutual recognition approach that is the regulatory convergence strategy that can be expected cannot provide for the four proclaimed advantages of the agreement. While it is as (and arguably more) beneficial for EU and US firms that are active across the Atlantic and can consequently boost trade and growth, mutual recognition of US and EU standards does not establish global standards, tends to lead to deregulation, and has only bilateral advantages, hence not benefiting third countries.

References

Commission Staff (2004): Priorities for Bilateral/Regional trade related activities in the field of Mutual Recognition Agreements for Industrial Products and Related Technical Dialogue, European Commission Staff Working Paper, SEC(2004)1072, Brussels, 25.08.2004. Available online.

Commission Staff (2013): Impact Assessment Report on the Future of EU-US Trade Relations, European Commission Staff Working Document, SWD(2013) 68 final, Strasbourg, 12.3.2013.

De Gucht (2013a): Transatlantic Trade and Investment Partnership: Opening Free Trade Negotiations with the United States, Committee on International Trade (INTA) of the European Parliament, Brussels, 21 February 2013. Available online: http://europa.eu/rapid/press-release_SPEECH-13-147_en.htm

De Gucht (2013b): Remarks on the Transatlantic Trade and Investment Partnership, Plenary debate of the European Parliament on the Transatlantic Trade and Investment Partnership, Strasbourg, 22 May 2013. Available online: http://trade.ec.europa.eu/doclib/docs/2013/may/tradoc_151289.pdf

De Gucht (2013c): The Transatlantic Trade and Investment Partnership: Global Impacts, Institute for International and European Affairs, Dublin, 19 April 2013. Available online: http://europa.eu/rapid/press-release_SPEECH-13-343_en.htm

European Commission (2013): Transatlantic Trade and Investment Partnership (TTIP): The Biggest Trade Deal in the World, DG Trade. Available online: http://ec.europa.eu/trade/policy/in-focus/ttip/

Nicolaïdis, K. & Shaffer, G. (2005) Transnational Mutual Recognition Regimes: Governance without Global Government, Law and Contemporary Problems, vol. 68 (Summer/Autumn), pp. 263-317.