Tag Archives: EU

The world’s largest free trade area is being negotiated and it’s taking place behind closed doors

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Chances are, you probably haven’t heard about the TTIP.  Last month the fourth round of the Transatlantic Trade and Investment Partnership (TTIP) negotiations took place between the US and EU.  These so-called ‘secretive talks‘ have been hailed as an ‘assault on democracy’ by some commentators.  Indeed, the negotiating mandate for the EU remains a restricted document, but what is the TTIP and why is it causing such a stir?

The Goals of the TTIP

The main aim of the TTIP is to remove a number of trade barriers between the EU and US ‘to make it easier to buy and sell goods and services between the EU and the US‘.  The negotiations will not only focus on removing traditional barriers to trade such as tariffs but they will also attempt to remove so-called non-tariff barriers (NTBs) to trade.   NTBS refer to prohibitions, conditions or specific market requirements that make the importation or exportation of products more costly or difficult.  NTBs between two trading partners can arise in a number of different forms examples include, differences in domestic testing standards, differences in mandatory labelling requirements and divergent customs and administrative procedures.  The TTIP has highlighted NTBs in a number of key sectors including chemicals, pharmaceuticals, automobiles and cosmetics.

What are the Potential Benefits from the TTIP?

NTBs can impact upon trade in to two ways.  Firstly, NTBs can restrict market access through traditional methods such as import quotas.  Such quotas can restrict supply of foreign goods into the domestic market and thus impact consumers through higher prices.  Alternatively, NTBs can raise the costs of doing business for firms by, for example, necessitating the costly reconfiguration of products to meet stringent technical standards.  Such regulations can make foreign firms less competitive in a domestic market.  The EU states that costs of dealing with unnecessary bureaucracy is the equivalent to adding a tariff of 10-20% to the price of goods, an extra expense which is paid by the consumer.

A number of studies have predicted that the elimination of both tariffs and NTBs, and thus a move towards regulatory convergence between the US and EU, could significantly boost trade between the two economic powers.  For instance, CEPR argues that:

An ambitious and comprehensive transatlantic trade and investment agreement could bring significant economic gains as a whole for the EU (€119 billion a year) and US (€95 billion a year). This translates to an extra €545 in disposable income each year for a family of 4 in the EU, on average, and €655 per family in the US.

In addition, CEPR states that EU exports to the US could increase by 28% (equivalent to an extra €187 billion of EU exports) whilst an earlier study, conducted by Ecorys in 2009, argues that the deal could lead to gains in GDP of 0.7%  and annual wage increases of 0.8% for the EU. German think tank Bertelsmann Foundation takes a different approach by stating that the European countries that currently have the most trade with the U.S. will gain the most from the agreement.  The countries set to benefit most are listed below.

Table 1

Source: Wilson Centre, America’s Trade Policy

Overall the results of the study, show that the deal could lead to increases in GDP of up to 4.82% and 1.31% for the US and EU respectively (figures derived from the study by OFSE).

So the TTIP is a win-win situation?

Not exactly, although the TTIP sounds good in theory some have challenged the methodologies applied for by these studies.  The most comprehensive criticism comes from a recent study by the Austrian Foundation of Development Research.  The authors argue that the studies focus mainly on the large overall gains of the TTIP, whilst failing to point out that such benefits are only projected to accrue over a period of around 10 to 20 years.  Consequently, even in the most optimistic scenario for the EU, the gains would amount to only 0.13% growth in GDP annually (1.31% spread out over the lower bound of ten years).

In addition, the authors argue that many of the studies fail to highlight the social issues that could arise due to the deal.  For instance, the elimination of NTBs and the adoption of a common regulatory standard could require to a loosening of regulations in the EU.  This could lead to a welfare loss for society as public policy goals such as consumer safety, public health and environmental safety are compromised.  For instance, in the US only eleven substances are restricted in cosmetics compared to over 1300 in the EU (Euractiv.com).  Adopting the lower standard in many industries could therefore have implications for consumers.

The authors also point out that the macroeconomic adjustment costs – in terms of unemployment, changes to the current account balance and losses of public revenues –  could be substantial.   For example, tariffs are important income source for the EU – in 2012 roughly 12% of the EU budget was financed by tariffs.  The report states that the loss of tariff revenues from US imports could lead to a permanent annual revenue loss of 2.7% for the EU budget.

A much bigger issue at stake?

Despite the economic concerns many argue that there is a much bigger issue at stake, namely investor-state dispute settlements (ISDS). With the US pushing for its inclusion in the deal, ISDS has become the main source of disagreement between the negotiators.  In essence, ISDS empowers foreign investors to challenge national authorities in international courts, in order to claim financial compensation if they deem that their investment potential (and related profits) are being hindered by regulatory or policy changes that have occur at the national level.

ISDS are controversial for many reasons.  For instance, in 2011 tobacco giant Philip Morris sued the Australian government over a new law making plain packaging mandatory on cigarettes, stating that the plan violated a bilateral investment treaty.  Critics claim that ISDS challenges a country’s sovereignty through non-transparent and unaccountable arbitration tribunals which bypass the national court system.

The TTIP therefore raises some important issues for the EU.  To date the EU has launched a public consultation amid concerns, however the lack of transparency within the deal leaves, for many, alot to be desired.  As the largest bilateral trade deal ever attempted it begs the question whether the public should have more of a say on such a deal.

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The European Problem

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One piece of news yesterday which I found quite ironic was that the President of the European Commission Jose Manuel Barroso has warned EU member states not to succumb to populist calls against austerity such as those seen in Italy. He argued,

“I hope we are not going to follow the temptation to give in to populism because of the results in one specific member state.

The question we have to ask ourselves is the following: should we determine our policy, our economic policy, by short-term electoral considerations or by what has to be done to put Europe back on the path to sustainable growth? For me the answer is clear.”

I found this statement intriguing because populist movements in other countries are preventing the EU from enacting the one policy which could help resolve the crisis – a fiscal union. Whilst some countries are calling for a union, others are arguing against such a policy. A majority of EU citizens find the union undesirable, after all why should the Germans, French or any other national in a EU country pay for the problems created in Greece by the Greeks. The German bail out of Greece in 2011, for instance, highlighted this when it caused a large amount of public resentment.

The fact is that any monetary union without fiscal union is deemed to meet problems. This is because countries locked into a monetary union lose their ability to combat external shocks with exchange rate policy. The country’s only instrument is therefore fiscal policy, however in a debt ridden country such as Greece this option also becomes unavailable. In short, a fiscal union can help alleviate such problems by transferring money from regions unaffected by a shock to those which are. This would be particularly useful for nations which have already rejected bail out packages due to stigma such as Spain. Furthermore a fiscal union can help prevent a debt crisis in the first place by promoting a centralized, organised and well disciplined fiscal policy. This would be a sharp contrast to the current clash of ideals and policies now becoming apparent in member states such as Italy (against austerity) and Germany (for austerity).

The economic theory on optimum currency areas further promotes the idea of fiscal transfers as necessary instrument for a monetary union to be successful. However the road to such a union is going to be tricky, the longer EU leaders wait the more difficult it will become. In a recent post by the re-define think tank, I can’t help but agree that public opinion will become more hostile to the idea as EU taxpayers realize the losses they have incurred through successive bail outs. This lack of trust in their leaders and resentment towards recipients of the bail outs could grow  the longer the crisis continues and possibly de-rail the process altogether.

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