By Jack Beecher, Transatlantic Economy Analyst
Responsible for about a third of global trade and 40% of global economic output, the U.S.-EU economic relationship is the world’s largest and most integrated. The EU invests eight times more in the United States than China and India combined, while the U.S. invests three times more in the EU than the entirety of Asia. This is largely a result of similar values and strong historical and cultural ties. However, developing economies, many of which are in Asia, are growing quickly and eroding the West’s economic preeminence.
The Transatlantic Trade and Investment Partnership (TTIP) is a far-reaching agreement that is meant to revitalize and boost this relationship. Negotiations for this agreement started last year and are forecasted to be concluded by the end of 2015. In addition, the Trans-Pacific Partnership (TPP), a large free trade and investment agreement including a dozen Pacific rim countries, also encompasses about 40% of the global economy. The TPP is one component of President Obama’s Asian Pivot, a policy of U.S. “rebalancing” to the Asia-Pacific region.
As negotiations for both agreements get bogged down over details, it is worth revisiting the question of why they are being negotiated and what the stakes are.
The main reason they are being pursued is the failure of the Doha Round of World Trade Organization negotiations, which aimed to greatly liberalize international trade and further incorporate developing countries into the WTO system; however, after the first WTO talks in 1993, developing countries thought they had conceded too much to the developed world and that the Doha talks were an opportunity to gain more concessions from industrialized countries. While some minor aspects of the negotiations have been salvaged, the Doha Round failed in July 2008 when the United States, China, and India failed to agree on agricultural subsidies.
In the absence of a new global agreement, and the rise of less economically liberal states, the United States and Europe were forced to find another way to introduce the international economic rules they sought. The TTIP and TPP are large, regional free trade and investment agreements that seek to set these rules by bypassing the BRICS and other developing countries, thereby ensuring that the global economy remains as open as possible. They will achieve this by removing tariffs, increasing competitiveness, and harmonizing regulations – making it difficult for states outside the agreements to adhere to more protectionist standards. While the standards set in the TTIP and TPP may find their way into later WTO trade deals, U.S. and EU negotiators have said that third countries will be able to join both agreements after the talks conclude.
These agreements would also provide a modest boost to economic growth in participating countries. In addition to cutting already-low tariffs, the TTIP would make U.S. and EU regulations in a number of sectors more compatible, cutting costs for businesses, increasing employment, and lowering prices for consumers. Differing regulations between the U.S. and Europe are estimated to contribute to 10-20% of a product’s cost. Studies on the TTIP’s potential impact place GDP gains in the U.S. and EU at 0.4% and 0.5% respectively. The TPP is expected increase U.S. and Japanese GDP by 0.4 percent and two percent respectively.
Despite these benefits, there is a risk that China, and other emerging economies, may still take a different course and seek their own trade and investment agreement to counter the TTIP and TPP. Putin’s recent energy deal with China and Russia’s Eurasian Economic Union can be seen as smaller ripostes to the TTIP and TPP. Currently, the BRICS are establishing their own alternatives to the World Bank and IMF, as the U.S. has so far refused to rework voting share arrangements in the IMF. While unlikely, it is even possible that the TTIP and TPP could cause the BRICS to respond with their own anti-Western bloc. However, with the exception of expanding their economic clout, the BRICS – unlike Europe and the United States – have much less in common and have not formulated a viable alternative to the current international economic order.
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