Friday October 3 marked the conclusion of the seventh round of negotiations in the “Transatlantic Trade and Investment Partnership” (TTIP), the free-trade deal being negotiated between the US and EU. The rounds have been going on for about a year and alternate between Europe and the US.
We know relatively little about the details being discussed at each round, but nobody was ever expecting anything contentious to come out of this one. The mid-term elections are around the corner in the US, so controversy is the last thing politicians want. On our side of the Atlantic, the new EU parliament and commissioners are bedding in, so US diffidence may not have been unwelcome in Brussels.
Not a traditional free-trade agreement
TTIP is not really like a traditional free-trade agreement. It is not about cutting tariffs, which are already very low between the US and EU. UK/US tariffs are just 0.5% on average (albeit other US/European tariffs tend to be somewhat higher). TTIP is focused on non-tariff barriers, such as duplicate regulation.
A good example is car safety, which is regulated differently on both sides of the Atlantic. Cars are equally safe in the US and Europe, but producers currently have to satisfy both sets of rules if they want to sell cars in both areas. To remove this duplicate burden, TTIP is aimed at mutually recognising the rules – or if that’s not possible, at least co-operating on future regulation. In the end this benefits not only the producers but also consumers since it should reduce car prices.
Another example is insurance regulation. In the US market, UK insurance providers are not always treated in the same way as domestic providers. If TTIP does its job, UK insurers will be free to compete head-on with their US counterparts. Most of the agreement is focusing on this kind of common-sense stuff. It simply makes sense to co-operate between America and Europe because it cuts costs and ultimately prices for consumers.
In addition, trade in the 21st century needs new, forward-looking regulation. For example, more and more companies set up international supply chains that source different products and services from different countries. This form of trade needs to be regulated. Likewise, international trade in services is on the rise, and the UK economy is at the forefront of that development.
But let’s be clear – many forms of regulation are controversial. For example, the overarching view in the US is that European regulation of financial services is weak and not fit for purpose. We certainly need a thorough and well-informed debate on this and other difficult issues.
If you have been following the TTIP negotiations in the press over the past year, you might have been under the impression that TTIP is a corporate sell-out and nothing but a threat for the average person in the street. There has been a lot of hype and scaremongering, which has not only taken some issues completely out of context but has often hopelessly exaggerated reality.
One example is the so-called investor state dispute settlement (ISDS), a legal procedure that would grant US companies the right to initiate international arbitration proceedings against European governments and allow European companies to sue the US government. There have been widespread fears in the UK that this would give US medical companies certain rights that will hasten the privatisation of the NHS; while in Germany the fears have been more about the implications for public utilities.
In reality, ISDS does not affect the UK much. EU member states, including Britain, have had the same kind of arrangement for decades in the vast majority of their international investment agreements (more than 1,000 in total) and indeed the Europeans invented the system. It provides for foreign companies to resort to an arbitration panel to ensure a fair hearing by bypassing potentially xenophobic local courts.
But because the UK legal system is generally quite fair to foreign companies, ISDS has not played a major role here (indeed the US will arguably have more cases to answer – some states such as Mississippi have a less than perfect reputation of treating foreign companies in an equitable way). All the same, the provision might eventually be dropped from the TTIP negotiations, not least because Germany has become increasingly hostile.
It’s also worth bearing in mind what TTIP is not about. It is not about freedom of movement. It will not create a customs union like the EU. It is not about labour standards either, even if some US trade unions who covet European labour standards might prefer otherwise.
Winners and losers
The reality is that UK business is in line to do well out of TTIP. The car industry will benefit because we tend to have smaller players. For example in the West Midlands, we have companies such as Jaguar – companies of that size find multiple international regulations a bigger hurdle than huge players like Volkswagen or Toyota.
The lamb and beef industry could also do well in the UK. It experiences severe restrictions in exporting to the US at present. Processed foods, pharmaceuticals, chemicals and UK financial services are likely to do well, too. This should mean more jobs that otherwise would not be created.
There will of course be losers, but the UK is probably in the fortunate position of not hosting too many of them. If you take France and Italy, for example, their farming industries are heavily regulated by rules that in reality often come down to protectionism. When the rules change, they are likely to suffer and we should be debating how these countries can make up for that. We have heard very little from the EU about ways of compensating losing industries.
In general, the consumer stands to win. This will depend on how ambitious the final agreement turns out to be, but the Centre for Economic Policy Research has produced a compelling guess. It estimates that in the best-case scenario, the average EU household of four could see its disposable income rise by €545 (£427) per year by 2027 through higher wages and lower prices. Those estimates come with large uncertainty and should be taken with a big grain of salt. Economists need to do a much better job in explaining to the public how such studies are produced.
Despite the positives, the UK government appears to be losing the debate about TTIP at present. It is not enough for Ken Clarke or Vince Cable to write the occasional newspaper article, or for the prime minister to provide the odd sound bite. The government needs to engage with the public in a meaningful way. After all, the three main UK parties are in favour of TTIP. The Trades Union Congress has in principle come out in favour, while disagreeing on ISDS.
Lack of transparency is an important criticism. The government needs to explain to the public why it would be impossible to conduct an international negotiation if all documents and negotiating offers were immediately and fully disclosed. Each side has to put sensitive issues on the table. Still, the EU should be able to improve on this front.
In the end, the size and importance of TTIP depends on what the administrations agree – whether it be rushed through before Obama leaves office, or (the more likely scenario) whether it drags out until later in the decade. In any event, national parliaments or governments (including the EU parliament) have to agree to the final outcome.
The price of failure
Part of the motivation for the agreement is the fact that World Trade Organization negotiations have stopped working effectively over the past 10 years or so. This is why the focus has moved from having the entire world at the table to having regional agreements. The US is holding a separate trade negotiation with 12 Asian countries including Japan, Australia and Vietnam known as the “Trans-Pacific Partnership” (TPP). If we don’t take part in something like this through TTIP, the world will move ahead without us.
Overall, we need a serious, well-informed and balanced debate that tries to take into account both risks and opportunities. We should not leave the public debate to one-sided ideological campaigners.