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The tough road to a trade deal between the US and Europe

When the EU-US summit kicks off in Brussels this week, the prospects of a new trade deal will be jostling for attention with events in Ukraine. The long-term implications might even be more far reaching…

Planting flags. Olivier Hoslet/EPA

When the EU-US summit kicks off in Brussels this week, the prospects of a new trade deal will be jostling for attention with events in Ukraine. The long-term implications might even be more far reaching.

The attraction of a free trade zone between the US and Europe is obvious. Business channels would be freed up, tariffs would fall, regulations could be harmonised – and China might get a bloody nose. On the other hand, it is likely that as talks escalate, necessary compromises will deliver a deal which looks more like a starting point than a triumph. Sceptical voices are already raised about US interests dominating the push to combine work on new regulations, and there are doubts about the legal recourse for companies which feel they have been hard done by.

The aim of the Transatlantic Trade and Investment Partnership (TTIP) is to create vast Free Trade Area encompassing the US and all members of the EU, but since the levels of direct trade barriers are already very low, it necessarily covers all possible obstacles to transatlantic trade and investment. Average transatlantic tariffs are 3% and while this number conceals some peaks whose removal would be significant, there is general agreement that for the agreement to have very big effects it would have to remove a large number of “regulatory barriers”.

Growth, obstacles

There are estimates circulating that a comprehensive agreement could raise transatlantic trade by 80% and real incomes by up to 10%. To get these numbers in context, it is is useful to recall the optimistic forecasts for the EU Internal Market programme which predicted an increase in GDP of 4-5%. Estimates after the event put the gain at about 2%.

To get such high estimates for a growth boost from TTIP one has to assume that absolutely all barriers to trade and investment are removed. So not just rules and regulations which directly discriminate against firms on either side of the Atlantic, but also those which are sufficiently different that firms find it costly to adapt. If we take this to its logical conclusion, it means that the US must adopt mandatory metric measures or the EU revert to Imperial measures. Or nearly as important, testing labs in one zone must meet the specifications of those in the other, and importers must accept that this is the case.

In the past the EU and US have adopted a number of plans to develop such “mutual recognition”. This has had very little success. The initial political claims that all barriers can be removed have been toned down. But the advocates of the programme argue that whilst existing rules may be entrenched there is no reason why all future rules and mandatory standards should not be developed through a joint process of “Regulatory Cooperation”.

The High Level Group setting the negotiating agenda is actually quite low key about the substance of what could actually be achieved regarding particular sectors. But supporters of TTIP argue that despite seemingly modest references to “establishing an ongoing mechanism for improved dialogue and cooperation for addressing bilateral TBT issues”, the references to “Regulatory Cooperation” could have a very big impact.

To achieve this would require a very radical change in regulatory procedures. Representatives of US business argue for more engagement with business in the EU at an earlier stage in developing regulations.

A positive interpretation of this is that both sides of the Atlantic could jointly develop an approach that combines the best of both regimes. But there are fears in some quarters that business interests are trying to foist a US style approach on the EU, with “technical” committees dominated by business bypassing the cumbersome processes currently in place.

Doubts emerge

Sceptics have observed that there have been many attempts in the past to harmonise regulations across the Atlantic and that they have made very little progress whether due to unnecessary procedural obstacles or due to basic disagreements. Proponents of TTIP have faced up to this and have thought through arrangements designed to ensure smooth bilateral consultations on all new regulatory initiatives to run alongside the domestic consultative and legislative processes.

This is unobjectionable where proposed regulatory differences are just the result of poor coordination but one proposal for binding decisions by a “joint council” in the case of political differences is hard to imagine being realised. Ultimately, no trade treaty can overwrite the core constitutional principles on either side of the Atlantic including the EU Commission’s right to propose legislation to the European Council and Parliament.

One aspect that has caused considerable controversy is the idea of an investor state dispute settlement (ISDS) scheme. This would mean that a business which was adversely affected by regulations could sue for loss of profit. This has proved hugely controversial and the commission has felt obliged to suspend negotiations on this pending further consultation. Even the conservative Cato Institute has suggested that for countries with good legal systems, this idea is superfluous. German chancellor Angela Merkel has come out strongly against ISDS.

How do the politics stack up?

There is no question of the European Commission being able to negotiate and implement an agreement without consent. There are many players in a position to veto the proposal.

EU regulatory bodies are an interest group in their own right and will challenge plans to subordinate their activities to an international regime. And the European parliament will have to be consulted. It has been vigilant on ever tighter intellectual property rights and has already baulked at harmonisation in this area. Senior figures in the parliament have made it clear they will not automatically offer approval and have demanded that an agreement on data protection must be signed before TTIP. The commission has insisted that it will not water down EU health and safety rules but there is an understandable need for vigilance here.

Finally, we should remember that this initiative has very high level political backing both in the US and the EU. There is a geopolitical element. It would be a symbolic indication of the willingness of the EU and US to work together to set the global economic agenda. And if the regulatory ambitions were to succeed it would be seen as an indication of an attempt to reduce Chinese influence – and some say it could even bolster transatlantic solidarity in relations with Russia, never more pertinent than now.