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Economic analysis 24 Apr 2016

EU-US trade negotiations: between economics and geopolitics

Op-ed by Federico Steinberg, Senior Analyst for Economy and International Trade at the Elcano Royal Institute 

For the last 200 years the world economy has been dominated by the North Atlantic countries. First, by Europe alone, and then by Europe and the United States (with a marked North American leadership after the Second World War). However, the decline that began 20 years ago in the relative weight of the transatlantic axis in the world economy is expected to accelerate in coming decades. The beneficiaries will be the new emerging powers –particularly in Asia, but also in Latin America and Africa.

In response to this scenario, in 2013 the European Union and the United States embarked on negotiations to set up a free trade and investment area (TTIP) which would be the most important in the world and cover over 40% of world GDP, one third of the economic flows worldwide, and almost 60% of the world’s accumulated investment stocks.

The goal is to reach an agreement by 2016 (before the American elections, to allow Obama to flag up another foreign policy success) to allow an even close integration of the transatlantic market.

In addition to totally eliminating tariffs –which are already very low (2.8% weighted average), the idea is to reduce the non-tariff barriers, deriving from a situation in which each block maintains its regulatory autonomy in areas such as intellectual property, regulations for protecting consumer security and marketing services with high added value and public procurement, among others.

All these obstacles are equivalent to additional tariffs of between 10% and 20%, and particularly hinder the trade in services, which is the area with the highest potential growth. Finally, another aim is to set up an arbitration tribunal to resolve disputes between companies and states for the ultimate purpose of further boosting cross-border investments.

The main justification for launching the TTIP according to the European and American authorities is that it will generate growth and employment. A study by the CEPR for the European Commission reported that a broad and ambitious agreement could generate 119 billion euros a year for the European Union and 95 billion for the United States. However, all these potential trade gains also existed ten years ago and will certainly do so in the future. So the key question is: why the TTIP now? And the answer lies in geopolitics.

The TTIP as a response to the rise of the emerging powers

In recent decades, with the advance of economic globalization, and as the emerging countries (particularly Asian) have increasingly been making inroads in the world economy, the nerve center of the international economy has gradually shifted from the Atlantic to the Pacific. Originally these changes had no great effect on the political, economic and intellectual leadership of the West. It was more a matter of the new countries conforming to the rules laid down by the traditional powers. However, 2007, with the onset of the global financial crisis and the major recession that followed in its wake, the prevailing narrative in international relations is that the future belongs to the emerging economies.

The TTIP can therefore be seen as Europe and the United States’ reaction to their relative decline; that is, as an instrument for recovering their leadership, and thus for achieving greater influence on the economic sphere internationally. It is a question of indirectly revitalizing their power, establishing new standards in the economic sphere; in other words, rewriting the rules of globalization.

If the TTIP proves to be successful, it will send a clear message to the emerging countries: if you want to sell your products to our wealthy consumers you must observe our rules; otherwise you’ll be sidelined, and your growth will suffer the consequences.

Using the TTIP as a lever to regain world economic leadership is certainly attractive. However, the strategy could backfire, either due to problems in actually negotiating the agreement, or else because the emerging economies fail to react as expected by the trans-Atlantic axis.

For the plan to work, it is essential for Americans and Europeans to agree to new rules for trade and investment. The thorniest issues have been excluded from the negotiations, so it is perfectly possible to achieve an ambitious TTIP.

However, as there are different regulatory traditions on each side of the Atlantic, this will certainly not be plain sailing. In fact, as the economic balance of power is balanced between the European Union and the United States, neither side will be in a position to force the other to adopt its own standards, meaning the most effective way forward will be mutual give-and-take. But the European Union knows full well that even when opting for mutual recognition rather than regulatory harmonization, it took decades to build the interior market. And this has still not been achieved in the area of services.

But even if the TTIP can eventually be achieved, there is no guarantee that the agreement will open up a new stage in globalization under western leadership. The emerging powers, particularly China, India and other countries in South America, have for years been reluctant to accept regulations from the WTO that reduce their room for maneuver in terms of industrial policy, which are precisely the regulations the TTIP seeks to establish.

So if by the time the TTIP is signed and up-and-running, their own markets represent a greater and increasing share of the world market, they may decide not to adopt the TTIP’s standards so as not to lose regulatory sovereignty, considering the opportunity cost of this decision to be acceptable due to the declining potential for export growth in the transatlantic market.

Thus the TTIP would not become the model for the new regulation in world commerce, nor would it be multilateralized through the WTO, but would signal the start of the fragmentation of the world market into large rival commercial blocks and mean the end of the influence of the WTO, which has so far been the most effective institution for regulating globalization.

** Federico Steinberg is Head Researcher at Elcano Royal Institute**

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