The Transatlantic Free Trade Area

February 2014  |  FEATURE  |  INTERNATIONAL TRADE

Financier Worldwide Magazine

The proposed Transatlantic Free Trade Area (TAFTA) or Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union has once again become headline news in both Europe and the US. In many respects the TAFTA bears a strong resemblance to its bilateral predecessors – agreements such as the Trans-Pacific Partnership helped to pave the way for the proposed transatlantic equivalent. However, the TAFTA is much more ambitious in its scope. The plan aims to cut non-tariff barriers, liberalise trade in services and move the two regions much closer to regulatory harmonisation.

The agreement is being touted as one of the most transformative trade deals in history, and with good reason. Job creation and increased levels of trade are just two of the benefits supporters suggest will flow out of a ratified deal. Elevating several European nations out of economic crisis is another understandable and achievable goal of the agreement. The deal, which is billed as the biggest bilateral free trade agreement in history, would encompass nearly half of the world’s economic output.

Although at the time of writing negotiators from both regions have not yet begun work on the finer details of the proposed deal, they have begun to draw up a list of sectors – such as automotive, pharmaceutical, cosmetics, medical devices, textiles, chemicals and information and communications technology – which would benefit from unified regulation.

Furthermore, as trade tariffs between the EU and the US are already low, the greatest gains for both sides can likely come from cutting regulations, bureaucratic hurdles and other non-tariff barriers.

With this in mind, removing the need for firms operating in both the US and Europe to double up on compliance is an important issue that will shape any TAFTA agreement. However, negotiators in both Europe and the US have been keen to emphasise that although the agreement hopes to create some level of regulatory uniformity covering both regions, in essence the TAFTA deal is not specifically about deregulation. Europe and the US are keen to ease some of the bureaucratic burden placed on exporters, which must often conform to two different sets of export rules and regulations. According to data held by the EU, under the TAFTA agreement up to 80 percent of the gains from a trade deal are expected to come from the reduced cost of bureaucracy and regulation arising from a deal, as well as from opening up trade in services and public procurement.

Negotiations between trade officials from both sides of the Atlantic have been ongoing for well over 12 months. In late December, a third round of discussions took place in Washington, with both parties still hopeful of reaching a deal. Following the December negotiations, the EU’s chief negotiator Ignacio Garcia Bercero noted in a press release that both sides expect to soon be able to identify a roadmap of areas where the agreement could provide real savings to consumers and businesses. However, Mr Garcia Bercero went to great lengths to reiterate that the agreement itself is not about deregulation. He also noted that neither the US or the EU had any intention of lowering their standards of consumer, environment, health, labour or data protection, or limiting their respective autonomies with regard to regulation setting.

In addition to the regulatory issues, the latest tranche of talks focused on a wide range of additional topics covering the food manufacturing industry, aviation safety and the energy sector. One aspect of the agreement where the two sides are still some distance apart, however, is the notion of including financial regulation within the scope of the TTIP. It appears that the EU is currently pushing for this measure while US officials are opposing it. The EU is also eager to include US gas exports in the agreement to help ease the considerable pressure on European energy prices. Despite the potential flashpoints, both the US and EU have announced that they are hopeful that a mutually beneficial deal may be reached in late 2014 or early 2015.

Criticisms

While the proposed agreement has received strong levels of support from many influential groups within the business community, a great deal of criticism has also been levelled at the plan. Detractors of the TAFTA have claimed, among other things, that consumer groups stand to lose a great deal if the plan is allowed to go ahead. Consumers, it has been argued, risk losing out in the free-trade deal if big business groups succeed in watering down European consumer regulations. European consumer and environmental associations believe that any finalised trade deal would allow foreign companies to bring claims against a country if it breaches the treaty in the future. This, according to anti-TAFTA groups, would drastically reduce countries’ rights to enact laws to adequately protect their citizens or the environment. Critics of the plan have also derided this element of the proposed agreement, labelling it Orwellian and an assault on democracy.

The bellicose rhetoric surrounding the TAFTA is due in no small part to the controversial investor-state dispute settlement clause. This clause is included in order to protect foreign investors from discrimination by governments. However, opponents of the agreement feel that in practice the investor-state dispute settlement mechanism will mean that corporations will essentially reserve the right to sue any foreign government of a country in which they operate if they dislike the local legislation. Legal proceedings are often carried out privately and tend to favour companies. As such, millions of dollars may have been paid out to private companies by way of compensation.

It is believed that under the proposed trade plan, US consumers could suffer if existing regulations surrounding products such as medical devices, financial services or alcohol were watered down. Opponents of the TAFTA plan have also suggested that the trade agreement is little more than a scheme devised by corporate lobbyists to ensure that new laws and regulations benefit large corporations. Critics of the plan have also suggested that TAFTA could potentially threaten food safety, access to medicine, and internet freedoms across both the US and the EU.

Affordable stimulus

In an age of Western economic and financial decline, however, an historic trade pact between the US and the EU could go a long way to reviving a number of ailing economies. Moreover, an agreement between the two powers may help to check the burgeoning economic strength of China. By creating a shared market of common standards, patents and laws, the more established, industrialised nations of the West could stymie the expansion of China’s economic might.

Even without the TAFTA in place, EU-American trade is already big business. Trade between the two already amounts to nearly $1 trillion annually, averages low tariffs and is the world’s largest trade relationship, accounting for around 40 percent of all global economic output. Thirteen million people across both regions are employed as a direct result of the bilateral trade agreement already in place. Yet, despite the already obvious strength and frequency of current transatlantic trade flow, further liberalisation and cooperation would undoubtedly bring even greater rewards. Industry representatives in a range of sectors have evangelised the prospect of a shared market boasting more than 800 million consumers.

Equally, by more closely aligning their respective economic strengths, the EU and the US could find an alternative and considerably cheaper way to stimulate their stagnating economies than vast programs of quantitative easing. With many European economies still in decline, lost in a sea of public debt and deficit, opportunities to potentially experience higher levels of growth should not be ignored. A liberalised and open free trade area covering the US and the EU would offer enormous potential if a deal can be agreed. Further job creation could also prove to be vital to European and US economies. According to EU estimates, the TAFTA deal would bring annual benefits of €119bn to the region, and the US would see only slightly less.

It would not, however, simply be a case of big business benefitting from a ratified trade deal. A TAFTA deal could also be particularly beneficial for small and medium sized enterprises (SMEs). Currently, goods and services worth more than $600bn are traded between the US and the EU annually, while tariffs are collected averaging 4 percent to 7 percent of the value of all goods traded. Predominantly these tariffs are largely deadweight costs for businesses, and, in all, total more than $20bn a year. Whereas larger multinational firms are able to partially hedge tariffs by carrying out manufacturing processes both in the US and Europe, many SMEs are unable to do the same. Accordingly, they are more exposed to this cost. Clearly, any reduction in trade tariffs under the TAFTA would benefit SMEs in the long run.

Global reform

The positive impact of the TAFTA would not just be felt in the US and EU member states. A timely shot in the arm from the TAFTA plan could boost the global economy. Agreeing to a substantial, effective and wide ranging TAFTA is likely to kickstart economic growth in the US and Europe. In turn, this should contribute to further economic development in emerging markets. Research suggests that erasing non-tariff barriers would boost the EU’s economy by 0.7 percent, while the US economy would see around 0.3 percent added. An economic revival may also draw countries away from controversial and divisive programs of quantitative easing and currency devaluation. Stimulus packages have previously been a source of tension between the US and the Europe, so the potential removal of them as a factor in future development between the two regions should be welcomed.

Further benefits which may be derived from the signing of the TAFTA relate to the reformation of the global trading system. Both the US and EU already have a number of bilateral trade agreements with other nations and regions worldwide – particular nations that are members or future members of the trans-pacific partnership. It is entirely plausible that the EU and the US could attempt to create a giant, unified free trade area once the TAFTA has finally been approved. Despite the myriad protests and accusations against the TAFTA, an agreement between negotiators from the EU and the US could be hugely beneficial to the global economic system.

© Financier Worldwide

BY

Richard Summerfield