11 Aug 2016
The Transatlantic Trade and Investment Partnership: Developments and Implications
Currently being negotiated between the US and the EU – which together account for 47% of global GDP and 29% of world trade – the Transatlantic Trade and Investment Partnership (TTIP) is the world’s largest ever trade and investment agreement. Despite the potential complications caused by Brexit, both the US and the EU indicate that they will stick to their goal of reaching an agreement by the end of 2016. This timeline is widely expected to be difficult to accomplish. Even if a TTIP deal is finally concluded, the effects would likely be modest over the near term. In the long run, however, TTIP will further strengthen transatlantic trade and investment links, providing an additional boost to economies on both sides of the Atlantic.
To some extent, stronger economic growth in the US and the EU should lead to increased demand for products from third party countries. However, as trade barriers will be reduced between the US and the EU, this will probably bring about a trade diversion effect with regard to other countries. The magnitude of such effects will very much depend on the degree of non-discriminatory openness in the ultimate TTIP deal. TTIP will also contribute to the development of international trade rules in areas where no agreements have been made at a multilateral level thus far.
The Background to TTIP
TTIP is an ambitious, comprehensive and high-standard bilateral trade and investment agreement aimed at creating opportunities for businesses, workers and farmers on both sides of the Atlantic. The proposed agreement is intended to boost transatlantic trade and investment linkages at a time of modest economic growth by eliminating customs duties, removing or greatly reducing red tape and tearing down barriers that impede trade both in goods and services. This in turn is expected to add new employment opportunities to the existing 13 million plus jobs that are supported by transatlantic trade and investment.
The US is already the EU’s largest export market and its largest source of FDI, while the EU is the US’s second largest market (after Canada) and also its largest source of FDI. TTIP's eventual impacts on both transatlantic and global economic growth and investment will undoubtedly be very substantial. The US and the EU together account for 47% of global GDP and 29% of world trade. By comparison, the recently concluded Trans-Pacific Partnership (TPP), which comprises the US, Australia, Brunei-Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, encompasses 37% of the global economy and 26% of world trade.
EU and US Objectives
In negotiations with regard to TTIP, the EU is seeking to ensure a balanced outcome between the elimination of duties, the elimination of unnecessary regulatory obstacles to trade and an improvement in rules, leading to substantial improvements in each of these components and an effective opening up of markets. On trade in goods, the EU hopes to negotiate a deal that eliminates all duties on bilateral trade, with the objective of achieving a substantial elimination of tariffs upon the deal's entry into force and a phasing out of all but the most sensitive tariffs in a short timeframe. All customs duties, taxes, charges on exports and quantitative restrictions or authorisation requirements on exports to the other party not included in exceptions under the agreement would need to be abolished.
In removing unnecessary obstacles to trade and investment, efforts will be made to reach an ambitious level of regulatory compatibility for goods and services, including mutual recognition, harmonisation and enhanced cooperation between regulators. The EU mandate makes clear that regulatory compatibility will be without prejudice to the right to regulate in accordance with the level of health, safety, consumer, labour and environmental protection and cultural diversity that each side deems appropriate.
The EU is also striving to negotiate provisions in the areas of sanitary and phytosanitary measures; technical regulations, standards and conformity assessment procedures; regulatory coherence; sectoral matters; IPRs; trade and sustainable development; customs and trade facilitation; trade-related energy and raw materials; SMEs; capital movements and payments; transparency; investment protection; trade in services and establishment; and government procurement.
The US is trying to achieve substantially similar objectives in the TTIP talks. Given that average US and EU tariffs on goods are already quite low (at just under 2%, with over half of the bilateral trade free from customs duties), new and innovative approaches to reducing the adverse impact on transatlantic commerce of non-tariff barriers (NTBs) are a significant focus of the negotiations. Key objectives include reducing costs associated with regulatory differences that may unnecessarily impede trade; continuing to meet legitimate regulatory objectives; and developing rules and principles on emerging global issues of common concern in order to strengthen the rules-based trading system.
Recent Developments and Prospects
The TTIP negotiations commenced in July 2013. The negotiating rounds held in 2013 and early 2014 focused largely on understanding US and EU positions on and objectives for the topics at hand. Since 2014, negotiators have been working on the concrete scope, architecture and details of the individual chapters. Specifically, the US and the EU have tabled textual proposals for specific chapters that reflect how they would like the final deal to be drafted. A final agreement will have up to 30 chapters, grouped under three parts, namely market access for US and EU companies (e.g. trade in goods, services and public procurement), cooperation on regulatory issues (including technical barriers to trade, food safety and specific industries such as chemicals, cosmetics, ICT and textiles), and global rules of trade (covering sustainable development, trade facilitation, SMEs, investment, competition, IP and more).
A total of 14 formal rounds of negotiations have been completed so far. In the process, the US and the EU have made considerable progress on a range of issues, and the talks could potentially be wrapped up by the end of this year as targeted. However, significant gaps still remain in a number of areas, including market access for goods and services, government procurement, investment protections and geographical indications. The process has also been complicated by rising opposition against TTIP in the EU from consumer, environmental, labour and other civil society groups who strongly believe TTIP would lessen or outright dismantle EU protections and standards. There also appears to be a growing scepticism towards free trade in the US as the presidential campaign heats up.
To further compound problems, Brexit has cast a shadow on an early conclusion of TTIP, although both the US and the EU indicate that they will continue to work towards their goal of reaching a deal by the end of the year. While Brexit may not have an immediate impact on the EU negotiating position as the European Commission is still negotiating on behalf of all 28 EU member states, including the UK, the impacts of British departure will increase gradually. As a strong supporter of trade liberalisation, the UK could have been expected to act as a facilitator during the negotiations and its absence is likely to make a final deal harder to achieve as certain EU members may feel more emboldened to make tougher demands in various areas that may not be acceptable to the US.
In addition to the general uncertainty that the Brexit process will bring to the negotiations, the overall value of TTIP for the US will diminish somewhat if the UK is taken out of the equation, given that the UK is the largest market for US exports in the EU, taking up the lion’s share of more than 20% of total shipments to the EU in 2015. All in all, it is generally held that having a TTIP agreement by the year's end looks increasingly unlikely.
Potential Impacts on the US and the EU
If a TTIP deal is finally concluded, the effects would probably be moderate over the short term as new rules and regulations are likely to be phased in gradually. However, its longer-term implications are expected to be significant. Over the long haul, TTIP will further strengthen transatlantic trade and investment links, giving an added boost to economies on both sides of the Atlantic. Like TPP, deepening economic integration between the US and the EU is likely to mean better economies of scale, lower production costs, increased exports, expanded investment and job creation, as well as faster economic growth. While a number of studies have assessed the potential impact of TTIP, the recently released draft interim technical report prepared by Ecorys for the European Commission – “Trade SIA on the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA” – is among the most up-to-date and comprehensive.
Under an ambitious scenario that includes complete tariff elimination and the removal of 25% of NTBs on most goods and services as well as 50% of procurement NTBs, the Ecorys report projects GDP to be 0.5% higher each year for the EU and 0.4% higher for the US after TTIP is fully implemented. Meanwhile, wages for both high- and low-skilled workers are expected to go up by 0.5% in the EU, compared with 0.3% for high-skilled workers and 0.4% for low-skilled workers in the US. Total EU and US exports are expected to increase by 8.2% and 11.3% respectively, with a 27% increase in EU exports to the US and an almost 36% gain in US exports to the EU.
For both the US and the EU, sectors which are now subject to high tariffs and/or substantial NTBs that would be reduced under TTIP are more likely to enjoy substantial production and associated employment gains. For the EU, the benefiting sectors are expected to include leather, textiles and clothing, motor vehicles, and beverages and tobacco. For the US, non-ferrous metals, meats, machinery, rice and textiles are likely to be among the benefiting sectors. On the whole, it has been estimated that for the EU, 76% of the positive economic impacts derived from TTIP would come from NTB reduction, with 24% coming from tariff reduction. Meanwhile, up to 87% of the positive impacts for the US would come from NTB reduction, along with 13% from tariff reduction.
While the average tariffs imposed between the US and the EU are already very low, the rates for some products remain high. For instance, the US imposes duties of up to 12.8% on furniture, 32% on clothing and even 48% on footwear, while the EU’s tariffs are as much as 5.6% on furniture, 12% on clothing and 17% on footwear. In such instances, removal of customs duties will undoubtedly help US and EU exporters expand across the Atlantic. For most other sectors, however, improved regulatory coherence is likely to be more important as the barriers arising from regulatory divergence are considered to exert more pronounced effects on trade than tariffs. Regulatory cooperation via TTIP is therefore well poised to help harmonise divergent and duplicated technical regulations, standards and certifications, in turn helping to remove red tape and reduce the costs of doing business.
Likely Implications for Mainland China and Hong Kong
Although TTIP is intended to reduce tariffs and NTBs between the US and the EU, its indirect impacts, albeit modest, will also be felt in other countries. To an extent, faster economic growth and increased well-being in the US and the EU should bring about greater consumer demand for products from other countries. On the other hand, reduced trade barriers between the US and the EU may result in trade diversion where other countries are concerned. The extent of such effects will very much hinge on the degree of non-discriminatory openness in the final TTIP agreement. While tariff elimination will benefit the US and the EU only, improved regulatory coherence could benefit outsiders too. Furthermore, if trade between the US and the EU accelerates, a stronger derived demand for intermediate goods might also bode well for outsiders.
Evidently, TTIP has an important bearing on China as the US and the EU are the mainland’s two largest markets, taking up 18% and 16% of its total exports in 2015 respectively. As an outsider to TTIP and hence excluded from preferential tariff treatment, China will risk a deterioration in its export competitiveness in the US and the EU. However, a brief analysis of the top ten US and EU imports from the mainland suggests that the impacts of TTIP on China’s exports are unlikely to be substantial.
With a share of almost 22% of total US imports, China was its largest supplier in 2015, followed by the EU (19%), Canada (13%), Mexico (13%), Japan (6%) and Korea (3%). Among the top ten US imports from China, the mainland held a dominant position in electrical machinery and AV equipment (HS 85), furniture (HS 94), toys (HS 95), footwear (HS 64), knitted apparel (HS 61) and non-knitted apparel (HS 62). Elsewhere, China faced keen competition from the EU in nuclear reactors, boilers and machinery (HS 84) and plastics and plastic articles (HS 39), and was outperformed by the EU in vehicles (HS 87) and optical and medical instruments (HS 90).
Given the phasing out of tariffs and NTBs under TTIP, China might therefore encounter increased competition from the EU with regard to HS 84 and HS 39, and more notably HS 87 and HS 90. In the electrical and electronic goods sector, however, where duties are already at low levels, China’s exports to the US are expected to benefit from better alignment of US and EU technical regulations and standards. On the other hand, despite its dominance in furniture, footwear and clothing, China might still face some challenges from the EU, which is expected to gain considerably from the removal of high tariffs levied at present.
Across the Atlantic, China, taking up over 20% of the EU’s total imports, was again its largest supplier last year, trailed by the US (14%), Russia (8%), Switzerland (6%), Norway (4%) and Turkey (4%). Among the EU’s ten largest imports from China, the mainland was also top source of electrical machinery and AV equipment (HS 85), furniture (HS 94), non-knitted apparel (HS 62), knitted apparel (HS 61), toys (HS 95) and footwear (HS 64). Meanwhile, China faced big challenges from the US in nuclear reactors, boilers and machinery (HS 84) and plastics and plastic articles (HS 39), and was outstripped by the US in optical and medical instruments (HS 90) and organic chemicals (HS 29).
China, amid the phasing out of tariffs and NTBs under TTIP, might therefore experience intensified competition from the US with regard to HS 84 and HS 39, and more seriously HS 90 and HS 29. In the electrical and electronic goods sector, where duties are low at present, the mainland’s exports to the EU are again likely to benefit from further regulatory coherence between the US and the EU. However, despite its supremacy in furniture, clothing and footwear, China could meet with a stronger challenge here from the US, which is expected to take advantage of the elimination of the high tariffs currently imposed.
Hong Kong, with its production and sourcing mainly undertaken across the border, will also be affected by the changing regulatory regime in the US and the EU brought by TTIP. While some Hong Kong exports are expected to benefit from increased regulatory coherence between the US and the EU, the sales outlook for other sectors will be somewhat clouded by the phase-out of transatlantic tariffs. Indeed, the lowering of tariffs and NTBs to trade and investment under TTIP could lead to an acceleration of FDI flows into the US and the EU, possibly at the expense of outsiders. In this context, Hong Kong might suffer from a resultant diversion of trade and investment. It is, however, well positioned to cash in on its role as a preferred platform for externally-focused mainland and Asian enterprises, which can leverage the city’s premier business services to pursue opportunities in the US and the EU.
Possible Implications for Multilateralism and Global Trade Rules
TTIP has a large bearing on multilateralism and global trade rules because it represents an unprecedented effort to complement traditional tariff liberalisation with broad-ranging commitments on regulatory co-operation and a joint rules-based framework for bilateral trade and investment. Similar to TPP in certain aspects, TTIP will thus help define global trade rules for decades to come, although its impacts will naturally depend on the level of ambition of any final agreement and on whether US-EU regulatory cooperation and coherence efforts are sufficiently meaningful to result in globally-prevalent regulations and standards.
To be sure, TTIP, in addition to TPP, should contribute to the development of international trade rules in areas where no agreements have been made at the multilateral level so far. It therefore offers a unique test bed for closing the fissures in the global regulatory regime and creating a rules-based framework for multilateral trade and investment. Eventually, TTIP hand-in-hand with TPP, could potentially help initiate a new round of multilateral trade negotiations in which NTBs, regulatory harmonisation, investment protection and trade in services assume a bigger role.
Some observers opine that China could lose significance in global economic affairs as a result of TTIP and TPP. While these fears are probably overstated given China’s extensive web of FTAs in the Asia-Pacific region, and ongoing efforts to conclude (by the end of this year, or possibly next year) a Regional Comprehensive Economic Partnership (RCEP) that would cover all ten Association of South East Asian Nations (ASEAN) members plus Australia, China, India, Japan, Korea and New Zealand, it seems the more ambitious and broad-ranging TTIP and TPP deals could overshadow the narrower goods-based FTAs that typically pursued by China.
The TTIP negotiations do not appear to have had a dampening effect on the parallel RCEP discussions. While the six partner nations participating in the RCEP process already have bilateral FTAs with ASEAN, this new arrangement is expected to expand on the existing regional framework by creating a modern, high-quality agreement designed to underpin and promote future growth, development and integration in the participating countries. Economic ministers from the RCEP countries believe that this free trade area could potentially transform the region into an integrated market that currently accounts for some 31% of the world’s GDP and 29% of global trade.
With regard to an eventual Free Trade Area of the Asia Pacific (FTAAP), an agreement that is expected to include all 21 members of the Asia-Pacific Economic Cooperation (APEC) bloc (which now accounts for some 59% of the world’s GDP and 50% of global trade), it is too difficult to predict at this time whether such an undertaking will move forward in the foreseeable future as the US appears unlikely to back an APEC-wide FTA unless it is based on the TPP/TTIP model rather than the RCEP one. The interplay between TPP/TTIP and RCEP, and the impacts one arrangement may have on the other, remains unclear. However, the hope would be for an FTAAP that consolidates both TPP/TTIP and RCEP according to standards that are acceptable to both the US and China.