New Rules of Engagement: Understanding TTIP and TTP

When the signing of the Havana Charter in 1948 initiated the International Trade Organization(later named the World Trade Organization, or WTO), the die was cast for an international negotiation forum and process. 

Centre William Rappard became secretariat for one of the most successful international institutions in the world. The edifice in Geneva remained tightly targeted on trade and investment zones, and achieved real global change, particularly in its tariff reduction negotiations. These lower tariffs led to lower prices, better products and more choice. They have made the organization, in spite of its government constituency, the pre-eminent glorious knight battling on behalf of consumers.

All of that began to change in the past two decades. Success attracted allies. The number of WTO members rose from 27 nations in 1948, to 123 in 1994 to 162 today. For decisions, the WTO still uses a consensus-based system, which means that every member gets to vote and that all votes have to be unanimous. Agreement and progress slowed to a glacial pace. The lubricating oil of past U.S. leadership was diverted to the heat of military preoccupations in the Middle East. Pervasive terror threats encouraged politicians to focus on the high intensity and visibility of the politics of national security and war, as opposed to the low-intensity politics of trade and investment. Progress also slowed due to shifts in the center of trade gravity and challenges in current markets by rapidly growing competitors. 

When current negotiations were initiated in 2001, they were started as the Doha Round​, where, as was tradition, “all play for everything.” A special focus on developing countries was promised. Despite major enthusiasm and public support, 16 years later the industries targeted in the initial focus—primarily agriculture, services and intellectual property rights—remain uncovered.

The global recession intensified the tendency to ignore international economic issues as attention shifted to domestic job creation and protection of domestic credit markets. In consequence, liberalization has taken a new approach outside the WTO. A do-it-yourself approach emerged in the past two decades, defined by mega-regional agreements and preferential plurilateral trade negotiations, handmade for a limited number of players.

The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) are key to this development. TPP is a free-trade agreement covering 12 countries from North and South America to the Pacific region, and TTIP represents a free-trade agreement between the U.S. and the European Union (EU). The TPP negotiations were successfully concluded in October 2015 after four years of intensive talks. Legislative ratification will be the next step. TTIP has been under negotiation since June 2013, aiming for completion by the end of 2016, making use of the transition time for administrations and Congress. 

The combined trans-Pacific and trans-Atlantic space covered by these agreements encompasses 60% of the world economy and 22% of its population, according to data compiled by the International Monetary Fund. The two agreements cover similarly sized populations, but the economies differ in terms of per-capita income and living standards. The TPP economies represent 27.3% of world GDP and 10.7% of the world’s population. The TTIP economies represent 33% of world GDP and 11.2% of the population. The average income per capita for the 12 TPP countries is $30,697, while the TTIP average income is $47,607. 

The U.S. and the EU are by far the two largest trading blocs in history. To remove unnecessary obstacles to the economic activities of these two economies is good. Given the size and scope of the trans-Atlantic economy, standards negotiated by the U.S. and the EU could become a leading benchmark for future global rules and slow down the acceptance of competing standards. The balance of power in the global economy might also be affected. The deal reached at the UN Climate Summit to reduce global greenhouse gas emissions showed that the EU and the U.S. possess the political will and the resources to set the standards. In fact, TTIP’s sustainable energy framework chapter would offer both political and economic impetus to both sides of the Atlantic. A separate forum could then support a successful TTIP.

TTIP and TPP are strategically interlinked with each other. Both agreements are important in terms of how the various partners, including the pivot of the U.S., jointly relate to rising powers and whether the West still has the energy and dedication to set standards for the international economic order. Both TTIP and TPP take on an increasingly strategic importance in light of the continuously growing role of China and other emerging markets in the global economy. Achieving progress in the simplification of trade and investment relations via the two negotiated agreements would push the WTO to expand its useful life.

TPP’s conclusion is also important for the EU. Higher growth rates in the U.S. will help the European economy through increased exports, but TPP also reinforces the geopolitical reality of rebalancing Asia. All of this represents more pressure to Europe to conclude TTIP.

Achieving progress in the simplification of trade and investment relations is important to global prosperity. The approaches taken by TPP and TTIP may indicate the future of trade negotiations: tightly focused talks between selected participants aiming for improvements in fields of comparative advantage within a clearly defined time frame. Operating within such framework constraints may also hold the key to the future of the WTO.

Beyond the differences in membership, however, there are also notable differences in the scope and goals of the agreements themselves. First, TPP is focused on opening markets and eliminating tariff barriers on trade and investment, whereas TTIP is mainly focused on tackling costly nontariff barriers and strengthening foreign direct investment (FDI) rules. Since 2000, U.S. investment in the European economic area has made up 55% of the total U.S. FDI flow. By contrast, U.S. capital flow into the TPP economies amounts to 21%. Similarly, the European Union’s FDI in the U.S. comes to 61%, in comparison to 24% by the TPP. 

Trans-Atlantic tariffs, on average, are much lower than those of the trans-Pacific with an average of only 4% trade tariffs, apart from sectors such as textiles, agriculture and automotive. TTIP is more about investments than free trade, with both parties extensively embedded in each other’s economies. Such a relationship has produced more income, created more jobs and generated more wealth than trade alone. In fact, according to a PricewaterhouseCoopers report on the economic impact of U.S. subsidiaries, such investment directly supports nearly 8.3 million jobs. TTIP negotiations also aim to improve regulatory convergence, reducing nontariff barriers and opening up the service flow across the Atlantic.

TTIP is also more ambitious in comparison to TPP. In addition to the financial and economic benefits, TTIP will have a larger geostrategic impact, because it reinforces the strong ties that exist between Europe and the U.S. TTIP is a natural Western partnership with mature, well-developed and consolidated markets on the one hand and a strong defense relationship based on the North Atlantic Treaty Organization (NATO) on the other—both components are missing in Asia. However, this might change with the tumultuous exit of Britain from the EU. 

Economic realities emphasize TTIP as well. The trans-Atlantic economies are the innovation powerhouse of the global economy and a crucial element in future growth and balance. The U.S. is the largest global spender on research and development (R&D), strengthening its role as the dominant force in global research across numerous industries. It spent $465 billion on R&D in 2014, almost 3% of GDP and 32% of global research and development spending. The EU spends, on average, little more than 2% of its GDP (or $283 billion) on R&D, about 20% of the world’s total.