Outsider’s Perspective on TTIP

The Transatlantic Trade and Investment Agreement (TTIP) has been a focal point of much discussion in recent months. Of course, much of this debate centers on the economic and political pros and cons for both the European Union and the United States. But concluding an agreement that would represent nearly half of the world’s economic output is not expected to have no impact on the outside world. Quite the contrary, outsiders such as China, Brazil and India are most likely to scrutinize the TTIP negotiation process. Apart from geopolitics, in an economic sense their views on these developments are determined by the following factors.

First, the extent of trade diversion. The more TTIP is diverting trade, the greater the likelihood that outsiders will react to such an agreement. Two notable studies have analyzed the potential trade effects of TTIP with differing results on third-party countries. The CEPR report, commissioned by the European Commission, states that outsiders will not experience any adverse consequences. This a result of the direct and indirect spill-over effects from a TTIP agreement. Direct spill-over effects are greater exports of goods and inputs by third-partner countries to a bigger Transatlantic market; indirect effects are potentially the additional trade effects in the event outsiders are adhering to TTIP standards. These spill-over effects are contested by the Ifo study which concluded that some outside countries would actually experience trade diversion. A more recent study by the Central Bank of Turkey assessed that China could suffer severely from a TTIP deal. As such the issue of trade diversion has not been settled yet.

Second, the “depth” of an agreement. A deeper Transatlantic agreement will have a more pronounced outcome on outsiders’ trade patterns. This is because a deeper trade policy agenda generates greater trade between partners, creating a higher wedge between insiders and outsiders in terms of trade costs. Some recent regional trade agreements have already included so-called “beyond-the-border” or deeper measures which are, for some at least, typically lying outside the realm of the WTO. Examples include competition policy, investment protection and data regulation, but also government procurement and services restrictions; two policy areas which are actually dealt with multilaterally. The gains from tackling these issues are great, much greater than the benefits from tariffs. Yet, all these issues touch upon regulatory and institutional sovereignty within each of the party countries. Negotiating a successful agreement will therefore inevitably lead to the erosion of regulatory rents. In this sense TTIP will be a real test-case whether ambitious goals can really be realized politically.

Third, whether standards are going global. An often-read argument in favor of TTIP is that the EU and the US could set a precedent for high-quality standards which will eventually be taken over by other countries around the world. Of course, this is an assumption as there is no guarantee that all firms in countries outside the agreement will truly apply these new standards. However, China’s accession to the WTO is a good example that an emerging country did want to adhere to global rules which were previously set by other countries bringing down trade costs. Nonetheless, a recent Bruegel study assessed that TTIP could also lead to a dual regulatory regime in emerging countries. This means that some firms in these countries that export will take over Transatlantic standards whereas other ones which are left behind only serving the domestic market will be unable to do so. This is a serious threat for emerging countries since a dual regulatory track system would increase costs for firms and eventually for domestic consumers.

Last, the extent of “multilateralization”. It is often said that more and deeper trade agreements bring along a greater degree of discrimination. Higher levels of discrimination could make it harder to multilateralize these agreements for outsiders. In fact, the world could be even in danger of more deep bilateral agreements as a result of TTIP. Various arguments go against such analysis. Bigger trade deals could also incentivise countries to go for a multilateral deal if enough compensation is given to outsiders by the deal makers. An example is the revival of the Uruguay Round after NAFTA had been created. In addition, recent research shows the dynamic effects of PTAs in Latin-America which has lead the participating countries to lower their multilateral tariffs over time. The logic behind this result is that eventually domestic import-competing firms will become dominated by the foreign exporting firms, which reduces their domestic political weight. Aside tariffs, the regulatory policies that TTIP and other big deals are supposed to tackle are alleged to be largely non-discriminatory in nature for reasons of practicality. In other words, it’s very hard for a regulatory policy to distinguish between different partner countries. This could lower third-party trade diversion and hence make it easier to multilateralize existing PTAs.