European Affairs

EU-U.S. Free Trade Pact—Now for the Hard Part     Print
By Brian Beary, Washington Correspondent, Europolitics

brianbeary-august2011With the official nomination of President Obama’s Deputy National Security Advisor for International Economics, Michael Froman, as the next U.S. Trade Representative, the Transatlantic Trade and Investment Partnership  (TTIP)has taken a vital and important step closer to the negotiating starting gate.  Froman, a close friend and advisor of the President, has been central to the Obama Administration’s trade agenda since 2009.

On the EU front, Trade Commissioner Karel De Gucht is taking the lead.  The clock has already started ticking as the European Commission’s term, along with all the commissioners, comes to an end in September 2014, less than a year and a half from now. Aware of this changing-of-the-guard, the two sides have set October 2014 as a target timeframe for concluding the talks. Privately, trade officials admit that it will probably take longer than this, but they want to have this target to sustain momentum.

The world will watch the TTIP talks closely. The EU and US between themselves account for half of the world’s GDP, so if the two sides manage to agree to something comprehensive, it would have major ramifications for global trade liberalization. And that would give heart to a trade community still reeling from the failure of the World Trade Organization (WTO)’s Doha Development Round,  launched in 2001.

In the mid-2000s, when the EU Commission started to appreciate that Doha might not deliver the goods, it launched itself a flurry of bilateral free trade agreement (FTA) talks, focusing on rising stars in Asia like South Korea, with which it sealed a deal in 2011. Many of these FTAs are still being negotiated, including one with Canada, which is close to being concluded, and an EU-Japan FTA, talks on which were launched in March 2013.

TTIP would tower over these bilateral FTAs in both scope and importance. It would also mark a new departure for the U.S., which essentially took a time-out on negotiating new FTAs when Obama was elected President in 2008. Having seen up close and personal during his presidential primary battle with Hillary Clinton the extent of hostility  in rust-belt states toward FTAs, which many blame for job losses in the U.S. manufacturing sector, Obama refrained from launching new bilateral FTA talks during his first term.

He did, however, get Congress to ratify in October 2011 three bilateral FTAs that his predecessor, George W. Bush, concluded with South Korea, Colombia and Panama. Meanwhile, Obama dispatched his Trade Representative (USTR) Ron Kirk, a former mayor of Dallas, around the country in a public relations drive aimed at extolling the benefits of trade in places where trade is a dirty word. Having won re-election in November 2012, Obama decided that the TTIP, along with a Trans-Pacific Partnership (TPP), a regional trade pact with Asian and Pacific states talks on which began in 2010, will be his two signature trade liberalization initiatives.

The best-laid plans of the Commission and the White House could come to nothing if each does not get its respective legislative body,  the European Parliament and Congress, on board. While neither Parliament nor Congress can dictate the negotiating mandates, the administrations still need to involve them in the whole process because if a deal is reached it can only take effect if Parliament and Congress ratify it.

So far the MEPs have been the more enthusiastic about TTIP. In Congress, the issue is just beginning to register on the radar.   A delegation of 10 MEPs came to Washington in mid-April to drum up support for the TTIP on Capitol Hill. The co-chair of that delegation, German MEP Christian Ehler,  noted that they also nudged Congress to try to get the U.S. regulatory agencies engaged in the process. This is important because many of the existing barriers to EU-US trade were created by Congressionally-funded independent regulatory agencies.

While MEPs’ support for TTIP is stronger than Congress’ at the moment, that could change depending on how the negotiations go. The last major trade deal that the EU and U.S. collaborated on, the WTO’s Anti-Counterfeiting Trade Agreement, was resoundingly rejected, not by Congress, but by the European Parliament in July 2012.  In that instance, MEPs objected as much to the process – specifically the lack of transparency in the negotiations – as to the agreement itself.

One missing element that Washington will need to put back in place if the TTIP is to see the light of day is the mechanism known as Trade Promotion Authority (TPA), which permits the U.S. President to submit a trade agreement to Congress for a single Yes or No vote. Congress allowed TPA to expire in 2007, which means that as things stands, Congress can vote on trade agreements article by article—a prescription for terminal delay and dismemberment.  In the absence of TPA, the EU will be wary of signing onto anything. The European Parliament, on the other hand, always uses a simple assent procedure to ratify treaties.  

The official launch of TTIP could come as early as June 17/18 when President Obama is due to travel to Europe to attend a G8 summit in the Northern Ireland border town of Enniskillen. That trip may provide a suitable setting for Obama and his EU counterparts to give the formal green light to the talks, something the Irish EU Presidency would dearly like to happen before its six-month stint at the EU helm ends days later.

So what are the likely the nuts and bolts of the talks? Historically, FTAs have tended to focus heavily on removing import tariffs on goods and services, but this is not expected to be a major part of the TTIP.    A relatively free trade in goods, with average tariff levels only 3-4% already exists.  There are specific sensitive sectors, notably in the agricultural sector, where tariffs remain high, and these will be up for negotiation.

The meat of the talks will likely be non-tariff, regulatory barriers to trade. In this field, Sanitary and Phyto-Sanitary barriers – i.e. food and plant safety-motivated regulations – will take center stage. This is an area where Europe is on the defensive. American farmers are keen to sell their genetically-modified (GM) crops to Europe and get rid of lengthy, complex approval processes that the EU has established to allay public fears about GM foods.

Another hot topic is hormones. It is common practice in the U.S. to give hormones to cattle to make them produce more meat.  An additive called ractopamine is given to pigs for the same reason. The problem is that the EU bans these additives and claims it has solid public health grounds for doing so, a claim that the U.S. contests.

Thirdly, chemicals commonly used in the U.S. to disinfect animal carcasses, such as chlorine for chickens, are also banned by the EU. The two sides did,   early in 2013,   reach a compromise agreement allowing for lactic acid to be used to disinfect beef.  The respective subsidy regimes to support farmers are not expected to be broached in the TTIP talks, because these issues are regulated by WTO rules.

If agriculture is the EU’s defensive zone, public procurement is its offensive one. Decades-old American ‘Buy-America’ laws requiring U.S. state and federal government agencies to only purchase from U.S. suppliers will be fiercely contested by the EU, which will note how much more open Europe’s procurement market is compared to the U.S.   While Obama’s team might be willing to give ground, a challenge it faces is persuading U.S. state governments to roll back Buy-America laws.   It is at the state level where most of these barriers exist.

The EU has another offensive zone that it is itching to raise: the aviation sector. European airlines remain barred from acquiring American airlines due to a U.S. law that caps foreigners’ voting stock in U.S. carriers at 25%. Congress has so far failed to be moved by entreaties to remove these investment restrictions, which airline trade unions want to stay in place, even though many cash-strapped airline owners would love to see European capital flowing into their balance sheets.

Some areas may be less contentious because the major industry players on both sides agree on the need to remove the trade barriers. For example, in the car sector, manufacturers are keen to lower tariffs and get rid of testing requirements which they view as unnecessary and duplicative. Germany, a major exporter, stands to gain a great deal if a single market is created for the car sector.

The transatlantic partners would also like to chart new territory by setting common standards in a range of sectors – for example on intellectual property protection – which they hope will evolve into a global standard. The impetus for this has come from the rapid rise of China, which threatens traditional EU-U.S primacy in this area.

The stakes are thus very high. If a deal is forged and adopted,   major neighboring economies like Turkey and Canada could come knocking and ask to become party to the TTIP. If agreement is not reached-- and there are mighty forces stacked against it—the result will be a significant setback not only for the EU and the US, but also for prospects of a more liberalized global economy.