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Global Trade - The Transatlantic Trade and Investment Partnership


By Tax-News.com Editorial
July 16, 2013



For our latest feature on developments in the area of global trade we look at the proposed free trade agreement between the European Union and the United States, which, if concluded, would arguably be the most significant and ambitious trade deal of its type in the post-war era.


Background

Only a few years ago, the possibility of an FTA between the EU and the US looked a long shot and something that wasn't really on the agenda of either party. This appeared especially so after the election of President Obama, who put his sights on improving economic relations in the Asia Pacific region as the top goal of his foreign trade and diplomacy agenda. Furthermore, the early years of Obama's presidency were characterised by a degree of mistrust of free trade, as demonstrated by the addition of ''buy American'' provisions in the 2010 Jobs Act.

Issues of importance to the transatlantic trading relationship have been discussed in the forum of the Transatlantic Economic Council since April 2007. However, it has only been over the past 18 months to two years that a transatlantic FTA - or Transatlantic Trade and Investment Partnership as it is now known officially - has been discussed seriously by senior trade officials and other heavyweight political figures in both camps.

At their November 2011 Summit meeting, US and EU leaders established a High Level Working Group on Jobs and Growth, with the aim of identifying ways to increase trade and investment between their economies.  This working group was tasked with identifying policies and measures to increase EU-US trade and investment to support mutually beneficial job creation, economic growth, and international competitiveness.

In June 2012, the Working Group issued an interim report and concluded that "a comprehensive transatlantic trade and investment agreement, if achievable, could generate substantial benefits for the US and EU economies." The report recommended the elimination of "all duties on bilateral trade, with the shared objective of achieving a substantial elimination of tariffs upon entry into force and a phasing out of all but the most sensitive tariffs in a short time frame."

These sentiments were echoed in the HLWG's final report, issued in February 2013, which reached the conclusion that a comprehensive agreement that addresses a broad range of bilateral trade and investment issues, including regulatory issues, and which contributes to the development of global rules, would provide the most significant mutual benefit of the various options considered.

That same month, the TTIP was one of the major new policy announcements made by Obama in his 2013 State of the Union address.

"To boost American exports, support American jobs and level the playing field in the growing markets of Asia, we intend to complete negotiations on a Trans-Pacific Partnership,'' Obama told his audience. ''And tonight, I'm announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union - because trade that is fair and free across the Atlantic supports millions of good-paying American jobs.''

On the following day, a positive final report was issued from the Working Group, which recommended that each side should ''initiate as soon as possible the formal domestic procedures necessary to launch negotiations'' on a Transatlantic Trade and Investment Partnership, and the US and EU leaders then followed up by making a formal joint announcement to that effect.

''We are committed to making this relationship an even stronger driver of our prosperity,'' they added. ''In that regard, we welcome the High Level Working Group's recommendations on how we can expand further our transatlantic trade and investment partnership, promoting greater growth and supporting more jobs.''

The official launch of the negotiations was announced by President Obama, President of the European Commission José Manuel Barroso, President of the European Council Herman Van Rompuy and UK Prime Minister David Cameron at the G8 Summit held on 17 June 2013. This followed an agreement by the EU Member States to allow the European Commission to start negotiations with the United States and define their negotiating guidelines


Transatlantic Trade in Numbers

The scale of trade between the EU and the US is quite awesome, and the trading relationship between the two powers is the largest and most complex in the world; goods and services trade flows were valued at an estimated USD2.7bn a day in 2012 and transatlantic investment was directly responsible for approximately 6.8m jobs in 2010.

Last year, US exports to the EU accounted for 21 percent of overall US goods and services exports.  US imports from the EU accounted for 19 percent of overall US goods and services imports.  The US purchased 17 percent of all EU goods exports and 25 percent of all EU services exports, and supplied 11 percent of all EU goods imports, and 31 percent of all EU private services imports.

The US goods trade deficit with the EU was USD115.7bn in 2012, a 15.9 percent increase over 2011.  US goods exports in 2012 were USD265.1bn, down 1.2 percent from 2011, but up 57 percent from 2000.  Corresponding US imports from the EU were USD380.8bn, up 3.4 percent from 2011, and up 67 percent from 2000.

The United States had a private services trade surplus of an estimated USD55.4bn with the EU in 2012, up 6.5 percent from 2011.

US exports of private commercial services (i.e., excluding military and government) to the EU were an estimated USD194bn in 2012, up 2.8 percent from 2011, and up 108 percent since 2000.  Other private services (business, professional, technical, and financial), royalties and license fees, and travel categories accounted for most US services exports to the EU.

Sales of services in the EU by majority US-owned affiliates were USD499bn in 2010 (latest data available), while sales of services in the United States by majority EU-owned firms were USD382bn. Intra-firm trading - trade that takes place within the same company - accounts for more than half of total US trade with the EU.

US exports of agricultural products to EU countries totalled USD9.9bn in 2012, and the EU countries together rank 5th as an agricultural export market for the United States. Leading categories include: tree nuts (USD1.7bn), soybeans (USD1.5bn), processed fruit and vegetables (USD514.9m), wine and beer (USD492.4m), and feeds and fodders (USD405.5m).

US imports of agricultural products from EU countries totalled USD16.6bn in 2012, and the EU countries together rank 2nd (after Canada) as a supplier of agricultural imports to the United States. Leading categories include: wine and beer (USD5.0bn), essential oils (USD1.9bn), snack foods (USD1.1bn), processed fruit and vegetables (USD934m), and feeds and fodders (USD832m).

US and EU investors together owned roughly USD3.7 trillion in direct investment in each other's economy in 2011.  The stock of US foreign direct investment (FDI) in the EU totalled USD2.1 trillion in 2011 (latest data available), and the stock of EU FDI in the United States was worth USD1.6 trillion that year.  US FDI in EU countries is primarily concentrated in nonbank holding companies, finance/insurance, and manufacturing sectors.  EU countries' FDI in the United States is mostly in the manufacturing, finance/insurance, wholesale trade, and information sectors.

The EU countries with the largest FDI in the United States are the United Kingdom, the Netherlands, Germany, and France.


What Will The TTIP Achieve?

In general, transatlantic tariff barriers are currently comparatively low, with an average of 5.2 percent for the EU and 3.5 percent for the US. But, given the magnitude of trade between the EU and the US, duties are said to still impose costs that are not negligible. Therefore, the declared goal of the agreement is to get as close as possible to the removal of all duties on transatlantic trade in industrial and agricultural products, with special treatment of the most sensitive products.

In addition, both sides want to open their services sectors at least as much as they have achieved in other trade agreements to date, also seeking to open their markets in new sectors, such as transport.

A further aim is also to achieve the highest levels of investment liberalization and protection negotiated to date in other trade deals, and to open up access to procurement markets at all levels of government without discrimination. It is pointed out that European companies whose business depends on public procurement represent 25 percent of GDP and 31m jobs.

However, it is intended that the TTIP will go beyond the removal of tariffs and opening markets on investment, services and public procurement. It will also focus on aligning rules and technical product standards - for example, different safety or environmental standards for cars - which currently form the most important barrier to transatlantic trade. Studies show that the additional cost burden due to such regulatory differences is equivalent to a tariff of more than 10 percent, and even 20 percent for some sectors.

Both sides intend to negotiate an ambitious agreement on sanitary and phyto-sanitary standards, as well as on other technical barriers to trade. They will work on regulatory compatibility in specific sectors, such as chemical, automotive, pharmaceutical and other health sectors, such as medical appliances.

Since not all regulatory divergences can be eliminated immediately, both sides envisage a "living agreement" that allows for progressively greater regulatory convergence over time against defined targets and deadlines, and the agreement will address other areas, such as intellectual property, competition and state-owned enterprises, small- and medium-sized enterprises and transparency - that go beyond bilateral trade.

According to the European Commission, the final agreement could see EU exports to the US rise by 28 percent, earning its exporters of goods and services an extra EUR87bn every year. It is said that the average family of four living in the EU would see their disposable income rise by EUR545 as a result of the agreement, and the European Commission has estimated that could add 0.5 percent to global GDP.

Furthermore, according to an independent study by the London-based Centre for Economic Policy Research, an ambitious and comprehensive transatlantic trade and investment partnership could bring the EU economic gains of EUR119bn a year once fully implemented.


First Round Of Talks Progress Well

It was not an ideal start for the inaugural round of the TTIP negotiations. The Edward Snowden affair, as a result of which it was revealed that the US intelligence agencies had been spying on their European allies, threatened to bring an abrupt halt to the TTIP before it had even got off the ground.

However, negotiators concentrated on the task in hand, and in comments made after the conclusion of the week long talks the European Union's Chief Transatlantic Trade and Investment Partnership negotiator described the first round of talks with the US as "very productive." Ignacio Garcia-Bercero said afterwards that participants had been "able to take this negotiation to the next step."

Around 150 delegates in 24 working groups set out the EU's and US's respective approaches and ambitions in roughly 20 of the areas that the TTIP is expected to cover. These included: market access for agricultural and industrial goods, government procurement, investment, energy and raw materials, regulatory issues, sanitary and phytosanitary measures, services, intellectual property rights, sustainable development, small- and medium-sized enterprises, dispute settlement, competition, customs/trade facilitation, and state-owned enterprises.

Garcia-Bercero believes that the "main objective has been met: we had a substantive round of talks on the full range of topics that we intend to cover in this agreement."

"This paves the way to for a good second round of negotiations in Brussels in October," he added.

United States Trade Representative Michael Froman gave an equally encouraging assessment of the maiden round of talks, and issued the following statement at their conclusion:

''This inaugural round marked an important step in transatlantic relations. During the meetings, each side presented to the other its ideas on how to proceed, how various chapters might be addressed, and how specific issues might be dealt with in an agreement. These very productive discussions set the stage for increased substantive engagement at a second round in the fall. I look forward to continuing our close engagement with the EU as we work to increase the substantial number of jobs already supported by trade and investment between the United States and the European Union.''


Many Potential Obstacles Ahead

So far, so good it seems. But it is still very early in the process, and there are potentially many factors which could bog down the negotiations, or, at worst, knock them off track.

Many senior lawmakers from both parties in the United States have whole-heartedly endorsed moves by the Administration to commence these negotiations. For example, Senator Max Baucus, a Democrat who chairs the influential Senate Finance Committee, which has jurisdiction over tax and trade legislation, noted in a letter to Froman in February that ''a comprehensive US-EU FTA, negotiated and implemented with the highest standards, would have a multiplier effect and would be certain to generate much needed economic growth on both sides of the Atlantic.''

Baucus's opposite number on the House of Representatives Ways and Means Committee, Dave Camp, a Republican, observed that a comprehensive trade and investment agreement with the EU has the potential to create well-paid jobs for American workers in substantial quantities. ''Negotiations will not be easy,'' he said, ''but they have enormous potential to open new opportunities for us to sell our goods and services in the EU.''

However, while Baucus said that the TTIP represents an ''enticing opportunity,'' he warned that there are ''barriers to free and fair trade that are long-standing and difficult to overcome.''

Baucus identified several priorities ahead of any negotiation process, including: access for US agricultural exports like beef and pork; strong intellectual property protection; access for US services exports; regulatory compliance and; a mechanism for dispute settlement.

Crucial to a successful negotiation and ratification of the TTIP from the US side of things could be the renewal of the Trade Promotion Authority (TPA). This piece of legislation, which expired on July 1, 2007, prevents Congress from amending or filibustering trade agreements - Congress is only permitted a straight 'yes' or 'no' vote on a trade deal - allowing the President to effectively fast track free trade agreements. US lawmakers, including Baucus, believe that only with the renewal of TPA will there be a positive outcome to the TTIP negotiations.

President Obama's Trade Policy Agenda 2013, presented in March 2013, indicated that it will work with Congress on the renewal of TPA, but there has been little in the way of concrete action to fulfil this pledge in the meantime. The process of nominating and confirming a new US Trade Representative probably hasn't helped matters - Froman has only just stepped into the role following predecessor Ron Kirk's decision to step down in January 2013. However, at his confirmation hearing in the Senate in June 2013, Froman said that he regarded TPA as a ''critical tool'' and assured he lawmakers that he would work with them to craft a new bill to renew this authority.

Without TPA, there could be a repeat of the convoluted process leading to the eventual ratification by the US of free trade agreements signed with Columbia, Panama and South Korea. The agreements with Colombia and Panama were signed back in 2006 and 2007, respectively, under the presidency of George W. Bush. However, a Democratic majority in Congress refused to ratify the deals until much more stringent labour rights and environmental protection (and, in the case of Panama, tax transparency) provisions were inserted into the texts. It took until 2011 for these agreements to be ratified. In the case of the South Korean FTA, the deal was held up until new agreements more favourable to the US auto industry were signed in 2011. Given the extensive trade relationship between the EU and US, similar snags are bound arise.

And there are a number of pitfalls preventing a smooth negotiation and ratification at the European end.

Approval of the European Commission's negotiating mandate from the council of ministers came swiftly, suggesting that Member States support the idea of the TTIP in principle. However, the process could unravel over the finer details of the agreement, with the 27 constituent countries making up the Council each fighting for their own particular interests. France for instance has been especially vocal on the issue of trade recently. Industry Minister Arnaud Montebourg has lobbied against the recent EU-South Korea FTA arguing that it allows Korean manufacturers to ''dump''  cars into the European market. Europe can be open but ''it must not be given away,'' Montebourg has said. Indeed, President Francois Hollande has parroted phrases used by Obama early in his presidency calling for ''fair trade'' rather than ''free trade.'' 

The European Parliament, although only an advisory body, will also have its say on any transatlantic trade deal. This institution represents a broad spectrum of political views and national interests across the 27 Member States, and the Left in particular, with its traditionally strong links to trade unions in many countries, is expected to fight hard against any deal which does not at the same time safeguard European jobs. Members of the European Parliament's International Trade Committee have already warned that "hard bargaining would be needed to clinch a deal acceptable to the European Union public." Almost all of those who participated in the committee's discussions highlighted what they called "systemic differences" between the EU and the US, and warned that strong public criticism could be expected.

What's more, trade relations between the EU and the US have at time been quite strained as a result of a series of potentially damaging, in economic terms, legal disputes, such as US Foreign Sales Corporation legislation (since repealed), and, more recently, the ongoing spat over subsidies for aircraft manufacturers.

It remains to be seen how these disputes, plus the many other variables at play, influence the negotiations as they progress.


Conclusion

Thus far, there seems to be plenty of enthusiasm on both sides of the Atlantic to seal this deal when the potential economic benefits of doing so are factored into the equation. So far, things seem to be progressing swimmingly - almost too easily. However, it is very early days in the life of the TTIP, and the hard bargaining is likely to stretch on for many months, if not years.


 

Tags: trade | services | tax | investment | United States | agreements | European Commission | standards | France | Investment | intellectual property | Panama | legislation | tariffs | law | Canada | environment | interest | manufacturing | insurance | business

 

 

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