Article / 19 July 2016 at 15:00 GMT

Trade talks in trouble

Managing Partner / Spotlight Group
United Kingdom
  • TTIP meant to boost US, EU trade and economic performance
  • Regulatory differences, public opposition weighing on deal
  • Election timetable in US, France, Germany implies no fast solution

Abandoned factory
Economists and many politicians favour free trade and globalisation, 
but they create their share of discontent as well. Photo: iStock

By Stephen Pope

Trade negotiations between the United States and the European Union have been ongoing for over three years and have included no less than 14 rounds of separate talks on the trade and investment deal known as the Trans-Atlantic Trade and Investment Partnership.

What is TTIP?

The drawn-out discussions are geared toward establishing the largest trading zone in the world by reducing the regulatory barriers to trade. The discussions are focused on areas such as banking regulations, environmental legislation, food safety law, and even the sovereign powers of individual nations.

Such an ambitious project would be hard enough to negotiate at the best of times, but the dialogue has been hounded by European misgivings over the influence of big business and a sense of scepticism in the US over free trade.

Sadly, the progress is next to glacial and the latest round of talks drew to a close last Friday with no significant breakthrough reported.

Economic potential

The key objective of TTIP is to provide economic stimulus by fostering the conditions for free, unfettered trade following the slowdown in the GDP growth in the wake of the global financial crash and the European sovereign debt crises.

Lift the veil and one can one finds that there is an alternative objective – i.e. TTIP will allow the US and EU to compete with China and India by setting mutually agreed standards in product and service areas that are crucial to the welfare of individual citizens. 

These can be in services such as accounting standards, banking practices, insurance protection, or workers’ rights. They also apply to physical goods, as the West can enforce rigorous standards on automotive safety, cosmetics, chemicals, and pharmaceuticals.

In short, TTIP looks to make globalisation improve the lot of the consumer and increase business opportunities for profit generation.

Given that we define “economic globalisation” as:

“...the increasing economic integration and interdependence of national, regional, and local economies across the world through an intensification of cross-border movement of goods, services, technologies and capital...”

TTIP would seek to do away with tariffs on goods and services. Consider the diagram below:
without trade, the domestic price and quantity are P & Q at equilibrium point E.

If a country opens up to world supply, price falls to P1, and output increases from Q to Q2. As a result, domestic producers’ share falls to Q1. Beyond Q1 the domestic supply cannot compete on price with the world supply. and imports now dominate, with the quantity imported Q1 to Q2.
Trade Tariff Source: 

Free trade means consumer welfare increases from the area of triangle AEP to the area of triangle ABP1. Still, the loss of market share by domestic producers will lead to job losses and so objections arise.

If there is no free trade agreement there will be an imposition of a tariff to shift up the world supply curve to World Supply plus Tariff.

This means prices rise to P2, and the new output is at Q3. Domestic producers' share of the market rises to Q4, and imports fall to Q4 to Q3. The result is that domestic producers have been protected from cheaper imports.

This is only a short-term solution, as overall welfare will fall if there is no willingness to engage in international trade. Economic research is packed with empirical evidence to prove that a closed economy will be worse off, over time, than an open economy. 

(As an example please refer to A New International Macroeconomic Model” by Tamim Bayoumi of the International Monetary Fund.)

The tariff implies as domestic consumers face higher prices, they also suffer a loss of potential consumer surplus. In contrast, domestic producers increase their producer surplus as they receive a higher price than they would have without the tariff.

In short, the industry has been protected and while in the short-run it will enjoy increased market share (and so jobs will be protected in the domestic economy), it will not last. A protected industry is the fastest route toward inefficiency. The government will be obliged to indulge the weak industry with ever greater state subsidies which will have to be financed through greater borrowing or taxation so dragging the economy down in the medium-term.

What is there to object to?

From the EU, the main concern is with public services. TTIP has the scope to open up EU public health, education, and water services to US companies. To counter these fears the European Commission has claimed that public services will be kept out of TTIP. However, according to the Huffington Post, EU insiders have admitted that talks about public health services are still on the negotiating table.

TTIP is structured to create a convergence of regulation. Now that is all well and good if it relates to raising standards and demands on manufacturers. In the area of food safety, for example, EU standards are more demanding than in the US. In the US, 70% of all processed foods sold in supermarkets contain genetically modified ingredients. By contrast, the EU allows virtually no GM foods.

The US also has looser restrictions on the use of pesticides and allows growth hormones in its beef which are restricted in Europe due to proven links to cancer. The US agricultural lobby has tried to have these restrictions lifted repeatedly in the past through the World Trade Organisation and so it is most likely that they will try to do so once more under TTIP.

A similar case is to be made with regard to the environment, where the EU’s Registration, Evaluation, Authorisation & restriction of Chemicals (or REACH) regulations are tougher on the use and disposal of potentially toxic substances.

In Europe, a company has to prove a substance is safe before its use will be authorised versus the US where any substance can be used until it is proven unsafe. As an example, the EU currently bans 1,200 substances from use in cosmetics, the US just 12.

Thankfully for Americans, chloroform is one of the 12 (mercury as well). Photo: iStock 

I must wonder, though, how many tests and trials can ever say a product is absolutely 100% safe. At one time, asbestos was thought to be a wonder material. It is the case that the highest standards, not the lowest should be applied; however, the EU does appear to be indulging in regulatory overkill.

Why the hostility?

Had the discussions been open with progress reports freely available, that may have taken away some of the opposition. Sadly, too much of the discussion between the US and EU has been secretive.

Information about the talks and any decisions taken has been hard to come as almost all the information relating to the discussions has been obtained from leaked documents and requests submitted under the Freedom of Information act.

What about Brexit?

The UK was one of the more enthusiastic supporters of free trade in Europe, but the referendum vote on June 23 to leave the EU means that the UK will become an increasingly less influential voice in any EU-US negotiations once Article 50 is triggered.

Of course, the UK will begin looking to forge its own deals with the wider world and so by being absent it could actually, perversely, pile greater pressure on the remaining EU nations to yield concessions to the US if TTIP is to proceed. 

The US will have noted that 25% of US exports into the EU went to the UK. If the EU see the UK getting a good deal, the pressure on the remaining nations will be considerably elevated.

No quick deal

There is little prospect of TTIP being approved before president Barack Obama leaves office in January 2017 unless there are significant compromises from both sides.

In November, the US will elect a new president and so Obama is unlikely to sign into law a deal in the last 12 weeks of his term unless Mrs Clinton wins the White House and she approves the deal as well. So far, she has been less than enthusiastic. If Trump is the victor, then all bets are off as he is deeply opposed to TTIP just as he is NAFTA.

Elections in France (April/May) for president and Germany (October) in 2017 will also make it extremely difficult for national leaders to push a deal that would open up their economies.
So do not expect the TTIP express to be coming to a country near you any time soon.

Container ships at the Port of Hamburg
Whatever the benefits of the TTIP, it is currently swimming against a rising tide 
of economic populism and nationalist sentiment. Photo: iStock 

— Edited by Michael McKenna

Stephen Pope is managing partner at Spotlight Ideas
20 July
vanita vanita
Dear Steve,
How you see GSR ?
And ftse , dax indices rgt now at the moment ?
Take care.
20 July
Stephen Pope Stephen Pope

I like equities right now, so would be long.

Just submitted an article of should come up on site relatively soon.

20 July
vanita vanita
Thanks sirji


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