GED Blog » Fostering Economic Integration Through International Trade & Investment » Part I: Why TTIP Is about More than “Just Europe and the US”

Part I: Why TTIP Is about More than “Just Europe and the US”

© flickr / Lieven Van Melckebeke© flickr / Lieven Van Melckebeke

For “the most contested acronym in Europe”, 2015 could be a chance for a fresh start for TTIP. At least new EU Trade Commissioner Cecilia Malmström hopes so. Aware that the fierce controversies around TTIP risk running the whole deal into the ground, she has announced a greater emphasis on transparency communication around the negotiations in the New Year. Such tactics would represent a most-welcomed effort to counter what US ambassador to the UK Matthew Barzun has described as “scaremongering” and “myth”.

 

However, to lift the current gridlock around TTIP, proponents must do far more than simply assuaging European fears on food safety and environmental standards. If the Commission truly hopes to give TTIP a fresh start, it must demonstrate that there is more to TTIP than Europe and the United States. In this two-post series, we will see that the real stakes of a transatlantic partnership are not regional but global; they are historic rather than anecdotic.

TTIP Could Drive Trade Liberalization Globally

Most of the debate so far has focused on TTIP’s impact on European growth, but this may be missing the point. If signed into law, the deal’s effect would spread far beyond the European and American economies. In fact, TTIP has the potential to transform current patterns of trade, acting as a springboard for deeper global trade liberalization. To understand how, we must get a closer look at one side effect of free trade agreements: trade diversion.

If TTIP would intensify exchanges between Europe and the United States, lowering trade barriers across the Atlantic could also imply some economic losses for third party countries not privy to the deal. In other words, if a certain parties (in this case, the US and EU) tear down trade barriers between them but maintain tariff and non-tariff barriers against countries outside the agreement, this would promote trade (and welfare gains) for the partners. But at the same time, it would divert trade away from with third parties. For instance, a German SME currently importing from Russia could decide to start trading with an American company instead because the removal of trade barriers would make the American firm more competitive than the Russian firm that must still pay tariffs.

As far as TTIP is concerned, such trade diversion effects can be tentatively measured. A study we conducted in 2013 quantified this potential trade diversion, concluding that: “liberalization of trade between the EU and USA leads to trade creation between the partners but to evident trade diversion in trade with third countries. With pure tariff elimination, the countries of West Africa, which traditionally trade a lot with Europe, lose up to about 7%.”

Illustration showing the change in global real per capita income

TTIP Would Cause a Chain Reaction in Trade Negotiations

Traditionally, trade diversion is mentioned to warn negotiators about the damaging effect of FTAs on third-party weak economies. Such concerns clearly apply in the case of TTIP. But apart from this detrimental impact, how could trade diversion trigger a free trade spillover? Well, with the WTO’s Doha round still frozen, that the threat of potential trade diversion could incentive third-party countries to revive negotiations around global trade liberalization. After all, Europe and the United States together account for 50% of world output. If India, Russia and other global economies do not want to see their trade revenues plummet, they will have to lower trade barriers with the Atlantic partners. The precise extent of this chain-reaction is impossible to measure, but considering how WTO talks remain at a standstill, even a small spillover would be an improvement.

Of course, this is not to say that discussing the potential benefits and drawbacks of TTIP for the European economy is a futile dispute. The debate is crucial and, a month ago, we interviewed experts and EU commission officials to get a better understanding on this matter. Their insights were diverse, sometimes controversial, and you should definitely check out their comments in the video below.

Still, a broader picture is just as important. More about this on Thursday!