House of Lords - The Transatlantic Trade and Investment Partnership

The Transatlantic Trade and Investment Partnership - European Union Committee Contents

The Transatlantic Trade and Investment Partnership

Chapter 1: Introduction

Purpose and Scope of this Inquiry, Structure of this Report

1. The Transatlantic Trade and Investment Partnership (TTIP) is the most ambitious trade and investment pact ever attempted, due to both its scale and its significance for the transatlantic relationship between the European Union and the Unites States. Our intention in conducting this inquiry has been to examine the prospects of the European Union (EU) and the United States (US) being able to conclude an agreement that fulfils that potential, and to explore what they wish to achieve by doing so. We also set out to examine the UK Government's approach to the negotiations, with a view to presenting our assessment of the prospects of making progress in some of the areas they have identified as UK priorities. We have at the same time sought to explore a number of concerns about the possible adverse effects of an agreement that have been brought to our attention, and present our conclusions on which of those concerns appear to us well-founded and which do not.

2. We hope that our report will make a timely contribution to public debate as the potential outline of an agreement begins to take shape now that the initial phase of negotiations between the EU and the US and the first political "stock-take" led by the European Commission and the US Trade Representative have taken place. We also intend that the evidence we present and the conclusions and recommendations we draw from that evidence should serve to inform the House, the UK Government and the European Commission as negotiations begin to gather pace after European Parliament elections, mid-term elections to the US Congress and the appointment of a new Commission.

3. Our report first sets out the background to the evidence we have gathered in the course of our inquiry, including a chronology of events and milestones in the negotiations thus far and facts and figures about a prospective TTIP agreement. We then turn to our witnesses' views on the objectives that could be pursued by means of an EU-US trade and investment deal, as well as the evidence we have received on outcomes to be avoided (Chapter 2). In a third chapter, we examine the prospects of making progress in the areas that the UK Government have identified as top priorities, and also highlight the issues that our witnesses identified as most challenging and therefore most likely to hold up the conclusion of an overall deal. Finally, we turn to the process of reaching an agreement, including our witnesses' views on the timetable envisaged, on engagement and communication with interested parties and the public, and on the political impetus likely to be required.

4. The inquiry that led to this report was carried out by the Sub-Committee on External Affairs, whose members are listed in Appendix 1. We received written evidence and heard oral evidence from a wide range of witnesses, who are listed in Appendix 2. We are grateful to them all for their contributions. We would also like to thank those who facilitated our visits to Brussels and Washington. We are particularly indebted to Dr Dennis Novy, our Specialist Adviser on this inquiry.

5. We make this report to the House for debate.

The road to TTIP

6. Negotiations on a Transatlantic Trade and Investment Partnership between the EU and US were launched in June 2013 at the G8 summit on the shores of Lough Erne. UK Prime Minister David Cameron described a prospective deal as a "once-in-a-generation prize" that could be "the biggest bilateral trade deal in history; a deal that will have a greater impact than all the other trade deals on the table put together." He went on to suggest that an agreement "could add as much as £100 billion to the EU economy, £80 billion to the US economy, and as much as £85 billion to the rest of the world". European Commission President Barroso described the negotiations between the EU and US as an opportunity to "write the next chapter of what is our common history", while President Obama presented them as a chance to "forge an economic alliance as strong as our diplomatic and security alliances—which, of course, have been the most powerful in history."[1]

7. The rhetoric is all the more ambitious when one considers the starting point for this endeavour. The European Union and the United States already have the largest bilateral trade relationship in the world. Each is the other's largest export market, and investment ties across the Atlantic are robust: the US invests considerably more in the EU than in all of Asia—three times more according to the European Commission—while the EU invests considerably more in the US than in China and India combined—eight times more. These economic ties are even more pronounced in the case of the UK: the US and the UK are each other's largest foreign investors, and those investments are estimated to support around one million jobs in each country.[2]

8. Nor is this the first time that an EU-US trade pact has been contemplated. Between 1994 and 1996, a Transatlantic Free Trade Area (TAFTA) was under discussion, but formal negotiations were never launched. According to the UK Government, this was because the priority at that time was "to ensure the stability of the newly formed World Trade Organisation (WTO) and to avoid creating a fault line in global trading patterns."[3] Lord Brittan of Spennithorne QC, European Commissioner for Trade at the time, placed the emphasis elsewhere, telling us that, while the US Administration and EU member states had been "very interested" in proceeding down this route, the American regulatory agencies had posed "the real obstacle", as they were hostile to an agreement, and the US Administration felt they could not take them on.[4] Lord Brittan went on to warn us that he had "not seen any evidence of a change either in their views or in their power".[5]

9. Professor Baldwin of the Graduate Institute, Geneva, suggested that this latest attempt to set up a transatlantic free trade agreement was different. In his view, there is a geostrategic dimension to the TTIP initiative to the extent that, in addition to the commercial interest that has always been there, there is now "a high-level interest that this might rewrite the rules of the world trading system in a way that is pro-Europe and pro-North America."[6] He noted that around 1990 the ICT revolution had changed the nature of trade in the sense that it allowed stages of production that once took place within a factory to be dispersed overseas. The effect had been to change the nature of trade, so that the trading system is now "being used to make things, not just sell things." This in turn changed the nature of trade agreements, he suggested, providing the impetus for regional agreements underpinning those production chains that include deeper, "21st-century" trade disciplines. Professor Baldwin went on to suggest that the TTIP was a step towards "knitting together" at the multilateral level these deeper agreements.[7]

10. The UK Government also take the view that an EU-US trade deal is "an idea whose time has come". This time around, driving forward the TTIP "will not be at the expense of the WTO agenda." Moreover, the domestic economic backdrop on each side of the Atlantic creates an incentive to seize every opportunity to "create both growth and jobs without taxpayers' money." Consistent with this view, the UK Government describe themselves as "instrumental" in putting the TTIP on the EU's negotiating agenda.[8] The launch of negotiations at the Lough Erne resort may thus be seen not as a coincidence, but as an indicator of the importance that the UK Government—with cross-party support—attach to the initiative. With the support of the UK Government and other EU member states, an EU-US 'High Level Working Group on Jobs and Growth' was set up following an EU-US Summit in 2011, and tasked with identifying ways of increasing trade and investment across the Atlantic. The group—co-chaired by the US Trade Representative, then Ron Kirk, and the EU Trade Commissioner, Karel de Gucht—published their final report, recommending the launch of negotiations on a comprehensive trade and investment agreement, in February 2013.[9] US President Obama, European Commission President Barroso and European Council President Van Rompuy accepted the recommendation in a joint statement days later.[10]

BOX 1

Launch and Conduct of EU Trade Negotiations

· Trade policy is an exclusive competence of the European Union, meaning that the European Commission negotiates international trade agreements on behalf of EU member states.

· The Commission requests formal authorisation from the Council of Ministers to open negotiations—a request also shared with the European Parliament.

· The Council adopts negotiating directives, which authorise the Commission to negotiate on behalf of the EU.

· The negotiating teams on each side are led by a Chief Negotiator at official level—in the case of the TTIP, this is Ignacio Garcia-Bercero from DG Trade on the EU side and Dan Mullaney from the Office of the US Trade Representative on the US side. The teams include experts covering all the different topics under negotiation, in the EU's case drawn from across the Commission.

· The Chief Negotiators set up negotiating rounds, normally alternating between the EU and the other party's country, at flexible intervals.

· At key points in the negotiations, the politicians formally overseeing the negotiations will meet for political 'stock-takes'—in the case of the TTIP these are EU Trade Commissioner, Karel De Gucht, and US Trade Representative Mike Froman.

· The treaty under negotiation will typically contain chapters on each topic and a number of annexes. These include the schedule of tariff liberalisation, sectoral agreements and protocols.

· The draft texts under negotiation are not made public during the negotiating stage, even when chapters (topics) are "closed", as the negotiation is not over until everything is agreed. EU member state governments and selected members of the European Parliament's trade committee have access to all EU texts, but—at the United States' insistence—not to US texts.

· For more on the signature and ratification of EU trade agreements, see Chapter 4.

Under the bonnet

11. After their formal launch at the G8 meeting at the Lough Erne resort, EU-US negotiations began in earnest in a first negotiating round held in Washington in July 2013 (see Box 1). A further three negotiating rounds have since taken place, the latest of which was held in Brussels in March. The fifth round of negotiations will take place later in May, with a further round to follow in July, and a second political "stock-take" scheduled for September.

12. The European Union has exclusive competence to legislate on trade matters and conclude international trade agreements under Articles 207 and 218 of the Treaty on the Functioning of the European Union, which in practice means that the European Commission conducts negotiations with the EU's counterparts—in this case the US—on behalf of the EU as a whole. It does so within the constraints of the negotiating mandate set for it by the EU member states acting through the Council of Ministers. Since the entry into force of the Lisbon Treaty, the EU competence to conclude international trade agreements includes agreements on foreign direct investment.

13. Prospective trade agreements negotiated by the Commission must be presented to the Council of Ministers for agreement before they can be signed, and the European Parliament must also give its consent before they can be formally concluded.[11]

14. The European Commission's negotiating mandate (technically "negotiating directives") for the TTIP, adopted in June 2013 by the Council of Trade Ministers, has not been made public, but its main elements are set out in Box 2. Broadly speaking, there are three areas in which negotiations are underway: market access, regulatory issues and non-tariff barriers, and trade rules around "shared global challenges".[12]

BOX 2

What is under negotiation: main elements of the EU mandate

Market Access

Tariffs—the objective is to get as close as possible to removing duties on transatlantic trade in industrial and agricultural products

Rules of Origin—the objective being to reconcile EU and US approaches to rules of origin, which are used to determine the origin of a product for the purpose of trade rules

Trade Defence Measures—the EU wants to establish a regular dialogue with the US on anti-dumping and anti-subsidy measures

Services—the objective is to open up more access for transatlantic trade in services, at both federal and sub-federal level, and to ensure that European professional qualifications can be recognised in the US

Investment—the objective is to secure investment liberalisation at both federal and sub-federal level and potentially, to establish investment protection provisions—the latter subject to consultation with Member States

Public Procurement—the objective is to open up access to government procurement markets at all levels of US government

Regulatory Issues and Non-Tariff Barriers

The objective is to tackle so-called "behind the border" barriers to trade, such as different safety or environmental standards for cars, or different health and hygiene standards for food products (so-called SPS—sanitary and phytosanitary—standards)

The objective of regulatory cooperation extends to trade in services, as well as trade in goods, for example financial services

Because convergence in these areas will take time, a further objective is that a "living agreement" for future cooperation against defined targets and deadlines should be put in place (see paragraphs 20 to 22 below)

Shared Global Trade Challenges

Intellectual Property Rights—the objective is to reconcile different US and EU approaches to specific issues, such as protection for Geographical Indications (e.g. parma ham, champagne)

Trade and Sustainable Development—the objective is to include commitments by both parties on the labour and environmental aspects of trade and provisions to promote adherence to and implementation of internationally agreed labour and environmental standards

Miscellaneous—including customs and trade facilitation, trade in energy and raw materials, trade-related aspects of small and medium-sized enterprises, state-owned enterprises

NON-TARIFF BARRIERS

15. A study about the potential economic effects of an agreement was carried out by the Centre for Economic Policy Research (CEPR) for the European Commission. The study was published in March 2013, and suggested that the vast majority (as much as 80 per cent) of the potential economic gains from an EU-US deal would result from the second of the above three elements, i.e. from reductions in non-tariff barriers on both sides of the Atlantic.[13] This is mainly because average tariff levels applied between the EU and US are already relatively low. This means that although the volume of trade between the two blocs is so large that further tariff cuts would add up to considerable savings overall, they would in most (but by no means all) cases make a very small difference to the level of protection in individual sectors. For the UK for example, the average level of tariffs for trade with the US is around 0.5 per cent, so the scope for further reductions in tariffs is limited, but the Government point out that dismantling them altogether could still save UK exporters almost £1 billion. They also emphasise that there are still products subject to US tariffs of over 20 per cent, for example many items of clothing and footwear.[14]

16. Non-tariff barriers can take different forms. Some non-tariff barriers, such as import quotas, directly restrict market access, while others, such as regulations that require expensive reconfiguration of products (e.g. changing voltage or adapting the exhaust system of a car) add to the cost of exporting into that market. While some non-tariff barriers, such as import quotas, can be removed relatively easily given political will, others—for example those taking the form of domestic regulations—often prove more difficult to address because they serve legitimate domestic purposes. Instead, the suggestion is that the costs they pose to prospective importers and exporters can be mitigated or reduced through some form of regulatory co-ordination. Lord Mandelson, a former European Commissioner for Trade, identified three possible approaches to such co-ordination: "mutual recognition of, broadly speaking, equivalent standards" at the lowest level of ambition, "harmonisation of existing brownfield standards and rules pertaining in the different jurisdictions" at the next level, and long-term convergence of regulatory approaches in "greenfield" areas of regulation on a third level.[15]

17. To illustrate, mutual recognition of broadly equivalent standards might involve the EU and US each accepting that a car manufactured to the other jurisdiction's safety standards is safe enough to be sold to consumers in its own market. Harmonisation of "brownfield" standards would mean the US and EU agreeing to revise their own existing car safety standards to create a common approach. Cooperating on "greenfield" regulation might mean attempting to develop from the outset a joint approach to regulation expected to be needed in future, for example for hybrid electric cars. All of these approaches would facilitate trade by reducing the regulatory hurdles faced by prospective exporters on each side of the Atlantic, in that they would save them the trouble of complying and/or demonstrating that they have complied with, a different regulatory regime. Lord Mandelson went on to predict that progress would be most likely on greenfield regulation, where there is no legacy to unpick, and that some mutual recognition should also be possible, but that harmonisation would be "extremely hard" because the EU and US are both "robust, insular and self-confident" when it comes to their existing stock of regulation.[16]

ESTIMATED IMPACT

18. The focus on non-tariff barriers as the most promising source of economic gains from a TTIP deal has implications when attempting to quantify those gains. The studies commissioned from the Centre for Economic Policy Research (CEPR) by the European Commission and the UK Government on the potential impact of a TTIP deal on the EU and UK economies, respectively, rest on assumptions about which non-tariff barriers can realistically be reduced, and on estimates of what the impact of such reductions would be on prices and costs. Those assumptions and estimates in turn rely on information collected in a previous 2009 study produced for the European Commission by Ecorys, an independent economic consultancy.[17]

19. The CEPR studies have also had to make assumptions about the eventual content of a TTIP agreement that has yet to be negotiated: for example, the headline figures about potential gains for the EU economy rest on the assumption that an "ambitious" agreement can be concluded, which is defined as tariff barriers being reduced to zero, non-tariff barriers in goods and services being reduced by 25 per cent and public procurement barriers being reduced by 50 per cent. Finally, the headline figures in the EU-wide study refer to economic gains that would be expected to materialise fully only once an agreement is fully implemented and the economies fully adjust—estimated to be in 2027 according to that study. With these caveats, we reproduce the headline results from the two studies in Boxes 3 and 4 and re-examine their robustness in Chapter 2.

BOX 3

Reducing Transatlantic Barriers to Trade and Investment: Headline Results[18]

· An ambitious and comprehensive transatlantic trade and investment agreement could bring significant economic gains as a whole for the EU (€119 billion a year) and US (€95 billion a year). This translates to an extra €545 in disposable income each year for a family of 4 in the EU, on average, and €655 per family in the US.

· The benefits for the EU and US would not be at the expense of the rest of the world. On the contrary, liberalising trade between the EU and the US would have a positive impact on worldwide trade and incomes, increasing global income by almost €100 billion.

· Income gains are a result of increased trade. EU exports to the US would go up by 28 per cent, equivalent to an additional €187 billion worth of exports of EU goods and services. Overall, total exports would increase 6 per cent in the EU and 8 % in the US.

· Reducing non-tariff barriers will be a key part of transatlantic liberalisation. As much as 80 per cent of the total potential gains come from cutting costs imposed by bureaucracy and regulations, as well as from liberalising trade in services and public procurement.

· The increased level of economic activity and productivity gains created by the agreement will benefit the EU and US labour markets, both in terms of overall wages and new job opportunities for high and low skilled workers. Labour displacement will be well within normal labour market movements and economic trends. This means a relatively small number of people would have to change jobs and move from one sector to another (0.2 to 0.5 per cent of the EU labour force.)

· The agreement would have negligible effects on CO2 emissions and on the sustainable use of natural resources.

BOX 4

Estimating the Economic Impact on the UK of a TTIP Agreement: Headline Results[19]

· A potential TTIP is estimated to yield an increase in UK national income of between £4-10 billion annually, or up to £100 billion over a ten-year period (which corresponds to a 0.14-0.35 per cent increase in annual GDP levels.) This means a sustained increase in the level of GDP over baseline levels without an agreement.

· Most of the national income gains are attributable to lowering Non-Tariff Barriers in goods. Aggregate exports (to all countries) are expected to increase by 1.2-2.9 per cent, and imports by 1.0-2.5 per cent (depending on the scenario modelled). The sector most strongly affected is motor vehicles, where output increases by as much as 7.3 percent (or as little as 1.7 per cent).

· While the results indicate that the effects of a TTIP for the UK are positive, the current overall level of barriers is lower between the UK and US as opposed to EU and US. This reflects a greater importance for services to the US-UK relationship than to the EU as a whole.

· The report highlights the crucial importance of non-tariff barriers (NTBs). Most of the gains stemming from a potential agreement for the UK are attributable to estimated reductions in NTBs. Reducing non-tariff barriers implies reductions in costs for producers and traders and so increasing productivity. This leads to potential investment and worker income gains. On the other hand, if the FTA is limited to tariffs alone, gains for the UK would be much more limited.

A LIVING AGREEMENT

20. A further consequence of the emphasis on non-tariff barriers to trade in TTIP negotiations is that it has been billed as a "living agreement"—meaning not a one-off negotiation, but a work in progress, not entirely dissimilar to the EU's Single Market programme.[20] Professor Baldwin suggested that, like the Single Market programme or the European Economic Area, it would mean launching a process of regulatory convergence.[21] Lord Mandelson put it to us that "most trade negotiations and trade agreements are snapshots of a period in time. What we would be trying to do in creating a living agreement is to convert the snapshot into a movie".[22]

21. The intention is that a TTIP agreement should create an institutional underpinning for sustained cooperation between EU and US regulators, so that regulatory barriers to transatlantic trade can be tackled on an ongoing basis. Commissioner De Gucht told us that he anticipated there would be "an actual agreement, where you agree on a number of things, with respect to tariffs, non-tariff barriers, norms, standards and regulations, intellectual property, public procurement and so on, and then you will have a living part, whereby you put in place structures that make sure that, in future, you will have much more common regulation than you presently have".[23]

22. The timetable for concluding the initial agreement or "snapshot" has already begun to slip. The original aspiration—at the time the negotiations were launched in February 2013—was that it might be possible to reach an agreement within the lifetime of the present European Commission, i.e. by the end of 2014, or as Mike Froman, now US Trade Representative put it, "on one tank of gas".[24] With negotiations having only just completed their initial phase, and with President Obama yet to secure Trade Promotion Authority (formerly known as "fast-track" authority) from Congress—which he needs in order to prevent legislation implementing an eventual agreement from being amended or filibustered during its passage through the House and Senate—it is likely that negotiators will have to "go back to the filling station."[25] We return to this in Chapter 4, and in the meantime turn to our witnesses' views on what could and should be the ultimate purpose of the TTIP initiative.

1 White House Press Release, 17 June 2013, available at http://www.whitehouse.gov/the-press-office/2013/06/17/remarks-president-obama-uk-prime-minister-cameron-european-commission-pr. Back

2 BIS, para 6; White House Fact Sheet: Transatlantic Trade and Investment Partnership, available at http://www.ustr.gov/about-us/press-office/fact-sheets/2013/june/wh-ttip; European Commission trade policy website, available at http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/. Back

3 BIS, para 8. Back

4 Q 1. Back

5 Ibid. Back

6 Q 198. Back

7 Q 198-9. Back

8 BIS, paras 10 and 13. Back

9 United States-European Union High Level Working Group on Jobs and Growth, Final Report, 11 February 2013, available at http://trade.ec.europa.eu/doclib/docs/2013/february/tradoc_150519.pdf. Back

10 European Commission MEMO/13/94, 13 February 2013, available at http://europa.eu/rapid/press-release_MEMO-13-94_en.htm. Back

11 For more on the process, see Chapter 4 and the European Commission, Trade Negotiations step by step, September 2013, available at http://trade.ec.europa.eu/doclib/docs/2012/june/tradoc_149616.pdf. Back

12 European Commission MEMO/13/564, 15 June 2013, available at http://europa.eu/rapid/press-release_MEMO-13-564_en.htm. Back