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The gains on offer from the current round of negotiations between the US and the EU under the banner of the Transatlantic Trade and Investment Partnership (TTIP) are substantial. Indeed, if successfully concluded, TTIP would be the most significant bilateral free trade agreement (FTA) to date, covering approximately 50 per cent of global output, almost 30 per cent of world merchandise trade (including intra-EU trade, but excluding services trade) and 20 per cent of global foreign direct investment (FDI).
The US and the EU are each other’s primary investment and trade partner. Bilateral investment flows between the US and EU generated a fifth of all international merger and acquisition (M&A) activity. The US accounts for 20 per cent of EU exports and 20 per cent of EU imports (excluding intra-EU trade), while the EU accounts for 28 per cent of US exports and 24 per cent of US imports. The US is by far the most important destination of EU value added, and it is also by far the largest supplier of value added in EU imports. Given that transatlantic trade barriers are already low, most of the benefits from an eventual agreement will come from easing impediments to trade and investment behind borders. With both economies facing a long-term need for fiscal consolidation alongside persistently high unemployment, estimated gains are considerable, all the more so because no additional spending or borrowing will be needed to achieve them.
None of these estimates captures the potential dynamic effects of trade and investment liberalisation and resulting productivity growth. Many commentators believe that these are, in fact, the most important potential gains, but they have not been captured in any of the studies done so far. Trade between the US and the EU is to a large extent of an intra-industry and intrafirm nature, suggesting that one effect of TTIP is more likely to be changes within existing value chains, such as where certain marketing services are carried out, rather than relocation of whole industries.
What about the multilateral trading system? Still, TTIP is a bilateral process rather than a multilateral one, and such processes are generally thought of as “second best”. On the other hand, as the US and EU are principal export, import and investment destinations and sources for many third countries, an ambitious agreement could therefore benefit third countries as well. In fact, an agreement could conceivably become a “gold standard", opening the way for deep and comprehensive global trade and investment integration. By addressing a wider range of sensitive and complex issues that have so far eluded the WTO negotiations, the agreement would be a building block for future multilateral initiatives, in much the same way as today there is interest in “multilateralising” WTO-plus provisions of existing regional trade agreements.
Mutually acceptable solutions may in some areas remain elusive in the short term, but innovative approaches to improving international regulatory collaboration, from mutual recognition agreements to joint consultative bodies, could mitigate differences over time. Transparency will also be a key element. Given that regulatory matters are expected to be at the heart of any eventual agreement, transparency in the way regulations are made and implemented will allow other countries, not party to the agreement, to consider whether and how to “opt in”.
An eventual TTIP agreement could also be made open to other participants willing and able to agree to the provisions. In the investment field, the US and the EU are already bound by the most favoured nation (MFN) obligation under the OECD Codes of Liberalisation: any liberalisation measures which result from TTIP should be extended to other adherents to the OECD codes.
Fortunately, second-best options can be supportive of an effective multilateral trading system if they are ambitious, break new ground in sensitive areas, keep participation as open as possible and are amenable to multilateralisation. With progress also being made in Geneva, it will be easier to ensure that regionalism and multilateralism are ultimately reconciled and become mutually reinforcing.