The Transatlantic Trade and Investment Partnership (TTIP) is a free trade agreement currently being negotiated between the EU and the US. I think it’s a good idea. Here’s what you should know about it:
1. Abolishing tariffs is only a small part of TTIP.
Tariffs are generally low between the EU and US, but for some sectors they are very high. The EU currently imposes a 10% duty on car imports from the US, and the US imposes tariffs as high as 40% on some clothes from the EU, like shoes. Getting rid of those high sectoral tariffs will allow for greater economic specialisation, and the EU and US economies are so large that even reducing small tariffs overall would boost wealth levels a bit.
2. The biggest costs to trade are from so-called ‘non-tariff barriers’, and getting rid of these could have a big effect.
Most of TTIP is designed to harmonise regulation where there is redundant double-regulation (or ‘regulatory incoherence’) of firms operating in both the EU and the US. For instance, cars may be just as safe in the US and the EU (or not – nobody’s sure yet), but have to adhere to completely different safety requirements to achieve that. Harmonising car safety regulations could make it cheaper to build cars without reducing car safety at all. Because of different rules about egg washing that don’t seem to make a difference to actual safety, US eggs couldn’t legally be sold in the UK and vice versa. Some regulations are simply designed to make it more expensive for foreign firms to sell goods, to protect native firms. Harmonising some of these rules should reduce costs substantially.
Different regulatory regimes might allow for more experimentation, but the feedback mechanisms involved in regulation are so fuzzy that this kind of ‘discovery process’ rarely actually takes place.
3. The economic gains from TTIP could be pretty substantial.
The CEPR estimates that a successful TTIP that removed a lot of these ‘non-tariff barriers’ as well as all existing tariffs would cause an increase to EU GDP by €120bn (0.5% of GDP) and US GDP by €95bn (0.4% of GDP) in total. That’s modest, but would translate into an extra £400 annually for British households. 90% of those GDP gains would come from non-tariff measure cuts.
4. The only regulations that TTIP will prevent in the future are ones that discriminate against foreign firms.
This will include rules that mean that US and EU governments will have to consider foreign firms for public procurement in certain areas (but not publicly-funded healthcare, social services, education or water services). In general the EU is extremely restrictive about the impact TTIP can have on public services. EU governments can organise public services so that only one monopoly provider supplies it (eg, the NHS), and they can regulate whatever they deem to be ‘public services’ at any level of government. The only exception is where an EU government has already opened up a sector to foreign firms (ie, to avoid firms that have already invested from losing their money). This is a pity, I think – I’d like to see EU states sign up to an agreement that stopped them from discriminating against foreign firms in all areas. But TTIP is not that agreement.
5. The Investor-State Dispute Settlement (ISDS) mechanisms in TTIP – the so-called ‘secret courts’ – are nothing new.
Pretty much every free trade agreement signed around the world includes an ISDS provision, which allows firms to challenge states that renege on their part of the deal. Since 1975 the UK has signed 90 ISDS treaties, and 3,400 exist around the world. In that time the UK investors have brought 43 claims against other states. Only two have ever been brought against the UK and both were unsuccessful. What’s more, ISDSes cannot compel a state to change its laws, only to pay compensation to firms if it has broken its treaty obligations. It might seem pointless to have this – the UK and the US both have strong rules of law. But TTIP also includes countries like Greece, Hungary and Romania which have much less reliable judicial systems.