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% of global output, almost 30% of world merchandise trade (including intra-EU trade, but excluding services trade) and 20% of global foreign direct investment (FDI).
The US and the EU are each other’s primary investment and trade partner. In 2012, 63% of US foreign direct investment went to the EU, and 44% of FDI inflows to the US originated from the EU. 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% of EU exports and 20% of EU imports (excluding intra-EU trade), while the EU accounts for 28% of US exports and 24% of US imports.
These transatlantic trade flow numbers are even more important measured in value added terms than in gross terms (see chart). The US receives 23% of total EU exports and provides 21% of EU imports on a value added basis, while the EU accounts for 29% of US exports and 27% of US imports. In other words, 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. For example, substantial benefits would be reaped if public procurement in both the United States and the European Union were opened, at all levels of government.
One OECD study estimates potential welfare gains to the EU and the US of as much as 3-3.5% of GDP; others range from 0.5% to 3.5% of annual GDP. One report even sees gains as high as 13% of GDP for the US and 5% for the EU. With both economies facing a long-term need for fiscal consolidation alongside persistently high unemployment, these 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. This already high degree of market integration argues for an aggressive “problem solving” approach to remove all unnecessary and costly bottlenecks to trade and investment.
The resulting reductions in costs will, of course, benefit businesses and generate growth and employment in the US and the EU. And because more efficient regulatory regimes in the US and EU are, by their very nature, not discriminatory, they could benefit trading partners that are not direct parties to any eventual agreement.
That means wider overall benefits than purely what bilateral actions would suggest.
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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. But if an agreement offers little new trade and investment liberalisation, at and behind the border, the TTIP would merely add one more deal to the hundreds of bilateral and regional arrangements that already exist.
The announcement of the TTIP negotiations by the United States and the European Union was appropriately ambitious, focusing on the remaining impediments to trade and investment both at and beyond their borders. At the same time, there was explicit recognition of sensitive and long-standing areas of difference. 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”. Some regulatory measures, such as improved border procedures and more effective anti-corruption provisions, are nondiscriminatory by nature and offer benefits far beyond the borders of the EU and the US.
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.
Extending mutual recognition of standards to third countries, with which either the US or the EU has already reached a comparable agreement, is another possible way forward.
The recent breakthrough at the multilateral trade talks at Bali in December is a boon for the WTO and for the multilateral trading system, and will generate large benefits, particularly for developing countries. Every effort must be made to ensure that progress continues. But governments will inevitably continue to pursue other avenues also. Fortunately, these 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.
Another dimension to take on board concerns trade in value added (TiVA) and global value chains. The OECD’s work to date on these issues highlights that trade and investment openness are important components of comprehensive structural policy reforms that could contribute to strong, sustainable, balanced and inclusive growth. But much remains to be learned about the full range of policy implications for countries at different stages of development and for industries and firms of various characteristics, structures and sizes. Our goal is to integrate TiVA into the international statistical system; extend country, industry and indicator coverage; and expand our analysis across the full range of relevant policy areas. All of this work is expected to be carried out within an expanded network of partner institutions and governments.
Visit the OECD-WTO trade in value-added database at www.oecd.org/trade
©OECD Observer No 297, Q4 2013