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EU and US working on a wide scale innovating trade agreement

Apr 14, 2014 European Union
EU and US working on a wide scale innovating trade agreement
Last summer, EU and US started negotiations for a free trade agreement, the Transatlantic Trade and Investment Partnership (TTIP). If negotiations succeed and the agreement is implemented in full, it will represent the most relevant regional free trade area and it will be the most impactful deal of its kind
As the average applied tariff for goods imported from both blocs is already very low and both the US and the EU have similar product specialization structures, what will be the main benefits for the two regions, as a consequence of the implementation of such deal? Why making this agreement a priority now? Such questions and many other make the discussion around this topic a burning issue, and it is pressing to understand clearly what the background for this negotiating effort is, and what will be the benefits for both economies and its business structure, namely SMEs.

The Transatlantic Trade and Investment Partnership, known as TTIP, is a proposed free trade agreement between the EU and the US. The idea of such arrangement is not new, as governments, business and academics have been discussing it for a long time. In 2011 the EU and the US set up a working group of government experts to see what trade and investment agreement between the two economic powers could be developed. The group concluded that a comprehensive deal covering all sectors would be overwhelmingly positive, opening up trade and bringing a significant boost to economic growth and job creation on both sides of the Atlantic. The decision to start talks in July 2012, in large part due to the ongoing economic crisis and the stalling of multilateral trade negotiations in the World Trade Organization, was also driven by the reform of the EU's Common Agricultural Policy and high commodity prices, as both blocs started to reveal more will to open their markets.

The TTIP aims at removing trade barriers in a wide range of economic sectors to make it easier to trade goods and services between the EU and the US. On top of cutting tariffs across all sectors, the two regions negotiating want to tackle barriers behind the customs border (differences in technical regulations, standards and approval procedures). The TTIP negotiations will also look at opening both markets for services, investment, and public procurement. As the agreement is so much wider than a simple tariff-removing deal, the expectation is high on both sides of the Atlantic and some believe this understanding could shape new global rules on world trade, motivating other blocs and regions to move towards the new standards. In a nutshell, three major areas can be identified within the negotiations:
- Access to the market: tariffs, services trade, public procurement;
- Regulations: the need to have consistent and better harmonized regulations; address technical barriers to trade and discuss sanitary and phytosanitary measures;
- Rules: sustainable growth, environmental protection and labor; energy and raw materials trade, and custom borders and measures to make trade easier.

As the development of trade is a huge opportunity for economic development, the wider scope of the negotiating agreement is even more important as it can facilitate growth and jobs creation by increasing opportunities for trade and investment with the rest of the world. In fact, the EU’s success is undeniably bound up with the success of their trading partners and in this context the trade policy is key. As the world's largest trading block and the world’s largest trader of manufactured goods and services, the EU is the top trading partner for 80 countries (the US is the top trading partner for a little over 20 countries). The average applied tariff for goods imported into the EU is already very low, with more than 70% of imports enter the EU at zero or reduced tariffs, and the region has not reacted to the crisis by closing markets. In fact, the Union has kept its capacity to conclude and implement trade agreements, such as the recent Free Trade Agreements with South Korea and Singapore.

A special element of the agreement, earning more attention nowadays, is its impact and importance for small and medium–sized enterprises (SMEs). In the EU and in the US, SMEs are critical motors of growth and job creation. 95% of the companies in both regions (over 20 million companies in the UE and over 28 million on the US) are SMEs. In the EU these companies provide two thirds of all private sector jobs and have a huge capacity to create new employment; in the US they are the provider of half of all jobs, being an important source of innovation, new services and products. As per material released by the European Commission, SMEs are keen to see TTIP going ahead, as it will eliminate specific barriers to trade, while it can potentially reduce the psychological gap between entrepreneurs in the transatlantic market, making business between both regions easier, reducing hurdles that currently cause delays, increase costs and require onerous documentation, while it can potentially expand access and distribution to their products. As the US is the most important destination for all European exports, the agreement is relevant for SMEs, especially as they are disproportionately affected by trade barriers (as they have fewer resources) and face costs to export or invest outside the EU that often outweigh the gains.

However, the impacts of TTIP go beyond the benefits for SMEs. A study by London based Centre for Economic Policy Research, has been released in March, and it takes a detailed look at the current transatlantic trade and investment flows, and existing barriers to these, using economic modelling to estimate the potential impact of the different policy scenarios. Key findings of the study highlight the huge gains to be made from liberalizing the EU-US trade for the two blocs, but also for the global economy. An ambitious partnership could bring significant economic gains as a whole for the EU (119 billion euros a year) and the US (95 million euros a year), once the agreement is fully implemented. This could result in an extra 545 euros in disposable income each year for a family (of 4 people) in the EU. The study also underlines that such benefits wouldn’t occur at the expense of the rest of the world. The researchers believe that liberalizing the trade between the two blocs will have a positive impact on worldwide trade and income, increasing GDP in the rest of the world by almost 100 billion euros. Income gains would result from increased trade as EU exports to the US would go up by 28% (an additional 187 billion euros worth of exports of European goods and services) and a rise in total EU exports of 6% and of 8% in US exports.

In terms of the sectorial benefits, it is considered that metal products, processed foods, chemicals, other manufactured goods and other transport equipment will get the highest boost in sales to the rest of the world. It is also believed that the biggest relative increase in trade would be in the motor vehicles sector, with EU exports to the rest of the world to expand by nearly 42% and imports to go up by 43%. Reducing non-tariff barriers is a significant element of the agreement in negotiation, as researchers believe that 80% of the total potential gains will come from cutting costs related to bureaucracy and (diverse) regulations, as well as liberalization on public procurement. Non-tariff barriers often cost unnecessary time and money for companies who want to sell their products on both markets. The most common example given is when a car is approved as safe in the EU, but it still has to undergo a new approval procedure in the US even though the safety level that both blocs want to achieve before allowing cars to be on market for sale is similar.

In essence, this is an ambitious program, in terms of the areas being discussed and in terms of timing for conclusion of negotiations and implementation. Both blocs assumed they would like to finish negotiation by the end of 2014, however, historically, most trade agreements took much longer to complete. For now, negotiations will continue into a fifth round, and all parts involved have underlined the commitment devoted to make progress soon. This agreement is seen as a huge opportunity to both the US and the EU, their economies, markets and industries, as recently stated by most speakers at a TTIP seminar organized by the European Commission in Lisbon, and reinforced a few days later in Brussels by EU and US representatives at the recent EU-US summit.

For more information about the Transatlantic Trade & Investment Partnership please visit the European Commission website dedicated to the TTIP: