The Debate

Why the Transatlantic Trade and Investment Partnership Is More Important Than TPP

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The Debate

Why the Transatlantic Trade and Investment Partnership Is More Important Than TPP

TTIP will be the West’s last, best opportunity to set global rules as the emerging markets continue to gain ground.

Why the Transatlantic Trade and Investment Partnership Is More Important Than TPP
Credit: White House

The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) — the former a free trade agreement covering 12 countries from North and South America to the Pacific Rim, the latter a free trade agreement between the United States and the European Union — represent the main trade negotiation motions of the current global economic system.

The TPP negotiations were successfully concluded in October 2015 after four years of intensive talks. Legislative ratification will be the next step. TTIP has been under negotiation since June 2013; hopes are for completion by the end of 2016.

The combined trans-Pacific and trans-Atlantic space covered by the two new agreements makes up 60.33 percent of the world economy, and 22 percent of its population, according to data compiled by the International Monetary Fund. The two agreements are very similar in terms of market shares and populations, but they differ in terms of per capita incomes and living standards. According to International Monetary Fund data, the TPP economies represent 27.3 percent of the world’s purchasing power parity, measured through its GDP, and 10.7 percent of the world’s population. The TTIP economy represents 33 percent of the world GDP, with 11.2 percent of the population. The average per capita Gross Domestic Product (GDP) for the 12 TPP countries is $ 30,697, while the TTIP average income is $47,607.

Beyond the differences in membership, however, there are also notable differences in the scope and goals of the agreements themselves.

First, TPP is focused at opening markets and eliminating tariff barriers on trade and investment, whereas TTIP is mainly focused on Foreign Direct Investment (FDI). Since the year 2000, U.S. investment in the European economic area has made up 55 percent of the total U.S. outward (FDI), compared to 21 percent in the TPP economy, and only 1.4 percent in the Chinese economy. Similarly, the European Union’s FDI in the U.S. comes to 61 percent, in comparison to 24 percent from the 11 countries included in the TPP.

Trans-Atlantic tariffs on average are much lower than the trans-Pacific ones, with an average of only 4 percent trade tariffs across the Atlantic, with the exception of few highly regulated sectors such as textiles and the agriculture and automobile industry. TTIP negotiations aim at improving the regulatory convergence to facilitate trade and investments, reducing the non-tariff barriers, and opening up the service market across the Atlantic.

Second, TTIP is more ambitious in comparison to TTP. In addition to to the financial and economic benefits, TTIP will have a larger geostrategic impact, since it vicariously reinforces the strong ties that exist between Europe and the United States. TTIP is a natural Western partnership, with mature, well-developed and consolidated markets, on the one hand, and a strong defense relationship based on the North Atlantic Treaty Organization (NATO) on the other hand — both components are missing in Asia.

Those strategic realities, as well as economic ones, mean the TTIP could have more lasting importance than the TPP. For one thing, the trans-Atlantic economy is the innovation powerhouse of the global economy, and a crucial element in future growth and development. The United States is the largest global spender on R&D, as a single economy, reprising its role as the dominant force in global research across numerous industries. It spent almost 3 percent of its GDP on R&D in 2014, more than $465 billion, making up 32 percent of the share of global R&D spending. The European Union combined spends on average a little more than 2 percent of its GDP (or $283 billion), a little more than 20 percent of the world’s total. Germany is the biggest spender in the European Union, with almost 3 percent of its GDP.

Technology is the key driver of development, and differences among regions in R&D economies are narrowing. China’s R&D spending has been increasing quickly over the last ten years, as it wants to evolve from a manufacturing-centric model — making products designed and developed in the West — to an innovation-based consumer economy. Spending 2 percent of the GDP, it makes up 17.5 percent of the world’s total R&D spending, but it might surpass the United States if it reaches its target of 3 percent by 2020.

Given the size and scope of the trans-Atlantic economy, standards negotiated by the United States and the EU could become a benchmark for future global rules, inhibiting the emergence and acceptance of competing standards. Arguably, TTIP would be the West’s last best opportunity to set global rules as the emerging markets continue to gain ground. The deal reached last December at the UN Climate Summit to reduce global greenhouse gas emissions showed that the EU and the United States contain the political will and the resources to set the standards. In fact, TTIP’s sustainable energy framework chapter would offer both political and economic impetus to both sides of the Atlantic.

It goes without saying that TTIP and TPP are strategically interlinked with each other. Both agreements are important in terms of how the trans-Atlantic partners jointly best relate to newly rising powers, and whether the West will set the new standards of the international economic order. Both TTIP and TPP take on an increasing strategic importance in light of the continuously growing role of China, and other emerging markets in the global economy. Achieving progress in the simplification of trade and investment relations in the framework of the two negotiated agreements TTIP and TPP, which make up more than 60 percent of the world economy, would push the World Trade Organization (WTO) to expand its useful life.

TPP’s conclusion is important also for the EU. Higher growth rates in the U.S. will help the European economy through increased exports, but TPP also reinforces the geopolitical reality of rebalancing towards Asia. This fact should put more pressure to Europe to engage on TTIP in order not to lose out on shaping and benefiting from the new free trade deals.

Despite all difficulties and objections (internal and external), achieving progress in the simplification of trade and investment relations is important to global prosperity. The approaches taken by TTP and TTIP may well indicate the future of trade negotiations – tightly focused talks between selected participants aiming for improvements in fields of comparative advantage within a clearly defined time frame. Operating within such framework constraints may also hold the key to the future of the WTO.

Michael Czinkota is a former Deputy Assistant Secretary of Commerce in the United States Department of Commerce. Valbona Zeneli is a professor at the George C. Marshall European Center for Security Studies. The views presented are those of the author(s) and do not necessarily represent views and opinions of the Department of Defense or the George C. Marshall European Center for Security Studies.