25 September 2015

Clearing the undergrowth in Europe to pave the way for a TTIP agreement

The vocal opposition to TTIP in Europe has been widely covered and culminated in the European Parliament backing the agreement in broad terms but calling for a new system to replace the controversial Investor State Dispute Settlement (ISDS) mechanism in July. This resulted in the European Commission bringing forward its proposal for a new system known as  the Investment Court System (ICS), which is designed to not only apply to TTIP but other free trade agreements going forward.

All the details can be found here, but the thrust is that the new court will aim to be more transparent, protect government’s right to regulate and based on a pool of qualified judges picked by the two sides. Ultimately, the proposals are aimed at convincing the S&D group in the European Parliament to back TTIP and allow it to move forward. Judging by the response, they seem to have done that. Therefore, despite some signs that they fall short of overcoming the grass root concerns, there is renewed hope in Brussels that the negotiations can push ahead apace.

But obstacles to TTIP rise in the US

However, the new proposals didn’t exactly get a warm welcome from the US side, as was always the risk when driven by domestic political concerns. The US Chamber of Commerce said it recognised “the EU has a political problem relating to future investment treaties” but said the structure of the new proposal “is not grounded in the facts”. It added (via the FT):

If the EU still regards the TTIP as a serious objective, today’s proposal is deeply flawed. Tough negotiations lie ahead, and the reforms the United States has undertaken in recent years in its own investment agreements represent a far superior starting point for these important deliberations.

Dispute resolution will be a key area of negotiation and feeds through to all other areas – ultimately a lack of security or trust in the dispute mechanism may limit the areas which either side is willing to open up or at least the depth of the opening up. You can also see where the US is coming from given most evidence points to ISDS working fairly well in the wide number of trade agreements it has been included in since its first use in the 1960’s. Furthermore, from a purely strategic perspective it would be a poor negotiation approach to let your counterpart unilaterally design the system which is meant to act as an impartial arbiter between the two sides.

A particular area of potential conflict is the opening up of the public procurement markets on both sides of the Atlantic. This has been highlighted as an important area, particularly by the EU side, and stands as an area for some of the largest economic gains. However, traditionally, while the US has been willing to open up its federal level procurement market under FTAs it has not done so with state and local level (see this excellent explainer from the Cato Institute for more detail). This is for a number of reasons but ultimately helps to ensure state support and a smoother approval process for any given FTA. It is possible that TTIP could alter this approach. This may well make political support more challenging but it also complicates the picture for TTIP approval due to the presence of another large FTA for the US – the Trans Pacific Partnership (TPP). While close to being concluded, it has been expressly ruled out that TPP could open up the state and local level procurement markets. As such having a serious debate around this and potentially including it in TTIP is unlikely to happen until TPP has been finalised and closed. This point could also apply more generally to other sectors with the fallout being a further delay to the negotiations.

Of course, the upcoming US Presidential elections complicate things further. With the rise of potential candidates such as Donald Trump, who has said he specifically opposes TPP though is yet to state his position on TTIP, and Bernie Sanders who has similarly been an ardent and long standing critic of trade agreements such as TPP, a pro-trade USA cannot be guaranteed beyond next November. The aim remains to get the negotiations completed before the election, but there are no guarantees and the longer it drags on the harder it will be to separate the two.

An asymmetrical impact in the UK EU referendum

I’m often asked how big a role TTIP might play in the UK’s upcoming EU referendum. It’s hard to say how much it registers with the man on the street, but I think it could become an important indicator for the campaign. That said, I don’t think the upsides and downsides to getting an agreement or not are symmetrical. By that I mean, I don’t think the boost to the ‘Remain’ side from agreeing a deal will be as big as the boost to the ‘Leave’ side from not agreeing a deal. Let me explain why.

I think the de facto position in the UK is: why shouldn’t we be able to strike a free trade agreement with the US? It is a close ally and a developed economy with which we already do significant trade. So it seems unlikely that securing such an agreement will do much in terms of convincing uncertain voters to back the EU. I would imagine for many this is the basic stuff they expect the EU to be doing. There is also no time for any economic benefits to filter through. However, if the EU fails to find a deal on TTIP, given that the assumption in the UK is that one should be pretty easy to strike, it could actually prove quite harmful to those arguing to remain in the EU. It would undoubtedly be held up by the ‘Leave’ side as an example of how Europe holds back the UK in trade terms, failing to even deliver a deal with our closest partner. I could imagine this negative image might convince some swing voters that the EU is not doing the right things or heading in the right direction.

As such, from the perspective of the EU referendum, delivering on TTIP is probably more likely to at best avoid boosting the ‘Leave’ side rather than actively helping the ‘Remain’ camp. But it certainly has the potential to play an important signalling role one way or the other.

Of course, the potential benefit of TTIP goes well beyond just the campaign and it remains the sort of policy which the EU should be undertaking. The sooner a deal gets struck the better but the risk of further delays looms large.