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Not So Fast: Conflicting Deadlines for the TPP and US-EU FTA

Friday, March 8, 2013

President Obama has suddenly embraced a highly problematic trade agenda for his second term.

After a fallow first four years, President Obama has suddenly embraced an ambitious — but highly problematic — trade agenda for his second term. First, he has adopted the goal of completing the hugely complex and politically difficult 11-member Trans-Pacific Partnership agreement (TPP) in the next 12 months. Second, in his State of the Union address the president gave the go-ahead for negotiating a comprehensive free trade agreement (FTA) with the European Union (EU) by the end of 2014.

The administration is misguided in bowing to the EU’s frantic plea for a crash, two-year timetable for FTA negotiations. Such a course will fail — and of much greater significance, it may well imperil a successful conclusion of the strategically and economically vital TPP negotiations.

Challenges to the TPP

The TPP negotiations have emerged as the central symbol of the U.S. diplomatic and economic “pivot” to Asia. Over the past three years, in ever more expansive language, President Obama and former secretary of state Hillary Clinton underlined the strategic importance of Asia. The president averred, “In the Asia Pacific in the twenty-first century the United States of America is all in.” National security adviser Michael Froman explicitly tied the TPP to U.S. economic and security goals: “This really embeds us in the fastest-growing region of the world, and gives us a leadership role in shaping the rules of the game for that region.”

Trans-Pacific Partnership negotiations have emerged as the central symbol of the U.S. diplomatic and economic ‘pivot’ to Asia.

The Obama administration has touted the TPP agreement as a model for “twenty-first century” trade pacts. If successful, it will establish rules to curtail or eliminate domestic barriers to trade in such areas as services, competition with state-owned enterprises (SOEs), health and safety, and government procurement. For the most part, these issues represent new and uncharted territory for trade agreements, and arriving at solutions will be a complicated process. The next nine months will be crunch time for the TPP. Detailed negotiations began in early 2010, and since then there have been 16 rounds of talks. Having missed one deadline in November 2012, the 11 participating nations have now set the fall of 2013 as a goal for conclusion of the new trade pact. According to the Office of the U.S. Trade Representative and other trade diplomats, much of the technical work in the 29 TPP chapters has been completed. But there are at least a dozen substantively complex and politically difficult decisions that must be made over the next several months at the highest national level in order to achieve a final agreement that can be sold in the 11 national polities.

The United States has yet to determine on which interests it can compromise — for instance, can it lower barriers on sugar, cotton, and dairy products, as variously demanded by Australia, Vietnam, and New Zealand? Will it agree to less restrictive rules of origin, which seriously impede international supply chains? Will it allow more imported clothing and shoes from Peru and Vietnam? Will it attempt to force TPP partners to accept onerous, intrusive new labor and environmental rules?

For the United States, the TPP endgame will command full White House attention and a strong mobilization of political resources to deal with, and mediate among, competing (and often conflicting) private interest groups, congressional committees, and individual members of Congress.

In sum, fashioning a balanced agreement that can be defended domestically by all 11 TPP nations is an enormous task, both substantively and politically. The distraction of a second, equally complicated and possibly intractable set of negotiations with the European Union will badly undercut the Obama administration’s ability to bring the TPP to a successful conclusion over the next year.

Challenges to the US-EU FTA

This brings me to independent reservations about near-term success for the US-EU FTA. First, given the continuing dire economic prognosis for Europe, the next several years will be an extremely difficult time to advance trade liberalization in the 27 EU member states or through the increasingly fractious European parliament. In recent weeks, a steady drumfire of bad economic news has battered the continent. The eurozone is in recession: GPD fell 0.6 percent in 2012, and the European Commission has recently projected that it will fall another 0.3 percent in 2013. Next year the unemployment rate for the region will rise above 12 percent. Currently, youth unemployment rates alone exceed 50 percent in Spain and Greece, and are around 40 percent in Italy and Portugal and 25 percent in France and Ireland.

There are at least a dozen substantively complex and politically difficult decisions that must be made over the next several months at the highest national level in order to achieve a final agreement.

This has given a surreal quality — and underlying desperation — to German Chancellor Angela Merkel’s and British Prime Minister David Cameron’s effusive cheers for the agreement (significantly, France’s Francois Hollande has curbed his enthusiasm). With the dismal prospects for internal economic salvation, many European leaders have seized upon the US-EU FTA as key to externally led economic growth. This is illusory, at least in the short- to medium-term. EU politicians endlessly repeat the prospect of 0.5 to 1 percent additional growth from a completed US-EU agreement. But these (quite modest) projections are for 15 years down the road, not the immediate future.

More to the point, the United States and the European Union have been at odds for decades on many of the issues identified as key to a successful FTA negotiation. Given that tariff rates between the two economies are quite low (an average of around 3 percent), the real payoffs must come from so-called nontariff barriers (NTBs), such as differing regulations and warring standards in the areas of health and safety, data privacy, cultural diversity, competition policy, services regulation, genetically modified organisms (GMOs), agricultural subsidy and protection, aviation subsidies, labor and environmental rules, and geographical indicators in trademarks. Beginning with former president Clinton, however, and continuing through the Bush and Obama administrations, special White House–appointed business coalitions have attempted (without notable success) to achieve some convergence or even mutual recognition on these issues. Opposing interest groups and domestic regulators, jealous of their authority, have stymied forward progress at almost every turn. For the purposes of this article, two illustrative examples of the difficulties ahead will suffice.

First, service sectors — financial, telecommunications, legal, insurance, architectural, medical — have been cited as a top priority for bilateral regulatory liberalization. Both economies have started down this road in the World Trade Organization and in FTAs, but deeper integration, particularly in the near term, is going to be difficult for the European Union. In 2006, the European Commission mandated future internal regulatory liberalization among all 27 EU member nations. To date, it is widely conceded that this goal has not been met and large obstacles remain. For instance, Germany, while a manufacturing power, retains highly anticompetitive services regulations. It still requires domestic diplomas to work in diverse professions, from boat builders to painters and ski instructors. Legal fees are set by the state, not by the market. In Italy, studies have shown that at least two dozen service sectors — lawyers, pharmacists, accountants, and even taxi drivers — maintain licensing restrictions that severely limit competition (both at home and abroad). And the protectionist shoe is not all on one foot: Will the Obama administration, for instance, finally take on the maritime unions and open coastal shipping to foreign companies and workers?

Second, there is the deep divide between Americans and Europeans on risk acceptance. Europeans are risk averse, while Americans tend to be more daring. Thus, in a number of areas, the European Union has pushed to have the precautionary principle accepted as the standard for public international law. Invoking the precautionary principle (admittedly a protean concept), the European Union has mandated that risk assessment not be bounded by science but also take into account outside factors such as consumer sentiment and social mores. This contrasts greatly with the U.S. demand that regulations be limited to a science-based approach. The differences are starkly illustrated in specific policies toward food and drug regulation, new chemical production, and GMOs. Popular sentiment, particularly in Europe, will not move quickly (if at all). Further, European and U.S. regulators certainly will not change their stances on these issues in the timeframe posited for US-EU FTA negotiations — and in most cases cannot do so because of binding legislative mandates. The end result will be watered-down regulatory provisions, continued stalemate, or leaving such areas out of the agreement altogether.

Given the continuing dire economic prognosis for Europe, the next several years will be an extremely difficult time to advance trade liberalization in the 27 EU member states.

In a letter to the Obama administration, Senate Finance Committee Chairman Max Baucus (D-Montana) and ranking member Orrin Hatch (R-Utah) warned that GMOs and other agricultural barriers must be liberalized as a condition of congressional support; and subsequently, Baucus has warned that European pressure to pursue “a limited agreement that would set aside tough issues in order to conclude a quick deal on the easier ones” would doom the negotiations.

The U.S. legislators’ intransigence is matched by members of the newly empowered European parliament, which to the consternation of European leaders (and the fury of the U.S. music and film industries) last year flatly vetoed an international anti-counterfeiting agreement. In comments on the proposed US-EU FTA, Martin Schulz, president of the European parliament, stated candidly: “We have differing takes on food safety, consumer protection, and environmental standards that are deeply rooted in our cultures.” But he has also said that the proposed pact must put “the European model at the core — labor unions, social rights.”

Resolution of these “deeply rooted” economic and societal mores will not come quickly — and certainly not in the short timeframe the Obama administration has proposed for US-EU FTA negotiations. One overly enthusiastic U.S. commentator proclaimed several weeks ago: “Forget Asia — Time to Pivot to Europe.” The more cautionary note espoused here would be that for the next several years, “Forget Europe — Time to Wrap Up the TPP.”

Claude Barfield is a resident scholar at the American Enterprise Institute.

FURTHER READING: Barfield also writes “Why Does the United States Bar Mexican Tomatoes and Vietnamese Shoes? And What Does This Portend for TPP Negotiations?” “Crunch Time for the Trans-Pacific Trade Pact,” and “Heat without Light.” Michael Auslin discusses “Getting It Right: Japan and Trans-Pacific Partnership.” Daniel Hanson explains “Missing the Slow Pitch on Free Trade.”

Image by Dianna Ingram / Bergman Group

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