Tag Archives: Global

Guest Commentary: TTIP – Views from Europe

By Fredrik Erixon, director and cofounder of the European Centre for International Political Economy (ECIPE), a world-economy think tank based in Brussels, and was the Convenor of the Transatlantic Task Force on Trade, a joint project of ECIPE and the German Marshall Fund of the US that spearheaded the TTIP negotiations. A fuller version of his analysis can be found here (PDF).

Failures in the World Trade Organisation’s Doha Round have prompted countries to turn to preferential trade agreements. But are they worth their salt? While the most outstanding feature of past FTAs is that they have not had impressive effects on growth in trade and Gross Domestic Product (GDP), the negotiations for a Transatlantic Trade and Investment Partnership (TTIP) may change this verdict. Clearly, TTIP will be won or lost for its economic merits. And the pro-growth effects of TTIP are really what persuaded reluctant officials and politicians in Europe to join countries like Germany and Sweden in their efforts to push for a transatlantic FTA. Given Europe’s poor growth rates, trade agreements that could deliver higher economic growth have been given a new hearing.

Few would deny that TTIP has the capacity to deliver a sizeable contribution to GDP in Europe. The gains from this FTA would be bigger than from other FTAs for the reason that it involves two large economies. Simply, size matters. A “conservative” estimate by the Centre for Economic Policy Research in London suggests the TTIP gain for the EU to be in the tune of 0.3-0.5 percent of GDP (the GDP gains are slightly smaller for the US).

However, political scepticism of TTIP is less concerned with the bilateral economic gains (or losses) and more directed to its consequences on the World Trade Organisation as the central forum of trade negotiations. But perhaps surprisingly to some, the debate in Europe over TTIP has taken a different view. Generally, it has not thrived on the notion that TTIP should be an attempt to build a Fortress Atlantic – or that it is a strategy to gang up on China or other emerging powers competing with the US and Europe.

So while the strange acronym of TTIP is for some a code word for the death knell of the WTO, many trade observers in Europe would argue it is the substance that should be used to give global trade policy a needed shot in the arm.

TTIP, like the TPP, was not born out of deep and genuine beliefs in the principles of free markets or the classical school of free trade. Like any other trade agreement in the past years, these initiatives build on conditional views of free trade and free competition mixed up with soft mercantilism and a growing urgency to support economic growth. Yet it is the best available strategy to rejuvenate global efforts to liberalise trade.

In the past 15 years, the multilateral trading system has been a leaderless system with no clear direction that has unified the key members. The system itself benefited for several decades from the leadership by the United States, which considered this system to be critical for its overall strategic objective of spreading market-based capitalism. There were willing followers to the US leadership, but none other than the US had the requisite economic, political, and institutional capacity to underwrite the system. Yet since the collapse of the Cold War, American leadership has withered away, and its general position on trade liberalisation has somewhat changed. Absent political leadership and direction, the Doha Round got stuck because the political instinct of many countries was to favour status quo rather than new liberalisation as long as there is no external pressure that prompts them to revisit that position.

Like many other things in economic life, trade liberalisation tends to be driven by two motives: profits and fear. Countries agree to open up for greater foreign competition because they believe it will boost their economy or because they fear that other countries will go ahead without them if they stubbornly resist liberalisation. Despite all the success of trade-oriented models of growth, many countries have grown to think that they will not stand to benefit much from new trade liberalisation – and that they have no reason to fear failure.

TTIP may partly change this. It is a big initiative. And if the two biggest economies of the world go for a bilateral agreement, it means that there is a risk for other countries that stand outside that bilateral agreement and, which is important, other efforts to liberalise trade. That risk is mostly about not having a voice in the design of the trade reforms that are likely to serve as benchmarks in future international agreements. It is far less about loosing current trade access – but it is about the fear of not having as good access to trade that will be liberalised in the future. Consequently, if TTIP is the ‘real thing,’ if it achieves the promise of ushering the world into 21st Century trade policy, the response from the larger emerging economies cannot be no response at all. The political and economic opportunity costs of status quo would have been changed.

Global Trade enters Crunch Time

Those who enjoy sports will be familiar with the rhythm of a season. In the period before the first games are played, every squad is filled with ambition and whispers about exciting new players. Then there are the initial games when those hopes are put to the test. Ultimately, one reaches the point in a season when the team must either win a big game or forget thoughts of post-season glory for at least another year.

The global trade agenda is entering an analogous critical stage.  There was a joyous pre-season with calls for new, improved, 21st century trade agreements. There were predictions of fabulous trophies for the successful – hundreds of billions of dollars in economic growth, countless new jobs!

The analogy to sports gets a little strained in one particular dimension, though. Following the progress of trade undertakings like the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership (TTIP) with Europe, or the WTO talks differs from a sports season in that one doesn’t actually get to watch the games. Instead, it’s the equivalent of being kept on the outside of the stadia where the games are played and just hearing the occasional rumor – “That player took a big hit!”; “Someone just made an amazing play!”; “I hear cheering! That has to be a good sign.”

The negotiations themselves are conducted in secrecy – a tradition that has become a sore point with complaints about the lack of transparency. Devotees are left to parse the emanating rumors or to wait for an established deadline, when the players who have been battling out of sight will all emerge beaming and victorious, with their helmets raised above their heads – or they will stagger out looking battered and dejected.

We are just now reaching one such key deadline. Next week, trade luminaries are scheduled to gather in Bali for a World Trade Organization Ministerial meeting. Cheering for a WTO agreement has recently been as fulfilling as backing the Cubs for the World Series. Yet lately there has been legitimate cause for hope. Even though the grand ambitions of the Doha talks, launched in 2001, were stymied years back, there was a recent move afoot to try for a less ambitious package, one that would demonstrate that the WTO was still relevant. Not only that, but there was a new manager. The Brazilian Roberto Azevêdo took over the WTO this fall from the Frenchman Pascal Lamy.

At The Chicago Council’s recent conference on the Frontiers of Economic Integration, former US Trade Representative Susan Schwab highlighted the importance of the Bali meeting, to be held Dec. 3-6. She said that the potential for a modest package was as important as anything that had gone on in global negotiations for the last two decades. She showered Azevêdo with praise, stating that if anyone could pull off the difficult feat of bringing 150 countries together, he had the skills to do it.

But the latest news coming out of the negotiating arena sounds grim. The negotiators involved failed to agree on a text for ministers to take up at the ministerial next week. Azevêdo was quoted as saying that members had “stopped making the tough political calls.”

In the sporting world, a setback like this would invariably be followed by predictions of redoubled effort and renewed hope next season. But the opportunities on the global trading scene are fewer and farther between. Instead of such bromides, Azevêdo warned of dire consequences from a Bali failure, both for the multilateral trading system and the global economy.

It is an inauspicious start for the critical phase of the global trade season. The TPP talks were intended to conclude by the end of this year. Senate Finance Committee Chairman Max Baucus (D-MT) has been saying he would like to get agreement on US trade negotiating authority by the end of this year as well, though past deadlines have already been missed. And the TTIP talks are meant to wrap up before the European Commission turns over in late 2014. Trade fans will be listening, increasingly nervous, for hopeful news. They will take little consolation from suggestions to just “wait for next year.”

Congress and the Currency Manipulation Craze

At last month’s trade conference and then on this blog, former Missouri Gov. Matt Blunt, now President of the American Automotive Policy Council, explained why US auto producers would like to link rules against currency manipulation to new trade agreements. “From an automotive perspective, currency manipulation both subsidizes our competitors’ exports to the US and around the world, and puts US exports at an equal cost disadvantage.”

He described growing congressional support. A filibuster-busting 60 US senators last month sent a letter to Treasury Secretary Jacob Lew and US Trade Representative Michael Froman asking for new enforceable rules in trade agreements to attack currency manipulation.  A majority of House members signed a similar letter in June.

Blunt and the senators cite a Peterson Institute study arguing that foreign currency manipulation has already cost between one and five million jobs. “A free trade agreement purporting to increase trade, but failing to address foreign currency manipulation, could lead to a permanent unfair relationship that further harms the United States economy,” the senators write.

But how would such a policy work? Will we have trade dispute panels sitting in judgment of core macroeconomic policies? Should we be fixated today on the economic philosophy of Roberto Azevêdo (new head of the World Trade Organization) rather than Janet Yellen?

If every currency depreciation were accompanied by a finance minister shouting: “Ha! Take that you foreign exporters!” then the manipulation determination would be relatively easy.  In practice, however, currencies can move for any number of reasons. Fixed exchange rates can deviate from “ideal” values when central banks are slow to move them, or when countries have different inflation rates. Market-determined currencies can swing with trader sentiment, or depreciate when central banks drop interest rates or engage in quantitative easing.

What happens if a central bank decides an economic recovery is too slow and unemployment is too high and it responds with massive purchases of bonds and other financial instruments? Such a move is highly likely to drive down its currency. Will that country be guilty of manipulation?

If you were thinking of Japan while reading that last paragraph, you were thinking like a member of Congress. If you were thinking of Chairman Bernanke’s September decision to postpone tapering, you were thinking like finance ministers all around the world. When the United States first engaged in quantitative easing, it was Brazil’s finance minister, Guido Mantega, who decried the launch of “currency wars.”

In fact, the world trading system already has a rule governing currency manipulation. It says that a country’s exchange arrangements should not frustrate the intent of the agreement. Adjacent provisions say, roughly, ‘We have no idea what this means; please ask the International Monetary Fund.’

Herein lies the problem. There is no agreed-upon proper value for a currency. One can construct some useful reference values, like the exchange rate that would make a specific bundle of goods in Japan cost the same as an identical bundle in the United States (so-called ‘purchasing power parity’).  But there is no good economic reason to demand that such rates hold all the time. Further, market-determined exchange rates fluctuate so much that no reference value will be held for long. There have been attempts to set multilateral currency policy standards – at least implicitly – as recently as the G-20 meetings in Seoul in 2010. They failed. If a trade dispute panel were to sit in judgment on a currency manipulation case, it would have very little guidance in how to rule.

The core problem with Congress’ recent approach is the belief that any determinant of trade flows ought to be subject to international regulation. In the past, trade rules carefully distinguished between measures that specifically supported a product or industry (such as a production subsidy) and broader policies that affected costs (such as education or roads). Monetary policy and exchange rates properly fall in the latter category.

Congress has constitutional authority over trade and needs to be taken seriously on this. There may be a case for another attempt at tighter global rules governing countries’ monetary policies. With a little reflection, though, we will probably decide we do not want those rules to be written and enforced by small committees of international trade lawyers.

Taking a Byte Out of Trade

Europeans have reacted to accusations of US spying with revulsion. In today’s Financial Times, Chicago Council President Ivo Daalder explores the degree to which European leaders’ surprise might be disingenuous, but also whether governments should refrain from crossing certain lines as they inevitably gather intelligence.

The furor over allegations that the United States has tapped Spanish phones or listened in on German Chancellor Merkel’s cell conversations touches on trade in at least two ways. First, alleged US government actions threaten a rift between the United States and the European Union at a time when the two are supposed to be racing ahead with a trade agreement, the Transatlantic Trade and Investment Partnership. Second, the dispute over government actions can color discussions about privacy concerns when setting rules for the private sector.

As part of the upcoming conference on “Frontiers of Economic Integration,” we will have a breakout panel devoted to issues of data privacy and electronic commerce. On the question of whether the spat over spying will impede the negotiations, one of the panelists at Wednesday’s session, Hosuk Lee-Makiyama, this summer argued that it should not. Hosuk, director of the European Center for International Political Economy, wrote:

European bluster over NSA spying is unlikely to decide the fate of trans-Atlantic trade talks, which faced huge obstacles long before Edward Snowden started leaking security briefs. For those of us who work within the narrow circles around Brussels, the only real surprise is that someone would actually bother to eavesdrop on us when every journalist and embassy intern seems to have access to the EU’s own ‘classified’ documents.

Hosuk also cautioned last month against letting the reaction to revelations serve as an excuse to block data flows.

Both Hosuk and fellow panelist Stephen Ezell have addressed broader questions about digital trade in the US and global economy in testimony before the US International Trade Commission (here and here). Stephen, a senior analyst with the Information Technology & Innovation Foundation (ITIF), has also co-authored a report on “How to Craft an Innovation Maximizing TTIP Agreement.”

There are a range of interesting policy and economic questions surrounding electronic commerce that did not necessarily arise back in the day, when countries just shipped manufactured goods in exchange for commodities. With such knowledgeable panelists – as they say these days – it should be interesting to listen in.