Talks begin this week on what will, if it comes to fruition, be the biggest trade deal in the history of the world. After months of comment-taking and framework-setting, the United States and the European Union are ready to start official negotiations over what is formally known as the Transatlantic Trade and Investment Partnership (TTIP). In short: The world's two largest economies are ready to allow the freer flow of commerce between them.
It comes at a time when global trade talks have stalled over differences between developed and less developed countries, and as Europe is worried that it's becoming less important to the United States than Asia (we're working on another big trade agreement over there, too). But the European Union's 28 member states are collectively still the United States's biggest trade and investment partner, according to Johns Hopkins University, and the United States and Europe together generate some 40 percent of the world's GDP. If all goes according to plan, they'll eliminate tariffs completely between the two sides of the Atlantic, and harmonize regulations on a host of goods and services, adding a boost to both economies without increasing deficits.
That doesn't mean it's going to be easy. Despite deep corporate ties and a certain cultural affinity, the Europeans do a few things differently that they may be reluctant to give up (and likewise for the Americans). Here's a guide to understanding the debate as it unfolds.
This is a giant free trade agreement. Does that mean it's like the North American Free Trade Agreement (NAFTA)?
Yes, in that it gets rid of direct trade barriers like tariffs, and more practical ones like rules about how imports may be produced. But it's also a lot bigger, since the trans-Atlantic relationship is worth $4.7 trillion in bilateral trade and investment annually to North America's $1.5 trillion. At the same time, our legal regimes are much more similar than were those of the United States and Mexico, with high safety, environmental, and labor standards on both sides. The labor markets are also more closely matched, which likely means less labor dislocation (read: offshoring) than NAFTA brought about. If anything, it could mean more stuff manufactured in the United States, since labor costs are 25 percent lower and energy is dramatically cheaper in the United States than Europe. For these reasons, the AFL-CIO has been cautiously optimistic about the TTIP's prospects for workers, after bitterly opposing NAFTA.
So the goal is to eliminate tariffs. What would that mean?
Tariffs on stuff traded between the United States and Europe are currently pretty low, in the 5 to 7 percent range. Getting rid of them entirely means that buyers pay less for goods, and also that firms get more productive to stay competitive -- a "dynamic" effect that could boost trans-Atlantic trade by around $180 billion a year.
What else will they try to solve?
Tariffs aren't actually the biggest thing in the way of commerce. American and European firms also have to navigate a maze of different rules and compliance standards in order to sell to each other -- even when they amount to the same degree of protection, they look different and require jumping through more hoops, adding the equivalent of a 10 to 20 percent customs duty. That can be prohibitive for businesses like the automotive industry, which is subject to duplicative safety and environmental regulations that they currently avoid either by manufacturing in other countries or simply not selling certain models in Europe or America.
In some cases, American industries want the European Union to relax its restrictions on imports of products that don't meet its high standards, like meat that's been washed with chemicals (American poultry, for example, has been effectively banned on these grounds since 1997). But harmonization doesn't always require changing regulations wholesale. Instead, the two parties could simply agree to recognize each others' standards, like they currently do with organic foods, which would benefit everything from pharmaceuticals to financial services to manufactured goods. Businessweek has a good roundup of things U.S. industries are hoping to from a deal.
What will be the major hang-ups?
Smoothing out otherwise similar standards, where the two parties agree in principle, is the easy part. Here's what will likely take the negotiations through next year, into 2015:
- Agricultural policy: The United States and Europe take markedly different approaches to growing food. Europeans are extremely skeptical of genetically modified crops, while Americans (mostly) embrace them. Europeans view farm policy as a tool to preserve rural landscapes and lifestyles; Americans let such shibboleths pass long ago. Both, however, subsidize their agriculture industries to the tune of about $100 billion (in the European Union's Common Agricultural Policy) and $14.9 billion (in the 2013-2014 U.S. Farm Bill). Vested interests and deeply-held beliefs on both sides make this issue a tough one to work through.
- Data privacy: Europeans also tend to take a harder line on protection of personal data than the American government has, and privacy advocates fear that if privacy rules are included in this round of trade negotiations, the European Union will be forced to water down its strong regulations.
- Intellectual property: The European Parliament's rejection last year of a treaty designed to address digital piracy, patent protections, and other intellectual property issues clouds prospects for agreement this time around.
- The movies: France announced its refusal last month to compromise on its longstanding practice of supporting its domestic film industry. While the audio-visual sector isn't a huge financial chunk of the agreement, it's the kind of thing that could prompt the United States to take other pieces off the negotiating table in retaliation.
- Airlines: Right now, foreign airlines can't fly between U.S. cities, and foreigners can't own more than 25 percent of a U.S. airline. Europe would like to end that restriction, but U.S. airlines may not be as excited for the competition.
- Financial regulation: Washington is worried that including a plank addressing financial services might undermine its own efforts, in the form of the Dodd-Frank law, to bring Wall Street to heel. Wall Street is less concerned, and the Europeans would like to see a chapter on the subject as well.
Overall, the biggest risk that threatens the deal isn't any one particular provision, but rather the challenge of cobbling together a treaty with so many different moving pieces. The United States has never cut such a big deal, preferring to stick to smaller country-specific arrangements, and this one will have to make it through a Congress that's killed many an ambitious initiative in recent years.
Environmental groups are concerned that the agreement could weaken protections against toxic chemicals as well as expand the export of fracked natural gas and open the door to litigation against carbon reduction measures (the Sierra Club has a whole report here). Economist Joe Stiglitz also worries that negotiators will bow to commercial interests and forsake the public on issues like generic drugs and agricultural subsidies.
Correction: This post initially confused billions with trillions on the size of the U.S.' trade relationships.