Is TTIP Europe's best chance for growth?

By Ian Harper, freelance business journalist

12 February 2015

As Europe and the US struggle to reach agreement on the Transatlantic Trade and Investment Partnership, Ian Harper assesses what the deal really means.

The proposed trade deal between the European Union and the US is certainly controversial. Bureaucrats in Brussels and the US, plus industry bodies such as the CBI, claim that, when it happens, the Transatlantic Trade and Investment Partnership (TTIP) could be worth between €68bn and €120bn a year to the EU and €50bn to €95bn to the US by 2027.

Hopes were high that agreement between the world's two largest trading blocs could be reached by the end of 2015. This looks unlikely now, as the controversial mechanism intended to resolve disputes between sovereign states and transnational corporations - the Investor-State Dispute Settlement (ISDS) procedure - faces renewed scrutiny.

In mid-January, following evaluation of nearly 150,000 submissions on TTIP, many expressing concerns about ISDS, the European Commission announced a "negotiating pause" to consult on possible improvements to the disputes procedure. While TTIP is far from dead, at best it's unlikely to take effect before 2017. The actual bargaining hasn't even started yet. Negotiations started in July 2013 on a deal which would cover more than 40 per cent of global GDP and account for large shares of world trade and foreign direct investment. The serious talking was due to start in early 2015, but although the US would like to reach agreement while Barack Obama is still president, the Europeans are more relaxed about the timescale.

Views on TTIP are coloured by ideology and cast in hyperbole, whether on the part of big business, consumer groups, governments, trade unions or whoever. The only sure thing is that there are few, if any, hard facts about its impact.

While the TTIP would remove tariffs and duties on goods and services, most of the hoped-for benefits derive from the removal of "non-tariff barriers" through the harmonisation of common standards and regulations affecting everything from food labelling and drugs testing to the manufacture of electrical components and cars. The key areas covered by TTIP are food standards, public procurement, intellectual property, air and maritime transport, and financial services. Another area deals with the settlement of disputes, the controversial ISDS.

For many in Europe, the big prize would be access to US financial services, which the US is resisting. The EU also wants equal access to US public procurement tendering while, for example, protecting its own foodstuffs using the system that decides what can be called "Scotch whisky", "champagne", or "camembert".

Impact of opening up public procurement tendering

One area of concern for the EU is the potential impact that opening up of public procurement tendering could have on its state-sponsored healthcare systems, the NHS in particular. This is despite the US chief negotiator having confirmed that the US has no provisions in its trade agreements on health, while his EU equivalent has stated: "...our approach to services negotiations excludes any commitment to public services, and the governments remain at any time free to decide that certain services should be provided by the public sector."

In theory, the EU member that stands to gain most from TTIP is Germany, Europe's largest exporter. It is also in Germany where scepticism regarding TTIP is strongest, fuelled by the EU's economic slump, and concerns over "tax-dodging" US corporations and the revelations of mass surveillance carried out by America's National Security Agency.

Beyond these points, there are some very rather large figures being bandied about. Last year the CBI hosted a TTIP roundtable in Brussels, attended by business leaders and seven European political leaders, including UK prime minister David Cameron. CBI director-general John Cridland told the assembled leaders: "TTIP could be worth up to €120bn to the EU every year. Quite simply, it would be the biggest trade deal ever signed. As European politicians gather to drive through Commission president Jean-Claude Juncker's €315bn investment package, they cannot ignore the significant contribution to jobs and growth that TTIP could also deliver."

Reliability of the figures

Dr Markus Kerber, director-general of the Federation of German Industries, and Siemens CEO Jürgen Maier also weighed in on the side of TTIP. Impressive as these numbers may be, are they based on reliable data or wishful thinking?

The latter, says John Hilary, executive director of antipoverty charity War on Want. He says: "The claims that TTIP will add billions annually to our GDP are completely bogus, and have been dismissed by most serious economists as no more than wishful thinking. The modelling used in the forecasts is over simplistic and has a woeful track record in predicting."

Colin McLean, MD of Scottish Value Management and one of the UK's most highly respected fund managers, also has doubts. He says: "The advantages look exaggerated, and some [left of centre] think tanks have questioned them. Unemployment risks are not factored in and the benefits are very long term; and they are possibly more for US firms and EU governments/regulators. A study by the Centre for Economic Policy Research, Reducing Transatlantic Barriers to Trade and Investment, commissioned by the European Commission, shows benefits that are calculated on a cumulative basis, but they are small anyway."

Caroline Muir, director of international tax at Johnston Carmichael, says: "This deal would certainly add to GDP but it's hard to say at this point whether the EU or US would benefit most. It will likely depend on terms of the final agreement - if, for example, the healthcare sector was included, as suggested, then it could be a great opportunity for UK pharma companies. Likewise any regulatory changes could help the EU's automotive industry."

As for the figures themselves, Jeronim Capaldo, senior researcher at the Global Development and Environment Institute at Tufts University in Massachusetts, says there is a problem with the economic model used to generate them. A report he authored (The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability, October 2014), notes: "TTIP negotiations have been accompanied by econometric studies projecting net economic gains for all countries involved. In the EU, advocates have pointed to four main studies mostly projecting small and deferred net benefits alongside a gradual substitution of intra-EU trade with transatlantic trade. This leads the European Commission into a paradox: its proposed policy reform would favour economic dis-integration in the EU."

Capaldo told The CA: "What's certainly being exaggerated is the reliability of many projections. Studies based on dominant economic models project positive effects,then it would hopefully set a benchmark for others to follow and aim for convergence. There are, however, valid concerns that full convergence would amount to a race to the bottom. American laws on food safety, among other things, are less stringent than in the EU but the US has far stricter financial sector regulations."

Where the UK stands to gain the most

Allie Renison, head of Europe and trade policy at the Institute of Directors, says: "Public procurement, intellectual property and financial services are probably the areas where the UK stands to gain the most. On financial services, UK firms are more integrated into the US market than any from any other country and, as such, they would benefit significantly from regulatory co-operation."

Regarding financial services, McLean says TTIP is potentially just a first stage: "Underlying, there are some fundamentally differing perspectives on regulation, and what constitutes an effective consumer market. This looks much more like an attempt by governments, especially the European Commission, to harmonise regulation, and make it harder for financial services firms to benefit from tax and regulatory competition. There are big barriers to marketing services in the US, but this will not change in the short term, and a big political lobby in the US is behind the status quo. Will it mean the US can export its financial services regulatory model?"

WoW's John Hilary says: "The desire to subordinate regulatory standards to the interests of big business is perhaps the most problematic aspect of TTIP. This represents an unwarranted abdication of responsibility on the part of our representatives, which is why there is so much opposition to TTIP across Europe."

One of the most controversial aspects of TTIP is its potential impact on the EU's state supported healthcare systems, especially the UK's National Health Service. As things stand, the Coalition government fully supports the position of the European Commission, which has explicitly ruled out public services from the scope of any market liberalisation in TTIP. Politically, though, the NHS is a very hot potato.

Where now for TTIP?

Perhaps the biggest issue of all is the resolution of disputes between corporations and governments. ISDS arrangements are not rare in international trade and, as Jane Wessel, international litigation partner at Shepherd & Wedderburn, says: "An international dispute resolution mechanism is essential, since national dispute resolution procedures in the host state itself may be regarded as inadequate to protect the investor's international rights under the treaty." While Wessel feels the concerns about multinationals are exaggerated, a submission by more than 100 legal experts to the European Commission regarding the ISDS concluded that the safeguards would not be sufficient to uphold health and environmental legislation.

John Hilary says: "There are already more than 500 cases where multinational corporations have sued sovereign governments using ISDS clauses in other trade and investment agreements, so we have a wealth of evidence as to how the power is used by investors to challenge public policies which they disagree with."

Examples include the US tobacco giant Philip Morris which is trying to prevent Australia, Uruguay and other governments from taking measures to persuade people not to smoke, and Australian mining company, OceanaGold, which is suing El Salvador for refusing to issue it with a gold mining licence as a result of environmental and community concerns related to an earlier venture. ISDS clauses may also influence a government's willingness to regulate. Canada withdrew a proposal for plain packaging of tobacco faced with ISDS arbitration under the North American Free Trade Agreement.

It was perhaps inevitable that in mid-January the EC extended the "negotiating pause" in this area to consult on improvements to ISDS. Renison says: "TTIP offers a good opportunity to reform the ISDS model to keep it from being used in an abusive manner. The Commission will consult on improvements in four areas: the protection of the right to regulate; the establishment and functioning of arbitral tribunals; the relationship between domestic judicial systems and ISDS; and the review of ISDS decisions through an appellate mechanism."

This latest move by the Commission to revisit ISDS may not derail the TTIP train, but it will certainly considerably delay its arrival. Whether it placates critics is another matter.


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