The Diplomat, January 2016
The Trans-Pacific Partnership (TPP) is a planned free trade agreement covering 12 countries from North and South America to the Pacific Rim. The Trans-Atlantic Trade and Investment Partnership (TTIP) is a planned free trade agreement between the United States and the European Union. Both represent the main trade negotiation motions of the current global economic system.
The TPP negotiations were successfully concluded in October 2015 after 4 years of intensive talks. Legislative ratification will be the next step. TTIP has been under negotiation since June 2013; some hopes are for completion by the end of 2016. Both are unlikely to be ratified in their current form under the Trump’s Administration. The combined trans-Pacific and trans-Atlantic space covered by the two new agreements makes up 60.33 percent of the world economy, and 22 percent of its population, according to data compiled by the International Monetary Fund.
The two agreements are very similar in terms of market shares and populations, but they differ in terms of per capita incomes and living standards. According to International Monetary Fund data, the TPP economies represent 27.3 percent of the world’s purchasing power parity, measured through its gross domestic product (GDP), and 10.7 percent of the world’s population. The TTIP economies represent 33 percent of the world GDP, with 11.2 percent of the population. The average per capita GDP for the 12 TPP countries is $ 30,697, whereas the TTIP average income is $47,607. Beyond the differences in membership; however, there are also notable differences in the scope and goals of the agreements themselves. First, TPP is focused at opening markets and eliminating tariff barriers on trade and investment, whereas TTIP is mainly focused on foreign direct investment (FDI).
Since the year 2000, U.S. investment in the European economic area has made up 55 percent of the total U.S. outward (FDI), compared to 21 percent in the TPP economy, and only 1.4 percent in the Chinese economy. Similarly, the European Union’s FDI in the United States comes to 61 percent, in comparison to 24 percent from the 11 countries included in the TPP.
Trans-Atlantic tariffs on average are much lower than the trans-Pacific ones, with an average of only 4 percent trade tariffs across the Atlantic. Exceptions are a few highly regulated sectors such as textiles and the agriculture and automobile industry. TTIP negotiations aim at improving the regulatory convergence to facilitate trade and investments, reducing the nontariff barriers, and opening up the service market across the Atlantic.
Second, TTIP is more ambitious in comparison to TTP. In addition to its financial and economic benefits, TTIP will have a larger geostrategic impact, since it vicariously reinforces the strong ties that exist between Europe and the United States. TTIP is a natural Western partnership, with mature, well-developed and consolidated markets, on the one hand, and a strong defense relationship based on the North Atlantic Treaty Organization (NATO) on the other hand. Both components are missing in Asia. Those strategic realities, as well as economic ones, mean the TTIP will have more lasting importance than the TPP. For one thing, the trans-Atlantic economy is the innovation powerhouse of the global economy, and a crucial element in future growth and development. The United States is the largest global spender on R&D, as a single economy, reprising its role as the dominant force in global research across numerous industries. It spent almost 3 percent of its GDP on R&D in 2014, more than $465 billion, making up 32 percent of the share of global R&D spending. The European Union combined spends on average a little more than 2 percent of its GDP (or $283 billion), a little more than 20 percent of the world’s total. Germany is the biggest spender in the European Union, with almost 3 percent of its GDP.
Technology is the key driver of development, and differences among regions in R&D economies are narrowing. China’s R&D spending has been increasing quickly over the last 10 years, as it wants to evolve from a manufacturing-centric model—making products designed and developed in the West—to an innovation-based consumer economy. Spending 2 percent of the GDP, it makes up 17.5 percent of the world’s total R&D spending, but it might surpass the United States if it reaches its target of 3 percent by 2020. Given the size and scope of the trans-Atlantic economy, standards negotiated by the United States and the EU could become a benchmark for future global rules, inhibiting the emergence and acceptance of competing standards. Arguably, TTIP will be the West’s last best opportunity to set global rules as the emerging markets continue to gain ground.
The deal reached last December at the UN Climate Summit to reduce global greenhouse gas emissions showed that the EU and the United States then contained the political will and the resources to set the standards. In fact, TTIP’s sustainable energy framework chapter would offer both political and economic impetus to both sides of the Atlantic. It goes without saying that TTIP and TPP are strategically interlinked with each other. Both agreements are important in terms of how the trans-Atlantic partners jointly best relate to newly rising powers, and whether the West will set the new standards of the international economic order. Both TTIP and TPP take on an increasing strategic importance in light of the continuously growing role of China, and other emerging markets in the global economy. Moreover, there may be insufficient content for change to re-balance inequities between the nations.
Achieving progress in the simplification of trade and investment relations in the framework of the two negotiated agreements TTIP and TPP, which make up more than 60 percent of the world economy, would allow the World Trade Organization (WTO) to expand its useful life. TPP’s conclusion is important. Higher growth rates in the United States will help the European economy through increased exports, but TPP also needs to reinforce the geopolitical reality of rebalancing toward Asia. More pressure on Europe to engage in TTIP may help to shape and benefit from the free trade deals. Despite all difficulties and objections (internal and external), achieving progress in the simplification of trade and investment relations is important to global prosperity. The approaches taken by TTP and TTIP are the future of trade negotiations—tightly focused talks between selected participants aiming for specific improvements in fields of their trading or investment advantage by becoming better at growingly, making, planning or coordinating outcomes. Operating within such framework can generate mutual and equitable benefits and can also assist in the future of the WTO.