5 Steps to Make TTIP Inclusive for All!

Last week, at the European Forum Alpbach, we talked to experts about the potential effects of TTIP on third countries not a party to the agreement. Clearly, a transatlantic agreement can also have a positive global economic impact on many emerging and developing countries for a few different reasons!

1) The Agreement can increase the demand for goods and services from third countries, as a result of the growth stimulated in TTIP countries.

2) So-called spill-over effects can decisively lower third-country trading costs. This can more than offset the potential negative trade diversion effects of the agreement.

3) And on top of that, TTIP can create an important stimulus for a fair multilateral trading System and the further development of the WTO.

Still, all these effects will not come automatically. There has to be political will and it must be supported by corresponding measures.

Here are 5 possible steps to support this development.

STEP 1: Complex rules of origin should be reduced as much as possible or eliminated

 In a free-trade agreement, rules of origin define what proportion of a product must have actually been produced in one of the partner countries to qualify for tariff reduction. The more complex and restrictive such rules are, the sooner a domestic exporter will cut back on supplies obtained from third countries and replace them with those from domestic suppliers. This can however be doubly harmful. Important export opportunities are lost to third countries, while the exporter from the TTIP country must switch to a more expensive domestic supplier in order to comply with the origin rules. A reduction or elimination of such rules in favor of a free-trade principle would substantially moderate trade diversion effects on third countries. For a start, it could be applied to countries with which both TTIP countries already have a bilateral free trade agreement.

STEP 2: The mutual recognition of standards should be extended to third countries

An essential aspect of a TTIP is the mutual adjustment or recognition of different production standards. How far this recognition is extended to third countries will determine the effect the TTIP will have on the rest of the world. Having products mutually recognized only if the producer of the goods is located in one of the partner countries should be avoided. Instead, the source of the supplier should be irrelevant, as long as the standards of either the USA or the EU are respected. Ideally, to verify compliance with standards, there could be an independent international inspection body coordinated and supervised by the World Trade Organization (WTO). This could initially concentrate on products and services that require less inspection and supervision but later be extended to the inspection and advising inspection and certification agencies of third countries.

STEP 3: Traditional TTIP trading partners should be involved at an early stage.

To mitigate any negative trade diversion effects of the agreement from the outset, the opening of an agreement should be announced at an early stage. In this, the TTIP partners should first approach their traditional, neighbor trading partners, such as Canada and Mexico as part of NAFTA und Australia for the USA and Norway and Turkey on the European side. The imminent opening of the agreement for the whole NAFTA space seems especially appropriate, since this trading area is already highly integrated. At a later stage TTIP could be opened up for the other Pacific Alliance countries (Chile, Peru, Colombia and Costa Rica).

The same applies to the countries of the European Economic Area and Turkey but also Japan and Singapour. An early opening of the agreement to these countries would not only reduce trade diversion effects but, because of their economic interactions with other world trading regions, these countries would serve as decisive multipliers of the regulatory spill-over processes mentioned. For that reason, initiatives already launched, like the EU-Canada Agreement CETA, the updating of the EU-Mexico agreement and the first attempts to strengthen trade relations with Turkey are very welcome.

In a next step, outdated agreements between the EU and developing countries could be updated and extended. The agreements should extend beyond pure trade in goods to trade in services, investments, etc. In addition to tariff elimination, regulatory components should also be included. Like the previous options, such a step would reduce the relative trade disadvantages of third countries and diminish future trade diversion effects.

STEP 4: Future regulatory cooperation should be opened to third countries

The future regulatory cooperation and adjustment contemplated in TTIP, in the form of so-called “regulatory councils”, should likewise be opened to third countries. The more third countries, especially developing countries, are integrated in these bodies, the weaker the trade diversion effects would turn out to be. TTIP countries would also benefit from the creation of “global” standards. However, it is clear that an unlimited opening of the bodies would not be really effective or functional. Here too only the traditional and central TTIP trade parties should be involved initially, along with an institutional representation of the developing and emerging countries. The WTO would also be worth considering in this context.

STEP 5: The role of the WTO as advisor and mediator should be strengthened

The role of the WTO as arbitrator, mediator and advisor on the international trading stage will become ever more relevant and necessary in the future. In view of world-wide regional trade initiatives or “mega-regionals“ like TTIP, TPP, RCEP etc., the demand for the fair and open design of new and old trade agreements, along with international information exchange about them, will grow – as will dispute resolution both within and between large trade areas. The WTO must be strengthened to play this role.

Even if the importance of the WTO in multilateral negotiations and international contracts declines, the Doha Round will at least be successfully concluded in a more streamlined version and the “trade facilitation” arranged in the Bali Agreements of 2013 will be implemented, at least in the medium term, leading to a further world-wide reduction of multilateral tariff and non-tariff barriers.

Please check out our new study on “TTIP and developing countries – How to make TTIP inclusive for all?” conducted by the ifo institute Munich which we will release next monday!

And if you are interested in what WTO chief economist Robert Koopman thinks about the topic, please click here to read a blog post and to watch a video with his statements.

For more analysis on TTIP, see TTIP and Developing Countries: Threats, Potential and Policy Options from CES ifo Group.