Getting to Yes on Transatlantic Trade

Revelations that the United States bugged EU embassies and monitored the emails and phone calls of ordinary Europeans almost ended this week’s U.S.-EU trade negotiations before they began. But prudence prevailed and EU officials withdrew their threats to postpone the talks. With U.S. economic growth still sluggish and eurozone unemployment reaching all-time highs, a transatlantic pact that could liberalize one-third of global trade and generate millions of new jobs is an opportunity neither side can afford to miss.

Still, hammering out the agreement, known as the Trans-Atlantic Trade and Investment Partnership (TTIP), won’t be easy. Beyond the traditional barriers to U.S.-EU free trade -- tariffs and quotas -- negotiators will need to address the real obstacles to transatlantic commerce: divergent or duplicative regulatory policies.

Although seemingly obscure, the fights that rage between EU and U.S. bureaucrats over such matters as the rules on chlorinated chicken, the privacy afforded to social media users, and the regulations governing derivatives trading are the central issues in the latest transatlantic trade negotiations. With tariffs between the United States and the EU already low, the United Kingdom’s Center for Economic Policy Research estimates that 80 percent of the potential economic gains from the TTIP agreement depend on reducing the conflicts and duplication between EU and U.S. rules on those and other regulatory issues, ranging from food safety to automobile parts.

It’s easy to be pessimistic about the prospects for success. Previous initiatives to improve EU-U.S. regulatory cooperation during the Clinton and Bush administrations went nowhere. Cultural attitudes on each side toward consumer safety, environmental protection, and privacy run deep, and they will not be overcome with promises of diffuse economic benefits and future job growth. High-level political leaders can bring EU and U.S. regulators to the negotiating table and prod them to resolve one-off disputes, but that is unlikely to produce the consistent regulatory interpretations and the predictable, efficient enforcement that are needed to facilitate transatlantic commerce.

Reducing divergence and duplication in transatlantic rules is possible, but it will require broadening the objectives of the TTIP talks beyond free trade. The negotiations should seek to ensure that the United States and Europe remain standard makers, rather than standard takers, in the global economy. Without a more unified approach to regulation, the increasingly global nature of production and the shift of economic power to emerging-market countries will erode the leverage that the United States and the EU have to promote the high, consistent standards that consumers need and the open and predictable global trading system on which businesses rely. The chances of achieving that transatlantic cooperation through the TTIP talks will be much improved if the negotiators focus on those sectors in which the interests of EU and U.S. trade and regulatory officials most overlap.

The emergence of global supply chains is changing the way the world trades. Increasingly, goods and services do not come from just one place. Cheap shipping, better communication technologies, and low tariffs have allowed companies to unbundle and outsource stages in the manufacturing process and intermediate services to specialist suppliers around the world. These global supply chains currently dominate international commerce, with the inputs and components used in these chains now comprising 56 percent of the global goods trade and 73 percent of the services trade.

This trend toward global supply chains has three implications for the TTIP talks. First, the role of regulation in international commerce is more important than ever. With parts and services often crisscrossing national borders multiple times, global supply chains depend on the adequacy, predictability, and efficiency of the regulatory oversight in the countries involved. Uncoordinated regulations challenge multinational corporations and keep small and medium-sized businesses from entering new markets altogether. The White House has indicated that divergent or duplicative health, safety, and technical regulations are the greatest barriers to its goal of doubling U.S. exports by 2014.

Second, the growing role of supply chains in international trade means that the days when the United States and Europe could unilaterally dictate regulation for global commerce are numbered. Although many once feared that globalization would lead to a race to the bottom, with countries competing to attract multinational companies by providing the least regulated business environment, the opposite has been true. On most issues, exporters have conformed their goods or services to the most stringent rules of the largest, most affluent consumer markets -- generally, the United States or European Union -- rather than incur the expense of differentiating their production for each market. Accordingly, EU rules on privacy and competition have become global standards, as have U.S. regulations on financial services.

Yet the mechanisms by which these rules spread internationally, including enforcement actions, tort liability, and companies’ investments in the good reputation of their brands, do not easily extend to intermediate suppliers in emerging economies where access to courts can be limited. As consumer spending in emerging markets grows and becomes a bigger target for exporters, the ability of the United States and the EU to ensure high global standards and rules-based trade will further diminish. The TTIP talks are an opportunity for the United States and the EU to reverse that trend by using the combined leverage of their consumer markets to ensure that producers worldwide continue to gravitate toward their joint standards.

Third, given the scale and complexity of global supply chains, EU and U.S. regulators simply cannot do their jobs without the help of their counterparts. Imports regulated by the U.S. Food and Drug Administration, for example, have quadrupled (from six million to 24 million shipments) over the past decade and now involve more than 300,000 facilities in 150 different countries. There are legal and practical limits on inspecting such a multitude of producers and suppliers. The adequacy of health, safety, and environmental regulation in one country increasingly depends on the adequacy of those regulations in other countries.

In short, trade negotiators and regulators need one another. Global adoption of the high standards that EU and U.S. consumers demand will occur only if doing it is in the economic interests of exporters and their governments. Trade talks provide the structure, incentives, and high-level political commitment that international regulatory dialogues lack. Conversely, EU and U.S. trade initiatives that focus on economic goals alone have not succeeded in reducing the inefficient and duplicative but otherwise nondiscriminatory regulations that increasingly hinder global commerce. Popular support for trade liberalization in the United States and Europe today necessitates accompanying efforts to ensure that freer trade also means safer consumer goods and improved public health.

The TTIP would allow EU and U.S. trade and regulatory officials to achieve their mutual goals in several ways. Promoting common rules and certification regimes that cover 800 million EU and U.S. consumers would provide predictability for exporters and investors, make it easier for them to comply with regulations in multiple markets, and thus permit economies of scale. Enabling the EU and the United States to share data and rely on each other’s inspections would stretch scarce regulatory resources and reduce the commercial burden of duplicative tests and requirements. The outcome would be smarter and more streamlined regulation that benefits businesses while protecting the general public from regulatory failures.

TTIP negotiators should pursue these strategies in the sectors where the goals of trade and regulation most overlap: regulated goods and services characterized by complex supply chains such as pharmaceuticals, agricultural products, and financial services. Progress in those areas will help build trust for future transatlantic cooperation on more difficult issues such as the data generated through e-commerce, where the goals of commerce (easy cross-border transfer of data) and regulation (consumer privacy) are not mutually dependent and can conflict. 

U.S. President Barack Obama and EU leaders have rightly touted the TTIP as the potential economic boost that is sorely needed on both sides of the Atlantic. The success of the talks depends on the negotiators recognizing that in the era of fragmented production and global supply chains, the transatlantic goals of freer trade and better regulation have become mutually dependent. The TTIP represents the best -- and possibly the last -- opportunity for the United States and the EU to set the global regulatory blueprints by providing a template on which other trade deals can build.