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Toward Transatlantic Free Trade
Prepared Text of Remarks by The Honorable Paula Stern, 7 June 2013
The Honorable Paula Stern, Ph.D., shared her insights on the proposed Transatlantic Trade & Investment Partnership (TTIP) at a luncheon hosted by the French-American Foundation on Friday, June 7, 2013.
It’s no secret that the American and European economies are still struggling five years after the financial crisis. Unemployment remains too high and GDP growth too low – both on this side of the Atlantic and across it. Policy-makers, politicians, and business leaders have now spent half of the last decade searching for solutions. Catastrophe was avoided, at least in most countries, but the recovery is hardly robust. Attitudes about the global economy remain gloomy, though this pessimism hangs heavier in some places than in others.
Things feel slightly better in the United States this spring, and while France, Spain, Italy, Portugal, and Greece remain quite gloomy, attitudes in Germany are more upbeat. This divergence within Europe has important implications for the future of the Transatlantic Trade and Investment Partnership (TTIP), and ought to inform how we think about it.
On June 19th President Obama is expected to announce the formal launch of this significant mission – in effect a U.S.-EU free trade and investment agreement, which has until now been only a dream for generations of geostrategic thinkers. The announcement marks a major transition within the Obama administration, which has come about only since he was sworn into his second term in office. The President’s newfound focus on freer trade is a welcome one, but I think that it is too often attributed only to the sluggishness of the economic recovery. Make no mistake – that is part of what has enticed President Obama. A massive free-trade agreement would be a welcome “pick-me-up” for the U.S. economy, and it would likely contribute substantially to his legacy. However, there is more at play here than that.
The newfound focus on trade represents a move aimed at strengthening the U.S. position internationally, and TTIP is one of its central pillars. Many Europeans have feared that the much-touted ‘pivot’ to Asia would leave Europe behind. A successful negotiation of a Trans-Pacific Partnership would accelerate that process – a fact of which Europe is well aware. TTIP is a good way for Europe to protect itself from becoming less relevant and for the U.S. to maintain and enhance an economic relationship that has been of central importance since the founding of the country. TTP also may helping accelerate TTIP formulations as Pacific nations have a headstart negotiating TTP.
In the spirit of cooperation and friendship that bind the U.S. and the EU – a spirit nurtured by the French-American Foundation – I won’t end there. The relationship between Europe and the United States, like the special French-American relationship, consists of more than economic or commercial opportunism. TTIP represents a golden opportunity for the United States and Europe to work together to establish and renew global standards for generations to come.
Doing this won’t be easy. Many relatively easier things have been done already in previous rounds of negotiation at the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade (GATT). Tariffs are already relatively low, but since our reciprocal trade is so enormous, lowering them further will be a welcome stimulus to our consumer economies. Negotiating down non-tariff barriers to trade, or NTB’s, will be trickier, as they are deeply embedded in the domestic systems of 27 different nations, and layered over by EU rules and regulations. The project is further complicated by the U.S.’s system of checks and balances, Congressional involvement, and a federal system which unites 50 disparate states.
There are a number of thorny issues which will be on the negotiating table. But negotiators know that the greater the reduction in trade barriers that they can achieve, the greater the economic payoff will be for both sides. At this starting moment, I am optimistic about TTIP’s prospects.
French/American Economic Lethargy v. German Competitiveness
At this moment, let me speak about the geopolitical significance and some of the internal EU politics which will complicate maximum achievement. One could say that the United States and France are, in a sense, similarly situated. Both of our countries are struggling to recover from the Great Recession. In the United States unemployment is declining, but too slowly. In France, it has risen to close to eleven percent. In the period from 1999 to 2012 France lost 40% of its export market share. In that same time its industrial added value in GDP fell by 30%. France’s export weakness is a pressing economic issue that requires frank discussions and substantive reform to overcome.
The United States is also losing ground internationally. The World Economic Forum’s Global Competitiveness Index ranked the United States the seventh most competitive economy. This is a fall from the fourth position only two years ago, and from first in 2008 and 2009. Similarly, France has fallen from 15th only two years ago, to 21st now. This is not a pretty picture. Both countries have lacked a coherent strategy for increasing competitiveness in the last decade. TTIP is a major opportunity and mechanism for them to readjust.
Germany, by contrast, has for the first time moved past the United States in the Global Competitiveness Index. Its unemployment is markedly lower than that of either France or the U.S. This is a direct result of a conscious German strategy and their focus on expanding exports. German structural reforms, notably education reform and the Hartz welfare and labor overhaul which together made up “Agenda 2010,” have strengthened Germany’s position internationally. These reforms have led to Germany’s position as the second largest exporter in the world – trailing only China.
On economic issues, Germany’s voice is the dominant one in Europe, and notably China is comfortable with Germany playing that role. Today’s headlines offer clear evidence of Germany’s strong monetary hand and dominant voice on fiscal austerity. One sees further evidence of Germany’s strength in its trade policy, where just last week it succeeded in watering down the European Commission’s order to levy duties on dumped Chinese solar panels. Under the WTO sanctioned laws governing this procedure, authorities were set to impose dumping tariffs on Chinese solar panels that had captured 80% of the European market share. Fearing Chinese retaliation against German exports and investment in China, Germany aligned with China to water down the procedurally preliminary dumping duties. It brought along enough EU countries, but not France. Berlin wielded substantial weight as Chancellor Merkel and Vice-Chancellor Philipp Rösler prevailed over the objections of European Commission trade authorities.
In response, the EU Trade Commissioner Karel De Gucht had to step back and lower the initial duties to 11% for 60 days – largely caving to the Beijing-Berlin position. Yet this didn’t satisfy the Chinese authorities who immediately announced retaliation against French, Spanish, and Italian wine rather than follow procedural channels for dispute settlement at the WTO.
What does this mean for TTIP? Certainly it means that observers, particularly those of us in the United States, must remember that the EU is not always a unitary body. It also highlights the fact that while Germany typically favors a stronger Brussels, it will place its own national interest over that of the EU as a whole.
The relative clout of Europe’s national economies will influence the final outcome of negotiations. Germany’s economy, being the largest and healthiest, will likely allow it to exert more sway over the negotiations than other countries. On the other hand, EU members that are less than enchanted by German policy and dominance may want to align more closely with the U.S. in order to dilute German influence. This is a kind of balance-of-power dance we have seen before, and we should watch for it in these negotiations.
Of course, it bears repeating that a well-negotiated, ambitious Trans-Atlantic Partnership would benefit all Europeans. Laying down rules of the road that preserve high-level standards would benefit France substantially – especially relative to the developing economies. Americans would also benefit from TTIP, a fact well-understood by President Obama. The economic benefit is only one side of his interest in securing such an agreement, though.
Obama Trade Policy
Before diving fully into the substance of TTIP, I want to present some background about the American side. It is a grave mistake to view TTIP in isolation, as nothing more than a particularly large free-trade and investment agreement. Much of the discussion of TTIP to date has focused on the economic implications of such an agreement. We read think-tank reports of one-, five-, and ten-year forecasts – expected GDP growth over projections – and estimated percentage increases in exports… All of these figures make attractive headlines. And they are indeed dramatic, but what is much more helpful, I think, is to look at the broader context of the global political and economic environment. To do so, I want to briefly trace the Obama administration’s evolution on trade issues.
In his first term, President Barack Obama hardly touched trade policy. Rather, his Administration focused on passing an economic stimulus package and keeping the economy from falling into depression. Additionally, he spent a lot of political capital to reform the healthcare system, culminating in the passage of the Affordable Care Act.
In his 2010 State of the Union, the President announced his intention to double U.S. exports by 2015 – a goal which, at the time, seemed overly ambitious, particularly given that the President’s attention seemed to be elsewhere. Since his reelection to a second and final term, President Obama has turned his focus much more squarely on trade. The anticipated announcement of TTIP combined with negotiations of the Trans-Pacific Partnership, represent a major expansion of President Obama’s trade policy.
Why has President Obama so dramatically increased his Administration’s focus on trade? The standard response is that the White House wants to boost the U.S. economy. There is truth to this, but that overlooks a more complex and crucial aspect of President Obama’s thinking.
The President approaches trade with a ‘wide-angle’ view of the international system, in contrast to a narrow focus on domestic economic indicators. The President’s trade agenda is not just about the economy, but about the U.S.’s overall position in the global system. His nomination of former Deputy National Security Advisor Mike Froman as the new U.S. Trade Representative suggests that he views trade in terms of security as well as economics. Mr. Froman’s longtime association with President Obama – dating back to their time in law school – further underscores that the President views trade policy and trade negotiations as central elements of U.S. global leadership.
President Obama’s simultaneous negotiation of major agreements on both the Atlantic and Pacific fronts reveals his desire to reshape global trade rules. With the WTO Doha Round of negotiations stalled, the Administration is looking for new avenues toward trade liberalization. These mega-agreements would cover an immense portion of international trade. For the U.S. and the EU to agree to a standard set of rules, or at least two concordant sets, would create a new global standard – a new set of ‘rules of the road’ for international trade. Together the U.S. and the EU can increase their leverage vis-à-vis China.
The elephant in the room is that these standards are, by and large, aimed at China and other fast-growing – largely Asian – economies. The Obama Administration seeks to raise global standards by establishing these more advanced rules while the U.S. and the EU are still globally predominant. History suggests that in the world of commerce, when the U.S. and the EU set standards, for telecommunications or automobile safety for example, they become the de-facto standards for the world market – China included. Negotiating TTIP would represent a major victory for both Americans and Europeans. Whether we are talking about standard economic measures such as GDP growth or more subtle measures of U.S. global leadership, an ambitious, deep Trans-Atlantic Partnership would strengthen their position in the world. Achieving such an agreement will not be easy, though.
Main Difficulties and Current Conditions
TTIP is still in its honeymoon phase. On both sides of the Atlantic there is enormous, welcome optimism. Yet this optimism should not blind us to the fact that there remain deep, protracted differences to overcome. And there are new ground rules to design for dealing with state-owned enterprises, as the Chinese solar dumping cases so dramatically demonstrates. Moreover, we should not leave out the energy sector – in this period of climate change. The World Trade Organization and its precursor the General Agreement on Tariffs and Trade (GATT) has no rules covering the world’s largest traded good – energy.
Non-tariff barriers to trade – NTB’s – that are on the agenda are particularly resistant to negotiations. These in-country barriers include consumer health regulations and environmental standards. They reduce trade dramatically – as much as if there were customs duties of between 10 and 20 percent, according to official EU calculations. Wherever negotiators can find common ground – and there ought to be plenty, these standards ought to be harmonized. That can be done through a variety of approaches including mutual recognition and convergence of standards. Both Americans and Europeans are understandably cautious about changing these standards. These standards reflect accommodations made at the national and European Union levels in Europe, or the federal and state levels in the U.S., and involve strong, often entrenched domestic incumbent industries and regulators. Furthermore, nobody, particularly nobody seeking reelection, wants to be seen as facilitating the outsourcing of jobs or lowering consumer protections.
For that reason, officials in Europe are loath to open their markets to American imports containing genetically modified organisms, chlorine-washed chicken, and hormone-treated beef. The EU has strict standards which generally require products to carry extremely low levels of risk: the so-called “precautionary principle.” By contrast, the United States is more accepting of risk, and American producers have more regulatory-leeway. Negotiators will have to find ways to accommodate these two different approaches to regulation or be willing to accept a less ambitious TTIP agreement.
Another area likely to be contentious is that of European access to American procurement markets, particularly at the state and local government levels. Government procurement markets are enormous, and more competition in this area would doubtless benefit taxpayers and companies providing competitively-priced goods and services. European negotiators would like to soften “Buy American” clauses or so-called domestic content requirements which instruct governments to buy American products whenever possible. The federal system in the United States makes forming national policy on this issue quite difficult. European companies are eager to enter these markets, but it is unclear to what extent the federal government of the U.S. will be able to guarantee them access. This will be a task requiring political “buy-in” state-by-state because the federal government cannot impose a new standard on all 50 states at once.
A third point, which has already sparked tensions, is that of the “cultural exception” designed to shield European audiovisual industries. President François Hollande has said he would not support the negotiation’s mandate unless the cultural exception was off the negotiating table. Recently, the European Parliament demanded the same. While the move was expected, it underscores the point that there are many different special interests here that have to be reconciled. Furthermore, it is concerning that elected officials are instructing negotiators to shield special industries before the negotiations have even begun. As EU trade commissioner Karel De Gucht put it, it’s “not good to start negotiations on the basis of carve-outs.” I think, ultimately, that this is one area in which the status quo is likely to be preserved. Look instead for this section to focus attention on sharpening the rules for copyright protection to tighten global standards.
These will be only some of the controversial areas, yet the answer to opponents of liberalization is that there will be greater overall gains on both sides of the Atlantic from tightening the ties between two advanced economic areas which make up close to half of the world’s GDP. According to some economic projections, the gains include the prospect of creating as many as ten million trans-Atlantic jobs by 2020 and boosting GDP growth by half a percentage point. , Additionally, with more than a third of Atlantic trade being intra-company transfers, bringing down barriers just makes sense. When GM or Mercedes has an auto part in France that they need for a fully assembled auto to roll off the line in Detroit, even low tariffs are senselessly costly. And why should a new BMW or Ford safety feature on headlights be tested for safety twice – once in the U.S. and then again in Europe? It seems that politicians in the U.S. and the EU are starting to agree.
Prospects for Success
Politically, this agreement appears more promising in the United States than the hotly contested North American Free Trade Agreement (NAFTA) or even the more recent U.S.-Korea Free Trade Agreement. Because European labor and environmental standards are higher than those in the U.S., there is less ground for opposition from unions and environmental groups, some of which have opposed trade liberalization in the past. The fact that the charge is being led by a Democratic president helps as well. Business groups have traditionally had the ear of the Republicans in Congress, which seems to be helping support for TTIP even in the highly contentious partisan world of Washington. Recently released figures indicate that U.S. exports to China fell 4.7% last quarter – an indicator of falling demand in China. Weakening global demand should be a signal to policy-makers in the United States to boost U.S. exports. TTIP is a major opportunity to increase exports to the benefit of consumers and businesses.
This is the case in Europe too. The grim economic outlook across Europe should help to bring doubters of free-trade on board. The latest trade numbers released by the Commerce Department show that U.S. exports to Europe have fallen significantly compared to last year – a sign of low European demand. Concerns, particularly in Europe, that the U.S. Federal Reserve may begin to unwind its quantitative easing program will make TTIP even more attractive as a stimulus for economic growth. The Eurozone is experiencing a sixth straight quarter of recession, leaving policymakers in Europe increasingly invested in making TTIP work.
The optimal timeframe for these negotiations, however, is short. The European Commissioner, Mr. De Gucht’s, mandate lasts only 18 months, and collective political will appears strongest now. The respective European and Congressional consultation and stakeholder comment periods end in the coming days, and negotiations should begin in earnest in coming weeks. Wide-ranging, deep integration of the world’s two largest economies would be good for the United States, good for France and the rest of the EU, and good for the world.
I thank you, and welcome any questions you may have.
A former chairwoman of the U.S. International Trade Commission (ITC) and distinguished scholar, The Honorable Paula Stern founded The Stern Group, Inc. in 1988 and leads its practice, serving national and multi-national companies and organizations on business, political and technological issues that affect their competiveness in a global economy.
As chairwoman of the ITC, from 1984-1986, and a commissioner for a nine-year term, Dr. Stern analyzed and voted on over 1,000 trade cases involving a broad range of industries and issues. At the time, she was the second highest-ranking woman in the executive branch of the U.S. Government.
Dr. Stern is a member of the US State Department's Advisory Committee on International Economic Policy, the US Department of Commerce's Advisory Committee on Renewable Energy and Energy Efficiency, the Executive Committee of the Atlantic Council, the Boards of the Committee for Economic Development, the Diversified Search Advisory Board and the Columbia University School of Social Work, and a member of the Council on Foreign Relations, the Inter-American Dialogue, the Bretton Woods Committee and the Global Subsidies Initiative High-Level Advisory Group.
Dr. Stern also serves on the Boards of Directors of Avon Products, Inc. and RAC, Inc., and the International Advisory Board of Lafarge. She is a former Board member of Neiman Marcus, CBS, Duracell, Harcourt General, Hasbro, Scott Paper, Walmart, Westinghouse and Avaya.
As both a member and senior advisor of the Trade Policy Sub-council of the bipartisan Competitiveness Policy Council, Dr. Stern prepared the Council's proposals for reforming U.S. international economic policy making, delivered to the U.S. Congress and President in 1993, which guided the trade and export policy of the Clinton Administration.
Dr. Stern was a also member of President Clinton's Advisory Committee on Trade Policy and Negotiations, and served as co-chair of the International Competition Policy Advisory Committee for the Attorney General and U.S. Department of Justice Antitrust Division; chair of the Advisory Committee of the U.S. Export-Import Bank; and as a presidentially appointed member of the Board of Directors of the Inter-American Foundation.
Dr. Stern's other service includes membership on the congressionally mandated National Academy of Sciences' Panel on the Future Design and Implementation of U.S. National Security Export Controls, and the U.S. Congress' Office of Technology Assessment's Advisory Panel on Technology, Innovation and U.S. Trade.
Dr. Stern began her career in Washington in the 1970s as legislative assistant and senior legislative assistant to U.S. Senator Gaylord Nelson, and also was a guest scholar at the Brookings Institution, where she wrote a definitive book on Congressional-Executive foreign policy making, titled Water's Edge - Domestic Politics and the Making of American Foreign Policy. She has also a fellow at the Council on Foreign Relations, a senior associate at the Carnegie Endowment for International Peace and a senior fellow at the Progressive Policy Institute.
Dr. Stern's writings and commentary on foreign policy, trade-related topics and women's issues have been widely published in scholarly and popular journals as well as The New York Times, The Wall Street Journal, USA Today, The LA Times, The Chicago Tribune and other mainstream media. She was named one of the top women influencing the American economy by MS Magazine, and honored by The National Women's Economic Alliance Foundation with its Directors' Choice Award for Leadership. She is a frequent public speaker and television commentator in the U.S. and abroad.
Dr. Stern has a B.A. from Goucher College, an M.A. in Regional Studies from Harvard University, a Ph.D. in International Affairs from Tufts University's Fletcher School of Law and Diplomacy, and honorary degrees in Law from Goucher College and Commercial Science from Babson College. She is a recipient of the Alicia Patterson Journalism Award and the Joseph Papp Award for Racial Harmony from the Foundation for Ethnic Understanding.
[i] Christian Saint-Etienne, Le Cercle des Economists
[iii] Monika Lohmuller, “Ten Years on, Hartz labor reforms aid Germany” DW, July 16, 2012
[iv] Karel De Gucht, “The EU-U.S. Transatlantic Trade and investment Partnership” Council on Foreign Relations, May 21, 2013 http://www.cfr.org/economics/eu-ustransatlantic-trade-investment-partner...
[v] Diahanna Lynch and David Vogel, “The Regulation of GMOs in Europe and the United States: A Case-Study of Contemporary European Regulatory Politics” Council on Foreign Relations, April 2001
[vi] James Kanter, “European Parliament Moves to Limit Scope of Eventual U.S. Trade Deal” New York Times, May 23 2013
[vii] Dan Hamilton, “Winning the Trade Peace: How to make the most of the EU-U.S. Trade & Investment Partnership” New Direction: The foundation for European Reform, May 2013, p.4
[viii] Joseph Francois, “Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment” Centre for Economic Policy Research, March 2013, p. 46
[ix] Transatlantic Task Force on Trade and Investment, “A New Era for Transatlantic Trade Leadership” The German Marshall Fund of the United States and European Centre for International Political Economy, p. 16
[x] Lucia Mutikani, “Widening trade gap offers mixed signals on economy” Reuters, June 4, 2013
[xi] Josh Mitchell and Eric Morath, “U.S. Trade Deficit Widens as Global Demand Falters” Wall Street Journal, June 4, 2013
[xii] Rachel Cooper, “Eurozone endures sixth quarter of recession” The Telegraph, June 5, 2013