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The Emerging US-EU-Asia Trade Triangle

Oct 14 , 2013

In his State of the Union address in February, President Obama announced he would initiate formal negotiations on the Transatlantic Trade and Investment Partnership (TTIP). That same day, European Council President Herman Van Rompuy, and European Commission President José Manuel Barroso started negotiations.

Dan Steinbock

In the US and Europe, the proposed FTA is usually portrayed as the potentially largest regional free-trade agreement in history. In President Obama’s address, however, the FTA was mentioned in only one sentence. In Europe, it is seen as manna from heaven to fuel growth in the ailing continent.  In Asia, it is a potential opportunity and threat.

The US-EU trade race 

The effort to create a US-EU free trade area represents a major deal between two world regions that were the first to industrialize and will be the first to cope with the consequences of maturation, aging and generous social models without adequate economic growth.

In the early 1990s, Henry Kissinger developed the idea of a transatlantic trade pact, based on largely strategic considerations. At the time, the deal was knocked down by France and its effort to shield French cultural industries from Hollywood and Silicon Valley.

The talks were re-ignited in 2007, when they were no longer motivated by the concern of the Japanese challenge, but by China. Now strategic considerations are subject to economic objectives.

As the advanced economies were swept by global crisis, the TTIP talks were set aside. And that’s where they remained at the turn of the 2010s. The efforts to negotiate a bi-continental FTA have intensified as the recovery in the West proved more challenging than anticipated.

Today, the TTIP is divided into 15 specific working groups, focusing on the elimination of all trade tariffs, the reduction of all tariff barriers, and more closely tied cooperation among the EU and US regulatory bodies. The most disputed areas include EU’s policy to limit the imports of genetically modified food, as well as EU’s relatively looser regulation of the financial sector.

In the summer, the Snowden cyber security debacle ignited a furious political debate between Washington and Brussels. However, the proponents of the deal argue that the economic gains of the partnership exceed the political headaches of the process.

The simple argument is that the TTIP would liberalize one-third of global trade and generate millions of new jobs. The real-life outcome depends critically on the underlying assumptions. In the projections, tariffs are widely seen as “low-hanging fruit.” The big money is in the regulatory issues.

In conservative estimates, tariffs are completely eliminated (currently less than 4 percent) and non-tariff barriers are reduced by 25-50 percent. In this projection, US GDP is expected to increase by 0.5 percent ($77 billion) annually, or by half of that in the more limited scenario. In turn, the EU GDP would rise by $36 billion in the more comprehensive scenario.

The difference stems from the fact that 20 percent of US trade flows toward the EU, while only 8 percent of EU trade flows toward the US

What these and other estimates ignore is the potential backlash by consumer rights and environmental organizations, which have condemned the secretive talks and consider the projected economic benefits mediocre. 

US and Chinese rebalancing in Asia 

While the US-EU trade pact is often portrayed as an inclusive quest for a level playing field, free and fair trade, it is also a defensive effort by the ailing advanced economies against the rising China and emerging Asia.

When President Obama gave his State of the Union speech, his only sentence on the US-EU TTIP was actually preceded by a reference to US commitment to complete a Trans-Pacific Partnership (TPP).

The TTIP is not just an effort to intensify US-EU trade and investment. It is driven by a defensive motive to defuse explosive growth of trade and investment in the rising China and Asia. Consequently, Washington is in a hurry to complete talks on the TPP, which originates from a 2005 free trade agreement among Brunei, Chile, New Zealand and Singapore. Since 2010, it has led to talks for a significantly expanded FTA, which would also include Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, Vietnam and South Korea.

As the US Trade Representative Ron Kirk has put it, the TPP is to be a “high-standard, broad-based regional pact” aiming at the emerging trade issues in the 21st century. Hence, the inclusion of Asia’s tiger economies (minus Hong Kong), entrenched and emerging ASEAN tigers, Latin American nations, as well as all three NAFTA partners (US, Canada, and Mexico).

However, the TPP excludes China and is – according to Chinese critics – an effort to contain China in US pivot toward Asia. Like its counterpart TTIP, the TPP talks have been conducted in secrecy.

While fueling the TTIP across the Atlantic, the TTP has also driven emerging Asian-Pacific cooperation in which China does have a role, particularly through free trade talks among the ASEAN member states, and their FTA partners (Australia, China, India, Japan, Korea and New Zealand). These talks aim at a Regional Comprehensive Economic Partnership (RCEP), an FTA among the leading nations in East Asia, South Asia, Southeast Asia, and Oceania.

The RCEP deal is to be concluded by the end of 2015. It includes more than 3 billion people, reflects a combined GDP of some $17 trillion and accounts for 40 percent of world trade. However, RCEP excludes the United States.

Regional trade rivalry until mid-2010s 

In brief, all these three deals seek to capture a major chunk in world trade and investment, benefit from growth momentum in Asia, stress cooperation between different regional partners – but are shaped either by the US or China, but not both, as of yet.

Since last summer, the triangle drama has also intensified negotiations on the US-China free investment treaty.

Notice also that all these talks seek to achieve major results by the mid-2010s. It’s not a chance event. That’s when the renminbi is expected to become fully convertible.

Since the postwar era, the US dollar has dominated globally. With the nascent multipolar economy, global trade needs complementary world currencies, such as the renminbi. At the same time, the momentum of global trade is shifting toward Asia.

Clearly, the rise of the US-EU partnership is not only based on bilateral economic interests, but on concern about rising China and emerging Asia in the world economy. In turn, the Trans-Pacific Partnership reflects US interest sphere in Asian and Pacific, while the Regional Comprehensive Economic Partnership represents the interest sphere of Southeast and East Asia as well as Oceania.

In the coming years, these three triangles can generate a fair amount friction in trade and investment. Over time, however, each will boost regional and inter-regional integration, which can also shape complementary interests from Asia to Americas.

Dr. Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China).

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