@ P. Messerlin Negotiating Issues in TTIP and other mega-PTAs Patrick A. Messerlin...

@ P. Messerlin http://gem.sciences-po.fr

Negotiating Issues in TTIP and other mega-PTAs

Patrick A. Messerlin

Friedrich-Schiller Universität JenaJean Monnet Lehrstühl

April 10, 2014Jena, Germany

Overview

Which lessons from the EU Single Market: an illustration of the limits of the current “deep” preferential trade agreements (PTAs).

Better PTAs require better negotiating instruments.

East Asia and the EU: their comparative advantages in the ongoing mega-PTA game.


I. Disappointing results of the EU Internal Market

EU as a good illustration of the limits of the current “deep” PTAs.

Focus on goods Focus on services Focus on international investment Focus on public procurement Focus on implementation


PTAs: goods vs. services PTAs not so efficient in dismantling barriers, based on trade costs [Miroudot Shepherd

2012] A major difference between goods (left panel) and services (right panel). Services are

what counts in modern economies.


Focus on goods Of course, agriculture much more protected than industrial goods. But it is often

processed food (farmers via subsidies and income support). But possibly higher protection in goods than in services, in particular if one includes FDI

and to a lesser extent NTBs.

@ P. Messerlin Groupe d'Economie Mondiale

http://gem.sciences-po.fr

US [a] EU [b] US [a] EU [b] US [a] EU [b]1 2 3 4 5 6

Manufacturing sectorsAverage of all sectors 18.0 18.6 38.9 40.0 26.1 28.5Average of the more protected sectors 24.4 24.4 44.6 44.9 38.0 41.2Average of the less protected sectors 11.5 12.8 31.1 36.9 18.2 19.2

Farm and processed food sectorsFood & beverages 73.3 56.3 45.5 33.6 21.8 20.9

Services sectorsAverage of all sectors 10.2 9.6 37.8 30.1 11.4 16.7Average of the more protected sectors 17.5 11.3 34.6 29.2 14.2 16.4Average of the less protected sectors 3.0 8.0 41.0 30.9 8.6 16.9

Tariff NTB indexes NTB indexesequivalents (%) Trade Investment

Focus on services

Product Market Regulation (PMR) indicators (OECD 2008) suggest two key results: Bad news: huge differences between high and low PMRs reveal strong limits Internal Market. Good news: the possibility of “trans-negotiating partners” coalitions. Caveat: the EUMS with the highest or second highest PMR is always a large ECMS.


2003Highest

PMRPMR EUMS PMR EUMS PMR EUMS

1 2 3 4 5 6 7Electricity [c] 60.0 41.7 Sweden 33.2 France 0.0 BritainConstruction 12.8 12.2 Belgium 10.0 Italy 3.6 SwedenDistribution [d] 41.5 40.9 France 40.9 France 12.7 SwedenTourism 16.5 13.2 Slovakia 7.6 Italy 3.4 SwedenTransport 55.8 43.8 Greece 28.9 Italy 9.1 DenmarkPost & telecoms 32.6 27.8 Slovakia 24.2 France 12.0 NetherlandsFinancial services 46.8 45.9 Slovakia 29.4 Italy 10.5 IrelandReal estate 9.5 7.6 Poland 4.3 Germany 1.5 GreeceRenting of machinery 42.4 42.0 Austria 39.2 Germany 10.5 SwedenProf. & Business [d] 41.3 40.8 Austria 38.5 Germany 10.0 Sweden

2007A: Highest

PMRC: Lowest

PMRB: Highest PMR inlarge EUMSs [a]

Focus on international investment

Same observations (based on OECD trade investment restrictiveness indexes) than for services.


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Belgium 22 22 22 22 72 72 22 22 44 44 22 122 248 72 22France 233 33 33 33 72 72 22 22 138 94 22 198 198 72 322Germany 22 22 22 22 122 122 22 22 116 72 22 248 198 22 122Iraly 22 22 22 22 72 72 22 22 88 144 22 494 66 22 122Netherlands 11 11 11 11 11 11 11 11 55 33 11 411 355 11 611Austria 348 348 348 348 172 172 172 172 272 172 172 322 472 222 172Denmark 1000 562 22 22 72 72 22 22 44 22 22 422 22 122 122Finland 550 550 110 110 110 110 110 110 110 160 110 310 210 154 210Greece 462 506 462 462 122 122 22 22 88 88 22 522 254 22 1000Ireland 22 22 22 22 122 122 22 22 88 44 22 466 66 22 1000Portugal 22 66 22 22 122 122 22 22 116 172 22 1000 122 22 122Spain 512 66 22 22 322 322 22 22 226 182 22 304 316 22 22Sweden 556 292 66 66 166 166 66 66 116 116 66 316 266 166 166Britain 17 17 17 17 17 17 17 17 83 67 17 267 361 17 17Czech Rep. 125 375 50 50 50 50 100 50 150 150 50 450 100 100 450Estonia 1000 22 22 22 22 22 22 22 122 22 22 322 366 22 622Hungary 100 100 100 100 200 100 100 100 150 100 100 500 400 150 200Latvia 0 0 0 0 0 0 0 0 0 0 0 132 0 100 1000Lithuania 50 50 50 50 50 50 50 50 50 100 50 350 94 50 650Poland 225 175 75 75 375 375 75 75 75 325 75 375 75 125 175Romania 250 50 50 50 150 150 50 50 50 175 50 750 150 50 450Slovakia 75 375 75 75 72 72 72 72 172 172 72 372 122 72 322Slovenia 125 125 100 100 200 100 100 100 100 100 100 740 244 100 700

Focus on public procurement

Two results based on World Input-Output Data: [1] Intra-EU openness not much better than extra-EU openness, particularly since the mid-2000s. [2] EU not as open as it claims to be.


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Focus on implementation

The often neglected/forgotten but key aspect: implementation and its cost (based on ranks for “Ease of doing business” [Doing Business]).


EUMS Rank Partner RankSingapore 1

EU-1973 7Korea 8Canada 13Malaysia 18

EU-1995 19Japan 20

EU-2004b 24C. Taipei 25

EU-1958 41EU-2004a 50EU-1980s 58EU-2007 66

China 91Argentina 113Russia 120Brazil 126India 132

EU Members States by cohort

EU Partners

II. Negotiating instruments

From the mid 1800s to today, trade policy in goods has progressively improved negotiating instruments.

Basic questions on regulations. The quest of an efficient instrument for

negotiating on regulations Harmonization: relies on unfounded assumptions. Mutual recognition: unstable and disappointing. The promising instrument: “Mutual equivalence” and its

preliminary step of mutual evaluation


Basic questions

Two opposite views on the value of regulatory differences. They are: “bad” minimizing costs of foreign producers is the goal targetted. This

is a producer-driven view. “good” maximizing gains of domestic consumers becomes then the

preferred choice of regulators. This is a consumer-driven view which focuses on welfare generated by both price and variety competition. Cassis de Dijon ruling (1979) echoes the public perception of increased

varieties as the #1 gain from EC (1960s-70s).

Regulations in modern economies should take into account that modern economies are based on varieties two-way dynamic interactions between varieties of goods or services

and varieties of regulations. absolutely key role of trust.


Harmonization and mutual recognition

Harmonization: the preferred option of trade negotiators, but relies on four unfounded assumptions: There is always a norm unambiguously superior to the others (Daimler case) Harmonization decisions are based on unbiased negotiations. Harmonized norms will be implemented in a harmonized way at no cost. Harmonization is possible in sequential PTA negotiations. Regulatory convergence: a “weak” and unlikely form of harmonization.

Mutual recognition: an unstable and disappointing hybrid A “core” of harmonized provisions. Only the rest is recognized. Hence its progressive drift to harmonization as the core expands over

time.


Increaseinitial revised (%)

Simple pressure vessels 4374 7678 75.5Safety of toys 9744 24948 156.0Non-automatic weighting instr. 6815 7921 16.2Appliances burning gaseous fuels 6646 6658 0.2

Number words

Mutual equivalence: a better instrument

Mutual equivalence: for a given good/service, it recognizes fully the partner’s regulations and related certification procedures. requires a joint ‘mutual evaluation’ of their regulations before granting the status of mutual equivalence. the mutual evaluation process creates or deepens “trust” => the key problem of TISA. Induces/forces to combine the work of trade negotiators and regulators.


(positive list approach)

Goods/services Goods/services not

to be harmonized yet subjected to

or harmon/MR

to be subjected to (always possible

mutual recognition to subject them

(core harmon.) to harmo/MR)

The whole universe of goods or servicesMUTUAL RECOGNITION

(negative list approach)

Goods or

exclusions services recognized

exceptions as

(permanent or mutually

temporary) equivalent

The whole universe of goods or servicesMUTUAL EQUIVALENCE

Mutual equivalence in services

Inspiration from the 2006 EU Services Directive.

Article 14. Prohibited requirements: discriminatory requirements based directly or indirectly on nationality or location of the registered office: prohibition on having an establishment in more than one Member State, or equivalent; restrictions on the freedom of a provider to choose between a principal or a secondary establishment; conditions of reciprocity with the Member State in which the provider already has an establishment; authorization conditional to a case-by-case application of an economic test; direct or indirect involvement of competing operators, including within consultative bodies, in the granting of

authorisations, or equivalent; obligation to provide or participate in a financial guarantee or to take out insurance from a provider or body

established in their territory; obligation to have been pre-registered for a given period.

Article 15. Mutual evaluation of requirements to be based on: conditions for access: quantitative or territorial restrictions (population, minimum distance); specific legal form;

requirement on shareholding; limited to particular providers; a ban on having more than one establishment; minimum number of employees; fixed minimum/maximum tariffs to comply with; obligation to provide joint services.

verification of the fact that these requirements satisfy the following conditions: non-discrimination; necessity, except overriding reason related to the public interest; proportionality.

apply to services of general interest only insofar no obstruction to the particular tasks.


III. East Asia and the EU:Comparative advantages

Which could be the mega-PTAs the most ready to face the challenges of delivering “serious” integration?

Have negotiations among East Asia and the EU some comparative advantages in this respect?

If yes, how could East Asia and the EU use these advantages for improving the welfare of the whole world?


The mega-PTAs in presence, Dec. 2013

US/EU PTAs until 2008: politically driven, economically light: the exceptions of KOREU and KORUS.

The mega-PTAs in presence (TTIP being the last one to be launched).


TTIP EU-Japan APEC TPP RCEP CJK ECFA FrequencyJapan X X X X X 5China X X X X 4Korea X X X X 4United States X X X 3EU X X 2Taiwan X X 2Other countries 0 0 15 10 13 0 0 -Shares in world GDP, trade flows and FDI stocks

GDP 0.45 0.31 0.57 0.38 0.30 0.21 0.12 -Trade flows 0.45 0.39 0.41 0.27 0.26 0.16 - -FDI stocks 0.58 0.43 0.36 0.27 0.13 0.09 - -

Political will

Political will from top-politicians (Heads of State/Government) is absolutely needed for getting economically meaningful PTAs. Illustration of Korea-US and Korea-EU.

Relative size of the negotiating partners is a key factor in the attractiveness of a bilateral trade agreement: a larger negotiating partner ensures changes in the domestic relative prices—hence gains from trade—of its smaller partner. The converse is (much) more questionable.

Two remarks in the context of the current mega-PTA negotiations: Hard to achieve better results than those of Korea-US/Korea-EU if one does not improve the

negotiating instruments. East Asia and the EU have different sensitivities to size, but a window of opportunity for the

decades to come: China’s growing size will make it less interested in bilateral PTA (but more in WTO or

plurilateral ) in the long term future. The EU: the political will is at the EU Member States level, and the EUMS are realizing

their relatively small size (FRA+GER=Japan; FRA+GER+BRI=China today).


A typical case: Japan-EU and railway

The stumbling block for launching the negotiations. Misperceptions, ignorance, misinformation, “national interest” and best

instruments. (equipment firms vs. passenger rail companies ).


pk % pk %France 88064 21.9 JR East 126960 32.4Germany 82836 20.6 JR Central 51674 13.2Britain 55831 13.9 JR West 52011 13.3Italy 43349 10.8 JR-3 others 13592 3.5Spain 22044 5.5Netherlands 16808 4.2 West Japan [c] 29262 7.5Poland 17485 4.3 Tokyo 9 [d] 62293 15.9Sweden 11218 2.8Belgium 9849 2.4 Tokyo Metro 18520 4.7Austria 9713 2.419 Others 45158 11.2 158 Others 37800 9.6Total 402355 100.0 Total 392112 100.0

EU [a] Japan [b]

A bilateral or plurilateral approach?

Trust: easier among economies at the same level of development. hence easier in case of bilateral PTA than in case of plurilateral PTA.

East Asia-EU PTAs should thus continue on their current bilateral track it gives flexibility notion of “living agreement”: a basic framework combined

with a sequence of detailed but focused agreements as time goes on. Conditions for a well working bilateral track:

The EU should abandon its approach (adopted in the 1990s) of a gigantic, all-encompassing, once-for-all trade agreements. In fact, it should return to its roots: the Treaty of Rome is a perfect example of a living agreement.

The issue of making consistent PTAs negotiated over time with different partners should be addressed. However, it may not be such a problem in the regulatory case (norms and services) for two converging reasons: Regulations often very country specific. Mutual equivalence requires systematic reviews.


“Norm-setting” vs. “norm-attracting”

The dangerous notion of “norm-setting” (TTIP) risks for the very similar US-EU to act as a duopoly increasing regulatory barriers, hence magnifying trade diversion.

The much better notion of “norm attracting” which can be satisfied by the Mutual Equivalence approach (not by harmonization or mutual recognition).

This is because mutual equivalence stirs competition among the regulators of the PTA members: each PTA member is induced to find the “best” (less costly) regulation while still remaining equivalent to the regulation of the other partner.

By stirring competition among regulators, mutual equivalence induces them: To improve the welfare of the consumers of their respective jurisdictions. To induce third countries to adopt the regulations of the signatory which has

been able to design the most attractive regulations—meaning achieving at lower costs the regulatory objectives considered as equivalent by its mega-PTA partner(s).



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