The Emerging Transpacific Partnership: Chance or Threat for the EU?

The views expressed in this paper are those of the authors and not necessarily those of the German government.

Preface

Following the Obama administration’s announcement of its pivot toward Asia, there has been a great deal of debate about what this strategic shift means for the transatlantic relationship. The Transpacific Partnership (TPP) project is symbolic of the U.S. administration’s endeavors toward Asia. But at the same time the final report of an EU-U.S. High Level Working Group—expected in early 2013—will probably recommend starting negotiations on a Comprehensive Trade Agreement (CTA). Will there be a shift to Pacific in US trade policies? Could the EU become marginalized?
I. Europe’s Woes

Economic Relationship

According to the perception of many U.S. observers, experts, and commentators, Europe is an economically declining and politically dysfunctional entity (euro crisis) of increasing strategic irrelevance. Europe’s current economic woes have only reinforced this view. While the transatlantic economy represents the most powerful economy in the world, it is followed very closely by China and a host of other Asian nations. What sets these Pacific economies apart from Europe is their potential. There is little doubt that these countries possess the tremendous growth potential that European economies lack. Furthermore, the transatlantic economy is in more of a maintenance stage, as there is little room for deepening an already close relationship. The transatlantic economy is already largely open and remaining issues are those that are hotly contested across the Atlantic, such as agriculture and consumer protection. These are unlikely to see successful resolution. Thus it makes sense for the U.S. to begin devoting a larger share of its resources to strengthening ties in markets that are of growing importance to the American economy.
Security Relationship

Despite the close military collaboration that exists through NATO, Europeans have been decreasing their role in global burden-sharing since the start of the 60 year old alliance, and show a preference for a far diminished role in the years to come. There is little political willingness in Europe, on a country-by-country basis, to provide adequate public funds to the military. Due in part to this shrinking military capacity, as well as geographic location, Europe’s influence on affairs beyond its borders will be sharply limited in the coming decades. Other allies are likely to become more relevant partners for the U.S. in the regions that present the greatest potential challenges. In Asia, this might mean Australia, India, South Korea, Japan, and Vietnam, especially if U.S.-China relations deteriorate. The willingness of these countries to engage more, especially in financial burden-sharing with the U.S., might increase considerably.
Shared Values

As far as shared values with Europe are concerned, these should not be overestimated. First, with the U.S. and EU broadly sharing a set of core common values, there is often great disagreement concerning how to best set forth our shared values in the world. Second, intimate ties across the Atlantic forged on common values were solidified at a time when American political and economic power was largely in the hands of Northeastern elites—many of whom traced their ancestry to Europe. Today the demographics are decidedly different, with an increasing percentage of Americans who trace their roots to Africa, Latin America, or Asia. As a result of this simple shift, American and European preferences will increasingly diverge.

II. Europe’s attraction

Economic Relationship:

Although relatively well known, the economic statistics are still quite staggering. The transatlantic economy is not only the largest in the world, but, based on its size, is the most important. As such, the EU is the United States’ largest trading partner, with $368 billion worth of European goods going to the United States and $268 billion of U.S. goods going to Europe as of 2011. Furthermore, EU investment in the U.S. is approximately eight times the amount of EU investment in India and China combined. In addition to trade flows, the EU and the United States have the most integrated economic relationship in the world, demonstrated most clearly by extremely high levels of mutual investment stocks. Furthermore, in a tightly integrated global economy, Europe’s economic fate—and possible recovery—impacts the U.S. economy dramatically. Last, the United States needs Europe, for only when taken together is their combined economic weight significant enough to put pressure on other competitors in global markets, in particular when it comes to the process of setting norms and standards.

Security Relationship:

First, the United States is both an Atlantic and a Pacific nation. Therefore, it is only logical that America would want to secure its interests in the region. The perceived pivot toward Asia does simply mean that the U.S. will be vigilant in the regions on both sides of its borders. Second, and perhaps most importantly, Europe’s 26 NATO members and Canada are the largest group of American allies in the world. Most have joined the U.S. in Afghanistan and Iraq.

Foreign Policy Relationship:

Europeans are by far closest to the United States in terms of their values. Furthermore, on issues of grand strategy and global governance, Europe is closer to the United States in its outlook and long term interests than anyone else in the world. As a result, Europeans have been the most willing to work with the United States on behalf of our substantial common strategic interests. This will continue to hold true as the U.S. and Europe struggle to address emerging transnational challenges, from climate change to terrorism, for these issues require deep international collaboration. This role cannot be replaced by other country groups.
III. U.S. Interests in the TPP

The key goals for negotiations as laid out in 2009 were:

1. Conclude a twenty-first century agreement that addresses new problems and enhances U.S. competitiveness in the Asia-Pacific region.
2. Build a regionally diverse agreement that includes both developed and developing economies.
3. Form a single agreement among countries that already have agreements among themselves, but with differing rules and standards.
4. Forge a living agreement that remains open and continues to further the vision of a twenty-first century agreement.

Along these lines, the U.S. administration apparently sees the following chapters as the most relevant that, if successfully negotiated, would serve to give the TPP the ‘modern’ status that they desire.

1. Sanitary and Phyto-Sanitary (SPS) measures: The U.S. is negotiating state-of-the-art WTO-plus commitments to make sure that that SPS measures are grounded in science and are subject to a transparent regulatory process.

2. Financial Services: As a result of often extreme divergence in terms of regulatory standards at the national level, financial services are always a difficult issue.  The United States is advocating the inclusion of it in the TPP, but also of a prudential carve-out to ensure that economies are able to take whatever measures they deem necessary in order to regulate their financial system.

3. Conservation: The United States has put forth a conservation proposal that seeks to address illegal trade in wildlife, illegal trade in logging, and illegal trade in fisheries.

In addition, the U.S. takes special interest in intellectual property, digital trade, small and medium enterprises (SMEs), and regulatory coherence.

In the original TPP partners the U.S. found an ideal combination of nations in the Asia-Pacific region who seem to straddle the line between carrying international economic weight and occasionally bending under the weight of American pressure. That is certainly not to say that economies like Singapore and Australia would necessarily bend to America’s will, but such concessions were not outside the realm of possibility.

Moreover, the new chapters on issues such as investment, regulatory coherence, and State owned Enterprises speak directly to the issues that the United States faces when trading in the Asia-Pacific region. The American impetus for joining TPP stemmed, at least in part, from the fact that by reaching an agreement with the original TPP partners on these key areas—which would be likely to be a version that coincides with American interests—before expanding TPP membership, they would essentially be setting trade in Asia-Pacific to the American standard. Considering that further expansion was an explicit goal of TPP from the outset, it holds tremendous potential to allow the U.S. to set standards for the region among partners that would be at least somewhat likely to follow the American lead. The logic here is fairly simple: one cannot overemphasize the importance of being the first to the finish line. Even if a TPP agreement is not perfect, as the negotiations continue and if the relative importance of Doha continues to wane, TPP negotiations will gain sufficient momentum within the region to push larger economies to join rather than risk the potential costs of being left out. If these chapters could be concluded before other members joined, they would be forced to accept the chapters as-is before negotiating on other issues. This is an experience seen before in the course of European integration.

A successful conclusion and effective start of a TPP along existing lines with the countries already on board would push up costs of non-membership for other countries significantly. This is particularly true in the case of Japan. The U.S. has extremely strong economic ties to Japan; however, the U.S. is continually plagued by the lack of transparency within the Japanese customs and regulatory systems. If the U.S. could have concluded these chapters before Japan joined negotiations they would have essentially forced the Japanese hand on issues which have been the subject of disagreement for decades. It does not come as a surprise then that Japan flirts with officially joining negotiations.

Meanwhile, the biggest prize in the region is China. If TPP is to reach a successful conclusion and regional economies continue to join the agreement and operate under these ‘higher’ standards, it would pose a serious threat to Chinese dominance in the region. Once the TPP has been concluded and regional economies continue to join, China could feel backed into a corner. That is to say that, following a successful negotiation of the TPP, China could already be forced to modify the way it does business with several of its neighbors. These added complications, when combined with the then very real opportunity costs, could be enough to push China into wanting to join the TPP. Joining TPP after the conclusion of formal negotiations would necessitate significant reform on the part of the Chinese in order to comply with the TPP provisions. These in turn would offer the possibility to facilitate greater rules-based market access for Western economies and businesses in China.
IV. U.S. Pivot to Asia? Conclusions and Assessments from a European Standpoint

Europe as Partner and Competitor

While the U.S. is trying to forge closer relations with Asia, there is little doubt that Europe has been and will continue to be America’s greatest partner when it comes to shared values and norms. Meanwhile, because the EU is considered a global strategic partner, it does not necessarily preclude the partners from competition in other areas. In fact, quite the opposite is true. In Asia, both the United States and the EU are trying to secure bilateral and regional trade agreements to support their own individual economies or geopolitical strategies, and each side aspires to lead in setting rules for global trade and investment, naturally to benefit their respective companies.
U.S. Strategy Following Well-Known Patterns

Current U.S. behavior in TPP speaks to the fact that the United States is continuing to behave as it always has, and does little to substantiate the claim that Europe is no longer an important strategic partner for the U.S. In fact, U.S. behavior in the TPP follows almost exactly along the lines of basic U.S. interests, with no surprise or fundamental strategic change. In those areas in which the United States and Europe have key strategic alliances, the U.S. is—at least in large part—holding true to well-known values and strategic interests in its dealings in Asia both in terms of security and economics. This could even come as an indirect advantage for the EU, should transatlantic talks start while TPP negotiations are ongoing. Along these lines, an attempt to open CTA negotiations with the EU during TPP negotiations is a way to continue to harmonize mutual relations, which could in turn allow Europe to reap some of the benefits of American involvement in TPP.
No Reason to Worry about TPP

The U.S. already has FTAs with five of the TPP partners. Before Japan, Canada, and Mexico expressed interest in joining TPP, the relative economic gains of the TPP were limited.

Despite limited economic gains, a small TPP (without Canada, Mexico, and Japan) could have made sense if seen from a defensive perspective of trade policy. Here, rising integration and standard-setting power within Asia, which has led to losses of market shares for U.S. companies, could be redirected to include U.S. interests—if TPP creates a critical mass.

But this scenario is now far from being likely. First, Canada and Mexico have joined. Second, a trade agreement will probably not be suitable to contain the economic expansion of a large country such as China, either economically or politically: the U.S. needs a cooperative China to confront the myriad problems facing the world economy and the security challenges posed by new and aspiring nuclear nations in Asia. And no one else in Asia wants to contain China either. Economic ties of all Asian TPP partners to China are very strong.

So expansion might be inevitable. At this point one could be skeptical that such an agreement could ever come to a successful conclusion, claiming that as the TPP expands it will fall victim to the same pitfalls of Doha. However, this demonstrated interest serves to show the relative importance of the agreement for the global trading system. If a successful agreement was reached, it is safe to assume that it would prompt similar agreements in other regions, or could ideally serve as a platform for re-launching Doha. So there is little reason for the EU to worry about TPP, be it a big or a small solution.
Reconciling Regional Agreements with the Multilateral Trade System

The EU would do well to choose its trading partners chiefly on the criteria that they have a large potential for growth and that they will allow the EU to further its interests. Much as the U.S. is doing in TPP, the EU ought to proactively advocate for its interests and its interpretation of the future of the global trading system throughout the world, but particularly in Asia. However, in doing so, the EU should resist the urge to turn swiftly to Asia and begin negotiating a wide range of agreements as if to directly compete with U.S. efforts. Considering the collective resources and overall strategy goals of the EU, such an approach seems both unsustainable and counterproductive. Additionally, the EU is well aware of the potential threat a range of multilateral agreements poses to the global trading system. Here the EU can play a pivotal role in attempting to safeguard this system and help the global economy to avoid the spaghetti bowl effect.

As, perhaps, the most vigilant protector of the multilateral trading system within the WTO, Europe should act in parallel to preserve this system over the next few years. Furthermore, it would also serve the EU well to remember that there is indeed truth to the fact that the U.S. relies heavily on EU support when it comes to global standard-setting and enforcement of these standards, which can serve as a powerful tool of negotiation in CTA.

As the U.S. begins to reallocate its resources in order to accommodate a strategy that recognizes the importance of both Asia and Europe, Europe is in the unique position of deciding upon how it would like to be relevant for the United States. That is to say, in which areas of their relationship the EU would like to remain heavily engaged with the United States.

For example, the EU should use CTA negotiations as a means of playing a greater role in international standard setting that is happening outside of Doha. The entrance of Canada and Mexico into negotiations is likely to prolong TPP negotiations significantly, despite official announcements to the contrary. As a result, this presents an opportunity for the EU to negotiate CTA alongside the TPP. As the U.S. is unlikely to want to entrap itself within seriously divergent regulations, developments within CTA could serve to both directly and indirectly impact TPP negotiations. This would present the EU with a crucial opportunity to shape not only the future trajectory of the transatlantic economy but also, to a greater extent, the future of the multilateral trading system.

Dr Berend Diekmann is Head of Division, External Economic Policy, Canada, Mexico, USA, G8/G20, OECD for the Ministry of Business and Technology. Elizabeth Livengood is currently a Fellow at the Robert Bosch Stiftung.