A different kind of Transatlantic Trade and Investment Partnership

When the United States-European Union High Level Working Group on Jobs and Growth released its final report on 11 February 2013, the conclusion was that a comprehensive transatlantic agreement on market access, regulatory convergence, and global trade challenges offered the best prospects for generating new business and employment while at the same time strengthening ‘the extraordinarily close strategic partnership between the United States and Europe.’

The goal was to create the standards that would shape the world economy. That Transatlantic Trade and Investment Partnership (TTIP) did not come into being. The negotiations proved controversial on both sides of the Atlantic and so the deal was never completed. Transatlantic trade and investment continued, as did the strategic partnership between the United States and the European Union, but the efforts to promote comprehensive regulatory convergence and to write the rules that would shape the world economy stalled.

 

Today the goals are very different. The 31 May 2023 joint statement of the EU-US Trade and Technology Council (TTC) highlights the importance of using the strategic partnership between the United States and the European Union to address global challenges. Some of these challenges related to very specific geopolitical objectives, like supporting Ukraine in its defence against Russian aggression through the joint application and enforcement of sanctions – including secondary sanctions against third parties. Others relate to more general considerations like setting the standards for critical and emerging technologies, ensuring the security of supply for critical raw materials, using trade to promote effective climate action, pushing back against ‘non-market policies and practices and economic coercion’, creating the infrastructure of ‘secure and trustworthy connectivity around the world’, promoting human rights, and leading the fight ‘foreign information manipulation and interference (FIMI) and disinformation’.

 

Read also: The potential role of the US-EU Trade and Technology Council in a rapidly changing global economic order

 

Many of the same geostrategic considerations centred on China lay behind the TTIP agenda that emerged from the High-Level Working Group and the agenda announced by the TTC last May. In both cases, the central concern is how to integrate China into the world economy in a manner that is consistent the existing rules-based multilateral system for liberalized market interaction and that does not undermine either competitiveness or ‘global leadership’ on either side of the Atlantic. What has changed over time is the context. China has become stronger and more assertive. Russia has become more aggressive. Other regional powers like Brazil, India, South Africa, and Turkey have begun to exercise greater autonomy. Politics within the United States and Europe has become more polarized and tumultuous. And other factors like the pace of technological innovation and the imperative to address climate change have become more pressing.

This change in context explains why the new transatlantic trade and investment partnership is more focused, why it is more limited, and why it is more likely to be a success. That success will have important consequences for how the new transatlantic trade and investment partnership shapes the world economy. The original goal of TTIP was to set the standards that would unite the global economy. The new partnership between the United States and Europe – for justifiable reasons – may wind up writing the standards that divide the world economy into rival camps.

 

Focus on Security

This new focus on security comes across very clearly in European Commission President Ursula von der Leyen’s speeches on the need for a new European approach to China. Her speech on 30 March 2023 makes the shift explicit, explaining that in China ‘the security imperative now trumps the logic of free markets and open trade’, and setting a four point agenda for Europe’s response that presages many of those policies agreed in the TTC declaration. After visiting China, von der Leyen reasserted those arguments in speech on 18 April to the European Parliament. On both occasions, von der Leyen insisted that the goal is to ‘de-risk’ and not to ‘de-couple’, but the also set out a combination of instruments and practices that would insulate and strengthen the European economy.

U.S. National Security Advisor Jake Sullivan reiterated von der Leyen’s comments in a speech he gave at the Brookings institution on 27 April. Citing von der Leyen’s speech, Sullivan made it clear that the Biden Administration intends to pursue ‘de-risking and diversifying, not decoupling.’ Sullivan also pointed to the joint declaration von der Leyen issued with President Biden on 10 March – stressing that their shared goal is to ensure that European and American supply chains are ‘resilient, secure, and reflective of our fundamental values’.

 

Legitimacy and Limitations

Sullivan finished that previous sentence with the parenthesis: ‘including labor’. That parenthesis is important to understand the limits on transatlantic cooperation. As President Biden explained in a speech on America’s place in the world given shortly after his inauguration: ‘Every action we take in our conduct abroad, we must take with American working class families in mind.’ Such a foreign policy for the middle class can only work if it takes into account the institutions and attitudes that shape the welfare of Americans. Those institutions are very different from the welfare states found in Europe – just as the federal arrangement of the United States is very different from the mixed intergovernmental and supranational structure of the European Union.

Those differences between the United States and Europe make it very difficult – if not politically impossible – to craft foreign or economic policy instruments that will not be perceived differently on both sides of the Atlantic. The Inflation Reduction Act is a good illustration. The IRA is only possible in the United States because the way it structures incentives through the federal tax system and because of the way it ties subsidies to buy-local provisions.

 

Read also: The Inflation Reduction Act and the rebirth of US industrial policy

 

But such an arrangement is much harder to sell in the European Union either as an acceptable policy for a U.S. Administration to pursue or as a template for how the EU might achieve the same objectives. Moreover, finding some way to create a convergence of views or instruments across the Atlantic is not going to be successful either. This situation in some ways echoes the problems that the original TTIP faced and the controversies it created.

 

Solidarity and Success

But that difficulty finding convergence does not have to spell the end of transatlantic cooperation. What it means is that cooperation is more likely to be case-by-case. Here you can see the similarities between the old TTIP and the new transatlantic partnership in the specific areas of agreement sketched in the TTC joint statement. The commitment to a ‘risk-based approach to AI [artificial intelligence]’ in the development of common standards is one illustration. The development of common standards for manufacturing processes that involve three-dimensional (3-D) printing is another. So are the standards for ‘charging heavy-duty vehicles’. These may not sound like dramatic breakthroughs – and they may still be works in progress – but they establish a record for concrete collaboration that helps to build momentum.

More important, this work on standardization dovetails closely with the strategy to strengthen sanctions enforcement while at the same time making supply chains more resilient – two themes that feature prominently in the TTC joint statement. As Agathe Demarais explains in her recent book, Backfire, the design of many industrial sanctions hangs on their connection to intellectual property that can be traced through the production process. This is how the Biden Administration is able to have such a powerful influence on the trade in microchips, for example, or why the decision to avoid using Huawei 5-G technology has such sweeping implications for trade with China. This connection is important because sanctions play such a vital role in the new geopolitical context – binding the United States and the European Union together both in action and in industrial capacity.

 

Implications for the World Economy

If the joint EU-US strategy is a success, however, this could have significant implications for the structure of the world economy. This is the point Demarais makes at the end of her book. The creation of rival standards – reinforced by sanctions – in the short term, will have longer-term consequences in the design and compatibility of global value chains. Moreover, tit-for-tat responses by the Russians, the Chinese, or third countries to the American or European use of sanctions will tend to reinforce that process – as the differences in standards develop alongside the use of different critical raw materials for key components.

This process will not show up immediately in the data for trade and investment, but it will show up eventually and with increasing momentum as the different parts of the world economy drift further apart. De-risking and diversification are not decoupling, but the longer-term impact may be difficult to distinguish for either side of the Atlantic.