The TTIP: the free trade and investment treaty between the EU and the United States, a necessary agreement

The Transatlantic Trade and Investment Partnership or TTIP that is being negotiated between the White House and the European Commission to unite two of the most important regions in the world (the EU and the US) forms part of the current proliferation of free trade agreements, both bilateral and multilateral. The US economy itself is holding conversations to join the Trans-Pacific Partnership (TPP) together with Japan and another 10 economies from the Asia Pacific region, while China has agreed treaties with Australia, Mexico and even the United States this November.

Although the creation of the TTIP has been planned for some time, it was not until June 2013, and after intense consultations, that the President of the United States, Barack Obama, together with the President of the European Council, Herman Van Rompuy, and the then President of the European Commission, José Manuel Durao Barroso, announced the start of the present round of negotiations. The objective: to create an integrated economic area without customs tariffs for manufacturing and agricultural products and with standardised regulations to encourage investment and trade in services. In short, the TTIP is attempting to become an agreement that significantly boosts the flows of trade and investment on both sides of the Atlantic. Should it come about, it would be the biggest agreement in history in terms of the economic weight of both parties: they represent close to 50% of the world's GDP, account for around 30% of international trade for manufacturers and 40% for services, and receive over 30% of the world's direct investment.

Both regions share a past that, combined with their copious dealings today, makes them natural partners. The US is the main trading partner of the EU and vice versa (see the first graph), and the US invests half its annual FDI in the EU while the EU's investment in the US accounts for two thirds of the FDI received by the United States.

Although their economic relationship is substantial, different barriers hinder greater transatlantic links, especially barriers beyond the customs border as customs tariffs between both regions are generally moderate (on average below 3%). These non-customs obstacles consist of factors such as quality and labelling standards, taxation and policies regarding competition and the environment, to name just a few. Their diversity and complexity means that it will be a much more complicated task to reduce or eliminate them than merely reducing custom tariffs. In addition to the difficult goal of achieving common regulatory standards is the thorny issue of protecting the rights of investors in the host state without affecting the sovereignty of the EU or US itself regarding regulations that affect their own citizens.1 It is precisely because of such problems that conversations are still ongoing today.

Regarding the economic consequences, and according to a recent study by CEPR, if barriers were extensively reduced (mainly non-customs), both regions would benefit from the agreement. Specifically, the EU would see its GDP increase by 119 billion euros (0.5% of GDP), the equivalent of 545 euros per European household, while the US would increase its GDP by 95 billion (0.4% of GDP) or 655 euros per household (see the second graph).2 Moreover, according to a study by the Fundación Bertelsmann Spain would be one of the countries to benefit the most from such an agreement being reached (together with the United Kingdom, Ireland and the Scandinavian countries), gaining access to a market that is particularly competitive for the kind of products it imports.3 At a time when Europe's recovery still appears to be lukewarm, such an agreement would represent an additional support.

1. The European Commission itself opened a public consultation to deal with this point (http://trade.ec.europa.eu/consultations/index.cfm?consul_id=179).

2. See Francois, Joseph, et al. (2013), «Reducing transatlantic barriers to trade and investment: An economic assessment», no. 20130401, Institute for International and Development Economics.

3. See «Who benefits from a transatlantic free trade agreement», Policy Brief 2013/04, Fundación Bertelsmann Stiftung, 2013.