Canada: Ambitious US-EU Trade Agreement Seeks Not Just To Reduce Tariffs, But To Redefine Global Trade

Declaring the intent to shape the global standards of trade, investment, and regulation, the United States and the European Union have announced that they will launch negotiations on a US-EU Free Trade Agreement—formally called the Transatlantic Trade and Investment Partnership (Transatlantic Partnership).

Both in terms of the size of trade involved and the ambitious agenda, this agreement has the potential to be the most significant trade agreement negotiated since the creation of the World Trade Organization (WTO).

The duty-free access to such large markets will re-shape trade and investment flows. Moreover, the ambitions of the Transatlantic Partnership go well beyond tariff barriers—it seeks to harmonize regulatory standards, to foster favorable investment environments, and to develop global rules for issues such as labor rights, the environment, and competition.

Context

Annual US exports to the EU have reached $459 billion (€356 billion).¹ Annual EU exports to the US exceed €405 billion ($522 billion).² Together, the EU and the US invest nearly $4 trillion (nearly €3 trillion) in each other's economies.³ As both the White House and the European Commission noted in their announcements of the decision to launch negotiations, together the EU and the US account for nearly a third of world trade and half the global economy.

The goal of the Transatlantic Trade and Investment Partnership (the "Transatlantic Partnership") is to grow this further.

The decision to pursue negotiation and formation of the Transatlantic Partnership arises out of the annual summits held between US and EU leaders. At the 2011 Washington Summit, the parties established the United States-European Union High Level Working Group on Jobs and Growth. The Working Group's mission was to examine ways to further strengthen the "transatlantic economic partnership" between the US and EU:⁴  "to identify policies and measures to increase US-EU trade and investment to support mutually beneficial job creation, economic growth, and international competitiveness."⁵

The group considered the following options among others:

• Elimination or reduction of conventional barriers to trade in goods, such as tariffs and tariff related quotas
• Elimination, reduction or prevention of barriers to trade in goods, services and investment
• Enhanced compatibility of regulations and standards
• Elimination, reduction, or prevention of unnecessary "behind the border" non-tariff barriers to trade in all categories
• Enhanced cooperation for the development of rules and principles on global issues of common concern and also for the achievement of shared global economic goals⁶

The Working Group returned with a recommendation of not just a new trade agreement to reduce tariffs. Instead, the Working Group urged the achievement of "a comprehensive agreement that addresses a broad range of bilateral trade and investment issues, including regulatory issues, and contributes to the development of global rules."⁷

The US and EU already have relatively open economies with low tariffs and minimal non-tariff barriers. As a result, a standard free trade agreement that emphasizes tariff reduction, while beneficial, would have no dramatic impact. The Working Group recognized that to achieve a more significant impact on economic growth, the Transatlantic Partnership will need to not only shape the trade relationship between the EU and the US but also must actively seek to shape fair trade expectations globally. Regulations and standards impacting trade, labor and environmental concerns, the key financial understandings that shape investment environments—these are the areas where the parties hope to reach world-shaping change through the Transatlantic Partnership. It is clear at the outset that the US and EU are aiming, with this agreement, to have an influence well beyond their own borders.

While the goal of both sides is to have an agreement with a global impact, each side will start from its own systems. Provisions of these agreements do not arise in a vacuum. They originate from the domestic laws, procedures and customs of the negotiating parties.

The pattern is evident in previous trade agreements. The US-Korea Free Trade Agreement provides a number of examples. The chapter on pharmaceuticals echoes the rules for drug reimbursement in the United States. Likewise, any US lawyer would recognize the agreement's rules on transparency as largely derived from the Administrative Procedures Act of US federal law.

Therefore, understanding the laws, procedures, and customs of both sides—and understanding not only the regional subdivisions and complexities of the two trading partners, but also the realities on the ground of trading in the 28 countries⁸  involved—will be crucial to understanding and responding to proposed negotiating texts.

Upon the completion of the Transatlantic Partnership there will be winners and losers: individual businesses, various industries, and national economies will be shaped and will re-shape themselves as the Transatlantic Partnership drives change in global trade. Those business entities and industries that maximize their participation in the process of negotiating, drafting, and implementing the Transatlantic Partnership will likely win the most or at least lose the least. Moreover, the players clamoring at the table will include not just businesses and industry associations but labor unions and issue advocacy groups. Each will lobby for positions that benefit its own interests. Obviously, US and EU entities will have the most impact on the process. However, as discussed more below, this agreement will impact nearly every company that trades internationally. Therefore, all companies that trade in goods or services or invest globally should monitor the agreement and look for opportunities to impact the process.

The Transatlantic Partnership's Ambitious Agenda

Resolving Regulatory Differences Towards an Increasingly Global Regulatory Scheme

An increasing global uniformity of regulations impacting trade is an apparent goal of the Transatlantic Partnership and would by far be the most striking consequence of the Transatlantic Partnership as currently envisioned. While the Transatlantic Partnership, of course, could not impose regulatory standards on non-parties, as a practical matter the result will be the same.

An important aim of the agreement is to structure an agreement that could evolve over time to allow a progressive deepening of economic integration across the Atlantic Ocean. An important aspect to this economic integration is what happens to everyone else? For example, as the regulatory structures of the US and the EU grow closer and economic integration increases, where does that leave Canada, for example? Would Canada be pulled along—required to change its own regulatory schemes to remain competitive or risk being left behind?

Businesses may increasingly find that one shared set of standards are required for them to participate in the combined US-EU market—as noted above, a market that makes up nearly half of the global economy. Those businesses may well find it appropriate to then direct all of their operations to satisfying at least the US-EU market regulations, irrespective of the actual destination of their goods or services. Thus, the aspirations of the Transatlantic Partnership to work towards resolving regulatory differences between the US and the EU could become the de facto regulatory floor globally.

But some of the areas likely of greatest interest to the parties are also the areas of the most profound disagreement.

Based on past disputes including beef hormones and genetically modified organisms (GMOs), the area of sanitary and phytosanitary (SPS) regulation could be one of the most difficult to resolve. Previous FTAs entered into by the US and EU have emphasized the commitment to the WTO SPS rules. The US has sought to emphasize commitments to science-based risk assessment. The EU in contrast has emphasized animal welfare standards. Neither has allowed dispute settlement in the area. However, the recent letter from USTR to Congress officially informing Congress of the negotiations seems to allow the possibility of dispute settlement.

Given the significant differences between the United States and the EU, the issue of health care payments is likely to be another area of contention. Again, using the US-Korea agreement as an example, the Transatlantic Partnership could include rules on how drug and medical device manufacturers are able to qualify their products and obtain reimbursement and at what level. In the US these rules generally cover medical payments at the federal level which include Medicare and Medicaid. This leaves out much of the payments made by private insurers. In the EU a larger proportion of health care benefits are provided through state-funded payment mechanisms.

In other areas, such as protection of intellectual property rights, the parties appear to moving already to consensus.

The Working Group's goal for the Transatlantic Partnership regarding intellectual property rights was simply to set a high level of IP protection including exclusivity. The agreement will likely include rules for pharmaceuticals similar to those included in recent free trade agreements of both the US and the EU, including data exclusivity provisions. The US-Korea agreement specifies data exclusivity for five years after marketing approval and three years after submission of clinical information for pharmaceuticals and ten years for agricultural chemicals. The EU-Korea Free Trade Agreement specifies data exclusivity of five years for pharmaceuticals and ten years for plant protection products. Thus, similar provisions in the Transatlantic Partnership would be unsurprising.

A perennial problem of geographical indicators (GIs) will arise again in these negotiations. The EU will attempt to cover more products and the US likely to resist indicators that have come into common usage. In its letter to Congress the administration indicated its intent to defend the intellectual property rights of farmers among others "including their ability to compete in foreign markets." Again, it is difficult to see how this issue can be resolved on a bi-lateral basis.

Based on past free trade agreements, other probable candidates for regulatory treatment in the Transatlantic Partnership are likely e-commerce, telecommunications, financial services, and government procurement.

Linking Trade to Other Issues

Since before the end of the Uruguay Round to some extent there has been an emphasis in both the United States and the EU on various "trade and _____" agendas. This has included trade and labor, trade and the environment, and trade and competition. These two parties have not been able to advance this agenda significantly in the WTO. But the United States has included trade and labor and trade and environment provisions and rules on transparency in most of its recent agreements. Given the two parties' interest in linking discussion of trade with these issues, it is likely that the Transatlantic Partnership will treat the issues in some respect.

But finding agreement here may prove difficult. For example, while both the US and the EU member states have significant domestic environmental protections, the parties' goals for the environmental provisions may sharply diverge. US businesses are expected to push for a relaxation of the EU's Regulation, Evaluation and Authorization of Chemicals (REACH) structure, which bars a chemical from entry to the market until the European chemicals agency has received the necessary data from the manufacturer. The EU may seek to incorporate concerns about climate change into the environment chapter—a development that would likely risk opposition from Republicans in the United States.

The Working Group also hopes that the Transatlantic Partnership can address government procurement practices, "to improve access at all levels of government and on the basis of national treatment."⁹ Even with reduced resources, governments will continue to be major purchasers of goods and services and therefore government procurement will remain relevant. In order to achieve at least a "WTO plus" agreement the two sides will have to reduce the thresholds levels that trigger full application of free trade rules and supply greater access at the sub-federal level. For the United States, the biggest difficulty will be in overcoming objections to the weakening or elimination of its "Buy American" rules. These rules have strong supporters in the United States including the steel industry.

Leveling the Investment Environment

The Working Group's goal in the area of investment is "liberalization and protections based on the highest levels negotiated in FTAs to date."¹⁰ This means that the investment rules will meet or exceed the US-Korea rules that included extensive investment protections such as an investor state dispute settlement dispute mechanism.

It is hard to overestimate the crucial importance of investment environment concerns for businesses both in the EU and US Investment and trade regimes are interdependent and complementary. Foreign direct investments (FDI) allow companies to build their worldwide supply chains that are integral part of the modern international economy. Supported by innovations in transportation and information technologies, FDI have become an important source of productivity gains and a key for establishment of businesses and creation of jobs globally.

Bilateral Investment Treaties (BITs) remain the basis for sustainable and predictable regime for FDI protection and normally include the following provisions:

• market access 
• national treatment or most favored nation treatment;
• fair and equitable treatment 
• restrictions on expropriation or obligation to pay full and prompt compensation;
• guarantees on free transfer of funds which allow to repatriate profits, interests, fees and other earnings related to investments;
• limits on local content requirements

Furthermore, BITs secure the right of a company or government to seek for monetary remedy through 'state-to-state' or 'investor-to-state' dispute settlement if an agreement was breached. All these standards provide a level playing field in foreign markets.

Before December 2009 when the EU Lisbon Treaty took effect, EU member states had exclusive right to negotiate and implement BITs with third countries. The Lisbon Treaty amended the EU governing treaties and expanded EU common commercial policy to include foreign direct investments. The common European investment policy is now being introduced gradually. EU Regulation No 1219/2012 has established transitional arrangements relating to investment agreements between member states and third countries implying that over 1000 BITs concluded by member states will be soon replaced by EU-level agreements.

The Transatlantic Partnership is expected to have an investment chapter which would replace all bilateral BITs between the US and EU member states with a single BIT applicable to the US and all 27 member states of the EU. This BIT is expected to offer an up-to-date and most investor-friendly regime for foreign investments thus offering vast opportunities for businesses on the both sides of the Atlantic.

But it should be noted that labor unions in both the US and EU have expressed opposition to investor-state dispute settlement mechanisms.

Labor unions will also try to inject enhanced worker rights into the discussion, partially as a response to the "right-to-work" laws of some US states. Labor unions have found it more difficult to organize or to grow or maintain their membership in "right-to-work" states. Not coincidentally, such states have also attracted substantial investment in the past. As reported by Inside US Trade, the European Trade Union Confederation (ETUC) has already begun lobbying the EU to "take all available measures to ensure in particular that European-based [trans-national corporations] respect in their US operations industrial relations standards we expect them to apply at home." ETUC cited Airbus's decision to locate a plant in Alabama, which is considered a "right-to-work" state, as an example of the potential risk of movement of businesses toward jurisdictions perceived to be less friendly to labor unions.¹¹

And ETUC will likely find a key ally in the US labor movement, which has suffered some recent high-profile defeats, including in its bruising battles in Wisconsin over public sector employee collective bargaining rights. The US labor movement can be expected to welcome the opportunity to ally with the strong European labor tradition to push generally for greater protections for workers.

Market Access—Elimination of Tariffs and Tariff Rate Quotas and Prevention of Barriers to Trade

Despite the larger ambitions for the Transatlantic Partnership, tariff reduction will remain a major issue and very much at the core of the agreement. But the questions involved are more complicated than merely which tariffs to eliminate. Targeted tariffs will not simply be reduced to zero on the day that the agreement enters into force. There are a number of issues before a tariff goes to zero that will effect whether a company or industry is hurt or helped by this agreement.

The parties will start the negotiations with a list of products for which they want to maintain some protection. These will be the sensitive issues. The US, historically, has sought to protect to maintain trade protections for its footwear, textiles, and agricultural products. As the negotiations start, various domestic industries will lobby their governments to secure continuing trade protection.

But it is likely that, once an agreement is reached, all tariffs eventually will be reduced or eliminated. This does not mean, however, that the parties will be without means of protecting sensitive industries.

Once it becomes clear that all tariffs will likely be eliminated, industries seeking protection will try to extend the phase-in period for elimination of the tariffs. In other agreements, industries have been able to maintain protection for up to ten years. Thus, even though a given industry can know that it has lost its traditional tariff protection, the industry may seek to guarantee favorable terms for a protracted phase-in period to help better position itself for the imminent change in the trade landscape.

Another key concern will be the process for the determination of origin of a particular trade good. It is, of course, not uncommon for one good to be produced in one country from goods (components or materials, for example) produced in another. But not all goods will receive duty-free treatment. If that were the case, goods could be transshipped or simply assembled from parts elsewhere and receive duty-free treatment.

The general rule in other US free trade agreements is that (1) if a part is imported from a country not under the agreement; and (2) that part is transformed in the United States such that the good exported is in another tariff heading; then the good is considered originating in the United States and receives the duty-free benefit of having originated in the US But that is merely the general rule. In many cases there may be an exceptional rule, like a regional value rule or, for instance, in the case of textiles, origin is determined on the basis of where the yarn is produced (the yawn forward rule).

Businesses disregard origination rules at their peril. If businesses are not aware of the origination rules for their products, then they may find themselves assigned an unfavorable origination (subject to unnecessary tariffs) because the businesses failed to factor in the impact of the origination rules when choosing suppliers. In the alternative, businesses may find themselves newly subject unfair competition from "domestic" competitors who are, in reality, offering some minor assembly of low cost components made elsewhere because of a far too lenient origination rule.

Even beyond efforts to manipulate the origination rules, the plethora of free trade agreements creates very real and practical problems for manufacturers. With country of origin rules that are similar but slightly different from agreement to agreement, each production run may have to be slightly different depending on where the goods are to be shipped.

This is not a new problem but the supply chain issues are real and manufacturers should look for ways to harmonize the rules to reduce the complications. Conversely, an industry that wants to maintain protection can seek to obtain a unique country of origin rule that will make manufacturing for a given jurisdiction more difficult. Much mischief can be done in the country of origin rules.

Whether faced with the prospect of losing a historically favorable tariff or anticipating the opportunity to be free of trade barriers, industries have the opportunity to position themselves for success by involving themselves the process of negotiating the phase-in periods, origination, and tariff shift rules.

Such negotiations will not take place in a vacuum. The negotiators, on their own, will not decide, for example, that in the case of steel that a shift in tariff heading is sufficient but that a more stringent rule should be imposed for bearings. Both the US and the EU have a free trade agreement with Korea. The origination rules between the two agreements differ from product to product. The Transatlantic Partnership could end up with the most or least restrictive origination rules.

Even when faced with a wide spread tariff elimination, then, businesses, industries, and regional economies will find themselves better positioned for the future or not depending on their ability to manage their involvement in the process and guarantee effective communication to and representation in the negotiating framework.

The Special Challenges of Trade in Agriculture

In nearly every trade negotiation agriculture has proven to be one of the largest hurdles to overcome and this is likely to be true for the Transatlantic Partnership. Simply reducing tariffs and opening up the European market will prove difficult. As discussed above, resolving regulatory issues regarding GMOs, etc., will continue to be a problem.

The Working Group foresees a different approach for the Transatlantic Partnership than that used in the on-going Trans-Pacific Partnership (TPP) negotiations. The TPP negotiations are attempting to cover all significant barriers in one agreement. In contrast, the Working Group model is a negotiated agreement that eliminates tariff barriers but that puts in place a mechanism to deal with regulatory issues. US agricultural interests have already objected to this approach and question whether the EU is serious about resolving sanitary and photosanitary (SPS) issues. However, failure to address SPS issues related to agricultural will make passage of an agreement very difficult.

The most difficult issue—and one that is not likely to be resolved in a comprehensive fashion—is that of subsidies to the farm sector. It is difficult to see how subsidies can be reduced or eliminated on a bi-lateral basis. The US and EU are the largest providers of agriculture subsidies in the world and therefore it is possible that some reduction may be possible on a by-lateral basis. Moreover, given budget restraints governments may view this as an opportunity to reduce subsidies. However, large scale reductions or elimination of subsidies are unlikely outside of the WTO context.

While agriculture has been a difficult area in each trade negotiation, most have been completed and resulted in reduced tariffs, subsidies and increased market access (or competition). This negotiation will likely be the same. The only issue is what level of change will occur. For example, how quickly will tariffs be reduced for individual products. Will tariff rate quotas be allowed for some products and how what kind of agreement will the two parties come to on GMOs and hormones.

Not Just Trade in Goods, but Recognizing the Substantial Trade in Services

As mature economies, the service sector is substantial in both the US and EU and in terms of proportion of the economy the Transatlantic Partnership could have the largest impact on the services sector. The services sector includes financial and legal services along with telecommunications, express delivery and audio visual services. In order to increase market access opportunities in the services sector, the negotiators will have to find ways to harmonize regulatory and licensing regimes.

In the area of financial services, interest in the United States will likely attempt to harmonize the level of financial oversight to the level required in the United States. However, the administration lacks consensus on whether to include financial services.

Elimination of "Behind the Border" Non-Tariff Barriers to Trade

These could include any number of actions including labeling requirements, buy local provisions that are required at the local level, distributorship requirements, discriminatory taxes and many others. From a business perspective the important point is that the negotiators know what post-importation discrimination the exporter has faced. The most prevalent such barriers are likely to occur at the state and local level in the United States and in the various member states in the EU.

Guidance

The negotiators have and will continue to reach out to stakeholders to solicit views on the negotiations. Moreover, to the extent that a national consensus can be reached on an issue, that will largely set the negotiation stance for that issue.

But it would be foolish for those with something at stake in these negotiations to wait for the US Trade Representative or the EU commission to solicit their opinions. There are steps that companies, industries, interests, and regions can take to obtain the greatest benefit from a future agreement.

1. Form coalitions—the bigger the group the more clout it will have. Moreover, to the extent that positions coincide, the coalitions should be US-EU coalitions, allowing advocacy on both sides of the Atlantic. And consider creativity in coalition-building. Traditional allies may not necessarily be the best coalition partners, and traditional antagonists may here have strikingly similar interests in the Transatlantic Partnership negotiations. The best counsel may be to look to someone who has both industry knowledge and access on both sides of the Atlantic who can help you develop a coalition strategy and then help build it.
2. Understand the position of the other side—a comprehensive understanding of the legal and regulatory system will be necessary to understand the negotiating positions. Negotiators on both side will attempt to start with the systems that they know and this will be incorporated into negotiating language. This means understanding the parties' negotiating positions may well require understanding Indiana's history with time zones and daylight savings time as well as the historic geographic bounds of the Bordeaux and Champagne regions of France.
3. Don't just lobby, participate. Understand that, given the magnitude of the Transatlantic Partnership, elected and appointed officials will have no end of lobbyists and advocates jockeying for a place in their calendar. Seek out partners who can help build an effective strategy. Moreover, seek out partners with history on both sides of the Atlantic to help ensure they have the relationships to have your message heard.
4. Begin planning for the day after the Transatlantic Partnership is complete. In addition to seeking to shape the agreement, prepare to make the most of the space created by the changes the Transatlantic Partnership will create. This means partnering with someone who can both keep tabs on the negotiations as they move forward and has the expertise to counsel you as to the ramifications for your business and the opportunities presented.

The leaders of the United States and the European Union have set out an ambitious agenda. There will be substantial difficulties in the area of health and safety standards, public procurement and agriculture. Moreover, there will be more localized sensitivities such as audiovisual restrictions in France.

Given the political issues that are involved both within the two areas as well as between them it is difficult to predict the likelihood of success. The two sides have set the end of 2014 as the deadline for completion. However, there are a number of contentious issues including agriculture, government procurement and intellectual property rights that will be difficult to resolve. However, if successful, the agreement will have substantial implications for global trade.

Footnotes

1. Office of the US Trade Representative, "Fact Sheet: United States to Negotiate Transatlantic Trade and Investment Partnership with the European Union" February 13, 2013.

2. European Commission, Directorate General for Trade, Fact Sheet on Statistics of United States Trade.

3. Office of the US Trade Representative, "Fact Sheet: United States to Negotiate Transatlantic Trade and Investment Partnership with the European Union" February 13, 2013.

4. High Level Working Group on Jobs and Growth, Final Report, 1 (February 11, 2013) [hereinafter "Final Report"].

5. The White House, Office of the Press Secretary, "Fact Sheet: High Level Working Group on Jobs and Growth" November 28, 2011; European Commission, "EU-US Summit: Fact sheet on High-Level Working Group on Jobs and Growth" November 28, 2011

6. Final Report, at 1.

7. Id.

8. In entering into the Transatlantic Partnership with the EU, the US would be effectively be entering into a trade agreement with the EU's 27 current member states: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. In addition, Croatia's accession to EU membership is expected to be complete in 2013. For that matter, Iceland, Montenegro, Serbia, the former Yugoslav Republic of Macedonia, and Turkey are all official candidates for EU membership, and other countries' candidacies are on the horizon.

9. Final Report, at 3.

10. Id.

11. European Labor Confederation Aiming for Joint Position with AFL-CIO," Inside US Trade, March 5, 2013.

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