The failure of the controversial transatlantic TTIP negotiations in late 2016 is a good opportunity to reflect on what went wrong and can be done with trade agreements involving regulatory talks in future. Professor Bernard Hoekman, Director and Professor in Global Economics at the Robert Schuman Centre for Advanced Studies, European University Institute in Florence, talks to Hermine Donceel about the dos and don’ts.
What are the main lessons you draw from the TTIP negotiations?
In the context of the TTIP discussions, it has struck me that the purported objective was to negotiate on regulatory regimes. If the aim is reducing the costs for firms that are associated with differences in regulatory regimes and standards, it will not be reached by means of old-style trade negotiation modalities, sitting around the table and say “I will change my regulation a little bit in this area if you change yours a little bit in that area”. Agreeing on rules of the game in a closed-door discussion, the way EU and US negotiators are used to operating, won’t work. Apart from being totally inappropriate this approach would inevitably generate increased opposition.
Trade negotiators should focus on trying to reduce the costs associated with regulatory differences, but it needs to be a completely open process. Regulatory cooperation can only come into being if it is transparent as to what the differences in regulatory regimes are and as to what legitimate goals should be achieved. It should be a deliberative process, meant to encourage the regulators to actually work together towards achieving objectives set by domestic parliaments.
This process should be participatory. If we are going to be talking about regulatory cooperation, we need to do that in a room with microphones. It has both to allow international firms to provide information on the impacts of differences in regulatory standards on their supply chains, and to ensure that the process will take the public interest into account by being open and transparent.
An interesting illustration of what regulatory cooperation could bring is the Volkswagen case. It has demonstrated that in terms of environmental pollution US standards are tougher than in the EU, and that the US can be more serious about enforcement than the Union is. This example shows that much can be learnt from contrasting approaches in an area where in principle both regulatory entities had the same objectives.
Now, it is probable that in some areas regulatory cooperation may simply not work because objectives and approaches differ too much. But here again one needs an open process of deliberation, be it only to identify and acknowledge that the gap is too wide to try and step over. In the meantime a plethora of other areas where we have very similar goals offers a wide scope for efficient and quality regulatory cooperation.
Was it a good idea to aim for a ‘living agreement’?
The purpose behind the idea of establishing a regulatory cooperation body within TTIP was to allow for a permanent EU-US regulatory dialogue to promote consistent cooperation after the pact was concluded. This was apparently taken off the table, which is unfortunate.
Detractors of this mechanism should understand that if regulators actually work together it is not necessarily because they want to, but because they have to. Because most goods are produced in international supply chains national regulators cannot control the production process for a particular product. It is made from components that come from all over the globe. Regulatory cooperation enables to cooperate on those regulations that have a significant impact on trade and the elaboration of mutually acceptable standards. This is already happening in many areas. A regulatory cooperation body would help facilitate dialogue and exchange of information.
It could also help ensure that regulators are allocated the resources they need to cooperate. Successful regulatory cooperation will not happen without sufficient means. Sharing data on risks associated with products and production processes within supply chains and how to reduce risks is a real challenge for regulators. How best to cooperate is something that needs to be learned and that will differ across types of industries. This notion is captured by the concept of a ‘living’ trade agreement.
But haven’t supply chains reached their expansion peak?
Technology has driven the huge fragmentation of production that is the core feature of supply chains. The economic rationale for this extensive specialisation may fall in some sectors, and it may increasingly make sense to produce within shorter supply chains or locally, simply because new technology makes it more efficient to use robots or 3D printers. But the impact of such changes will be very much industry- or product-specific.
On the other hand there are whole regions, notably Africa but also large countries like Brazil and India where there is great potential for growth in value chain production. The speed and extent to which this potential is realised is a function of how fast these regions will grow over time and how effective they will be in pursuing regional integration and reducing trade costs.
In addition, as a result of ‘servicification’ and digitisation, there is great scope for supply chain-type of activities in services. But the potential for services supply chains is less studied than those for goods, their status is uncertain and so is the direction they are taking as they have particularly complex dynamics.
What should the EU do to bring its trade policy back on track?
In my view, the first thing the EU should do now is to reflect on the lessons of , TTIP, CETA and of the deep and comprehensive free trade agreements (DCFTA) with the European neighbourhood countries. It should analyse why none of these have really been successful.
Europeans should also explore introducing some of the ideas on regulatory cooperation at the sectoral level in the WTO. This could include dialogue on regulation of data flows and data privacy, something that both consumers and the business community are worried about and where international regulatory cooperation can provide more clarity and help assure that regulatory goals are met. The WTO allows to hold plurilateral talks: it just requires someone to step forward and launch the ideas, and I think the EU has the incentive and the capacity to do so.
The CETA episode in the EU has illustrated deep problems of perception and communication issues around the functioning of trade negotiations. I think there is now a huge lack of trust in trade talks, which urgently needs to be dealt with and overcome. I am not talking about the substance of issues, but about re-thinking our negotiation mechanisms, reporting systems, demystifying the role of the Commission vis-à-vis member states, increasing the popular understanding of the role that the European Parliament plays in EU trade policy process. Without that trust, nothing is going to happen.
An important element of this is to address concerns on the purpose and implications of regulatory cooperation. Assuming we do not revert back to old-fashioned protectionist policies as a result of trade wars triggered by the imposition of illegal trade barriers of the type President Trump has repeatedly suggested he favours, the agenda for international cooperation is mostly regulatory in nature. If EU representatives are able to clarify and convince electorates that cooperation is needed to achieve better the legitimate regulatory objectives that have been collectively set by legislatures we will be in a much better place.
Bernard Hoekman is Director and Professor in Global Economics at the Robert Schuman Centre for Advanced Studies, European University Institute in Florence.