WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

by Robert Stehrer and Roman Stöllinger.
Photo: Container, kmichiels, CC-BY-NC-ND 2.0

Latest interventions by leading European politicians (e.g. from Germany, France and recently also from Austria) to stop the negotiations on the ‘Transatlantic Trade and Investment Partnership’ (TTIP) - the free trade agreement between the EU and the US under negotiation - reignited the discussion about the merits and dangers of comprehensive trade deals in general and TTIP and ‘Comprehensive Economic Trade Agreement’ (CETA) - the deal between the EU and Canada - in particular.

Whereas the future of the TTIP negotiations seems to be unclear – opinions range from a full stop, a re-start to a quick conclusion (even in a ‘light’ version) before the end of this year and a new US administration coming into power – the CETA is due to be signed.

An interesting question is therefore whether the arguments underpinning criticism of TTIP also apply to CETA, thus whether these two trade deals are the same or differ in important aspects.

This note focuses on three main topics that raised most suspicion by stakeholders and the general public and are therefore important for the success of the agreement: the harmonisation of standards, the Investor-state-dispute settlement (ISDS) and the attitudes of the involved trading partners in the negotiations.

Standards and regulations

Standards and regulations are important for any functioning economy, in particular in today’s high-tech economies. However, they may increase trading costs and sometimes be protectionist in nature. In trade-policy parlance these are part of what is called non-tariff measures (NTMs) and are important because they determine the properties a product must fulfil to be admitted to a market. They are at the heart of both agreements though are a number of similarities but also important differences:

Similarities

• Both TTIP and CETA are deep and comprehensive free trade agreements that go far beyond classical trade policy issues like tariffs and quotas. As such they comprise far-reaching rules concerning i.a. subsidies, public procurement, intellectual property rights and most importantly standards which are negotiated under the heading ‘non-tariff measures’.
• Since tariff rates are already low, NTMs are the key source for the potential benefits to be gained from a free trade agreement. The reason is that NTMs, whatever they are intended for (safety and consumer protection or protectionism), from the view of the exporters might constitute a cost (such as extra labelling, certifications, use (or not use) of potentially hazardous substances allowed in one country but not the other, etc.).

Differences

• Despite the general similarity of the two agreements there is a major difference in the domain of standards. While the exact rules are rather complex and detailed and also differ for different types of NTMs, the main difference is that in CETA the standards of the importer country will prevail, while TTIP strives for mutual recognition of standards. Irrespective of the comprehensive tariff reduction and elimination, generally CETA does not eliminate the differences in standards. Imports still need to comply with the rules and regulations that the product in question needs to satisfy on the respective import market (technical, sanitary or phytosanitary rules for the security and the protection of the consumer, the user or the environment, including notably food safety and labelling requirements). There are several procedural improvements (e.g. regarding ‘Technical Barriers to Trade’, TBTs) making it easier for an EU exporter to obtain the required certification for the Canadian market (and vice versa) that obviously lower trade costs but Canadians standards have to be obeyed (and vice versa). Hence, many of the sensitive issues debated in TTIP remain untouched by CETA.
• The situation regarding standards is entirely different in TTIP as the US insists on ‘regulatory cooperation’ which may mean harmonisation of standards or mutual recognition of standards. Mutual recognition of standards means that a product admitted to the US market may also be sold anywhere in the EU (and vice versa) or a body needs to decide on the applied standards. While harmonisation or mutual recognition of standards will entail the largest trade effects, it is therefore here where most risks, be it environmental or health-related) for consumers may arise.

Investor-to-state-dispute settlement

The Investor-State Dispute Settlement (ISDS) issue is probably the single most contested element in the two FTAs. In essence, the ISDS is an instrument for investment protection of multinational firms. If a foreign firm feels treated unfairly in the host country (e.g. if it is expropriated to mention an extreme case) it can bring a charge to a dispute resolution body. The instrument was developed in order to facilitate foreign direct investment in developing countries lacking a proper juridical system and exist between many states (with the exact nature of these treaties being different). Here is how the two agreements differ with regard to ISDS.

Similarities

• Both trade deals contain an ISDS clause. Both agreements envisage the establishment of a permanent tribunal and an appeal tribunal that will decide upon any complaint by either EU or Canadian/US companies. According to the negotiating parties’ statements attempts were made to avoid extensive interpretations of this clause. For example, in CETA there is an explicit statement that a mere change of regulation does not constitute a reason for arbitration and arbitration is only possible, if foreign investors are discriminated against. Still, the main concern with this clause is that it is a privilege granted to multinational companies allowing them to sue national governments, not only through the ordinary judicial system (like everybody else) but might establish an additional legal (and maybe still intransparent) process.

Differences

• There are basically no differences which are known so far. Since TTIP negotiations are ongoing it is unclear whether the US is willing to accept the recent EU approach (or even further improvements) in line with UN rules. Nonetheless, this issue might prove to be one of the major stumbling blocks in the TTIP negotiations, as there is strong resistance in several EU Member States.

Attitudes of trading partners

Last but not least it is important who is concluding a FTA. It is generally acknowledged that trade deals are easier to accomplish when the trading partners involved have similar attitudes and preferences. This includes a variety of issues including the negotiation style of the trading partners but also consumer preferences. 

Similarities

• CETA and TTIP are both FTAs between developed countries. Therefore some delicate issues such as labour and social standards might be less problematic than in comparison to developing countries.
• With regard to the scope of the agreement for (reciprocal) market opening both agreements – for the first time in an EU trade deal – work with so-called negative lists. This means that all economic areas, including sensitive ones such as cultural and media industries or services of public interest, may be covered by market opening rules unless they are explicitely. This negative-list approach makes it possible that industries that may emerge in the future will also be covered by the agreement. The importance of this negative-list approach becomes obvious when we recall that we are undergoing a digital revolution. However, it is further argued that the negative-list approach might lead to an unintended liberalisation of services as negotiators might have failed to demand exclusions that are sufficiently ‘watertight’.

Differences

• It is probably fair to say that the negotiation style of the US in trade deals seems to be rather peculiar. The general attitude from the US side is that the granting of access to the large US market is a huge concession for which it wants to be compensated with. Hence, typically demands on the US side are large while what they offer in terms of concessions for sensitive issues close to zero or non-existent. For example, the US will not accept that cultural goods should be exempted from the agreement which is a sensitive issue for the EU. Further, the US does not move at all in the area of public procurement where the pervasive “Buy-American clauses” are therefore supposed to remain. EU trade negotiators themselves, when summarising the results of the 14th TTIP negotiation that took place in July 2016, had to admit that the US offer on the table ‘brings very limited improvement in market access’. Obviously, such an attitude on the side of the negotiation partner only leaves two possible outcomes: either the EU gives in in many or all difficult matters (which probably will not lead to the most favourable outcome for Europeans) or the deal is simply not concluded. This type of behaviour was not observable in the CETA negotiations.
• While both agreements have the above mentioned negative-lists, their use by the US and Canada is very different. For example, in CETA, the whole cultural and media sectors are on the negative list so that they are not subject to the agreement. In TTIP, the request by the EU to exempt the culture and media sector was, so far, declined.

Given the plethora of aspects of the mega trade deals and lack of information on the status of negotiations in TTIP it is not an easy task to assess how similar or how different these are. In some respects, such as the ISDS, CETA really looks like a blueprint for TTIP. At the same time, the outcome with regard to the elimination or harmonisation of standards is very different, with CETA being less ambitious and probably entails less potential risks for European consumers (potentially also fewer benefits). This outcome is due to another difference which relates to the negotiation style of the parties involved. A tentative summary may be that the general architecture, scope and objectives of CETA and TTIP are very similar but that the compromises found in CETA in many important issues will make it a materially quite distinct agreement from TTIP – if it is ever to be concluded - as one can judge now.

So the question whether CETA and TTIP are very much alike is probably best answered in the way a vendor in a Thai street market would answer when asked whether the watch is a real Rolex: ‘Yes Sir, same-same but different’.