[Leonid Bershidsky] US-EU trade deal gets hung up on politics

Germany’s vice chancellor, Sigmar Gabriel, says talks about a major trade deal between the European Union and the US have failed, though “nobody is really admitting it.” That statement should be taken with a grain of salt, but the Trans-Atlantic Trade and Investment Partnership appears to be doomed, at least until after elections in the US and major European countries.

Gabriel’s Economy Ministry is not involved in the TTIP negotiations. He also is the leader of Germany’s Social Democratic Party, the coalition partner of Angela Merkel’s Christian Democratic Union as well as its biggest political rival. Germany has a general election next year, and polls show a 10-11 point lead for the CDU over Gabriel’s SPD, so it’s in the vice chancellor’s interest to kick off the political season early and try to score points by taking popular positions. He is, for example, also calling for a cap on the number of refugees Germany will accept -- an unusual position for a leftist, but one the German public considers reasonable and Merkel rejects.

Denouncing the TTIP looks like a similar ploy: The trade deal’s negative rating in Germany reached 59 percent late last year. “As Europeans, we mustn’t, of course, submit to American demands,” the vice chancellor said in an interview with the German TV channel ZDF.

Originally, EU and US officials planned to conclude the deal by the end of 2014 -- “on one tank of gas,” as US Trade Representative Michael Froman said. The 14 weeklong rounds of talks held so far have not produced a deal on any of the 27 subject areas, as Gabriel has correctly pointed out. The EU’s public report on the latest stage of the talks reads as though they are still in a starting phase. The sides are still exchanging widely diverging proposals on the most contentious issues.

The three most sensitive areas concern trade in agricultural goods, the mutual opening of government procurement and the resolution of disputes between governments and investors.

On agriculture, European nations -- especially France, Italy and Greece -- insist on the recognition of their sole rights to sell certain products under their common names. Greece, for example, demands exclusive ownership of feta cheese. There also are politically important issues such as European environmentalists’ objections to the US’s “chlorine-washed chicken” and genetically modified corn.

On government procurement, Europeans have pointed out that they have a unified bidding system that would let US companies compete for orders at lower government levels but that the US cannot provide equal access to state- and city-level procurement.

Investor conflict resolution is another politically fraught issue. To anti-globalization activists both on the left and on the right, the deal attempts to make multinational corporations unaccountable to national governments. The EU is pushing for a greater role for governments in regulating foreign investors’ activities.

All these issues have been successfully resolved in the EU’s trade deal with Canada, CETA, which now needs approval by individual EU members and the European Parliament to take effect. For example, sub-federal government procurement has been opened with certain limitations, the European product origin demands have been met and Canada agreed to use Europe’s new dispute resolution mechanism -- the Investment Court System. Even so, the negotiations and the legal editing of the text have taken much longer than planned, and individual European countries can still scuttle the deal.

In the case of TTIP, US negotiators did the deal a disservice from the start by insisting on stricter secrecy than necessary. The public, acutely interested in a major agreement that would remove most of the remaining trade barriers with the US, has had to rely on partial leaks, and distrust has flourished. Anti-free trade activists have used this to their advantage. Besides, as the negotiations progressed, trust in the EU has somewhat eroded, and, as a recent study from the Austrian Institute of Economic Research showed, it is directly correlated with support for the TTIP.

In addition, the US has been less flexible than Canada, even though it probably stands to benefit at least as much as does the EU, which enjoys a big surplus from the existing relationship. According to a recent paper from the Leibniz Institute for Economic Research at the University of Munich, TTIP could increase Europe’s per capita gross domestic product by 0.4 percent, while the US should get a 0.5 percent boost.

Now the negotiations have dragged on for so long, and so many doubts about it have been raised in Europe, that neither the German government nor the French will want to make any serious compromises before next year’s elections. Nor will the US want to back down during the next round of talks, expected at some point in the fall. US Republican presidential candidate Donald Trump opposes the deal, and his rival Hillary Clinton is careful not to be seen backing any agreement that could hurt US jobs. President Barack Obama’s administration will be careful not to hurt Clinton in any way. Whether she will be more disposed toward concessions if she wins is unclear.

Both the US and EU have missed the moment when a mutually beneficial deal could be done quickly with some mutual concessions. As a result, the Obama administration‘s vision of a new global trade architecture appears to have failed, even if the US Congress ends up ratifying the Trans-Pacific Partnership -- that vision’s other pillar.

At least, if TTIP never does come together, the rest of the world will benefit: According to the Leibniz Institute paper, it stands to lose 0.2 percent of per capita GDP from the deal.

By Leonid Bershidsky

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru. -- Ed.

Bloomberg