Finding a Formula for Trade Success

By Steve Kopperud, Policy Directions, Inc.

I’ve been accused of being a cynic. I don’t understand why; perhaps it comes with having spent 25-plus years in Washington, DC, dealing with Congress and various presidential administrations. Let’s set the record straight: I love everyone, trust everyone, and believe everyone is working for the greater good in all things.

However, this round-headed midwestern view of my fellow citizens disintegrates when someone mentions the Transatlantic Trade and Investment Partnership (TTIP), known as the United States (US)-European Union (EU) bilateral trade negotiations. This endeavor strains credibility; it inspires cynicism and skepticism.

Make no mistake: I’m 110 percent in favor of truly liberalized and unfettered trade between the United States and EU. It’s a win-win, if it can be achieved. And it can be achieved, but it’s going to be a very heavy lift.

While in theory a tariff-free, hassle-free bilateral trade bridge between the United States and Europe makes perfect sense, there is no greater love-hate relationship as intense as that between the United States and EU when it comes to trade broadly. When you factor in the parochial challenges of ag and food trade, acceptance of the science and technologies that underpin one nation’s production over the other, how to provide an “income safety net” for farmers, or the simple notion of “safe” versus “unsafe,” it seems we’re not just occupying different continents, but different planets.

These trade talks represent a zero sum game; it’s all or nothing, with both the United States and EU agreeing a successful outcome is a full-blown bilateral trade package blessed by both governments and covering the four corners of both economies. Recognizing there will be various specific trade or product sectors to be dealt with because of their unique or existing regulation by either aide, broadly there will be no side deals or industry/product specific bilateral agreements. US agriculture has been emphatic to both its government and the folks on the other side of the pond; all ag/food
issues/goods/services are on the table or the deal is off.

However, experience watching US-EU sparring at the World Trade Organization (WTO), the draconian manner in which the EU sets its standards, definitions, and directives, the hit-or-miss actions of EU members when it comes to accepting government instructions, and the United States’ overall zeal to bring enlightenment to the known world begs the question: Is this pact achievable or are we wasting time, manpower, money, and electrons chasing something that cannot be caught?

US and European negotiators held their first session on July 8 and they’ll continue this effort for the next several months, at least. The US goals of the talks are: to further open EU markets; pump up reciprocal “rules-based” investment; eliminate all tariffs on trade; take on costly “behind-the-border” non-tariff barriers – including sanitary/phytosanitary hurdles – impeding the flow of goods, including ag products; reduce the cost of differences in regulations and standards by “promoting greater compatibility, transparency, and cooperation while maintaining our high levels of health, safety, and environmental protection”; create new rules on intellectual property; and promote small and medium-sized companies.

Here are the economic realities from which the negotiations to reach a US-EU bilateral trade agreement begin. The United States and EU represent the world’s largest and most complex economic relationship, representing fully one-third of the planet’s total trade in goods and services and nearly 50 percent of global economic output. In 2012, trade between the two blocs racked up $2.7 billion a day, supporting about 6.8 billion jobs on both sides of the Atlantic, according to the US Trade Representative’s (USTR) office.

Yet it’s a bit of a lopsided relationship. Nearly 21 percent of all US-produced goods and services are exported to the EU, but only 19 percent of everything the United States imports comes from the EU. The United States buys about 17 percent of the goods and services produced in the EU, and US goods represent about 11 percent of Europe’s total imports. Last year, this represented a $115.7 billion US trade deficit with the EU, up nearly 16 percent from 2011. Meanwhile, US exports to the EU in 2012 were worth $265 billion, down 1.2 percent from the year before, but imports from Europe by the United States were valued at $380.8 billion, up 3.4 percent from 2011, and a whopping 67 percent higher than in 2000.

For agriculture, the United States shipped products to the EU worth about $10 billion in 2012, making the EU this country’s fifth largest ag trade partner. The main products shipped from US shores to theirs include $1.7 billion in tree nuts, $1.5 billion in soybeans, $514.9 million in processed fruits and vegetables, $492 million in wine and beer, and “feeds and fodder” – mostly unprocessed minor grains and oilseeds – clocked in at $405.5 million. However, the United States bought $16.6 billion in ag products from EU countries, making it the United States’ second largest supplier – after Canada – of ag imports. Telling is the major products the United States imported, including $5 billion in wine, $1.9 billion in “essential oils,” $1.1 billion in snack foods, $934 million in processed fruits and vegetables, and “feeds and fodder” represented $832 million.

However, no matter the noble and economic goals of this endeavor, it’s fair to say trade battles between the two industrial giants over time have their genesis in the classic philosophical and cultural differences that spawn all conflicts, armed or verbal. Respective domestic rules and regulations reflect those philosophies and cultural biases as these are the primary ingredients of the homegrown politics that spawn the rules.

There are great opportunities in reasonable men and women sitting down together to fix what’s broken or to enhance a successful endeavor. However, the big problem is getting folks to agree that a system is broken in the first place, and then convincing everyone to mutually agree on the best way to fix it.

That being said, consider the following statement on technical barriers to trade, included in an EU TTIP position paper from June 2013: “…although compatibility is important, it must be recognised that the systems of the two regions are different, both to meet the specific needs of their economies and for historical reasons, and it is not possible for one side to impose its system on the other; nor can either side be expected to treat its partner more favourably than its own side sic.”

So where are the opportunities? Here’s a top-of-the-head list of positions that need reconciling.

Bovine spongiform encephalopathy (BSE) rules: In the 1990s, BSE was the scourge of global beef cattle markets, but science, risk-based regulations, testing, inspections, and changes in animal husbandry have all but eliminated the threat level the disease once had. While still a very real challenge, it’s time for the United States and EU to recognize that in this particular case, the World Organization for Animal Health, or OIE, is the arbiter, that BSE nation status is valid, that animal age is less the issue than feeding practices, and that free trade in legitimately processed animal by-products is a good thing.

Animal welfare: For decades, the EU unsuccessfully tried to insert into various rounds of negotiations on the General Agreements on Tariffs and Trade (GATT) the so-called “fourth hurdle” or “fourth protocol”; simply put, the right of a GATT nation to slap non-tariff trade barriers on imports based on some calculus of “consumer concerns.” Already it’s known that EU negotiators have tried to insert animal welfare – the bloc enjoys 28 separate union-wide regulations/directives related to its definition of enhanced welfare of food animals – into the discussions. One can only imagine the language to be offered, as in “commodities derived from animals that have been housed, transported, handled…in accordance with the relevant provisions of…,” and so on.

The EU acknowledged a couple of years ago it was time to rethink and rework its process for determining such regulations – using science as the foundation, not the philosophy/politics of animal rights – because several member nations either couldn’t afford to comply or simply ignored the welfare directives altogether. USTR has politely, but firmly, informed Europe that the US isn’t going there. Free trade will not be predicated in whole or in part on some certification that US meat products come from animals as “happy” as those living in the EU (i.e., raised and transported in systems the same as or equal to European systems).

Animal drugs: Europe operates on the precautionary principle, which I define as trying to regulate “what if.” This principle reveals an inherent distrust by the Europeans of man’s ability to use science and technology in ways that benefit the planet in general. Over the years, this has impacted meat and poultry exports from the United States based on animal drug use, processing system chemical use, etc. The best example is US beef cattle implanted with growth hormones. It can be argued until the cows come home about the illogic of castrating animals only to turn around and replace natural hormones with implants, but the bottom line is hormone use is not a legitimate food safety issue.

The seemingly unending number of WTO decisions – based on science and OIE recommendations – in favor of the United States notwithstanding, the Europeans continue to import US beef from implanted animals based on an archaic quota system. Again, science must trump the perceived “ick” factor. This goes for the pseudoscience and urban myth used to inspire European consumer fears over such things as chlorine used in poultry baths – unless the poultry is coming from EU-member the United Kingdom – and judiciously used antibiotics to prevent/treat disease, bovine somatotropin hormone, and ractopamine, just to name a few prominent issues.

Biotechnology: Perhaps no greater disparity exists between the two trading blocs than their respective acceptance or rejection of biotechnology. While over 90 percent of US corn and soybeans are the product of genetic modification (GM) – and by extension over 80 percent of US food products contain at least some form of GM ingredient – consumers here seem to be generally okay with that.

However, Europe is the world’s bastion of biotechnology animus, going so far as to influence developing nation use of the technology based on what it will and will not import from those nations. The EU has struggled over the years to ban outright the use of GM ingredients, requiring labeling for even the possible presence of GM ingredients – there’s that “precautionary” thing again – yet science overwhelmingly demonstrates there are no food safety issues. Some of the world’s preeminent hunger experts contend we cannot meet world food demand over the next few decades without judicious use of biotechnology, whether for disease, drought, or saline resistance, or in animals that grow faster, eat less feed, produce less waste, and are resistant or immune to animal disease. Interestingly, the EU has a practical side as seen in its waiver a couple years back of its ban on some GM feed grains and oilseeds when European farmers faced a feed-deficit continent.

These talks must succeed, but the devil will be in the details of a finished agreement. Most observers agree the formula for success of the TTIP negotiations is to rely on fact and not philosophy, science and not politics, and the reality of risk, not precautionary principles. Both governments are beholden to their constituents and this will mean less or no progress in some areas than in others. Both governments must be wary of overzealousness. And let’s not forget, both governments must ratify whatever the negotiators hammer together, and ultimately that ratification will turn on whether affected constituents feel good about it.

The United States cannot be blinded by dollar signs and/or political legacy; this is not a one-shot opportunity to redress its European trade deficit. From an ag perspective, the United States has enjoyed record exports for a number of years because what this country produces is what the world demands and no one can supply it in the amounts or quality available from the United States. Therefore, concessions need not be made that may mean increased exports in the short-term, but long-term pain or losses for US industry over time. The United States must also be keenly aware of its domestic legal authorities and be vigilant it does not overpromise what can’t legally be delivered.

The EU is hugely challenged in accepting the negotiation of this agreement. In some key areas, it will fundamentally need to shift its existing position and collective philosophy if trade with the United States is to be truly increased, open, and tariff free. However, it would be naïve of the United States – farmers, ranchers, consumers, or politicians – to expect that Europe will commit to a 180-degree turn on anything.

Returning to the EU position paper cited above, the key line is as follows: “…*it is not possible for one side to impose its system on the other*.” Nor should either side be so heavy handed as to even attempt such a strategy. However, politics is the art of the possible, as they say, and the United States and EU are now engaged in a heavy exercise of the “what ifs” should they fail.

October 2013 RENDER | back