Can thousands of regulations be harmonized?
Last summer, the European Union (EU) and the US took the first steps to establish a partnership between the two markets that together account for almost half the world’s economy. Teams of negotiators met in Washington to talk about how best to take the Transatlantic Trade and Investment Partnership (TTIP) forward, and even though the second round of negotiations was canceled due to pressing political issues, both sides expressed a firm commitment to the TTIP process.
The possibility of TTIP is important as the partnership promises both sides significant economic benefits. According to US Trade Representative (USTR) Michael Froman, trade and investment between the US and the EU currently far exceeds any other bilateral relationship, with $2.6 billion worth of goods flowing between the two sides each day. Many Americans do not realize that more than 13 million people in two countries owe their jobs to the transatlantic economic relationship.
At the time when the American and European governments are working to stimulate economic growth and job creation, regulatory inefficiencies can hardly boost their efforts. Some products have to go through two separate testing procedures even where the requirements on both sides of the Atlantic are the same, leading to vast inefficiencies in trade, and making it particularly difficult for small and medium sized enterprises to expand their markets.
The TTIP would address two areas: tariff-related trade barriers such as customs duties; and non-tariff-related trade barriers such as licensing regulations, compulsory certifications and standards. In the global economy, harmonization of standards becomes, in a way, a precondition for the free trade with a mutual recognition and eventual alignment of standards defining the traffic of goods. Greater harmonization would allow manufacturers to save costs by reducing the number of certificates and tests their products need to pass.
Should the agreement become reality, manufacturers would benefit from scalable effects. For them, the need for only one test instead of many means faster time to market and lower testing costs. These benefits will help the economy as a whole as new markets open up and various industries grow. This would also lead to growth in the testing and certification business, as there would be increased mid- to long-term development in the transatlantic economic zone. Consumers would also benefit as product prices go down and increased competition enhances product quality and selection. This article will discuss the potential of TTIP to change for the better not only the US and EU economies but also economies of their trade partners.
The study by the Centre for Economic Policy Research (CEPR), an independent, non-profit research organization based in London, estimates that an ambitious and comprehensive TTIP could bring significant economic gains for the US ($129 billion) and the EU (about $163 billion) once the economies implement fully the agreement. These economic gains would translate into a 0.5% and 0.4% increase in the EU and US GDP respectively by 2027 as compared to their levels without TTIP. The gains will be increasing every year from the moment the agreement comes into force until it reaches its full level by 2027.
While the CEPR study is based on an advanced computable general equilibrium model to simulate the impact of TTIP and is a standard tool of trade economists, keep in mind that these are ballpark estimations, not precise predictions.
The CEPR study assumes that the tariff barriers be reduced to zero, non-tariff barriers in goods and services be reduced by 25% and public procurement barriers reduced by 50%. The assumptions are based on the commitment expressed by both parties: Office of the USTR announced that the TTIP would eliminate all tariffs on trade as well as tackle costly “behind the border” non-tariff barriers that impede the flow of goods. Reducing non-tariff barriers is a crucial driver of the economic gains. According to the CERT analysis, as much as 80% of the total potential gains could come from reducing costs imposed by duplicative bureaucracy.
Companies would benefit from more variety and lower prices for the parts, components and services that they use in their business. As a result, they would be better able to compete on their home markets and around the world.
Increases in GDP translate into a permanent increase in wealth for more than 800 million people on both sides of the Atlantic. The CEPR study found that the TIPP would have a positive impact both on skilled and less skilled workers’ wages, raising each by about the same amount, roughly 0.5%. The assumption is that the industries growing thanks to the TTIP would be able to offer higher wages to attract employees.
As with any trade deal, both imports and exports would increase, giving consumers more choices at lower prices. It is estimated that the average American family of four will see an increase in disposable income of $865 annually, with its European counterpart adding about $720. This figure accounts for both an increase in wages and price reductions.
The Cascading Effect of TTIP
The TTIP benefits are not limited to the US and Europe but extend to their trading partners around the world by the estimated $137 (€99) billion. Predicted economic growth of the two powerful economies, coupled with an increase in the household income, will allow consumers and businesses to purchase more products, made both domestically and abroad.
Any joint regulatory approaches or streamlined certifications between the EU and the US will reduce costs for manufacturers trading in these markets. Eliminating or reducing regulatory barriers will allow for improved market access for manufacturers from other countries. Many companies around the world that export to both Europe and the States currently have to comply with two sets of standards and regulations, often requiring separate production processes. Two specific examples are the IT and automotive industries, which are highly bound to regional standards and must go, at times, through duplicate tests for each region.
Moreover, one needs to keep in mind the highly interdependent nature of the world economy, with complex global value chains. As American or European companies produce more products, the demand for components and services from their suppliers in other countries will also increase.
World-class safety and quality standards are indispensable for successful economies. Competent and rigorous certification builds confidence in products and brands in developed and emerging markets. The economic powers of the US and EU have a strong bearing on the emerging international standards. Their combined influence in bodies such as the American National Standards Institute and Deutsches Institut für Normung (DIN), or the German Institute for Standardization, affords them the potential to create a universally acceptable set of regulatory practices that could be adopted internationally. Manufacturers and suppliers from outside the TTIP economic zone will have an incentive to move towards product standards agreed between the Europe and America. This would improve market access between the EU, US and their third-party partners, and may even reduce trade barriers among those countries themselves.
While sophistication and expertise of the two developed regions positions them to lead in the standard setting area, they must not take this position for granted. With so much manufacturing focused in China, and the emergence of premium brands such as Huawei and Lenovo, the US and EU risk gradually losing influence and control over the standard creation for products they are importing.
The Virtue of Competition
Lowered tariffs and easier market access bring about an increase in imports, which naturally escalates competition. The benefit of increased competition is that companies have to work harder (or smarter) to stay efficient, enhancing productivity of both economies and fostering a culture of innovation. Of course, in a more competitive environment, the least efficient companies are likely struggle to stay afloat.
One Standard, One Test?
Despite all TTIP’s professed benefits, the countries will need to overcome major hurdles to enjoy them. Apart from political uncertainties, both markets, embedded in their respective cultures, have developed their own licensing regulations, compulsory certifications and standards over decades. They have differing safety philosophies for product testing or certification that cannot simply be reduced to a common denominator.
What are the negotiators to do when it comes to discussing all the cases with differing norms for the same products? Which safety standards should they adopt within the agreement – the higher, or the lower ones?
The Solution Begins with Trust
Ideally, a harmonized standard would include all worthy safety practices from both members to create a single comprehensive approach to ensure consumer safety. However, this does not mean that a single standard needs to be introduced. Nor is it absolutely essential to harmonize all standards for evaluating the safety of products.
Legislators, standard writing organizations and testing and certification companies across the Atlantic need to cooperate when it comes to testing and compliance methodology. A practical first step in the right direction is to have a Mutual Recognition Agreement. Mutual recognition only works well if both sides have confidence in the competence of the other certification body and acknowledge their know-how.
The second step is to establish Notified Bodies and allow them to perform conformity assessments and certification. It is also important to create uniform standards and apply comparable procedures when it comes to accrediting laboratories and appointing or licensing certification bodies to prevent the distortion of competition despite the free trade area.
Thus, the two markets will need mutual confidence – whether it concerns aligning existing regulations and allowing for mutual recognition of certification or cooperation on drawing up new national or international standards, if the latter should be necessary. Achievable and practical goals could be set as follows:
- Common rules, standards, and test procedures with the aim to establish uniformly high levels of quality and safety;
- Effective and efficient regulation of safety and testing standards on both sides of the Atlantic;
- Unburdening of the authorities by an independent conformity assessment system; and
- Strengthening the competences and expertise of standard setters.
Many independent testing and certification bodies are working now to make sure that future negotiations succeed in making the world a safer place. They will play a major role in establishing the success of what will surely be a very complicated and, at times, frustrating process of aligning more closely the different approaches to product safety standards and testing in the two markets. There is a strong support from the industry for a functioning and flourishing single market across the Atlantic, based on mutual trust and confidence.
As Chief International Officer of TÜV Rheinland AG, Stephan Schmitt has overseen business in the USA, Canada and Mexico since October 2011. An electrical engineering graduate of Trier University of Applied Sciences in Germany, he joined TÜV Rheinland in 1986 as a technical expert in Japan and has held various positions with the company ever since, including as CEO of TÜV Rheinland of North America.