regulatory coherence

The TTIP Paper Conundrum: A4 versus US Letter

This week American and European trade negotiators are meeting in Brussels for the 8th round of Trans-Atlantic Trade and Investment Partnership (TTIP) trade talks. 

TTIP is, perhaps, the most difficult trade negotiation ever. 

This statement will likely be met with complaints by current and former trade officials who will argue that other agreements were much more challenging.  The early global talks in the General Agreement on Tariffs and Trade (GATT) had to operate in a world with no rules at all governing international trade.  Each provision—every sentence and even every word—required careful thought since it was unclear what sort of implications might follow from different commitments. 

The GATT’s successor organization, the World Trade Organization (WTO), has been unable to bridge differences across what are now 160 different members.

The North American Free Trade Agreement (NAFTA) talks were no picnic, as the types of integration imagined in the deal were deeper and broader than most commitments to that point.  European Union (EU) market integration negotiations have also proven difficult since many of the regulations struck deep into domestic territories.

Even the parallel Trans-Pacific Partnership (TPP) negotiations with 12 parties across the Pacific have taken more than 20 rounds across nearly 5 years with conclusion still elusive.

In spite of the difficulties faced by officials in these other megaregional deals, TTIP is still more challenging.  Why?  Largely because the agreement on the table now has more win-lose, binary options than previous trade deals.

Since the EU and the United States have broadly similar approaches to trade and market liberalization, much of the normal “meat and potatoes” of a trade agreement are not so critical for these negotiations.  Tariffs (with some exceptions, especially in agriculture) are relatively low.  Services and investment (again with some exceptions) flow relatively freely.  Even the sorts of non-tariff barriers that confound trade in many places are relatively modest.

The real benefits from TTIP come from harmonized or reduced regulations and closer alignment of standards.  The economic payoff from getting companies to use only one set of standards or to comply with one broad set of regulations would be incredibly significant.  A producer could create one product to be bought and sold in all 28 individual member markets of the European Union and the United States.

Yet the costs of harmonization in TTIP are also potentially enormous.  As the most basic example of this problem, consider the paper conundrum.  When the deal is done, what sort of paper will it be printed on?  A4 or US Letter size?  The former is the European standard for paper and the latter is the American default.

A4 paper is 210 x 297 millimeters or 8.3 x 11.7 inches in size.  US Letter is 216 x 279 mm or 8.5 x 11 inches.  Even the approaches to measurement—metric versus imperial—are different.

To really unlock the economic benefits of TTIP, not having to produce, stock and carry two sets of paper sizes would be very important.  The harmonization of standards around paper size would allow firms to more easily shift from producing for the American market to the European market and vice versa. 

But note that this simple decision—to agree on the paper used for the agreement—also brings significant other changes to the economy.  Printers, printer software and copiers may need alteration.  Binders, three-hole punches, folders of every description would also need to change.  File cabinets would be made redundant if they do not fit the new paper size.

Most notably, however, the burden for this change would fall on only ONE side of the agreement.  There is no way to standardize or harmonize paper sizes in TTIP without putting one side at an advantage and imposing a major financial burden on the other party.

Officials in past deals will quickly argue that similar win-lose outcomes have taken place all the time in such trade negotiations.  But the difference, I think, is that past agreements like the GATT or NAFTA or even the EU itself had the potential to enlarge the pie and to create other types of win-win outcomes.  In other words, trade officials could think creatively about how to balance the benefits more broadly and the upside potential of new markets usually was sufficient to offset the relatively modest number of groups, firms, industries or sectors that suffered (or thought they might suffer) a particular loss from an agreement.

TTIP is wading deep into regulatory and standards territories where win-win outcomes are not likely.  A key point of the whole exercise, in fact, is to eliminate divergence between these powerful markets.  The only way to get to such an outcome is to either agree on one or the other existing standard or create some sort of new standard that imposes costs on both sides (and, presumably tries for equal costs to both parties).

Let me illustrate the problems again with several additional examples. 

In autos, there are clear differences of opinion over regulatory issues.  To take a small example, the very premise of EU and American rules over the safety of auto bumpers is different.  The EU side is primarily concerned about pedestrian safety in crafting bumper standards.  The Americans are worried about crashes between autos and have standards to cover higher speed impacts.  How can these two differences even be reconciled?  It is (as I understand it) not possible to create a bumper that simultaneously takes pedestrian safety and head-on collision safety as equally important in manufacturing.  If the TTIP chooses, it will automatically privilege one side over the other.  Yet, if officials do not make a decision, firms will have to pick one set of manufacturers to work with or the other or continue to manufacture completely different products for both markets.  The whole purpose of harmonization will have been lost.

Similar problems abound in TTIP.  On food safety issues, the regulatory principles behind the rules are often fundamentally different.  The EU side generally approaches food with the understanding that food must be proven safe before it can be sold.  The Americans generally argue that unless food is proven unsafe, it is suitable for distribution. 

In data privacy and protection, both sides approach the issue differently as well.  Again, reconciling the two approaches would have benefits for firms trying to operate in both key markets.  But it is not possible to somehow “split the difference” between the two regulatory approaches because they start from different points.

Officials are not oblivious to these challenges.  They are especially working in this round, it appears, on mutual recognition.  Under this approach, both parties would recognize, for example, that a product that meets safety standards in one market could be viewed as meeting the regulation in the other market.  Chemical products could be tested in one market and automatically approved in the other market. 

But this does not really get around any fundamental differences in the first place.  If I believe that chemicals can only be certified as safe under the rules that my regulators have created, why would I trust the safety of your product using a different set of rules (and ones that I, presumably, trust less or I would have incorporated them into my own rules in the first place)?

Hence, despite the renewed momentum behind the talks and potentially significant economic benefits, the TTIP faces the toughest set of challenges of any trade agreement.  If it somehow succeeds, it will be an entirely new kind of trade deal—closer to an imagined “21st century” agreement than anything else out there.  But the obstacles to closure are deeper and wider than seem to be appreciated thus far on either side.