How the EU and the USA could collaborate in pioneering fair competition and an economy fit for the future. It is time for a positive, sustainable vision of free trade.
Free trade is not a strategy of subjugation
No, free trade does not mean the strong having the right to ensure their economic interests always prevail in every corner of the world. The fundamental, liberal idea of free trade put forward by Adam Smith and David Ricardo was cosmopolitan in nature: Trade on the basis of a liberal order and human rights as a counternarrative to imperialism and the despotism of the nation state. The promise of free trade was posited on the assumption that it would result in a more efficient division of labour, a higher degree of specialisation and, above all, greater prosperity thanks to rising productivity.
About 250 years later, the reality is that free trade has not been able to deliver its promises of prosperity for all. The deepening integration of the world economy and rapid global growth have seen inequality increase as well. The unilateral dismantling of trade barriers and policies of isolationism, on the one hand, and the deterioration of social and ecological standards as a result of competition to offer the lowest production costs, on the other, have shattered many people’s confidence in free trade. What we have experienced has been, above all, free trade that has advantaged the prosperous industrialised countries. While we in Germany profit from low customs tariffs on highly specialised industrial goods, the EU pumps vast subsidies into its agricultural sector and pursues an aggressive export policy at the expense of the developing countries.
However, free trade does not inevitably have to lead to an asymmetrical distribution of benefits and the erosion of previously protected standards. Innovations, intelligent production methods and the know-how they require are, of course, always decisive factors in who manufactures what products and where. Nevertheless, this does not mean that states are unable to define what standards ought to apply for these products and their manufacturing processes. With the Transatlantic Trade and Investment Partnership (TTIP), an attempt is now being made to combine the two most significant economic areas on the planet into a common free trade area. Between them, the USA and the EU represent just over 10% of the world’s population, but generate about 50% of global economic output. Without question, this is of significance geopolitically. The consequences for third states will also have to be looked at extremely carefully. The immediate implication for free trade, however, is that the world’s two most powerful economic areas are negotiating bilaterally on an equal footing to arrive at a new agreement. And that is a good thing.
What has not been good, though, is the course the negotiations have taken hitherto. They have rightly been criticised for a lack of transparency and the EU’s unbalanced negotiating mandate. It is claimed the conduct of the negotiations is not being guided by the common good of employees and consumers, but exclusively by the interests of the parties’ export industries. This criticism is necessary and justified in many respects.
The ‘sustainable economy’: a leitmotif for the TTIP
An even greater impact would be achieved by a fundamental debate about the opportunities the TTIP holds out, combined with demands for the negotiations to start again from square one. A free trade agreement based on high ecological and social standards, and informed by the values the USA and the EU share in common, could have an influential impact on global trade. The interest of the common good should be a prominent part of any agreement of this kind, with as many stakeholders as possible being involved. The first attempts to formulate such an approach have already been made: Last autumn, civil society groups from all over Europe drew up what they called an ‘Alternative Trade Mandate’, an alternative blueprint for free trade in the 21st century: www.alternativetrademandate.org.
A Green agenda for the TTIP could do more than encourage acceptance among the population. By reaching consensus on clear ecological, social and democratic parameters, we could stimulate the transition towards a sustainable economy on both sides of the Atlantic, something that would ultimately be seen as a harbinger of hope for global climate protection. The fundamental consideration common to all the proposals made here is that functioning free trade is predicated on markets driven by fair competition. Prices must always internalise the true ecological costs of products and services as well. It is in the interests of the players on a market to pay a minimum wage that prevents the exploitation of social dumping as a means of competition. The Stern report quantified how damaging it is for our economies not to invest fundamentally in energy efficiency and the careful management of resources at an early stage. In our time, the most important question for the future is the resource revolution. Europe will not be able to cope with the challenge it represents unilaterally. It is not utopian to imagine the EU and the USA making joint efforts to address the issue, since this would be an expression of their shared interests: Both economic areas are aspiring to reduce their dependence on imports of raw materials. Both claim to be promoting real competition on the basis of a fair framework for trade.
Analysis 1: The raw materials question affects the USA and the EU equally
For Europe, as a continent with few fossil resources, the conversion to renewable energies and energy conservation is a strategic necessity if it is to insulate itself from the volatility of the international raw materials markets over the long term. Germany purchases one third of its natural gas from Russia. More than two-and-a-half times as much as we can store each year. The USA will be able to rely on its own, large-scale fossil reserves for a limited period, but energy efficiency is still clearly not being paid anywhere near enough attention there, to the detriment of consumers and industry. In Texas, for example, power prices are just a third of those in Germany, but per capita consumption is three times higher. The shale gas boom in the USA was hailed as a supposed geopolitical turning point. Yet the latest studies show there can be no suggestion that fracking is going to bring about reindustrialisation in the USA. The forecasts have proven to be exaggerated. As of 2025, at the very latest, the USA too will have to become more dependent on the dwindling petroleum reserves of the Gulf region again. This has been said by no lesser person than Maria van der Hoeven, the Executive Director of the International Energy Agency. China has already recognised the signs of the times. In a recent government statement, Premier Li Keqiang declared war on environmental pollution. He said China would combat it with the same determination it has shown in fighting poverty within its borders. The Middle Kingdom is now the global market leader in renewable energies and will install 14 GW of photovoltaic capacity this year, almost twice as much as the EU.
Analysis 2: The tipping point to energy conservation and renewables has been reached
Is this the truth that has still not been grasped? The tipping point to the post-fossil transformation that lies ahead of us has already been reached, as is evident from the markets. According to The Wall Street Journal, the volumes of oil and gas produced by Chevron, ExxonMobil and Royal Dutch Shell have been constantly declining in the last five years. And this has happened even though these corporations have invested a gigantic US$500bn in new projects over the same period. In a remarkable talk given in February of this year, Steven Kopits, Managing Director of the consulting company Douglas-Westwood, described how the returns on investments in the exploration of fossil energy carriers are falling dramatically and continuously, while the business case for efficiency technologies, wind power and solar energy is becoming more and more convincing. And we are just at the beginning of the transition process!
The resource revolution and the ‘fossil-fuel phase-out’: a fitness programme for industry
If the TTIP is intended to make a credible contribution to fair competition, serious negotiations will have to take place about the ‘fossil-fuel phase-out’. The high subsidies for the extraction and protection of fossil energy carriers are massively distorting competition and damaging the economies on both sides of the Atlantic. According to figures from the International Energy Agency, an unbelievable US$523bn was spent around the world on petroleum, coal and gas in 2011, approximately six times as much as on climate-friendly technologies. And the trend is moving upwards. The German Federal Government’s 2014 Subsidy Report lists the €1.172bn of assistance for hard coal, the extraction of which is uneconomic in Germany, as the largest of the subsidies paid out from the federal budget. Meanwhile, the costs for the final storage of nuclear waste are being burdened onto future generations for the time being.
Nevertheless, we in Germany have successfully got the first stage of the efficiency revolution underway. Thanks to technological developments encouraged by the Renewable Energy Sources Act (EEG), it has been possible for the unit costs of photovoltaics and wind power to be slashed. The world economy is profiting from this today. However, we will only bring about a real resource revolution that will take us towards a climate-friendly economy if truly equal competition between fossil and renewable energy carriers is fostered. Zero marginal costs for fuel inputs – that is the prospect that makes renewables so attractive, irrespective of all the ideological conflicts. A clear commitment to these technologies would be needed in any free trade agreement between the USA and the EU.
Greater competitiveness with the top-runner approach and emissions trading
At the end of the 1990s, Japan introduced what is known as the top-runner approach for its industry, under which the highest efficiency standards are always established as the benchmarks for the development of products and technologies. Technologies that do not meet these standards are gradually withdrawn from sale. Its concentration on the highest possible levels of efficiency should also have a major influence on any transatlantic free trade agreement.
The use of ecological standards to inspire innovation is a tradition that goes back a very long way in Germany. How competitive would our chemicals industry be today if it had not been for the decades of tough conflicts with environmental campaigning groups? What kinds of vehicles would the automotive industry still be producing today if we had not put in place different parameters for the sector by introducing emissions certificates and levying ecotaxes? Why do we not tackle environmental goods first when it comes to customs liberalisation? Germany holds a 15% share of the global market for environmental technologies. California is regarded as a pioneer of the ‘green economy’. Emissions trading with CO2 certificates is on the rise in many US states. The EU has just upgraded its emissions trading system with back-loading and is discussing how it is to continue in operation from 2016 on with the target of reducing greenhouse gas emissions 40% by 2030 relative to 1990. Noticeably stricter regulations will apply for the automotive industry as of 2020 in both economic areas. We are therefore travelling in the right direction, but not fast enough yet, and the various systems and instruments are not being coordinated consistently. On both sides of the Atlantic, however, actors have recognised that it is more sustainable to rationalise the consumption of resources than companies’ staffing levels. In consequence, ecological considerations are advancing a social agenda.
Learning from the USA: the green economy will only function if we have sustainable financial markets
Let us not hold any illusions: Without the comprehensive re-regulation of the financial markets, many of these ideas will remain but fine aspirations. It is essential to break with the principle that, ‘The debts belong to all of us, the assets to the select few.’ Fair competition can only function on the basis of a regulated market, and the catastrophic experiences that ensued from the global financial and economic crisis after 2007 are forcing us to act. However, the idea that Europe stands for ‘high’ standards and the USA for ‘low’ standards is revealed to be an absurdity when we look at the regulation of the financial markets.
After all, it is first and foremost the Europeans who are standing in the way of meaningful reforms, prime among them the British and the German Federal Finance Minister Wolfgang Schäuble. In the most recent BASEL III negotiations, it was decided that the ‘leverage ratio’ should set below 3%, but the USA is demanding 6% as a first step, with 10% aspired to as a prospect for the future. BASEL III permits off-balance-sheet special-purpose vehicles and will therefore encourage once again a lack of transparency about the risks that are being taken. The USA has a system of the firewalls between commercial and investment banking that minimises the exposure to risk because the two areas of business have to be accounted for separately, even within the same institution. This rules out the possibility that state assistance will be extended to high-risk investment banking operations. The liability principle is making a come-back in the banking industry, something the EU is resisting. However, there will not be a ‘sustainable economy’ without sustainable financial markets.
Summary: Time for an alternative TTIP mandate
The EU and the USA should jointly recognise the opportunities offered by an alternative TTIP mandate that is focussed on the levelling of unequal competitive conditions in transatlantic trade. Fair competition will consign our wasteful fossil economy to the history books. Any country that wishes to remain competitive at the global level will have to manage its economy sustainably. A clear framework of regulatory policy would mean:
- Competition founded on ecologically correct prices
- Introducing the top-runner approach for industry
- Retaining and expanding social standards
- Making provision for future raw materials shortages
Regulating financial markets in such a way that they perform their functions providing services to consumers and business
These would be the main elements of a positive agenda for free trade that would meet with broad acceptance and achieve greater prosperity for all in the end. Are these ideas merely castles in the air? Not if the actors finally examine the framework of the real economy to ascertain whether it is fit for the future and draw their own conclusions from what they find. The USA and the EU would certainly have plenty of shared interests.
To read more, visit our TTIP Index
This article was originally published in German by The Huffington Post