TTIP – Selling Out Standards?

A background paper on the role of standards in bilateral and multilateral trade agreements

By Christine Chemnitz[1]

The basic premise behind the World Trade Organization

The World Trade Organization (WTO) was developed as a result of several years of negotiations regarding GATT, General Agreements on Tariffs and Trade, and has formed the legal framework for international trade relations since January 1, 1995. The so-called Most Favorite Nation (MFN) clause of the WTO specifies that countries are not allowed to discriminate against other countries through their trade policies. This in effect means all countries trade with one another under the same conditions and regulations. Thus, the EU may not grant the US easier access to its markets than Japan, for example. Bilateral agreements must also respect WTO regulations, and thus WTO law is also binding for the current negotiations for the Transatlantic Trade and Investment Partnership (TTIP).

The basic premise of the WTO is as follows: By reducing customs duties and other trade barriers, effective international trade can develop in a way that will lead to an improved international division of labor from which all countries can profit. Particularly in the 1990s, the discourse in economics and development economics was dominated by the assumption that the growth achieved through liberalization would reduce poverty through so-called trickle-down effects. Today, we know that this idea was very shortsighted and that there was a failure to establish a clear development agenda in the trade negotiations. This is one of the greatest failures of the WTO.

The underlying question multilateral trade law is wrestling with is how to shape national or regional policymaking in a way that avoids impeding or distorting the flow of trade and thereby placing other countries at a disadvantage. If we take a look at the multitude of rules which nation states used in the 1990s to protect or strengthen their respective economies, claiming to use trade policies to provide a legally binding framework is then well justified. Customs duties, quotas, subsidies, minimum prices – these are a few of the many national measures that had a strong effect on the global market and thus on the production structures, and the import and export relations of other countries.

One of the best-known examples of a misguided national policy with significant global consequences is the design of the EU agricultural policy. Within the scope of the common agricultural policy, the EU subsidized its agricultural production and supported production with minimum prices. (For example, a farmer received a specified minimum price for a ton of wheat that was often above the production costs and above the global market price.) When the EU market price fell below the minimum price, the EU purchased the wheat and thus stabilized producer prices. For farmers, this was an incentive to produce increasingly more product. In order to protect the domestic market from price declines, export subsidies were paid and the overproduction was exported to the global market. Simultaneously, customs duties and quotas for products from other countries were increased. The effects on the markets of the Southern Hemisphere were significant: The global market prices dropped due to the cheap, greatly subsidized products coming from Europe to such a level that many farmers in the South had no chance to compete. Agriculture in many countries of the world was weakened. This resulted in rural poverty, hunger, and migration from rural regions.

The WTO had and has to this day, according to the organization's own definition, the goal of eliminating trade discrimination and negative trade-related effects. Therefore, a country must not differentiate between its own products and the products of other countries and also must not treat some trade partners better than others. Quotas, minimum prices, customs duties, and other non-tariff barriers to trade should be harmonized, eliminated, and made more manageable through international trade law. Thus, at the conclusion of the Uruguay Round[2], most of the non-tariff barriers to trade, even in the agricultural sector, had to be converted to customs duties, which were then successively eliminated – though in different timeframes for different products and groups of countries. Even national subsidy programs were to be designed such that they do not have any (or the least amount possible) trade-distorting effect. Thus, the EU had to change its agricultural policies in order to match the guidelines of the WTO. However, based on its bargaining power, the EU was able to leave many areas unaffected that would disadvantage the developing countries.

All in all, the aim was correct: International trade must be molded to a globalized world. However, it was a failure on the part of the WTO to equate liberalization with “molding” and to attach immense social and political value to liberal trade, thus placing the economic interests of the industrial countries before a global development agenda. Social and economic demands were mostly ignored when molding the liberal trade policies. “Fewer policies – more market” was the order of the day. Instead of allowing developing countries the policy leeway to protect particularly young or socially sensitive sectors, customs duties had to be eliminated everywhere. The national policy leeway had to be subordinate to the WTO rules.

Primarily in developing countries, the WTO rules had various effects on the policies and economics – often with significant social consequences. Even today, normative specifications in the interests of humans have almost no meaning in the respective countries when molding the trade law framework.

This also involves standards, not only tariff barriers to trade

Trade agreements not only involve the elimination of customs duties. The respective parties negotiate all regulations that could contribute to the products of respective trade partners being presented more poorly on the domestic market. This means that it also involves so-called non-tariff barriers to trade. If, for example, standards for food safety or the technical rules of a trade partner are considered trade-distorting, the trade partner can file a complaint against said rules.

International trade is increasingly being regulated by safety and quality standards. Standards specify rules and conditions for participating in value-added chains and thereby lead to the redistribution of market shares within a value-added chain. Anyone who does not meet the standards of a respective trade partner will not be allowed to export. This means, for example, that the EU may specify that only a certain quantity of pesticide residue may remain in a tomato that is imported into the EU. Or that a peanut may only contain a certain quantity of fungi (alfatoxins). The criteria that a seatbelt must meet, etc. may also be specified. If the products do not meet the EU standards, they cannot be imported.

Simultaneously, with the elimination of customs duties at the turn of the century, the meaning of standards and technical rules increased drastically. Two reasons are listed for this in the scientific literature: a) industrialized countries that were allowed to protect their products with customs duties in the past, for example, are now protecting their markets through high-quality standards and thus effectively preventing market access for other countries; b) due to increasing incomes and increasingly nuanced consumer behavior, the standards in industrialized countries have changed and been adapted.

At the turn of the century, standards (primarily food safety standards regarding, for instance, pesticide residues, impurity of foodstuffs through fungi, animal diseases, plant diseases, etc.) were a very important subject in the debates at the WTO and in bilateral trade agreements, because many developing countries rightly criticized the fact that the increasingly stricter standards were blocking their newly won potential market access to the markets of the industrialized countries. Different laws and test methods made it impossible for many developing countries to import into industrialized countries. For example, in the agricultural sector, there was often a lack of the laboratories necessary to check for pesticide residue quantities or fungi levels. There was a lack of veterinary offices in order to verify that certain animal diseases were not present in the countries (or regions).

However, trade disputes based on standards did not take place only between the North and the South. Many developing countries did not and do not even have the knowledge, the personnel, or the financial wherewithal to submit complaints to the WTO regarding the standards of industrialized countries. A large part of the trade disputes regarding standards is between industrialized countries.

The WTO stipulates the handling of standards in two agreements: All aspects regarding food safety and animal and plant health are specified in an agreement regarding Sanitary and Phytosanitary Measures (SPS agreement). All other standards fall under the agreement on Technical Barriers to Trade (TBT agreement). Both agreements stipulate rules for handling standards and attempt to establish a balance between a) the need of the respective country to set standards when regulating products and production processes, and b) preventing “unnecessary trade barriers” as it is called by the WTO.

The two agreements define how standards are allowed to be set in order to not be classified as trade barriers. Both agreements accept the international standard-setting organizations – e.g. the Codex Alimentarius, the World Organization for Animal Health (OIE), etc. – as a reference framework and require that countries align their own standard setting with the international guidelines. Deviating from international standards is allowed if the respective government can scientifically verify that there is a hazard to the health of consumers, animals, plants, the environment, etc. If the respective government is not able to provide corresponding scientific documentation, it must either adapt the standard, or, in the event of a complaint by another country, be judged by the WTO Court of Arbitration and assessed to pay a financial penalty. The precautionary principle established in the EU, upon which consumer protection in the EU is based, is not recognized by WTO law.

When countries or institutions such as the EU require standards that other countries classify as trade barriers, these other countries can file a report with the SPS committee or the TBT committee. This will be followed by a bilateral clarification process that will go before the WTO Court of Arbitration if it is not successful. This is what happened to the EU, for example, when it was brought before the WTO Court of Arbitration by the US and Canada because it does not allow any growth hormones in beef production. Because the scientific documentation of the EU could not convince the court of a potential health hazard caused by hormones, the EU was ordered to pay annual financial penalties amounting to US$202 million to the US and C$75 million to Canada. Instead of concrete payments, both countries obtained the right to levy customs duties for EU products that corresponded to this value.

An example from the area of renewable energies is the trade dispute that Argentina raised within the scope of the Renewable Energy Directive (RED) in December 2013 for the blending quota of the EU. It should be noted that the production of biofuels is greatly subsidized in the EU: about €0.5/liter for biodiesel and about €0.74/liter for bioethanol. Furthermore, domestic biofuels are greatly supported by a customs rate of 63% (i.e. 63% of the import price is charged at the border as a customs duty). Thus, the EU is infringing on the Most Favorite Nation rule, the non-discrimination rule of the WTO, because it favors national production over other products. In addition to this, the EU requires that the biofuels that are to be calculated in the blending quota have 35% less CO₂ output than the fossil fuel carriers in its lifecycle analysis.  

An additional reason for the trade dispute: The WTO does not allow differentiation between “like products” – this means that product standards (to be verified in the final product) are recognized; process standards, however, that can no longer be verified in the final product are not recognized under WTO law. An example: Paper is produced in once case from 50% recycled materials and in one case from 100% new fibers. Even when the environmental effects for the second type of paper are much worse, the respective importing country cannot make any differentiation between the two types of paper if the end products have the same usage properties. 

Because the CO₂ balance of the biofuel end product cannot be verified, the requirement violates WTO law. According to the WTO, this standard could negatively impact countries that are not capable of meeting the requirements. The outcome of the trade dispute with Argentina concerning the blending quota is still unclear; however, the example clearly shows how strongly national policy leeway is limited by international trade law.

This also partially applies to protecting new sectors in the area of renewable energies. Customs duties for solar panels and wind turbines could be attacked before the WTO regardless of the fact that initial protection towards foreign economies is a recognized mechanism for protecting vulnerable, budding national economic sectors until they are capable of international competition.

To summarize, the previous actions of the WTO and the corresponding legal framework indicate that standards are only the subject matter of negotiations within the scope of trade agreements if they are considered to be too high, i.e. trade-restricting, by a trade partner. There are few examples in which standards are considered to be trade-distorting because they are too low.

TTIP and Standards – Relevance and Outlook

If we now explicitly take a look at the TTIP negotiations, it is absolutely necessary to understand that WTO law represents the framework for the negotiations. No trade agreement can fall short of the rules set by the WTO, and that includes TTIP as well. In order to respect the non-discrimination rule of the WTO, bilateral agreements must meet certain criteria, i.e. the additional opening of markets between individual partners may only be ensured within the scope of free trade zones that contain “substantially all trade.” All sectors and, to the extent possible, all tariff lines[3] must be included in the liberalization. Only a very few tariff lines which are of great importance for a trade partner may be excluded. Reductions in customs duties, however, now play only a very limited role in the TTIP negotiations due to the existing long-term transatlantic trade partnership; most of the sectors have only minor tariff limitations at this point.

The central aspect of TTIP is the harmonization of standards and technical regulations. This means that the goal of both trade partners is cooperation in the area of setting concrete standards in individual sectors and cooperation between comprehensive standard-setting organizations. In all sectors, the cooperation should go beyond the rules stipulated in the WTO. This does not mean, however, that the parties should agree to common higher standards but that they should agree on the types of cooperation as to how standards will be set or reviewed.

Cooperation between the US and the EU in this area is not new. There are various non-binding guidelines and principles as well as binding Mutual Recognition Agreements (MRAs) for standards and methods as to how certain standards will be tested in order to enable close cooperation in the area of setting standards and mutual recognition of the legal framework. Even so, we still have not been successful in building a bridge between the two fundamentally different approaches and cultures of consumer and environmental protection in the US and the EU. The EU bases its approvals on the precautionary principle – meaning that certain products are not allowed on the EU market until their harmlessness is proven. In the US on the other hand, food safety measures need to be based on the scientific evidence of their harmfulness.

Because the prior efforts of both parties have not led to satisfactory cooperation, there will be a specific governance structure, the Regulatory Cooperation Council (RCC), in the future, in which the standards are tested for their effects on trade and the corresponding consequences for trade are discussed, even before the standards are approved by the respective parties. The RCC will be made up of representatives of the respective standard-setting organizations in the EU and the US, representatives of business, the EU Commission, and the US Office of Information and Regulatory Affairs.

According to international trade law, the respective governments must adopt the least trade-distorting and trade-restricting measures. Consequently, the business representatives and a representative of the respective authorities must negotiate as early as the legislative process as to whether they find the targeted measure trade-restrictive or not. One can vividly imagine the influence that industrial companies and economic associations will have in this process, especially in connection with the already existing transparency and control deficits in the TTIP negotiations: lobby interests have the door wide open for them while the consumer is shut out.

The decisions of the RCC will be supported by cost-benefit analyses. However, they only investigate the effects on the flow of trade and not the ecological and social costs and benefits – and that is the general problem of these analyses.

In its position paper on Regulatory Coherence, the EU formulates various aspects that are of central importance for further cooperation in setting standards. It states clearly that the high level of consumer and environmental protection targeted by the EU should not be eroded by the agreement. The negotiators are continually stressing that the EU will not approve chlorine chicken or meat with hormones due to the high level of consumer sensitivity.

However, the extent to which the concessions will go in other areas, such as the currently banned pesticides in the EU, the lifecycle analysis of biofuels, or importing and cultivating genetically modified organisms (GMOs), is unclear. Various American companies have already made it clear that they will not respect the geographical indicators supported by the EU in their current form, because they represent unjustified trade barriers for American products. This means that Parma ham, Black Forest ham, Feta cheese, or even Champagne would no longer be protected product designations and in the future could just as easily come from California or Texas.

In addition, TTIP presents us with the challenge that all new standards and regulations must be able to withstand the Investor to State Dispute Settlement, i.e. the dispute settlement process, provided it is to be included in the TTIP agreement.

Thus, TTIP is not a platform for agreeing on high common environmental and consumer standards but rather a platform for negotiating how the existence of standards can be made as minimally trade-distorting as possible.

In order to make trade fair and sustainable, it requires other approaches than the current trade agreement. The Heinrich-Böll-Stiftung has been involved in various initiatives of alternative trade policies for many years. This involves rethinking trade policy. Decisions in policy design should not be made by looking for the least trade-distorting measures but by considering the largest social and ecological benefits for society. Trade must be molded in a globalized world – but in a manner that meets the demands and requirements of the 21st century.