Free-trade pact could hit developing countries

Since July last year, the EU and the US have been negotiating a Transatlantic Trade and Investment Partnership (TTIP). This free-trade agreement would reduce trade costs between the US and the EU, according to Julia Kubny of KfW Development Bank.

'This would mean a bottle of wine from Italy would be cheaper for the US consumer, who might thus be more likely to buy the Italian instead of Chilean wine,' she said. 'More trade between the EU and the US tends to lead to less trade with other countries.'

The EU and the US together account for around a third of world trade. By creating the largest free-trade zone with 800 million consumers, world per capita income is expected to rise by more than 3 percent. These are the findings of a study by the Munich-based Ifo Institute for Economic Research. That is a statistical average that would, however, have very different regional effects, Thiess Petersen of the Bertelsmann Foundation said. 'The US and Europe would benefit greatly. But there would be drawbacks for the rest of the world.'

'The rest of the world' means above all the emerging and developing countries in Asia, Africa and Latin America. But the TTIP could also adversely affect the traditional trade partners of the US and the EU, Petersen said. 'The most worrisome implications are for Canada and Mexico. As GDP per capita could contract seven to nine percent.'

The TTIP would negatively affect the North American Free Trade Agreement (NAFTA)that binds these two countries with the United States. And other trading partners such as Chile and Australia would be hit. 'And in Asia, too, virtually all countries would suffer a decline in growth, between 0.5 and 2.5 percent,' he said.

Two scenarios

At present, the TTIP negotiations are faltering. It is unlikely that the FTA will be passed within the next two years. Even so, it is becoming apparent that the impact on third countries will likely match one of two scenarios.

If the transatlantic trade agreement only eliminated customs duties, the impact on transatlantic trade relations would be relatively small because duties in most regions are already very low. The second variant would thus make more sense: reducing not only tariffs but also so-called non-tariff barriers to trade. These include food regulations and other standards for environmental and consumer protection.

They have ignited a conflict between the interests of European consumer advocates and development experts. The former want to cement their high EU standards in the TTIP. They aim to prevent, for example, non-labeled genetically modified foods going on the European market. 'If the partly lower US standards are implemented at the EU level, producers who previously exported to the US, but did not meet EU standards, would now be excluded from the US market,' Kubny said. 'Or they would have to bear substantial costs to adapt to the higher standards - if they are ever able.'

Free trade versus development policy

At present, new worldwide sustainable development goals are being negotiated to replace the UN Millennium Development Goals from 2016. They aim to eliminate worldwide hunger and extreme poverty by 2030. If the transatlantic free trade agreement should lead to a decline in per capita income in third countries by up to nine percent, then there is the question of policy coherence: how can the economic and commercial interests of the north agree with the development needs of the south?

The stated goal of German and European development cooperation is to strengthen the competitiveness of developing countries and to facilitate their participation in world trade. 'If it comes to the point that developing countries' market access to the US and the EU is hindered, this would thwart development cooperation efforts' Kubny said.

Doha by the back door?

Developing countries have almost brought World Trade Organization negotiations on a far-reaching liberalization of world trade to a standstill. Among other things, they oppose abolishing state aid in the food supply in the course of cutting subsidies. India is spearheading this movement. The dispute over patent protection on drugs represents another almost insurmountable obstacle. While the industrialized countries agree to only a very limited easing of patent protection, the southern countries want to manufacture and distribute essential medicines, such as for cancer and AIDS, even ignoring patent protection.

In this context, the Doha Round of trade talks is 'a catalyst for taking the interests of developing countries into account' Kubny said, since the developing countries sit at the negotiating table as equals. 'Some of the standards that developing countries torpedoed in the Doha Round, will be discussed again in the context of the TTIP. So they could now be introduced through the back door.'

Developing countries do not have direct influence on the TTIP negotiations. It would be desirable, but not realistic, for the EU and US to open their internal market to products from the south to compensate these countries for the drawbacks of the new trade bloc, Petersen said.

'An alternative would be for the regions that expected to lose out from this Agreement to pursue stronger integration.' Only regional alliances such as South America's Mercosur and the Asian free trade area between ASEAN countries and China could allow the countries of the south to challenge the TTIP.