From Inside Trade

As the end of 2015 approaches, U.S. and EU trade officials are entering a new year without the “outline” of the Transatlantic Trade and Investment Partnership (TTIP) that political leaders had expressed hope for last summer. But what is becoming clear to both sides is that if a deal is to come together under the Obama administration, it will fall far short of the sweeping U.S.-EU regulatory alignment project that it was initially framed to be.

The plan of action for 2016, as laid out in private conversations by U.S. officials, is not focused on the regulatory cooperation side of the agenda. Instead, it envisions an exchange of modest government procurement market access offers by February. By summer of the new year, the aim is to be in the “middle game” of the negotiations, during which both sides envision having all the text of the deal essentially agreed and further advancement on sensitive areas.

Exactly what this advancement would entail is not clear, although the EU has indicated it wants at least some inkling that the U.S. will agree to grant new protections to geographical indications (GIs) in this timeframe.

U.S. and EU sources contend the main body of the text could come together rather quickly, and will likely be an amalgam of pieces borrowed from the Trans-Pacific Partnership (TPP) on issues like state-owned enterprises, along with portions on issues like sanitary and phytosanitary (SPS) measures that deal more specifically with U.S.-EU challenges.

Under this plan, the notoriously elastic “end game” would begin in the fall. This will be the final stage where deals are cut on sensitive agricultural tariff lines, longstanding trade barriers rooted in SPS measures, and other sticking points, sources said. This ambitious scenario foresees the conclusion of the TTIP negotiations during the lame-duck session of Congress, or even just before Obama leaves office in 2017.

But what this kind of rush to wrap up would necessarily mean, sources on both sides of the Atlantic say, is that some components of TTIP’s regulatory agenda must be left for later — becoming items in a future work program to be taken up by regulators, or else left by the wayside entirely.

Whether the EU, which is seen as more wedded to the sectoral regulatory aspect of the talks, is willing to go along with this will depend on both sides’ ability to tee up a package that sufficiently addresses other key priorities like procurement so that a scaled-down deal could still be defended as economically meaningful. Already, the U.S. has tamped down expectations for its first procurement offer in February.

Overshadowing all of this is TPP, Obama’s legacy trade policy priority. Until the administration can secure Congressional approval of the Pacific deal, observers say it is unlikely to expend the focus or political capital on issues needed to close a deal with Europe, such as procurement and GIs.

But political leaders on both sides have also framed the TTIP initiative in a broader geopolitical context, with Russia encroaching on Ukraine and the Syrian refugee crisis introducing new challenges to the EU. Advocates for TTIP acknowledge the possibility that substance may be sacrificed if President Obama urges leaders in major members states like Germany, the UK and France to pressure the European Commission to conclude.

At this point, it is doubtful Congress will approve TPP before the November presidential election. That leaves almost no time to conclude a TTIP agreement before Obama’s term expires. Bernd Lange, the chair of the European Parliament’s International Trade Committee, has said he doubts that TTIP can be concluded in 2016 and that it may be delayed indefinitely if TPP does not pass in 2016.

The elections themselves may have an impact, too, said Daniel Hamilton, executive director of the Center for Transatlantic Relations at Johns Hopkins School of Advanced International Studies. If a Republican candidate wins the election — depending on who in the crowded field it is — the EU might hit the brakes knowing that the new administration will surely demand to put its own stamp on the deal.

Progress in the TTIP’s so-called “sectoral” regulatory talks — those dealing with the weedy differences in how each side regulates cars, chemicals, pharmaceuticals and other industrial sectors — has been slow. While there are some hints of progress on cars, sources say, regulators particularly on the U.S. side have not gotten the political direction to identify and pursue specific outcomes. As a result, many agree that any sectoral regulatory outcomes will be small if a TTIP deal is wrapped up in 2016.

This might suit the U.S. just as well, according to Hamilton. The Obama administration is so keen to say that it achieved a trade deal with the EU “that they’re willing to go for ‘TTIP light,’” he said in an interview.

From the start, it has been clear that the EU has been more enamored of the “sectoral” aspect of TTIP, claiming this is where the real economic efficiencies and savings for businesses are to be reaped. The EU auto industry, for one, sees this component as essential in order to balance the inevitable tariff cuts. The U.S. tariff on passenger vehicles is 2.5 percent, while the EU tariff is 10 percent.

The U.S., while not the rejecting the sectoral approach, has focused intensively on what it calls “regulatory coherence” — the notice-and-comment style procedures followed by U.S. regulatory agencies that U.S. Trade Representative Michael Froman has said the European Commission should mimic.

The U.S. is perceived as needing to secure some outcomes on this objective in order to credibly claim that it has made progress toward greater regulatory alignment with Europe. The European Commission has shown willingness to make its legislative and regulatory procedure more transparent in ways that would partially satisfy U.S. demands, under its own “Better Regulation Agenda.”

Whether the U.S. is willing to settle for that remains to be seen, although even some of the biggest U.S. business champions on this front privately concede the U.S. is unlikely to convince the EU to subject its process of drafting new laws to notice-and-comment style procedures.

Another critical fight that will have to be settled — and has made very little progress, sources close to the talks say — surrounds the issue of what is an “international standard.” This battle has played out in the negotiating group on Technical Barriers to Trade (TBT), as well as between private standards groups.

At its most basic level, this is a simple question of whether the EU is willing to endorse in its laws and regulations the standards that private-sector industry leaders in the U.S. draw up. In reality, this involves challenging the interests of EU and European national standards-setting bodies that would be loathe to see their role diminished.

Froman has made this exceedingly technical fight a priority, highlighting it as a big part of his first major policy speech on TTIP in Europe in October 2013, following the launch of negotiations in July of that year.

The standards issue is one “which is really down in the weeds, but is also really quite critical,” Hamilton said. “They haven’t unlocked the door on this yet, but that doesn’t mean they can’t.”

The degree to which the EU will make concessions on those sensitive points depends, of course, on what it gets in return. Formally, the EU has rejected the notion of a “TTIP light” agreement. But what exactly TTIP light means is open to interpretation. It may ultimately be that a package that includes new procurement market access, protection for commercially significant GIs, and a few modest sectoral regulatory outcomes is enough for Brussels.

Regulators have begun to nibble at the edges of some of these issues. The U.S. Food & Drug Administration (FDA) has been actively assessing whether it can rely more on EU regulators in inspecting the manufacturing practices of EU pharmaceutical firms by observing EU audits; the EU has done the same for the U.S.

But FDA by the 2015 was only expected to cover a fraction of the 28 EU member states through these visits. Earlier this year, an FDA official said the agency had not decided whether it could begin to rely on the inspections of certain member states it has reviewed and slowly phase in others. That approach has proved problematic before, over EU claims it would give some companies in those member states an unfair advantage.

In the automobile sector, the main objective of the U.S. and EU industry — to have regulators on both sides recognize each other’s standards as effectively equivalent in protecting passengers in a crash — took a big hitthis year when a joint project conducted by independent U.S. and EU research institutions concluded data do not support that claim.

The UK-based consulting firm Transport Research Laboratory (TRL), one of the institutions that participated in that study, has conducted another study on crashworthiness with a different methodology that is still in the process of being reviewed. One industry source said that the U.S. National Highway Traffic Safety Administration (NHTSA) had received a copy of the report but had been silent on it; a TRL spokeswoman on Dec. 22 declined to comment on the conclusions of the study.

The industry source, however, said NHTSA had given signals it was more seriously evaluating the results of a separate study conducted by TRL that aimed to evaluate the effectiveness of a subset of U.S. and EU car safety regulations dealing with visibility and lighting. That study found key differences between these sets of standards in some areas, but also found that interior mirrors provide an equivalent level of safety in the EU and U.S., for instance.

Outside of the TTIP context but related to it, the U.S., EU and Japan have put forward a proposal at the multilateral Working Party 29 body in Geneva that aim to foster smoother implementation of so-called Global Technical Regulations (GTRs) for autos. These are intended to be a way for auto-producing nations to harmonize certain standards, but the system has not delivered on this promise; the U.S. has often ended up altering GTRs prior to adopting them because its regulatory system requires it to take into account input from stakeholders.

A trilateral “white paper” on how to address this issue and others was discussed at the Working Party 29 meeting in November and is expected to see further discussion at a session in March, the industry source said.

The U.S. and EU car industries are also hoping to complete by the next TTIP round, slated for the week of February 22, a study showing the potential economic benefits of granting mutual recognition of certain safety standards.


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