German vice-chancellor Sigmar Gabriel is Europe’s most talented undertaker. He can bury political discussions that aren’t even dead yet.
“The negotiations with the U.S. have de-facto failed,” Mr. Gabriel said in late August, as U.S. and E.U. negotiators were preparing for the 15th round of talks in October to try to hash out an agreement over the proposed Transatlantic Trade and Investment Partnership (TTIP). “Things are not moving on that front.”
Mr. Gabriel has just returned from the summer break. He is no longer just Germany’s economics minister. He’s the leader of the center-left Social Democrats and a candidate for chancellor. Mr. Gabriel senses no prizes are to be won in Germany with TTIP. So he hauls out his shovel and personally digs a grave for the world’s largest free-trade zone.
Mr. Gabriel knows he has the majority of Germans behind him. Although 55 percent said they favored TTIP in 2014, support withered to 17 percent by April 2016. About twice as many Germans emphatically opposed the agreement.
The TTIP deal seems curiously out of touch with the times. Elites are promising growth and leaps in prosperity in the name of “good economic sense.” But over the past 20 years that good sense has shifted well-paying industrial jobs to China. It has established a low wage sector, and maximized the profits of global companies. Europe has used taxpayers’ money to bail out “systemically important banks” that made bad bets and lost.
Meanwhile, good legal sense on both sides of the Atlantic is concerned over what the German Association of Judges characterized as “creating special courts for certain groups” of litigants to protect investment. The real concern is over the primacy of moneyed interests.
Opposition to TTIP is also a protest against the systematic, anonymous and powerful in the global economic processes. It’s an attempt to win back the concrete and tangible, to regain policy-shaping political power on a local level.
Lastly, there is a yawning abyss of absurdity between the TTIP’s political aspirations and its implementation. Chancellor Angela Merkel, leader of the center-right Christian Democrats, is concerned with developing a “market power” that also sets “global standards” for China and India.
But the negotiations might end because the producers of 30 percent of the worldwide gross domestic product can’t agree on the exclusivity of designations of origin – such as apply to Meissen porcelain and Parma ham.
A few economists and company leaders say the stalled negotiations should be called off completely. Others are unconcerned. Stefan Sommer, the chairman of the automotive parts supplier ZF Friedrichshafen, said: “The world would continue to turn even without this agreement.”
He’s right. German companies don’t need the TTIP to convince Americans of the merits of German products. The United States has replaced France as the number one target nation for German exports, despite scandals and compensation lawsuits in the United States against Bayer, Deutsche Bank and Volkswagen.
Germany shipped goods totaling €114 billion ($128 billion) in value across the Atlantic in 2015, more than to Italy and Poland combined. The balance of trade surplus – the difference between exports and imports – was over €50 billion.
In other words, while the TTIP negotiations were developing into a trans-Atlantic bone of contention and the political mood darkening, German companies went about their business unaffected.
It isn’t that the foreseeable failure of the proposed free-trade zone is leaving them cold. Even ZF Friedrichshafen’s Mr. Sommer is pushing hard for a “harmonizing” of product standards and norms in trans-Atlantic trade because, he said, “differing global regulations” present “a considerable burden for industry.” And yet the industrial world’s lament is muted.
Another factor is that private consumption in Germany has replaced exports as the economic driver. The latest export figures don’t bode well. In July, statisticians recorded minus 10 percent growth compared with the same month last year. Still, most economists are convinced that exports will pick up in 2017 and 2018, after 2016’s slump. The Institute for the World Economy (IfW) in Kiel is expecting about 4 percent growth in 2017. The rate in 2018 is expected to increase to almost 6 percent.
What’s more, when one considers the surplus in the current account balance – which includes income as well as cross-border financial payments and trade in goods and services – German companies are expected to regain the title of world export champ from China this year.
According to estimates by the Ifo Institute, Germany’s most influential economic research body, the country is heading for a $310 billion (€275 billion) surplus this year, corresponding to 8.9 percent of Germany’s economic performance.
Things are going well for exporters mainly because demand for German products is not particularly price-sensitive. Many German companies are world market leaders in their industries or serve niche segments where very little foreign competition exists.
The “Made in Germany” seal still stands for outstanding quality – something consumers are prepared to pay a considerable premium for.
Also, German manufacturers of capital goods attract customers because they offer complete packages and a full range of services from just one source. Companies provide such things as financing and maintenance tailored to the needs of their customers. That creates a bond that prevents customers from immediately running to the competition when prices rise.
Empirical research shows German exports suffer comparatively little when their ability to compete on price worsens.
That was the case in the times of the deutsche mark. After exchange rates were allowed to float freely in the early 1970s, the currency increased in value for decades. That had the effect of companies putting a whip to productivity and quality. They drove down costs and improved the quality of their products to maintain market share. It was akin to the birth of a German export miracle.
To this day, quality rather than the price is the decisive factor for those buying German products. TTIP’s failure won’t change that – if only because the average customs tariff in trans-Atlantic trade is just 3 percent.
So can German business lean back and relax while politicians drive TTIP into a wall? It’s not that simple.
And certainly not as simple as the predictions of the TTIP proponents. Some studies predict annual growth of 0.5 percent in Europe’s gross domestic product, and a 0.5 percent increase as the overall effect by 2027. Some predict an increase of 181,000 jobs in Germany, and others put the figure at 100,000. But that’s not what legitimate (and serious) projections looks like.
“Given the many heterogeneous subjects being negotiated with the TTIP, the conventional effects’ estimation models have their limits,” said Rolf Langhamme, IfW’s free-trade researcher.
The European Commission, he says, believes numbers impress the public. Instead, they have “mostly provoked confusion, doubt and opposition,” he said.
Only two things are certain in the opinion of most economists:
The trade volume between Germany and the United States would be increased by the TTIP. And second, “the greatest stimulus for trans-Atlantic business isn’t dependent on tariff reductions,” said Erdal Yalcin, the Ifo Institute’s foreign-trade expert.
Far more important, he says, is that the TTIP is focusing attention on non-tariff trade barriers. They include the harmonization of consumer-protection regulations, the standardizing of consumer products and the regulation of services that companies must fulfill if they want their products sold on the other side of the Atlantic.
If TTIP fails, Ms. Merkel will be right: Europe and the United States would lose control over the definition of global standards and product regulations.
Of course, the question remains whether the world needs such politically determined standards at all. Why shouldn’t the consumer decide themselves which products and, by extension, which safety standards they will buy?
Even the British social philosopher John Stuart Mill (1806-1873) wanted to let a hypothetical passer-by know only that the bridge to be crossed was rotting but in no way wanted to prevent them from attempting to cross it.
So, in an era when accessing information is child’s play, why not leave it to consumers whether, for example, they want to eat American-cultivated, genetically-modified corn or prefer to consume organically-grown vegetables from the German countryside?
Instead of trying to gain an advantage through political haggling over standards and safety in goods and services, the European Union and the United States should try as far as possible to leave it to the market which standards will prevail.
That would be completely in line with what the liberal pioneers of free trade envisioned. They saw the unrestricted exchange of goods and services as the best way to force a division of labor and increase prosperity.
For example, British economist David Ricardo (1772-1823) demonstrated with his theory of comparative advantage that all participants profit from free trade. The basic thinking is that since resources are in short supply, companies are forced to concentrate on the production of goods in which their cost advantage is relatively the largest. In this way, companies that have cost disadvantages also have a chance to profit from the division of labor and trade. This improves the worldwide supply of goods and increases prosperity.
When politicians determine product standards, they are lessening the choices for the consumer.
However, the TTIP negotiations have very little to do with this liberal ideal of a free trade. When politicians determine product standards, they are reducing consumer choice.
Also, although the TTIP frees trade of tariffs between the E.U. bloc and the United States, the proposal excludes the rest of the world. This will cause trade flows to be redirected. Thus the duty-free traffic of goods between the European Union and America would give European companies an initial advantage compared with companies from most other regions around the world. For example, Turkey.
Since the country is tied to the E.U. bloc in a customs union, the U.S. producers would be able to offer their wares in Turkey. But that doesn’t apply in reverse because Turkey isn’t a member of the European Union. To prevent Turkish goods from being able to gain free access to the U.S. market through, so to speak, the back door (as upstream products of E.U. goods), companies in the European Union would have to prove that the percentage of Turkish intermediate products doesn’t exceed a certain upper limit.
The takeaway? Maybe this: TTIP is dead. So what? Do a better job next time!
This article first appeared in the business daily, WirtschaftsWoche and was written by Malte Fischer, Dieter Schnaas, Simon Book, Marc Etzold and Annina Reimann. To contact the authors: firstname.lastname@example.org, email@example.com