Time for a TTIP Light?

Stormy-Annika Mildner

Executive Director, The Aspen Institute Germany

Stormy-Annika Mildner is the executive director at the Aspen Institute Germany and a Geoeconomics Non-Resident Senior Fellow at AICGS. She was Sherpa of the Business 20 (B20), the official Engagement Partner of the German G20 Presidency and Head of the External Economic Policy Department at the Federation of German Industries (BDI).

Germany and Transatlantic Economic Relations

“Germany should dismantle transatlantic trade barriers and make a new start on a free trade agreement that increases prosperity while protecting climate and social policy standards,” wrote the head of the German Chancellor’s Office Wolfgang Schmidt (SPD) in a strategy paper together with SPD foreign policy expert Michael Roth in mid-October 2022. According to the paper, trade agreements with liberal democracies could reduce dependencies on individual countries and diversify German and European foreign trade.

The Social Democratic Party has come a long way since the negotiations for a Transatlantic Trade and Investment Agreement (TTIP). While the party never joined the anti-TTIP movement TTIP unfairhandelbar and was less opposed than its now-coalition partner Bündnis 90/Die Grünen, it showed little enthusiasm for a trade agreement with the United States. Germany’s then-Vice Chancellor and Economy Minister Sigmar Gabriel declared the agreement for dead in 2016, given the large opposition in many EU member states and the difficult negotiations with the United States.

It did not come as a surprise that the coalition agreement of the new government of SPD, Greens, and the Free Democratic Party of late 2021 did not mention a trade agreement with the United States. When German Finance Minister Christian Lindner propositioned to restart the negotiations for a transatlantic trade agreement in March 2022, his proposal was met with little enthusiasm among the coalition partners. Robert Habeck, Vice Chancellor and Federal Minister for Economic Affairs and Climate Action, outright rejected the idea. A trade agreement with the United States was also not mentioned in the coalition government’s trade strategy (Eckpunktepapier), which was put forward in July 2022.

German Chancellor Olaf Scholz (SPD) expressed his support for trade agreements in a speech in Prague late August 2022, albeit without specifically mentioning an agreement with the United States: “Europe owes its prosperity to trade. We must not leave that field to others. We therefore need additional, durable free-trade agreements and an ambitious trade agenda.”

A Changing Geopolitical Environment

The change in tune is, without doubt, a reaction to the new geopolitical and geoeconomic environment Germany finds itself in.

When Russia invaded Ukraine on February 24, 2022, a shockwave went through Germany. Few had believed—or wanted to believe—that Russia would attack its neighbor and call into question the very existence of Ukraine as a sovereign nation. A few days later, on February 27, 2022, German Chancellor Olaf Scholz gave his now famous “Zeitenwende” speech before the Bundestag heralding a turning point in post-war European history as well as German foreign and security policy. Since then, it has become blatantly clear how dependent Germany is on Russian gas and how misguided German energy policy had been over the last decade. German industry is struggling with high gas prices and shortages. Households are going to feel the pain when heaters will be turned up with the arrival of winter. Russia’s cruel violation of international law and human rights sharpened the eye for Germany’s dependence on another difficult player on the international stage—China.

The geopolitical environment is changing rapidly. Great power politics threatens to divide the world into new blocks, with an increasing rift between democracies on one hand and autocracies on the other and many countries in the middle, gravitating towards one of those poles. And with this, the narrative on trade is changing in Germany. Trade is more and more seen from a security lens: as a source of national vulnerabilities on one side and as a coercive, strategic instrument on the other.

The narrative on trade is changing in Germany. Trade is more and more seen from a security lens: as a source of national vulnerabilities on one side and as a coercive, strategic instrument on the other.

The July 2022 Eckpunktepapier thus reads: “Particularly in view of the current crises, we want to reduce dependence on individual countries and broaden both import countries and sales markets. Above all, we want to intensify cooperation and trade with countries with which we share fundamental values of liberal democracy, and to this end we want to drive forward appropriate trade agreements on the basis of the most progressive EU trade agreement.” The agreement with Canada, CETA, is to be ratified (under certain conditions, mostly regarding investment protection), new agreements are to be concluded, and the World Trade Organization (WTO) is to be reformed and strengthened. Foreign trade and investment also play an important role in the new national security strategy, which the foreign ministry is currently deliberating.

The most important trade and investment partner for Germany outside the EU is the United States. In trade in goods, the United States ranks first as an export market and third (after China and the Netherlands) for import goods. Overall, the United States is Germany’s third largest trading partner for goods outside the EU according to the Federal Statistical Office of Germany. The United States is by far the most important source of foreign direct investment for Germany and the most important destination country for German investment (measured in stocks, 2020, Deutsche Bundesbank). German companies are the fourth largest foreign employer in the United States, accounting for a total of approximately 700,000 jobs.

Remember TTIP—and Its Opposition?

The history of TTIP, however, suggests a renewed attempt at a U.S.-EU free trade agreement will be an uphill climb. Negotiations for TTIP began in 2013 under European Commission President José Manuel Barroso and U.S. President Barack Obama. While a political framework agreement was supposed to be in place by 2016, at that point the negotiating parties were still far from consolidated treaty texts on many core issues. Particularly contentious issues included agricultural trade, where the United States has a strong market-opening interest, while the EU is more on the defensive side. The EU, on the other hand, wanted more access to government procurement in the United States—a difficult topic for the United States. Interests also diverged regarding investment protection and regulatory cooperation.

This was, however, not the only problem. Rather, TTIP was highly controversial in several EU member states. No other trade agreement caused as much opposition in Germany as TTIP. According to a Eurobarometer survey of all EU member states (2015), Germany (59 percent of the population against, 27 percent for TTIP) was one of the four EU member states in which the majority of the population was against TTIP, along with Austria (70 percent against, 22 percent for), Luxembourg (47 percent versus 40 percent) and Slovenia (47 percent versus 41 percent). More than 200,000 people marched against TTIP on the streets of Berlin in 2015. A well-organized civil society movement, “Stop TTIP,” with members ranging from environmental NGOs to unions, effectively organized the opposition.

Opponents criticized the lack of transparency in the negotiations. Many feared that TTIP would lower standards in Europe in areas such as workers’ rights; consumer, environmental, and health protection; public services; culture; animal welfare; and food. There were also warnings that increasing competition as a result of trade liberalization would destroy jobs and lead to growing income inequality in Germany. Apart from regulatory cooperation, investor protection and investor-state dispute settlement (ISDS) met particularly strong opposition. Many feared a wave of lawsuits from U.S. companies. While the business community strongly supported TTIP, its fact- and figure-oriented arguments did not catch on in the emotionally-charged public debate. Given the strong opposition from civil society, it is hardly surprising that the German government did not take a more proactive role in the TTIP negotiations.

During the presidency of Donald Trump, transatlantic relations were burdened by a multitude of trade conflicts (U.S. steel and aluminum tariffs; Airbus-Boeing conflict). Some, who had been critical of TTIP in Germany, then wished for a binding agreement to hold Washington more accountable. In July 2018, Trump and European Commission President Jean-Claude Junker agreed to start negotiations on reducing industrial goods tariffs and non-tariff trade barriers to ease transatlantic relations. In January 2019, the United States tabled its negotiating objectives for an agreement with the EU. In mid-April 2019, the Council of the European Union adopted two negotiating mandates. The mandates related firstly to the reduction of industrial goods tariffs and secondly to the mutual recognition of conformity tests to remove non-tariff barriers to trade. However, little came out of the initiative.

Time for a TTIP Light?

The election of Joe Biden allowed for a restart of the transatlantic relationship. Not only did the United States and the EU launch the Trade and Technology Council (TTC); they worked closely together to align their sanctions against Russia. A big point on the transatlantic agenda is how to counter unfair trade practices by China. If the United States and the EU wanted to reduce dependencies on China, counter unfair trade practices, and more forcefully go after human rights violations, they also need to outcompete the country economically. And for this, the impetus for economic growth is necessary. One way to generate such growth is deeper transatlantic economic integration by eliminating barriers to trade—tariffs and non-tariff barriers.

Without doubt, there is little appetite for an ambitious transatlantic trade agreement on both sides of the Atlantic—and the European Commission also does not have a mandate for this. But what about a TTIP light—eliminating all industrial tariffs or sectoral agreements? From a welfare and strategic point of view, this would be highly desirable. However, it is still a hard sell.

The EU and the United States should not miss the opportunity to advance the negotiations within the TTC, agree on final solutions for the conflict on steel and aluminum tariffs as well as aviation subsidies, and tackle new conflicts on the horizon such as on discriminatory public procurement and outbound investment screening.

President Biden has had a hard time getting major legislation through Congress given the small Democratic majorities in the House of Representatives and Senate. Most recently, he scored points on two legislations: the CHIPS Act and the Inflation Reduction Act, boosting his approval ratings. Nonetheless, the outlook for the Democrats is not great for the upcoming mid-term elections. According to aggregate data from FiveThirtyEight, Democrats are favored to retain control over the Senate, while the Republicans are forecasted to win the majority in the House of Representatives (September 2022). A split government will make it even harder for Biden to get any legislation through Congress, and any attempt will require a lot of political capital.

For a trade agreement, which requires Congressional action, to have any chance of passage, Biden would first need to ask Congress for Trade Promotion Authority (TPA). A trade agreement negotiated with TPA enjoys certain benefits: Both chambers of Congress must vote on the package deal without being able to make any amendments. And simple majorities suffice for passage. However, Democrats are rather critical of trade agreements, and the Republicans will not be too keen on granting Biden any political wins in the run-up to the presidential elections in 2024. It is thus rather unlikely that Biden will ask for and be granted TPA. This would leave him with the option of an executive trade agreement. The United States concluded a sectoral agreement with Japan in 2019, which took effect in January 2020 without formal action by Congress. Thus, there is a precedent for a binding executive trade agreement. However, Trump earned criticism on both sides of the aisle for bypassing Congress. Whether or not Biden would risk another big conflict within his own party is rather questionable.

In the EU, a limited tariffs-only trade agreement with the United States would certainly be less controversial than an ambitious TTIP-like endeavor, as it would not touch upon controversial issues such as regulatory cooperation and investment protection. There is an increasing appetite for trade agreements—also in Germany—given the changing geopolitical environment as can be observed regarding the trade agreements the EU is negotiating with New Zealand and Australia. In addition, the EU Commission still has its mandate to negotiate an industrial tariffs agreement with the United States. What’s more, such a trade agreement would fall into the exclusive competence of the EU. Thus, it only needs consent from the European Parliament and the Council, while the parliaments of the member states do not have to ratify the agreement. However, a sectoral agreement such as the one between the United States and Japan would be controversial in the EU—and also in Germany. First, it would not encompass sustainability issues such as binding labor rights and environmental and climate protection. Second, it would not feature a mechanism to solve conflicts or enforce rules. Third, it would not be fully compatible with the rule book of the WTO. And the multilateral trade organization is still a major pillar of EU trade policy.

Another difficult topic is agriculture. Trade in agricultural products is not covered by the mandate of the European Commission. Granting more market access in agriculture is always a very hard sell in all trade agreements for the Commission. The Biden administration, on the other hand, is unlikely to go for a tariff agreement without more agricultural market access in the EU. This holds even more true in the light of the upcoming elections: Rural areas and many more rural states are strongholds of the Republicans. The Democrats will have to fight hard to hold seats there. It thus does not come as a surprise that U.S. Trade Representative Katherine Tai has discouraged the idea of a TTIP light in all her visits to the EU and European countries.

The Road Forward

Where does this leave the proposals by the SPD and the FDP? Is a transatlantic trade agreement out of reach? It would be a strong signal in these geopolitically challenging times. However, several preconditions would have to be met.

First, the traffic light coalition of SPD, Greens, and FDP has to strongly rally behind the proposal, leaving no room for doubt that this is a joint initiative. Furthermore, Olaf Scholz needs to throw his whole weight behind the initiative.

Second, the German government needs to secure the support of other EU member states. An important step would be a joint statement of Germany and France on the content of such an agreement and a possible lending zone. However, other countries such as Austria and the Netherlands must also be convinced.

Third, the EU member states have to work closely together with the European Commission to avoid a public relations disaster reminiscent of the last attempt and garner the support of civil society and business early on.

Fourth, the EU and the United States need to engage in an open and frank discussion on the highest political level on the possibility of a binding trade agreement and its content.

Overall, not an easy route to take—and with a very uncertain outcome. In the meantime, the EU and the United States should not miss the opportunity to advance the negotiations within the TTC, agree on final solutions for the conflict on steel and aluminum tariffs as well as aviation subsidies, and tackle new conflicts on the horizon such as on discriminatory public procurement and outbound investment screening. With the presidential election coming up in the United States in 2024, time might be running short to put the transatlantic economic partnership on sound footing.