The proposed Transatlantic Trade and Investment Partnership (TTIP) is a trade and investment agreement currently being negotiated by the United States and the 28 nations forming the European Union. President Obama announced upcoming TTIP talks on February 13, 2013, and negotiations started in July 2013. The negotiations aim at reducing trade barriers in a wide range of economic sectors, to facilitate the buying and selling of goods and services between the European Union and the United States, as well as to encourage transnational investment in companies in both regions.
This article opens a series discussing the TTIP and the trade barriers and regulations being negotiated, beginning with tariff reforms. Tariff reforms are typically considered the most basic part of trade negotiations and will be so for the TTIP. Upcoming articles will look at other trade barriers and issues, including trade-inhibiting regulatory measures, and restrictions on investments. The food and agriculture industry will be a major focus of the TTIP negotiations, and we will place special emphasis on that industry in the series.
In 2013, European Union exports to the United States represented roughly €288 billion and agricultural products represented €15 billion, or 5.3 percent of overall trade (see Table 1). As for the European Union, total imports from the United States represented €196 billion in 2013; of that €9.75 billion or 5.0 percent were from agricultural products. The European Union clearly has an agricultural trade surplus with the United States as shown in Figures 1 and 2. Indeed, agricultural trade share in 2013 corresponds to 12.8 percent of European Union exports in value to the United States and 9.6 percent for imports.
What Is a Tariff?
A tariff is a tax on imports. For example, before an American buys an automobile imported from Japan, a 2.5 percent tax has been paid by the auto dealership for that car to be allowed into the country. So, if the American auto dealership has paid $20,000 to Toyota to import a Prius, it has paid 2.5 percent of that amount, or $500, to the U.S. government for the Prius to be allowed off the ship. Tariffs make it harder for foreign firms to compete with domestic firms as they try to sell their products to consumers in the country that has imposed the tariff. Higher domestic consumer prices of the good on which the tariff was imposed result.
One principal type of tariff is the ad valorem tariff, which imposes a tax of a certain percentage of the import price of a good, such as the U.S.’s 2.5 percent automobile import tariff. Another principal tariff type is the per-unit tariff, which is a tax of a fixed amount per unit of an imported good—for example the 19.8 cents per liter U.S. tax on imported wine. Dividing a per-unit tariff by the value of a unit of the good gives the good’s ad valorem equivalent tariff. For example, if the price of a bottle of wine paid by an importer is $19.80, it would face an ad valorem equivalent tariff of 0.198/19.80, or1 percent.
What Are Current U.S. and EU Tariff Policies?
The United States imposes an average (over AV and AVE tariffs) tariff rate of 1.7 percent for manufactured products from Europe, and a 6.6 percent average tariff rate for agricultural products. U.S. dairy products are among the most protected, with a 22 percent average tariff duty (including 40 percent on yogurts and 33 percent on unripened cheese). This is a sector in which European exports are often competitive with domestic production in the United States. Protection is also significant for a number of articles of apparel, knitted fabrics, and shoes, with tariff rates averaging about 10 percent over these. Specific types of steel products are also significantly protected.
On the European side, protection is focused mainly on agricultural products, with an average tariff rate of 12.8 percent, compared to 2.3 percent for manufactured products. Tariffs on meat are the most pronounced, averaging 45 percent in a sector where American producers are very competitive and accounted for nearly 20 percent of world exports in 2010. The beef sector is particularly affected, with 97 percent, 75 percent and 146 percent average tariffs on fresh boneless meat, frozen boneless meat, and frozen edible bovine offal (the internal organs of an animal used as food). In several other highly protected sectors, such as dairy, milled products, and sugar, the competitive position of the United States is not strong, but tariffs are in place to protect EU producers from competition from other foreign counties. In the manufacturing sector, protection is low for most products, but is far from negligible for clothing (with an average tariff of 11 percent) and footwear (9.4 percent), transport equipment (7.8 percent), and most automobiles (10 percent).
The economic impact from TTIP implementation will depend on the details of the final agreement. While the United States and the European Union currently have tariffs in place on certain goods, the tariffs are relatively low from a historical point of view. Low tariffs between the two are the result of successfully conducted trade liberalization negotiations over many decades. Because tariff rates are already low, current estimates predict that simply reducing tariffs between the United States and the European Union would not have major effects on either economy. Since tariff rates are already low, reducing them to zero would make little difference.
Recent studies have estimated that a more comprehensive trade liberalization that removes regulatory barriers and harmonizes production requirements would increase trade significantly and have noticeable impacts on national incomes and employment. Regulatory barriers, as compared with tariffs, are typically defined as non-price and non-quantitative restrictions on trade in goods and services. Such barriers can include border measures, such as customs procedures, as well as domestic laws, regulations, and practices that have an impact on investment. Such matters generally involve sensitive issues often surrounding agricultural and food products, particularly disagreements over sanitary and phytosanitary standards. One study assessed different liberalization scenarios between the United States and the European Union, and concluded that in the ambitious liberalization scenario, TTIP leads to a total of two million additional jobs created. The study also found, however, that TTIP might lead to job losses in some countries, such as 100,000 jobs lost in Canada. The study also estimates that real wages in the directly affected countries would rise on average by about 2.3 percent.
Tariff reform between the United States and the European Union is a very basic part of the TTIP negotiations to reduce barriers to trade. Four key studies that examine the impacts from different degrees of liberalization, however, all conclude that because tariff rates between them are already quite low, the United States and the European Union should not expect to be significantly affected by tariff elimination alone. The studies tend to agree that reductions of non-tariff barriers and harmonization of regulations would have much more significant effects on U.S. and EU economies. We will discuss non-tariff barriers and regulatory harmonization in upcoming articles in this series.
Table 1. Share of agricultural products of the total value (in 1,000 euros) of exports and imports from the EU to the US 2009-2013. Source: Eurostat, 2014.
Figure 1. EU28 agricultural products exports 2008-2013 with the U.S. (1,000 Euros)
Figure 2. EU28 Agricultural products imports 2008-2013 with the U.S. (1,000 Euros)