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Case Number 2045.0

This case was written by Anjani Datla, case writer at the John F. Kennedy School of Government (HKS), Harvard University for Albert L. Williams Professor of International Trade and Investment, Robert Z. Lawrence. Funding for this case was provided by the Joseph B. Tompkins, Jr. Fund for Case Study and Research. HKS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective manage- ment. (January 2014)

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Setting the Standard in Free Trade: The Making of the Transatlantic Trade and Investment Partnership

Introduction

On July 8 2013, more than 150 negotiators from the European Union (EU) and United States (US) began talks

on what could become the world’s largest free trade agreement—the Transatlantic Trade and Investment Partner-

ship (TTIP). If the negotiators succeeded, the TTIP would reduce trade barriers between two economic giants and

encompass nearly half the global economy.

The challenge of crafting the bold and ambitious TTIP fell to technocrats at the office of the United States

Trade Representative (USTR) and the European Commission Directorate General of Trade (DGT). For lead TTIP ne-

gotiators, Daniel Mullaney at the USTR, and Ignacio Garcia-Bercero at the DGT, the stakes were extraordinarily

high. Under pressure from US President Barack Obama and European leaders to complete the TTIP by the end of

2014, the negotiators were in a race against time.

For decades, the United States and countries of the European Union shared a successful trade and investment

relationship, described as “the most prosperous and dynamic economic bond in the world ever.”1 In 2013, the US

and EU accounted for 30 percent of global trade. Every day, $2.7 billion in goods and services were traded across

the Atlantic (see Exhibit B). And together, the US and EU had bilateral investments worth roughly $4 trillion (see

Exhibit C).2 Yet, proponents of free trade argued that substantial regulatory and “behind-the-border” obstacles

remained on both sides of the Atlantic, preventing American and European markets from reaching their full eco-

nomic potential. By one estimate, a comprehensive US-EU trade agreement would create one million jobs over 10

years, and increase European and American GDP by at least 0.5 percent each. *

US President Barack Obama and European leaders including German Chancellor Angela Merkel and British

Prime Minister David Cameron, hoped a transatlantic pact would provide a low-cost boost to struggling American

and European economies (which were mired in recession and high unemployment since 2008, and buckling under

* In January 2013, a “High Level Working Group” commissioned by American and European leaders to identify measures for

increasing transatlantic trade, reported that a “deep and comprehensive” trade pact would mutually benefit the US and EU by promoting economic growth and creating jobs.

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HKS Case Program 2 of 20 Case Number 2045.0

rising competition from Asia). “Both of us need growth, and both of us also have budgetary difficulties,” said Jose

Manuel Barroso, president of the European Commission. “Trade is the most economic way of promoting growth.”3

To many observers, it appeared that the time for broad transatlantic trade liberalization had arrived.

President Obama formally announced the TTIP in his 2013 State of the Union address. “We will launch talks on

a comprehensive Transatlantic Trade and Investment Partnership with the European Union,” he said, “because

trade that is fair and free across the Atlantic supports millions of good-paying American jobs.” 4 Prime Minister Da-

vid Cameron, calling the TTIP a “once-in-a-generation prize,” asserted that “a deal will create jobs on both sides of

the Atlantic and make our countries more prosperous.”5

Billed as a transformational trade agreement, the TTIP would go beyond tariffs to cut non-tariff barriers, ex-

pand trade in services, streamline regulatory standards, and incorporate elements of trade relevant to a rapidly

evolving global economy. In sheer size and scope no other bilateral trade agreement would compare to the pro-

posed TTIP. But the United States and European Union faced a sobering reality. “The reason we have not had a

trade agreement like this between ourselves in the last several decades isn’t because nobody thought of it,” said

United States Trade Representative, Michael Froman. “It’s because there have always been issues that have

tripped us up.”6 Many of the easier trade deals between the EU and US were already in place. On the negotiating

table were serious issues that would test fundamental differences in American and European approaches to trade

and public policy, including contentious topics like genetically modified food, regulatory standards for pharmaceu-

ticals, and notions of privacy. “The low-hanging fruit doesn’t exist here anymore,” EU Trade Commissioner Karel De

Gucht explained.7 Yet, spurred by economic necessity, and informed by past mistakes, Froman and De Gucht ex-

pected both continents to bridge the gap with the TTIP.

Could lead TTIP negotiators, Mullaney and Garcia-Bercero succeed where their predecessors had failed? Could

the negotiating teams (haggling over thousands of issues, across a dizzying array of industries, and operating under

intense scrutiny) rewrite the rules of transatlantic trade?

Mega Regionalism in Motion

The offices of the United States Trade Representative and the European Directorate General of Trade had to

undertake a substantial amount of preparatory work before they could begin negotiations in earnest. In March

2013, per US Congressional requirements, the Obama administration informed the US Congress of its intent to

negotiate the TTIP with the European Union and gave Congress members 90 days to comment. * At the same time,

in Brussels, the European Commission—the executive arm of the EU—requested formal approval from the Council

of the European Union to begin negotiations on the TTIP. † The request included a list of general objectives the talks

were expected to achieve, also known as negotiating directives. The negotiating directives were presented to the

European Parliament at the same time and later endorsed by the EU Council. In June 2013, the US and EU revealed

* Under the procedures of the 2002 Trade Promotion Authority, which was granted by Congress in 2002 and expired on July 1, 2007, this notification began a 90-day consultation period for Congress to comment on the proposed negotiations, after which the Administration could start negotiations. † The European Commission negotiates with trading partners on behalf of the European Union, working closely with member

states through the Council of the European Union (also known as the “Council of Ministers”).

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HKS Case Program 3 of 20 Case Number 2045.0

their negotiating teams and a sampling of the topics and industries to be covered in the negotiations (see Exhibit A

for list).

In 2013, both sides engaged in consultations with stakeholders, including businesses, regulatory organizations,

and civil society groups, and commissioned studies on the potential impacts of the TTIP. Many corporations, large

and small, saw transatlantic trade liberalization as key to boosting their exports and global competitiveness. But

consumer groups were wary of businesses exercising undue influence in the TTIP talks. “What [the corporations]

consider trade irritants, we consider the most important consumer, health, environmental, privacy, financial stabil-

ity safeguards on either side of the Atlantic,” said Lori Wallach, a director of Public Citizen, an advocacy group in

the US. “This is an effort to achieve through trade what that they could not achieve through democratic processes

domestically.”8 Mullaney guaranteed that the TTIP negotiations would not "undermine protections for consumers,

the environment and human health and safety." Garcia-Bercero concurred, “the negotiations are not about com-

promising our standards," he said.9

Critics of the TTIP also complained about the lack of transparency in the negotiation process, particularly when

a sweeping transatlantic deal would have far reaching implications for America, Europe and the rest of the world.

Both groups claimed they would work to keep the talks transparent, but EU Trade Commissioner De Gucht ex-

plained why an element of secrecy was integral to the process. “Negotiations of all kinds—and certainly trade ne-

gotiations—involve building trust between both partners. They also involve subtle negotiating tactics and trade-

offs. Negotiations are basically impossible with TV cameras in the room," he noted. "If we want a good result,

some level of confidentiality is required."10

With the bulk of TTIP being crafted behind closed doors, developing countries worried about how the deal

would impact their own ability to shape global trade rules. “Will [the TTIP] be an ambitious EU-U.S. agreement that

will help push economies worldwide to produce safer products for the environment and consumers?” asked Chi-

nese government newspaper Xinhua. “Or will TTIP raise the market entry barriers for developing countries, making

it more difficult for their companies to reach western consumers?”11

According to trade expert, Arvind Subramanian at the Peterson Institute, “mega-regionals” like the TTIP posed

an “existential threat” to the multilateral trading process promoted by the World Trade Organization (WTO).

Subramanian warned that as such deals proliferated, “multilateral trade as we have known it will progressively

become history.”12 But with the possibility of a meaningful global trade deal rapidly eroding, were regional agree-

ments the future of trade liberalization?

The (Failed) Promise of Doha

In 2001, trade ministers from WTO members met in Doha, Qatar and famously embarked on an ambitious

multilateral trade negotiation. The Doha Round, as it came to be known, began with a staggering 155 countries at

the negotiating table and was to include trade in agriculture, goods and services, along with aspects not directly

related to trade, such as intellectual property and antitrust rules. The Peterson Institute estimated that a multilat-

eral agreement could help the world economy grow by $280 billion dollars a year.13 In addition, the negotiations

were designed to include the interests of developing countries, signaling a new era in trade liberalization.

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HKS Case Program 4 of 20 Case Number 2045.0

Yet, for more than a decade, the Doha Round floundered. A host of issues plagued the negotiations. The stick-

iest subjects were agriculture and industrial goods. Developing countries wanted rich countries to lower farm sub-

sidies and increase market access to poor world farmers. Western nations, on the other hand, wanted greater ac-

cess to emerging markets for their industrial products. By 2012, the WTO’s focus on achieving an all-inclusive

grand bargain, driven by the dictum: “nothing is agreed until everything is agreed,” had rendered the Doha Round,

by most accounts, virtually dead.

Frustrated by the stasis at the WTO, countries grew increasingly attracted to regional trade agreements. Bilat-

eral or “plurilateral” deals offered the benefits of liberalization without the compromises inherent in broader trade

integration efforts. “For too long, much of the economic force and sacrifice in [the WTO] to produce global trade

agreements has come at the expense of the US and EU,” said former USTR Ron Kirk. “We have been lectured over

and over by our colleagues from the emerging markets that they have the economic heft and prestige to demand a

seat at the table. And we agree.” But Kirk believed that emerging economies also needed to make allowances by

opening up further to America and Europe.14 Regional agreements like the TTIP, in essence, allowed America to

pursue trade with “can-do countries” rather than “won’t-do countries.”15

In 2012, the Obama administration unfurled an ambitious regional trade agenda by kicking off talks with most

of East Asia, called the Trans-Pacific Partnership. Even the EU, historically committed to a multilateral trading pro-

cess facilitated by the WTO, demonstrated a shift in policy by entering into trade agreements with Canada and the

US, and floated similar proposals with Japan and India. And many emerging economies began to enter into region-

al trade agreements of their own.

In December 2013, however, the Doha Round negotiators finally concluded their first global trade deal with a

pact on “trade facilitation”—a set of customs procedures to cut bureaucratic costs—agreed to by all 159 WTO

members. Proponents of the multilateral trade approach optimistically touted the agreement as an important

breakthrough. But critics noted that it had taken the Doha Round 12 years of extensive bickering to arrive at a

relatively limited agreement. In July 2014, just seven months after agreeing to the trade facilitation deal, India

blocked its passage, nipping the deal in the bud, and lending greater weight to the argument for regional accords

like the TTIP.

A Pincer Movement

For the US and EU, the pivot toward regional agreements belied a deeper geopolitical strategy. By the early

2000s, as the second largest economy in the world, China had begun to wield considerable influence on the global

economy. Moreover, to the dismay of developed and developing nations alike, China was routinely found guilty of

flouting WTO rules for fair trade such as dumping and subsidies. Foreign firms operating in China experienced

problems in protecting their intellectual property rights and competing with domestic, state-owned firms which

were often given special benefits. By excluding China from large trading blocs, like TTIP and the Trans-Pacific Part-

nership, the US and EU were aiming to consolidate their own global clout in the twenty-first century—and hoping

to establish a “rules-based” trading system that China and other emerging economies would have little choice but

to follow. "No individual country has the influence to persuade China to play by the rules,” said Dan Grant, Fellow

at non-partisan think tank, American Security Project. “No country's market is so big on its own that the threat of

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HKS Case Program 5 of 20 Case Number 2045.0

tariffs is enough to curb Beijing's behavior. The TTIP zone would change that. It would present China with the

choice of joining in or potentially being frozen out.”16

According to EU Trade Commissioner De Gucht, “unless the United States and Europe are in agreement, in too

many future trade cases, we would be forced to accept Chinese standards.” Alluding to China, US Secretary of

State John Kerry announced, “if [the US and EU] can bring our regulations regarding safety and other kinds of

things together… We will have established a huge number of goods and products being produced according to a

set of standards. And others who want to get into that are going to have to raise their game.” 17

The pincer movement could place Europe and America in a position of strength, but China was unlikely to

stand by as Western economies tried to shift the balance of power. Chinese officials actively campaigned for a seat

at the Trans Pacific Partnership negotiations, promoted their own mega regional agreement (the Regional Com-

prehensive Economic Partnership) and closely watched the TTIP talks. * “Intermittent claims of a potential trade

cold war are bubbling up in Chinese media, and they're likely to intensify as the TTIP negotiations advance,” ex-

plained Grant. “Moreover, developing countries would be more likely to harmonize their rules in line with the

principles of a well-designed TTIP. This is of particular concern to China, which is spending billions to pull govern-

ments into its economic orbit.”18

Deeper Economic Integration

By 2013, the cost of commerce between the EU and US was already at an all-time low. Tariffs on products sold

across the Atlantic ranged from just 3 to 5 percent.19 But the TTIP negotiators were working toward “deep and

comprehensive” trade liberalization; their sights on reducing “behind the border” trade barriers, which included:

 Increasing market access to products and services, including opening up government procurement prac-

tices, especially those of some US states, (i.e. eliminating “buy American” government contract rules);

 Streamlining standards and regulations across a range of industries such as automobiles, pharmaceuticals

and financial derivatives;

 And incorporating elements relevant to trade in the twenty-first century, like intellectual property, labor

regulations, environmental rules, foreign direct investment, and the treatment of state-owned enterprises.

The London-based Center for Economic Policy Research predicted a transatlantic trade agreement that elimi-

nated tariffs and reduced non-tariff trade costs by 25 percent would increase annual EU GDP by 1 percent and that

of the US by 0.8 percent. Annual exports for both the US and EU would grow as much as 2 percent of GDP. Given

the volume of transatlantic trade, even a less ambitious deal that left some tariffs intact, and made only nominal

cuts in non-tariff barriers could yield substantial gains, according to the Center. 20

* The Regional Comprehensive Economic Partnership is a proposed free trade agreement between the Association of Southeast

Asian Nations (ASEAN) countries, which include: Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, the Philip- pines, Singapore, Thailand and Vietnam, plus the countries ASEAN has free trade agreements with, namely, China, Australia, India, Japan, Korea and New Zealand.

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HKS Case Program 6 of 20 Case Number 2045.0

In theory, such an overarching transatlantic deal would be easier to reach than an agreement with countries

from the emerging world, with vociferous protectionist factions. In practice, however, large gaps remained. “For us

and probably for the Europeans, the issue… is: Where can a comprehensive negotiation add value to the relation-

ship?” said Mullaney, chief US negotiator for TTIP. “The United States and Europe have been working together for

a long time to try to remove trade and investment barriers, so any low-hanging fruit has long ago been eaten and

digested. We’re left with many of the challenging issues.”21

But the big economic prize lay in the much harder to negotiate areas of common regulatory standards and

non-tariff barriers.22 It would be up to lead negotiators Garcia-Bercero and Mullaney to find new ways to address

old disagreements.

Market Access

In addition to expanding trade in goods, the US and EU were looking to open up markets for services, which

made up the bulk of their economic output. But powerful vested interests on both sides of the Atlantic jeopardized

these ambitions. In a broad range of industries, from financial derivatives to audiovisual services, lobbying groups

and political forces could easily press for exemptions, known as “carve outs,” hollowing out the final scope of the

TTIP.

French Film

In June 2013, France and other EU countries gave the TTIP negotiators an early taste of the challenges that lay

ahead. For many years, European nations had successfully protected sectors the EU considered “culturally sensi-

tive.” France’s subsidized films and television programs were prominent beneficiaries of this cultural exception.

Even before the TTIP was formally announced, France and several other European countries demanded that audi-

ovisual services remain out of the European Commission’s negotiating mandate, particularly because the “power

of the United States’ audiovisual industry worldwide makes this sector one of [the US’s] priorities in all trade nego-

tiations.”23

The EU did not include audiovisual services in the list of sectors to be negotiated under the TTIP, though Jose

Manuel Barroso, the head of the European Commission, left open the possibility of adding them into the agree-

ment later.24 The US, however, hoped for more productive discussion. “There are going to be sensitivities on both

sides. There are going to be politics on both sides. But if we can look beyond the narrow concerns to stay focused

on the big picture—the economic and strategic importance of this partnership—I'm hopeful we can achieve the

kind of high-standard, comprehensive agreement that the global trading system is looking to us to develop," Presi-

dent Obama said.25

Buy Transatlantic

A central goal in the TTIP negotiations related to improving access to government procurement opportuni-

ties.26 Europe urged the US to set aside “Buy American” bidding preferences in government contracts for all sec-

tors, at all levels of government.

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HKS Case Program 7 of 20 Case Number 2045.0

Mullaney and his colleagues at the USTR were authorized to negotiate federal procurement processes under

the TTIP, but state government contracts were outside the USTR’s jurisdiction. State governments could voluntarily

agree to TTIP procurement obligations, as 37 of them had done in the plurilateral WTO Agreement on Government

Procurement. 27 In difficult economic times, however, it was hard to imagine that representatives from economical-

ly depressed states would be willing to set aside “Buy American” protections in government contracts to promote

free trade.

Regulatory Coherence

Multinational corporations had long complained that differences in US and EU regulations were far bigger bar-

riers to trade than tariffs or quotas. Factors like different drug approval processes, separate automobile safety

standards, and consumer-product safety procedures introduced extra costs for companies doing business on both

sides of the Atlantic. Economists similarly argued that even though regulations were designed to protect consum-

ers and the environment, different standards and certification processes negatively affected the competitive posi-

tion of firms. A 2005 OECD study estimated that regulatory differences between the US and EU cost America

roughly 1 to 3 percent of its GDP.28 TTIP proponents asserted that a common standard or “mutual recognition” of

US and EU regulatory processes would significantly reduce firms’ costs of complying with two sets of rules, and

help boost both economies.

A single transatlantic standard appealed to a diverse range of industries, such as automobiles, toys and foot-

wear. A US Congressional Research Service report on the TTIP observed that:29

Even though similar cars are sold in both [US and EU] markets, there are widely different transat-

lantic standards and testing requirements for many parts, including wiper blades, headlights,

light beams, and seat belts… [A] U.S.-based producer of light trucks found that a popular U.S.

model the manufacturer wanted to sell in Europe required 100 unique parts, an additional $42

million in design and development costs, incremental testing of 33 vehicle systems, and 133 ad-

ditional people to develop—all without any performance differences in terms of safety or emis-

sions. EU manufacturers face similar issues in reverse when selling an EU-designed model in the

United States.

For others, the notion of a common transatlantic standard, tapped into deep-seated fears. Consumer and en-

vironmental groups believed that in a rush to align regulatory systems, officials in Washington and Brussels would

engage in a “race to the bottom.” According to Matthew Yglesias at Slate, an American online magazine, “business

talks a big game about its desire for simpler and more harmonious rules, but in practice this means they want laxer

regulations. America could adopt European-style lax rules about bank capital while Europe is pushed to embrace

American-style light regulation of hedge funds.”30 Amid criticism, the TTIP negotiating teams maintained that “mak-

ing regulations more compatible [did] not mean going for the lowest common denominator. But rather seeing

where we diverge unnecessarily. There will be no compromise whatsoever on safety, consumer protection or the

environment,” they guaranteed.31

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HKS Case Program 8 of 20 Case Number 2045.0

For Mullaney and Garcia-Bercero, reaching consensus on regulatory standards presented the biggest hurdle in

the negotiations, but promised the greatest reward. If the two economies were able to meaningfully harmonize

their regulatory systems, it would lead to an unprecedented transatlantic integration, and (given the economic and

industrial heft of the two continents) usher in a US-EU led regulatory regime as the de-facto standard for the rest

of the world. But experts widely believed that talks on regulatory coherence were more likely to break the TTIP

than make it.

Mutual Recognition

The principle of mutual recognition emerged out of the failure of the European Commission to agree on com-

mon pan-European standards for products. Instead of navigating the exceedingly difficult (and lengthy) task of

building consensus on standards among all member states, the EC deftly opted to recognize different standards in

European countries as equal. In essence, mutual recognition ensured that when a product met the standard in one

European country, it could be sold in all other European countries. By the 1990s, mutual recognition had become

de rigueur in the EU, but translating that success across the Atlantic proved immeasurably more difficult.

Between the 1990s and mid-2000s, American and European officials were engaged in numerous attempts to

harmonize standards, but to mixed effect. The 1995 New Transatlantic Agenda (NTA) was the first mechanism

through which the European and American government officials, along with important stakeholders, such as busi-

ness, labor, and environmental groups, held regular dialogs on regulatory compliance. These dialogs laid the foun-

dation for early “Mutual Recognition Agreements” between the US and EU.

For pragmatic reasons, negotiators in Washington and Brussels decided to pursue a narrow form of mutual

recognition in a small number of sectors. Under these agreements, if a product met the testing, certification and

inspection requirements in the US, it would automatically satisfy the testing, certification and inspection require-

ments in Europe, even if the underlying regulations or standards for the product remained different in the domes-

tic markets. The mutual recognition process, by its nature, required domestic regulatory systems (like the Federal

Drug Administration) to interact with international trading rules which triggered “unprecedented institutional chal-

lenges” on both sides of the Atlantic. 32

Ultimately, after four years of “on-again, off-again” talks, the EU and US

signed the first set of Mutual Recognition Agreements in 1998. Industries included telecommunications equip-

ment, recreational crafts, and medical devices. Other sectors were added in 2003.

If the TTIP negotiators adopted the mutual recognition template for different sectors, they would once again

face the challenge of mapping domestic regulatory processes to the demands of trade liberalization. Perhaps for

this reason, the teams also looked into “horizontal” standards—which would apply across a group of industries. In

addition, the teams explored the creation of a regulatory compliance body that would oversee future transatlantic

standard setting. "There are different types of tools which depend very much on the specificities of each sector,

and where you need to have the regulators looking into the issues thoroughly,” explained Garcia-Bercero. “[We

are] Looking into all the opportunities and moving forward on each of them as we progress in these negotia-

tions."33 Whatever regulatory compliance mechanism the negotiators chose, they were sure to contend with en-

trenched differences in European and American policy preferences.

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HKS Case Program 9 of 20 Case Number 2045.0

Farm Frenzy

Agricultural products reopened old wounds with the TTIP. European preference for non-genetically modified

food historically raised US farm lobby hackles and did so once again under the TTIP. The EU determined that trade

in genetically modified crops and hormone-fed beef would not be part of TTIP negotiations. * In response, a coali-

tion of 50 American farm groups wrote a letter to the USTR saying, “‘precaution’ in the EU has become a pretext

for import protectionism under the pretense of consumer safety. As a result, US exports have repeatedly paid the

price.”34 Barroso, head of the European Commission retorted, “these negotiations are not about compromising the

health of our consumers for commercial gains.” 35

The arguments over agricultural trade brought into sharp focus core differences in American and European

approaches to risk management. EU regulators, for instance, could adopt policy measures when they believed sci-

entific evidence on the safety of a product (or process) indicated potential harm. US regulators, on the other hand,

could do so only when the evidence conclusively demonstrated harm. In the area of agricultural trade, as in the

past, the TTIP negotiating groups would be hard pressed to find common ground.

Financial Services

The TTIP negotiators hit on yet another thorny issue with financial services. Both sides agreed on the need to

eliminate unnecessary or duplicative requirements made of financial institutions, but disagreed on how to achieve

those gains. The EU was keen to use the TTIP to establish a common transatlantic framework to bind financial

regulators and authorities. “The inconsistencies are not only significant barriers to trade and investment but they

also undermine the global financial stability that both the US and EU have been seeking to achieve,” the European

Commission said.36 US regulators, however, feared the TTIP could weaken financial reforms, enacted under the

2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, to prevent another economic crisis like the

one in 2008.

Yet, the Dodd-Frank legislation was a big drive behind the EU’s strident demand for TTIP action on financial

regulation. The EU worried that under new US capital requirements, European banks, which until recently could

operate in the US with relatively little capital, would have to comply with significantly higher capital by setting up

US subsidiaries, rather than operating their American branches as part of a larger integrated company. Several

members of the US Congress and regulators at the Department of Treasury and Federal Reserve were loath to give

up the hard-won gains in the Dodd-Frank legislation just to appeal to EU interests, particularly in light of the persis-

tent economic challenges the EU continued to face.

* The EU allowed small concessions, such as approving lactic acid as a cleanser for beef carcasses, but the bigger issues re-

mained.

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HKS Case Program 10 of 20 Case Number 2045.0

Data Protection

Before the TTIP negotiations began, Mullaney was confident that the US and Europe could negotiate “provi-

sions that would encourage data flows and respect the privacy regimes that each side values so much." 37 But a

wide-ranging US government-sanctioned data surveillance program, which included the tapping of German Chan-

cellor, Angela Merkel’s cell phone, cast a pall over the opening round of TTIP talks. Outwardly, both negotiating

teams maintained that talks were cordial in the wake of the massive snooping scandal. “The Commission’s view

and the position taken by all leaders at the… European Council is clear: Let’s not mix up the phone tapping issue

with the ongoing trade talks,” announced Vivian Reding, Vice-President of the European Commission.38 Yet,

charged debates on digital data clauses in the TTIP revealed otherwise.

At the center of the debate lay the difference in American and European approaches to data privacy. “For the

EU, privacy is considered a fundamental right and remains highly regulated, said journalist James Fonatella-Khan at

the Financial Times. “Meanwhile, in the US, [privacy] is deemed a consumer right and is lightly regulated.”39 Histor-

ically, the EU banned companies from transferring private data of its citizens to another country, unless that coun-

try provided an “adequate” level of data protection. The US was among the countries the EU deemed to have in-

adequate data protection. To overcome this trade barrier, in 2000, the US and the EU signed a “Safe Harbor”

agreement under which US firms could voluntarily comply with EU data protection laws. From the outset, for both

American companies and European regulators, Safe Harbor presented numerous compromises. Some American

industries with large data components such as financial services firms were not part of the Safe Harbor framework

and were required to make independent legal arrangements to transfer EU citizens’ data. In light of the revelations

of the US spying program, several EU countries were further convinced that Safe Harbor was a “leaky sieve for EU

citizens’ personal data.” 40

With the TTIP, US firms including technology giants Google and Facebook saw the opportunity to free up data

flows across the Atlantic. “US businesses operating online in the EU or engaged in transatlantic digital trade have

encountered significant obstacles and impediments,” said a lobbyist for the US technology industry. “The obstacles

US [technology] companies face in the EU are analogous to classic technical barriers to trade – they disfavor US

business in cloud computing, social media, mobile apps and other internet services without any substantial justifi-

cation.”41

Mutual recognition of digital privacy standards would help American companies operate under US law in the

EU, and prevent them from having to comply with far more stringent EU privacy regulations in the future. But, in

November 2013, the EU appeared to close the door on a TTIP data privacy chapter. “Including data protection in

the trade talks is like opening Pandora’s box,” Reding said. “The EU is not ready to lower its own standards ... That

is why the free trade agreement negotiations are not going to include privacy standards.”42

Rules of Trade

In comparison to the tricky mandate of negotiating regulatory coherence, many analysts believed discussions

on trade-based rules for the TTIP would be relatively simpler. In terms of strategic importance, however, chapters

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HKS Case Program 11 of 20 Case Number 2045.0

in the TTIP on investments, intellectual property, labor, environment, and trade facilitation, would eventually de-

termine whether the TTIP lived up to expectations of being the standard bearer of a global rules-based trading

system.

International Investments

Unlike in other aspects of international trade, there was no comprehensive multilateral framework for inter-

national investments. Investment flows between countries were instead, governed by Bilateral Investment Trea-

ties (BITS), and investment chapters in free trade agreements. Many investment treaties were often crafted with a

common premise: protect foreign investors when operating in the territory of a host country. Under these agree-

ments, host countries faced a series of obligations to ensure “fair and equitable treatment” of foreign direct in-

vestments, including allowing foreign investors the right to transfer profits back to their home countries, as well as

the right to receive compensation for “direct and indirect” expropriation of assets or funds. Investment agree-

ments also typically included provisions for resolution of disputes between investors and states at independent

arbitration panels.

Designed primarily as a way to safeguard global investments, international investment agreements were em-

braced by developed and developing nations alike. Developed countries could enjoy investment protection abroad

under the aegis of investment agreements, while developing countries could promote foreign direct investments

by agreeing to comply with the norms as set by the accords. Globally, by 2011, there were approximately 3,000

international investment agreements in operation.43 The EU and US had trillions of dollars invested in each other’s

economies, and had each negotiated dozens of Bilateral Investment Treaties and investment chapters in free trade

agreements with countries across the world (see Exhibit C).

But a staple in investment agreements, the investor-state dispute settlement mechanism had become contro-

versial. In theory, provisions for investor-state dispute settlement at international arbitration panels helped ensure

that governments complied with treaty obligations by allowing firms to bring a lawsuit directly against a country.

But as investment agreements proliferated, so did investment disputes, which increasingly involved multinational

organizations seeking compensation against specific national policies. In 2011, for example, Phillip Morris the ciga-

rette maker brought a lawsuit against Australia’s Tobacco Plain Packaging Act. The legislation banned the use of

graphics, pictures and symbols in cigarette packaging and marketing. Arguing that the Tobacco Act violated the

Australia Hong-Kong Bilateral Investment Treaty, Philip Morris sought to either suspend the legislation or receive

compensatory damages to the tune of several billion Australian dollars. *

Some experts argued that the TTIP would not need an investment chapter since the US and EU shared similar

investment climates and strong legal systems. Yet others believed that the TTIP should include a mechanism for

investor-state dispute settlement, to create a precedent for future deals with countries where legal protections for

foreign investments were not as robust. "We both have strong rule of law. We have strong legal traditions against

discrimination against foreign investors," said Michael Froman US Trade Representative. "But many of the other

countries don't, and for this reason, we hope that investment protection will be one of several areas in which TTIP

* As of July 2014, the case was still in the dispute settlement process.

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HKS Case Program 12 of 20 Case Number 2045.0

is able to set a new global standard."44 European Trade Commissioner Karel De Gucht too sought to bolster provi-

sions in existing member state investment treaties through the TTIP, particularly after the 2009 Treaty of Lisbon

gave the European Commission authority over foreign investment policy for EU countries.

TTIP negotiators argued that the transatlantic trade deal could help strengthen investor-state dispute clauses

by tightening the rules and closing loopholes found in other investment agreements. But in Europe, labor, con-

sumer and environmental groups vehemently opposed the inclusion of investor-state dispute settlement in the

TTIP out of fear that European governments would open themselves up to a slew of lawsuits that could ultimately

weaken European standards in areas as wide-ranging as healthcare and food security. German and other EU mem-

ber states’ political opposition to investor protections had already threatened to unravel the investment chapter in

the 2013 EU Canada trade deal, widely seen as a precursor to the TTIP. Similarly, Australia refused to abide by in-

vestor protections in the US-led Trans Pacific Partnership. Not surprisingly, in mid-2014, amid rising public outrage

against investor protections, Garcia-Bercero and Mullaney were forced to temporarily suspend negotiations on the

investment chapter.

Energy Boost

Another unexpected source of tension in the TTIP talks grew out of the EU’s decades-long dependence on

Russian oil. In mid-2014, Europe looked to the US for support as Russia’s increasingly combative President Vladimir

Putin annexed Crimea, took a tough stand on Ukraine, and signed a large energy deal with China. EU leaders be-

lieved that given the natural gas and shale oil boom in the US, the TTIP should include an energy chapter to help

secure an affordable supply of US energy exports to Europe. The leaders hoped this agreement would further

boost Western nations’ ability to apply geopolitical pressure on Russia to conform to international norms. But for

the US, a TTIP chapter on energy presented economic and political challenges at home. The US had instituted a

ban on oil exports in the 1970s, and except for the North American Free Trade Agreement with Canada and Mexi-

co, had not included an energy chapter in any trade agreement. US negotiators maintained that the EU like other

trade signatories with the US would be given “domestic treatment” for exports of liquefied natural gas, but clearly

the EU wanted more.

Geographic Indicators

Although the TTIP trade officials had not foreseen the degree of opposition they would encounter with inves-

tor protection or energy exports, they were aware that negotiations on regional labels, or “Geographic Indicators”

were likely to reprise old discords. In order to successfully conclude TTIP, Mullaney and Garcia-Bercero would have

to address demands from small but significant groups like cheese makers in Parma and potato growers in Idaho.

Historically, the EU insisted on strong Geographic Indicator commitments to secure the economic interests of re-

gional European manufacturers. But US officials relied on trademark law to protect regional labels and believed the

EU focus on Geographic Indicators ran counter to international trademark practice, affecting the viability of global-

ly accepted generic products.

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HKS Case Program 13 of 20 Case Number 2045.0

The End Game

By June 2014, after five rounds of trade talks, most observers agreed that the TTIP negotiations were unlikely

to result in a trade pact by December 2014, but likely to go on till 2015 or later. Garcia-Bercero and Mullaney had a

clear sense of the objective challenges in crafting a comprehensive transatlantic deal, but the political obstacles

had become increasingly hard to ignore. The May 2014 European Parliamentary elections marked the beginning of

a slowdown in the TTIP talks. Negotiators chose to focus on technical aspects of the agreement rather than politi-

cally sensitive issues as they awaited the new composition of the European Parliament, with a new European

Commission President and Trade Commissioner set to assume office before the end of 2014. US negotiators feared

that some of the newly elected Members of the European Parliament were actively against the TTIP, and would try

to block the agreement (see exhibit D for 2014 results of the EU Parliament elections). EU negotiators, on the other

hand, worried that the US midterm elections in November 2014 would once again stall negotiations. President

Obama had been unable to convince his fellow democrats in the US Senate to give him “trade promotion authori-

ty,” which would allow a fast-track, up-or-down vote on trade agreements. Even if the Democrats regained their

majority in the US senate, the question of giving the Obama administration trade promotion authority was likely to

be shelved till 2015 or 2016, when Obama’s second term would end.

Public opinion too was unexpectedly redefining the course of the negotiations. Many environmental, consum-

er and labor groups in Europe were using public consultations on the TTIP and the power of social media to rau-

cously argue against several TTIP proposals. On the other side of the Atlantic, an April 2014 Pew survey found that

Americans, in general, valued free trade but found specific provisions in the TTIP problematic.45 A surge of anti-TTIP

sentiment among Europeans and Americans boded ill for the negotiators. Trade officials also recognized that in the

interconnected era of “mega regionals,” the fate of trade agreements such as the EU-Canada trade deal, and the

US-led Trans Pacific Partnership, would also ultimately influence the scope of the TTIP.

More than a year into the talks, Mullaney, Garcia-Bercero and their teams were yet to begin negotiating the

actual text of the trade agreement. Despite the odds, they hoped to craft a transformative transatlantic trade

agreement that would set the standard for global trade in the twenty-first century.

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HKS Case Program 14 of 20 Case Number 2045.0

Exhibit A: US and EU Lead Negotiators for the Transatlantic Trade and Investment Partnership

Source: EU list of negotiators available at: http://trade.ec.europa.eu/doclib/docs/2013/july/tradoc_151668.pdf (accessed Feb- ruary 12, 2014; US list of negotiators available at http://www.ustr.gov/sites/default/files/lead%20negotiators%20list%20TTIP.pdf (accessed February 12, 2014).

Chief Negotiator Dan Mullaney Chief Negotiator Ignacio Garcia Bercero

Deputy Chief Negotiator David Weiner Deputy Chief Negotiator Damien Levie

Assistant Chief Negotiator Kate Kalutkiewicz

Negotiating Team Coordinator Isabella Detwiler

Negotiating Area Leads

Agricultural Market Access Mary Lisa Madell Market Access for Goods Damien Levie

Competition Mary Ryckman John Clarke/Jean-Marc Trarieux

Cross-Border Services Thomas Fine Zoltan Somogyi

Customs and Trade

Facilitation Dawn Shackleford Antonis Kastrissianakis

Electronic Commerce and

Telecommunications Robb Tanner Fernando Perreau de Pinninck

Energy and Raw Materials Jean Kemp

Environment David Oliver Services and Investment

Marco Düerkop

Financial Services Amanda Yarusso-Horan and

Gavin Buckley Martin Merlin

Government Procurement Scott Pietan Marco Düerkop

Intellectual Property Rights George York Investment Leopoldo Rubinacci

Investment Jai Motwane Investor-State Dispute Settlement Colin Brown

Labor Carlos Romero

Legal/Institutional Issues Amy Karpel and Matthew Jaffe Overall coordination Fernando Perreau de Pinninck

Localization Barriers Arrow Augerot Regulatory Coherence Geraldine Emberger

Market Access and Industrial

Goods Tariffs

Sushan Demirjian and Mary

Thornton Technical Barriers to Trade Paul De Lusignan

Regulatory Coherence and

Transparency Rachel Shub Sectoral Annexes on Trade in Goods Fernando Perreau de Pinninck

Rules of Origin Jason Bernstein Philippe Jean

Sanitary and Phytosanitary

Measures Mary Lisa Madell Carsten Schittek

Sectoral Annexes/Regulatory

Cooperation

Jim Sanford and Barbara

Norton Birgit Weidel

Small- and Medium-Sized

Enterprises Christina Sevilla Pablo Neira

State-Owned Enterprises Victor Mroczka Klaus Berend

Technical Barriers to Trade Julia Doherty Benjamin Musall

Textiles Gail Strickler and Caroyl Miller Laurent Selles

Trade Remedies Victor Mroczka Ivone Kaizeler

Sébastien Goux

Ivone Kaizeler

Roman Mokry

Ivone Kaizeler

Constantin Livas

Ivone Kaizeler

Lorenzo Terzi

Ulrich Weigl

Public Procurement Anders Jessen

Pedro Velasco Martins

John Clarke/Raimundo Serra

Trade and Sustainable Development

(labour and environment) Monika Hencsey

Competition Policy; State Owned

Enterprises; and other enterprises

benefiting from special government

granted rights; Subsidies

Christophe Kiener and Blanca

Rodriguez

Trade-related Aspects of Raw

Materials and Energy Petros Sourmelis

Antonis Kastrissianakis

Denis Redonnet

Dispute Settlement Luca De Carli

SMEs Denis Redonnet

Other rules Denis Redonnet

United States European Union

Services and Investment

Customs and Trade Facilitation

Intellectual Property (including

Geographic Indicators)

Sanitary and Phytosanitary Measures

Textiles Technical Barriers to Trade

Cosmetics

Pharmaceuticals

Medical devices

Overall Coordination

Agriculture & Processed Agricultural

Products

Rules of Origin

Sub-group on regulatory cooperation

in financial services

Cars

Machinery and electronics

Chemicals

Regulatory Cluster

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HKS Case Program 15 of 20 Case Number 2045.0

Exhibit B: US EU Bilateral Trade

Note: Two-way trade calculated as the sum of exports and imports of goods and services. Trade figures were revised as of March 2013 and not seasonally adjusted.

Adapted from Jeffrey J. Schott and Cathleen Cimino, “Crafting a Transatlantic Trade and Investment Partnership: What Can be Done,” Peterson Institute for International Economics Policy Brief, March 2013.

For the exclusive use of Z. Wang, 2020.

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For the exclusive use of Z. Wang, 2020.

This document is authorized for use only by Zehua Wang in The Global Economic Environment-1-1-1-1 (A) taught by ROBERT COSCARELLO, Pepperdine University from Mar 2020 to Apr 2020.

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HKS Case Program 18 of 20 Case Number 2045.0

Exhibit D: European Parliament 2014 Election Results by Political Group

Source: European Parliament, “Results of the 2014 European Elections,” http://www.europarl.europa.eu/elections2014- results/en/election-results-2014.html (accessed July 2014).

Political Group

% of EU Parliament

Position on TTIP

EPP

Group of the European People's Party (Christian Democrats) 29.43% Pro

S&D

Group of the Progressive Alliance of Socialists and Democrats 25.43% Pro

ECR

European Conservatives and Reformists 9.32% Pro

ALDE

Alliance of Liberals and Democrats for Europe 8.92% Pro

GUE/NGL

European United Left/Nordic Green Left

6.92% Anti

Greens/EFA

The Greens/European Free Alliance

6.66% Anti

EFDD

Europe of freedom and direct democracy Group 6.39% Mixed

NI

Non-attached Members – Members not belonging to any political group 6.92%

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HKS Case Program 19 of 20 Case Number 2045.0

Endnotes

1 John Meltzer, “Transatlantic trade called win-win growth formula for US and Europe,” World Tribune, April 19, 2013.

2 Final Report, High Level Working Group on Jobs and Growth, February 11, 2013, available at:

http://trade.ec.europa.eu/doclib/docs/2013/february/tradoc_150519.pdf, accessed February 2014. 3 James Canter and Jack Ewing, “A Running Start for a US-Europe Trade Pact,” The New York Times, February 13, 2013.

4 Ibid.

5 Ibid.

6 James Politi and Joshua Chaffin, “Rocky road lies ahead in trade pact talks,” The Financial Times, February 13, 2013.

7 Ibid., endnote #3.

8 Danny Hakim and Eric Lipton, “US-European Trade Talks Inch Ahead Amid Flurry of Corporate Wishlists,” New York Times,

September 12 2013. 9 John Thor Dahlburg, “EU, US Envoys: Trade pact wouldn’t hurt consumers,” Bloomberg Business Week, November 15, 2013.

10 “TTIP ‘Stocktaking’ Set for February 17. In DC; Officials Hold Preparatory Meeting,” World Trade Online, January 23, 2014.

11 Christien van den Brink, “Dutch expert says TTIP might be game changer for geopolitics,” Xinhua Net, January 14, 2014.

12 “In my backyard: Multilateral trade pacts are increasingly giving ways to regional ones,” The Economist, October 12, 2013.

13 “Goodbye Doha, Hello Bali,” The Economist, September 6, 2012.

14 Ibid.

15 David Pilling and Shawn Donnan, “Trans-Pacific Partnership: Ocean’s Twelve,” The Financial Times, September 22, 2013.

16 Dan Grant, “Transatlantic trade: Is China in or out?” The Hill Blogpost, July 22, 2013, available at:

http://thehill.com/blogs/congress-blog/foreign-policy/312613-transatlantic-trade-is-china-in-or-out, accessed February 2014. 17

Steven Erlanger, “Conflicting Goals Complicate an Effort to Forge a Transatlantic Trade Dea,l” New York Times, June 12, 2013. 18

Ibid., Endnote #16. 19

Final Report, High Level Working Group on Jobs and Growth, February 11, 2013, available at: http://trade.ec.europa.eu/doclib/docs/2013/february/tradoc_150519.pdf, accessed February 2014. 20

Center for Economic and Policy Research, “Reducing Transatlantic Barriers to Trade and Investment: An Economic Assess- ment,” March 2013. 21

Ibid. 22

“Opening Shots: Trade negotiations between America and the European Union will not be smooth,” The Economist, July 4, 2013. 23

Letter from EU member state Cultural Ministers to European Commission, available at: http://insidetrade.com//index.php?option=com_iwpfile&file=jun2013/wto2013_1853.pdf, accessed February 2014. 24

“Obama EU Leaders Formally Launch TTIP, Acknowledge Challenges Ahead,” World Trade Online, June 17, 2013. 25

Ibid. 26

Final Report, High Level Working Group on Jobs and Growth, February 11, 2013, available at: http://trade.ec.europa.eu/doclib/docs/2013/february/tradoc_150519.pdf, accessed February 2014. 27

Institute for Agricultural and Trade Policy, “Promises and Perils of TTIP,” Heinrich Boll Foundation TTIP Series, October 2013. 28

Raymond Ahearn, “Transatlantic Regulatory Cooperation: Background and Analysis,” Congressional Research Service, August 24, 2009. 29

Shayerah Ilias Akhtar and Vivian C. Jones, “Proposed Transatlantic Trade and Investment Partnership: In Brief,” Congressional Research Service, July 2013. 30

Matthew Yglesias, “Getting in Bed with Europe,” Slate, June 18, 2013, available at: http://www.slate.com/articles/business/moneybox/2013/06/ttip_transatlantic_trade_and_investment_partnership_would_cre ate_the_biggest.html, accessed March 2014. 31

European Commission, In Focus: TTIP, available at: http://ec.europa.eu/trade/policy/in-focus/ttip/questions-and-answers/, accessed March 2014. 32

Charan Deveraux, Robert Z. Lawrence, and Michael D. Watkins, “Case Studies in US Trade Negotiation: Vol. 1: Making the Rules,” Peterson Institute, 2007. 33

“US EU Negotiators Begin to Focus on Common List of Industry Sectors,” World Trade Online, January 2 2014. 34

Joshua Chaffin and James Politi, “Faultlines emerge on EU-US trade liberalization pact as talks loom,” The Financial Times, May 23 2013. 35

Ibid., endnote #3.

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HKS Case Program 20 of 20 Case Number 2045.0

36

Christian Oliver and Shawn Donnan, “Brussels wants finance rules back in US trade pact,” The Financial Times, January 27, 2014. 37

“SPS Highlighted in First TTIP Round, But Few Signs of Progress Emerge,” World Trade Online, July 18, 2013. 38

Ibid., footnote #6. 39

James Fonatella Khan, “Data protection ruled out of EU-US trade talks,” The Financial Times, November 4, 2013. 40

“EU Court of Justice Case Could Subject ‘Safe Harbor’ To Greater Scrutiny,” World Trade Online, January 8, 2015. 41

Ibid., endnote #38. 42

Ibid., endnote #6. 43

UNCTAD, 2012 World Investment Report. 44

“Froman Says ISDS Needed in TTIP to Set Standard for Other Agreements,” World Trade Online, May 8, 2014. 45

“Support in Principle for US-EU Trade Pact,” Pew Research Center Global Attitudes and Trends, April 9, 2014.

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