The TTIP agreement will be a way to promote Western values and bring benefits to producers outside of the U.S. and EU, but it can also weaken the strength of other global powers and reduce the dependence of the EU on Russia in terms of energy security.

German businessmen express their support of the TTIP at a meeting in Berlin, Germany,  Jan. 28, 2015. Words read: Say Yes to TTIP. Photo: AP

Thousands of protesters took to the streets on April 18 to oppose the biggest-ever free trade deal between the U.S. and Europe – The Transatlantic Trade and Investment Partnership (TTIP). This indicates that there are still some obstacles in reaching this agreement.

In reality, TTIP will increase economic integration of the Western world and possibly bring benefits to some countries outside the TTIP zone, but is also likely to affect third-party countries, especially Russia. The TTIP agreement will be a way to promote Western values, weaken the strength of other global powers and reduce the dependence of the EU member states on Russia in terms of energy security.

The scale of TTIP

The Transatlantic Trade and Investment Partnership (TTIP), a free trade agreement currently being negotiated between the U.S. and the EU, is potentially one of the largest such agreements ever attempted. The two economies account for more than 40 percent of world trade, which means that the impact of TTIP on the world economy will also be enormous.

The motivation behind this latest step towards transatlantic trade liberalization has mainly been due to the potential economic benefits, but there is also a strong political current. In particular, TTIP may also be motivated by a desire in Washington and Brussels to strengthen the role of the West in the global economic order.

The stated economic goal of the TTIP agreement is simple: an attempt to foster economic growth and job creation in the U.S. and the EU via enhancing trade and investment. This liberalization, as shown by various estimates from both sides, will lead to higher levels of income in the two economies, productivity gains, higher wages in the long run, as well as lower prices and more variety available to consumers.

In fact, a key feature of TTIP, and the estimated driver of 80 percent of the economic benefits from the agreement, will come from enhanced regulatory cooperation, as the divergence between standards and norms prevailing in the two economic powers is the main obstacle to trade.

How will TTIP affect other countries?

Mainly the U.S. and the EU will realize the above-mentioned gains, but a significant question is how TTIP will affect other countries. For example, will the increased cooperation between the world’s two largest traders be positive or negative for developing countries or the BRICS group of nations?

On this point, the European Commission (EC) has also created a study that shows that the rest of the world will also benefit from the conclusion of TTIP, due to two specific effects: higher demand for products outside the U.S.-EU nexus and the harmonization of standards reducing transaction costs for producers.

In regards to the first point, if the TTIP agreement comes into force, the U.S. and the EU will create a much more integrated economic zone, which should also demand more goods produced in third countries, like raw materials and components. This is because TTIP will increase income on both sides of the Atlantic, with higher income driving higher demand, not only on domestic and intra-TTIP zone products, but also outside-TTIP inputs.

For a very different take on this issue, read "What are the implications of TTIP for Russia and the world?"

More importantly, producers outside of the U.S. and EU face wildly different standards in food safety, intellectual property rights, and other regulatory barriers between the two trade blocs. If standards were harmonized on both sides of Atlantic, it will be easier and cheaper for third-party countries to sell their products both in Europe and the U.S. This regulatory cooperation could effectively double the market for some producers, while easing transaction costs for those who already sell in both markets.

Promoting the West

Of course, the TTIP is not only a free trade agreement, but also a way to promote Western values and standards in the world. Thanks to the agreement, the U.S. and the EU have a chance to be a standard-maker for the world through sheer economic might. As they will create a (mostly) common and coherent regulatory framework in force in the world’s two largest economies, there will be substantial pressure for other countries to adopt the same or similar regulations.

Even if countries do not go through the time-consuming process of adapting their domestic legislation or regulations, it is likely that producers will hold themselves to these external standards, rather than risk being shut out of potentially lucrative markets. In this manner, the high standards of the Western world, especially those related to consumer and environmental protection, may diffuse around the globe.

It is clear that the TTIP agreement will increase economic integration of the Western world, which should bring about economic gains for the two parties involved and possibly other countries. In this way, the U.S. and the EU will increase their role in the global economic order.

What does the rise of TTIP mean for Russia and China?

What does it mean to other powers, like China and Russia? It is possible that a more integrated West, with more market power to direct standards, can translate into weakening the economic importance of other global players, especially those unable to compete in the U.S.-EU market. This might be an additional political motivation for the U.S. and the EU to complete TTIP, in addition to the economic benefits related to trade liberalization.

Along these political lines, it is likely that the U.S. has an added impetus to improve trade with the EU as a counterbalance to rising Asia. For Europe, on the other hand, there may be more concerns related to Russia and its aggressive policies at the eastern borders of the EU, with TTIP offering some more economic security from the U.S. if relations continue to deteriorate to the east.

In particular, economic integration of the Western world might help in the longer-term to reduce European dependency on Russian energy sources, as European negotiators are interested to get access to U.S. crude oil and natural gas via TTIP binding commitments guaranteeing free exports of these goods from the U.S. The U.S. has been reluctant to export crude oil ever since the oil shocks in the 1970s, while the exports of natural gas are restricted as well. In 2014 the U.S. produced over 3 billion barrels of crude oil, while it exported only 126 million barrels, mainly to Canada.

Washington, Brussels, Moscow

The combination of these political and economic moves mean that Russia will be further isolated as a result of the TTIP agreement.

First of all, the possible benefits of TTIP for suppliers of the EU and the U.S. might not be realized in the case of Russia, as quality standards and regulatory harmonization could actually double the difficulties for Russian goods reaching these markets. Moreover, TTIP will make transatlantic economic policy towards Russia more coherent, meaning that any new round of sanctions may have a broader and more coordinated effect.

Secondly, TTIP may promote Western values and strengthen the position of transatlantic countries in the world economy at the expense of Russia and other economic powers. This is because the TTIP countries (despite possible benefits for third-party countries) will be the main beneficiaries of the agreement, seeing the largest rise in incomes relative to other countries.

After all, the whole point of a trade agreement is to secure commercial benefits that can improve the quality of life. As a consequence of TTIP, the relative role of the U.S. and the EU in the world economy will increase, distancing them even further from countries experiencing an economic downturn, such as Russia.

And even if Russian companies can improve their standards to Western levels across-the-board, the process of convergence will be much more protracted and disjointed: home market demand will remain sluggish while new markets in the EU or U.S. might still be years away.

The strengthening of the EU market via greater access to the U.S. also provides a powerful incentive for countries on the fence about concluding Association Agreements (AA) with the EU. Faced with the choice of an as-yet-ill-defined Eurasian Economic Union (and increased exports to Belarus) versus access to both EU and U.S. markets, it may prove too tempting for a country to shy away from the Eurasian Economic Union.

But the most threatening aspect of TTIP concerns Russia’s own weakness and inability to diversify its economy. If TTIP can lead to EU countries becoming less dependent on Russian supplies of energy fuels, if TTIP facilitates access to U.S. energy sources, EU demand for Russian oil and gas will necessarily drop. In this way, Russia will also lose an important political tool to exert pressure on European countries.

Not surprisingly, Russia is not interested in further economic integration of the Western world, as it will be costly in economic terms. However, the higher cost to the Russian economy may be failing to adapt to the new economic order that TTIP might bring. If there were less of a focus on bringing outdated industrial areas under Russian control and more on the diversification of the Russian economy, TTIP could offer concrete benefits to Russia. It remains to be seen if these lost economic opportunities are a powerful incentive, or if Russia has chosen to ignore both carrots and sticks.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.