Thursday, 10 July 2014

Outsider's perspective on TTIP

The Transatlantic Trade and Investment Agreement (TTIP) has been a focal point of much discussion in recent months. Of course, much of this debate centers on the economic and political pros and cons for both the European Union and the United States. But concluding an agreement that would represent nearly half of the world’s economic output is not expected to have no impact on the outside world. Quite the contrary, outsiders such as China, Brazil and India are most likely to scrutinize the TTIP negotiation process. Apart from geopolitics, in an economic sense their views on these developments are determined by the following factors. 

First, the extent of trade diversion. The more TTIP is diverting trade, the greater the likelihood that outsiders will react to such an agreement. Two notable studies have analyzed the potential trade effects of TTIP with differing results on third-party countries. The CEPR report, commissioned by the European Commission, states that outsiders will not experience any adverse consequences. This a result of the direct and indirect spill-over effects from a TTIP agreement. Direct spill-over effects are greater exports of goods and inputs by third-partner countries to a bigger Transatlantic market; indirect effects are potentially the additional trade effects in the event outsiders are adhering to TTIP standards. These spill-over effects are contested by the Ifo study which concluded that some outside countries would actually experience trade diversion. A more recent study by the Central Bank of Turkey assessed that China could suffer severely from a TTIP deal. As such the issue of trade diversion has not been settled yet.

Second, the “depth” of an agreement. A deeper Transatlantic agreement will have a more pronounced outcome on outsiders’ trade patterns. This is because a deeper trade policy agenda generates greater trade between partners, creating a higher wedge between insiders and outsiders in terms of trade costs. Some recent regional trade agreements have already included so-called “beyond-the-border” or deeper measures which are, for some at least, typically lying outside the realm of the WTO. Examples include competition policy, investment protection and data regulation, but also government procurement and services restrictions; two policy areas which are actually dealt with multilaterally. The gains from tackling these issues are great, much greater than the benefits from tariffs. Yet, all these issues touch upon regulatory and institutional sovereignty within each of the party countries. Negotiating a successful agreement will therefore inevitably lead to the erosion of regulatory rents. In this sense TTIP will be a real test-case whether ambitious goals can really be realized politically.

Third, whether standards are going global. An often-read argument in favor of TTIP is that the EU and the US could set a precedent for high-quality standards which will eventually be taken over by other countries around the world. Of course, this is an assumption as there is no guarantee that all firms in countries outside the agreement will truly apply these new standards. However, China’s accession to the WTO is a good example that an emerging country did want to adhere to global rules which were previously set by other countries bringing down trade costs. Nonetheless, a recent Bruegel study assessed that TTIP could also lead to a dual regulatory regime in emerging countries. This means that some firms in these countries that export will take over Transatlantic standards whereas other ones which are left behind only serving the domestic market will be unable to do so. This is a serious threat for emerging countries since a dual regulatory track system would increase costs for firms and eventually for domestic consumers. 

Last, the extent of “multilateralization”. It is often said that more and deeper trade agreements bring along a greater degree of discrimination. Higher levels of discrimination could make it harder to multilateralize these agreements for outsiders. In fact, the world could be even in danger of more deep bilateral agreements as a result of TTIP. Various arguments go against such analysis. Bigger trade deals could also incentivise countries to go for a multilateral deal if enough compensation is given to outsiders by the deal makers. An example is the revival of the Uruguay Round after NAFTA had been created. In addition, recent research shows the dynamic effects of PTAs in Latin-America which has lead the participating countries to lower their multilateral tariffs over time. The logic behind this result is that eventually domestic import-competing firms will become dominated by the foreign exporting firms, which reduces their domestic political weight. Aside tariffs, the regulatory policies that TTIP and other big deals are supposed to tackle are alleged to be largely non-discriminatory in nature for reasons of practicality. In other words, it’s very hard for a regulatory policy to distinguish between different partner countries. This could lower third-party trade diversion and hence make it easier to multilateralize existing PTAs.

Wednesday, 2 July 2014

The Costs of Data Localisation: Country Reports

Last month, we published a paper that aimed to quantify the losses that result from data localisation requirements and stringent data privacy and security laws. The study looks at the effects of recently proposed or enacted legislation in seven jurisdictions, namely Brazil, China, the European Union (EU), India, Indonesia, South Korea and Vietnam.

Below, we are presenting our findings in country-specific reports for easier reference:


Wednesday, 28 May 2014

E-health solutions: is the EU moving in the right direction?

by Martina F. Ferracane

Technology-based innovations are often seen as a luxury and the healthcare sector is not an exception. However, recent technological innovations, coupled with increasing broadband coverage and quality, widespread use of smartphones and enhanced storage thanks to cloud-based solutions, can provide the European healthcare system with more efficient and effective treatments. Several studies, in fact, confirm the positive impact of mobile devices, electronic health records, personal digital assistants and other e-health solutions on data management, error prevention, time and cost savings, patient compliance and remote patient monitoring.

An example of how mobile devices are revolutionizing healthcare.

Although the first Commission plan on e-health was adopted 10 years ago and since then the Commission has implemented (at least on paper) several other initiatives including the most recent launch of eHealth Action Plan 2012-2020, the European Union lags behind other countries in implementation of IT solutions in the healthcare sector.  The shift towards e-health solutions is moving extraordinarily slowly while costs in healthcare keep rising fast.

The recent European Commission proposal to reform existing regulations for market authorization of medical devices might be a good opportunity to reduce the delays in patient access to medical devices that EU citizens encounter compared with our counterparts on the other side of the Atlantic. However, it seems that the EU intentions are moving in the opposite direction. In another important area of e-health such as telemedicine, the EU has adopted the Directive 2011/24/EU which calls for the right of patients to be reimbursed for the provision of cross-border health services, including telemedicine. However, the Directive came into force last October and yet the majority of member states are lagging behind in its implementation.

We would like to shed some light on this complex framework and encourage you to send your comments, information on successful initiatives, proposals or analyses to or to share your view commenting this post!

Here some questions on which we would like to hear your point of view:

Are EU initiatives on e-health moving in the right direction? How will the reform of the approval processes for medical devices affect use and trade of medical devices? Is the Directive 2011/24/EU being actually enforced in the area of telemedicine? Which barriers are preventing IT solutions to be applied in healthcare sector?

What European industrial champions and US tech firms actually pay in corporate taxes

Today, an EU Expert Group on Taxation of the Digital Economy will present its conclusion in the presence of Commissioner President Barroso. The expert group is set up to correspond with the OECD, who at the request of the G20, has designed an action plan to address what it calls base erosion and profit shifting (BEPS) – namely that the corporate tax base is eroding due to the internet.
Following media reports on the low tax rates paid by some of the world’s largest multinationals, international tax reform has moved to the top of policy-makers’ agendas across the world. However OECD itself admits there is no evidence of base erosion in reality. Nonetheless, some OECD and EU Member States are targeting the digital economy as the main culprit for alleged erosion of corporate tax income.

Our new report raises doubts on some of the assumptions surrounding the OECD/EU work. Here's our first example – as we can see, internet companies in fact pay effective tax rates similar to European multinationals:

The options currently considered in the OECD BEPS process is to require online businesses to have a local presence in every country they operate in, and thereby forcing them to pay taxes in these countries. This would not only contradict the OECD’s own technology neutrality principle in taxation, but also reverse the free movement of services on the EU’s single market. In essence, it would create a separate tax regime for the digital economy, despite intentions to the contrary.

Furthermore, the idea that digital services/online exporters should be seen as always having a commercial presence in the countries in which they operate would mean that music, e-banking, e-commerce web based delivery services, etc. would be barred from international trade. The EU is negotiating more cross-border trade commitments (so-called mode 1) with efforts to ensure that they are not linked to  requirements on local presence – but apparently, this should apply everywhere except in Europe itself.

Good luck explaining that double standard to the US and Chinese trade negotiators.

A new ECIPE report, OECD BEPS: Reconciling global trade, taxation principles and the digital economy, released today

Cheerleading for trade agreements

Attempts to raise the public support for trade agreements (even for some of the best ones) sometimes takes surreal forms. Here's one example:

May I propose the following 21st century standards on public diplomacy and trade? 
  1. Never assume your counterparts are dumber than you are, just because they are not Rhodes scholars.
  2. A barbershop choir is a sure way of swaying protectionists. But only if the protectionists are playing croquet on the west bank of the Mills River,  New Haven, while quoting Walt Whitman.

Tuesday, 27 May 2014

EU Reform and the European Parliament Elections

There is a confusing debate going on about how to interpret last week’s European elections. A fairly considerable body of opinion suggests that the rise of the populists, extremists and protest parties has delivered such a blow to the EU that it now needs considerable reform – handing back powers to the member states, allowing for stronger borders around countries or welfare states, reducing the EU budget, et cetera. I agree that the EU needs to be reformed, but I don’t think you can make this case on the back of the election results.

After all, the number that matters after an election is 51 (or, sometimes in the EU, 67): those that can gather 51 percent of voters or deputies in favour a policy wins. And if you pull together all the populists, extremists, protest and anti-EU parties – a very diverse group – you don’t come close to that number. So: if the European elections really should matter – the result is not that now is the time to push reforms attractive to this group of parties.

There is an irony here. A lot of people making claims that the rise of the non-establishment parties should prompt reforms are people who don’t like the idea of having a parliamentary democracy for the EU at all and that favour a European Union built on the undisputed role of the Council as the chief decision maker for the EU. And there is a good case to be made for that view: since its creation in 1979 the European Parliament has not helped to build democratic legitimacy and accountability for the EU or new EU policy.

I don’t think the increasing role of the Parliament has weakened policy efficiency or taken the EU in a different direction. And this is chiefly because the Parliament is not the place where big decisions are taken about the direction of policy: the parliament is a compromise machine that most often makes marginal changes to policies proposed by the Commission and agreed in the Council. There are also some positive consequences of the increasing role of the Parliament: it has helped to produced a more open and transparent debate – admittedly among a very small share of the EU electorate – and marginally helped to push the EU towards a “culture of evaluation”. Proponents and opponents of a policy now need to spend more time defending views and policies – and defending them openly rather than defending them in a closed-door milieu where the might of power trumps the forcefulness of an argument.

But the parliament has to be evaluated on the basis of its contribution to creating a culture of democratic legitimacy and accountability. On that score it has failed. And it would be surprising if it had not failed. After all, the low voter turnout is perfectly rational given the fact that the parliament has a limited role to play in the shaping of EU policy. If elections are not about holding real decision makers accountable, there is bound to be a low turnout and those who actually vote are very likely to cast the ballot paper in a way that has very little to do with the EU. As long as parliament elections are not consequential for the policy direction in the EU I don’t think it is possible to make an honest argument that an election result should take policy in this or that direction.

So, the case for EU reform – and the content of EU reform – should be separate from the discussion about the election results. Is there a case for EU reform? Yes, there is. And a pretty strong case, too. And that reform agenda should concern policy that should remain in the EU and policy that can be handed back to the EU member states. But the reform agenda that I favour is very different from the reform agenda pushed by populists, extremists or protest parties of all shades. My agenda is for greater economic openness, more deregulation and competition, stronger rules to protect against discrimination and market distortions, et cetera. I think there are several policy areas that can be transferred back to member states – and I would include regional policy and agricultural policy in that group. I think there should be a big treaty change soon that should address the core issue for the EU in the future: the relation between the euro and the non-euro countries. More generally, it should create a constitutional structure for variable geometry and allow countries to choose the degree of integration, provided they stick to the core.

I also think that a good case can be made for such an agenda in the next five years. It will boost economic growth and make countries more free to make their own choices. It also stands a better chance to have the support of the member states now than in the past five years. But if the outcome of the European elections should matter for future policy – there will now be bigger opposition to that reform agenda.

Monday, 26 May 2014

After the Election: Business as Usual

The elections to the European Parliament hardly produced unexpected results. All the polls in the past weeks have shown that Front National and the UK Independence Party were close to becoming the biggest parties in the French and British elections. Nor was it surprising that the established centre-left and centre-right parties in Spain and Greece would substantially lower their share of the vote. Fringe parties have always performed better in European elections than in national elections – and that fringe parties of all shades were going to do pretty well after the last five years of crisis and crisis mis-management was not surprising.

What is perhaps more surprising is that the election results will have a very little impact on the European Parliament and the way it works. Populists and extremists will not have much of an impact on new legislation. Nor are they likely to seek such influence. They are more interested to use the Brussels platform to broadcast anti-EU messages to their national electorates and burnish their campaigns for forthcoming national elections.

Furthermore, the European Parliament is a compromise machine and any politician with ambitions to make a mark on policy must be able to build a majority for his or her proposals. Populists and extremists are not the types that seek compromises or to be part of building a larger coalition for a policy change in Brussels. In fact, much of their existence is based on opposing the way politics work. If, to take a theoretical example, the Front National will want to effect a change on issues regarding movement of labour, the MEPs from FN will have to accept supporting 90 percent of a legislation that they do not like in order to get 10 percent of their policy into the final legislation package. That is a bargain they will refuse.

So the main result of the election is that it will reinforce centrism and the established mainstream parties. The EPP group and the S&D group will most probably build some sort of a parliamentary coalition, perhaps with the participation of the liberals. Neither the EPP nor the S&D can command a majority by building a leftist or rightist sort of a coalition. Even if the idea of a coalition or a coalition agreement is an awkward one in the European Parliament (it is difficult to build a coalition when you are not in control of the executive or know what proposals that will be sent to you) this will not be very difficult.

This is how it already works in practice, in the legislative work in the committees. Even if the past five years saw the emergence of some sort of block politics, with the EPP taking the lead in some issues and getting the support from the Liberals and the Conservatives in the ECR group, the most important legislative processes did feature cooperation between the established parties across the block.

Part of that agreement will involve the role of the election for the choice of the next Commission President, but a coalition agreement is hardly going to be helpful for those demanding that the top candidate for the biggest party group should bag that job. All real candidates for that job are weakened by the election result and it has been an open secret for some time that key leaders in the EPP political family are not very keen to get Juncker as the Commission president. That job is probably going to go to someone else – and I have put my money on Jyrki Katainen.

The election result is likely to cool EU policy-making activity in the next five years. Even if the election had led to a parliament similar to the one we had in the past five years, the activity would have gone down. A good part of new policies from Brussels in the past five years was related to the crisis and even if you can make a good case for revisiting many of these policies, or re-doing them from scratch, the sentiment in Brussels and the main political capitals is largely that the “job is done”. The election result will prompt officials and political leaders to stay away from re-opening files because a centrist type of coalition in the Parliament would probably want to increase the degree of intrusiveness in economic and regulatory policy. Nor will the election result help those that want to see a change of the treaty. The election result will probably reinforce those that previously thought that a new treaty, with ensuing referenda, is politically toxic.

It is difficult to say if the election will negatively impact the trade agenda. A centrist coalition in the parliament will have enough votes to support new trade agreements. And most of the agreements under negotiation are already based on the political analysis that they need the backing from both the centre left and the centre right – centre left or centre right governments as well as parties in the European parliament. There may be issues like ISDS that will face bigger hurdles now, but a centrist agreement will also force parties and MEPs to “concentrate minds” and stay away from irresponsible pandering or political ploys. And regardless what you think about ISDS, the way the S&D group addressed the issue in last period of the previous parliament had very little to do with substance.

In a strange kind of way, the result of yesterday’s elections is “business as usual”. The idea among the centrist establishment parties that now is the time to push for a greater role of the European Parliament in the shaping of EU policy will be moderated. But nor will the election lead to a parliament more influenced by the populist and extremist parties that gained seats in the election.