TTIP - Four Letters That Spell Rising Poverty

02/10/2014 17:13 | Updated 02 December 2014

Bilateral trade agreements have been around for a long time, but thanks to TTIP - the big daddy of them all - and its controversial ISDS provisions, both the general public and the world of politics are finally sitting up and taking notice. For those who haven't yet done so, TTIP is the Trans-Atlantic Trade and Investment Partnership between the U.S and the E.U., currently in the final stages of negotiation behind doors that remain firmly closed.

ISDS stands for Investor State Dispute Settlement and is controversial because it subjects state sovereignty to commercial interests. It means that an overseas investor may claim compensation from a host country which changes the rules in a way that prejudices their interests. In Britain, concerns have been raised that the ISDS provisions in TTIP could prevent a future government from returning to the public sector any parts of the NHS that have been outsourced to U.S. healthcare companies. Environmental regulation is another sensitive area. If an investor builds a plant to produce a chemical that is subsequently banned, should the host country pick up the bill?

ISDS provisions in bilateral trade agreements are nothing new. The North American Free Trade Agreement, which contains a chapter on ISDS, is over twenty years old, and the principles of investor protection are much older than that. What is new, however, is the strength and profile of public opposition. In the aftermath of the banking crisis, corporate investors are viewed with suspicion and critics have latched on to the potential consequences of ISDS in the event that the interests of investors and those of the host country turn out not to coincide.

Public opposition has brought unaccustomed scrutiny to bear on negotiators and bureaucrats, for whom the benefits of free trade have for generations been unquestionable. The E.U.'s economic assessment of TTIP continues in that vein, asserting that, if a "high ambition" comprehensive agreement can be reached, GDP will increase by 0.48%. This is equivalent, they say, to an increase in disposable income of €545 for a family of four. The catalyst for this will be an increase of 28% in exports from the E.U. to the U.S. and 37% in the other direction.

Tariffs between the E.U. and the U.S. are already low, so the big gains are supposed to come from removing non-tariff barriers, such as different safety standards for cars. Indeed, cars form a big part of the E.U.'s case for TTIP. They account for 47% of the increase in exports and 41% of the increase in imports in the best case scenario, with well over three times as many vehicles braving the Atlantic storms in one direction or the other than at present.

How would that make anybody richer? After all, both European and American car purchasers are already spoiled for choice. The logic of free trade is that it increases the opportunities for specialisation and economies of scale. Things get made in whatever way - or whatever place - is most cost-effective. Cost-effective should mean better value, and buying things at better value makes people richer, since they have more to spend on other things.

The question is - better value for whom? Cheap labour may be good for investors and shareholders, but at the societal level at which governments operate, it creates a whole new set of problems. Much the biggest task of government is redistributing wealth, via pensions, benefits and the free provision of education and health services. Cost-effectiveness in this context would lie in ensuring that productive wealth is effectively distributed without such costly government intervention. The free market economy is particularly bad at this, which is why companies pay taxes which are then redistributed to their employees in the form of benefits to make up for wages that are too low to sustain life.

If TTIP does, indeed, increase wealth as the E.U. is suggesting, it is a dead certainty that this gain will not be evenly distributed. The primary beneficiaries of long-distance trade are the middlemen who seek to buy cheaply and sell at the highest price that they can. Shipping lines, freight operators, advertisers, traders and other transactional intermediaries will do disproportionately well, as will motor manufacturers, who should benefit from a streamlining of production.

Productive workers, however, can expect to find their wages increasingly under pressure. If the extra cost of transporting cars back and forth across the Atlantic is to be absorbed, and the vehicles are to offer better value to the consumer, it follows that the productive work contained in them will have to be acquired more cheaply. That could mean greater automation, or lower wages, or both. Either way, a smaller slice of the value of cars will go to the people who actually make them.

Neither the E.U. nor the U.S. is poor, on average, but those averages conceal huge differences. The U.S. census found a poverty rate of 14.5% for 2013; using a different methodology, the E.U. found that 24.3% of its population were at risk of poverty or social exclusion in 2012. When real wages are falling, productive work is scarce and the systems for distributing wealth are woefully inadequate to the challenge, workers in both regions are ripe for exploitation.

Trade which outsources production to low wage countries has the effect of importing poverty from the poor country to the rich one, since the loss of productive work in the rich country causes wages to fall. The danger of TTIP is that Europe and America will start exporting their significant levels of poverty to each other at a much faster rate than at present - a potentially disastrous chase to the bottom in which poverty increases inexorably as real wages continue to fall. Meanwhile, the capacity of governments to address the problem will be further eroded by the investor protections of ISDS and the tax breaks inevitably demanded by investor capital that can go wherever the return is greatest.

ISDS is a serious issue, to be sure, but a far bigger issue with TTIP is the inadequacy of the outcomes that the negotiators are targeting. For so long as these relate to narrow measures of largely transactional wealth which is poorly distributed, no good will come of it. There is still time (just) to insist that those outcomes are refocused on the economic health of society as a whole.