Unrevised transcript of evidence taken before. The Select Committee on the European Union. External Affairs (Sub-Committee C)

Transcription

1 Unrevised transcript of evidence taken before The Select Committee on the European Union External Affairs (Sub-Committee C) Inquiry on TRANSATLANTIC TRADE AND INVESTMENT PARTNERSHIP Evidence Session No. 18 Heard in Public Questions THURSDAY 23 JANUARY am Witness: Professor Richard Baldwin USE OF THE TRANSCRIPT 1. This is an uncorrected transcript of evidence taken in public and webcast on 2. Any public use of, or reference to, the contents should make clear that neither Members nor witnesses have had the opportunity to correct the record. If in doubt as to the propriety of using the transcript, please contact the Clerk of the Committee. 3. Members and witnesses are asked to send corrections to the Clerk of the Committee within 7 days of receipt.

2 1 Members present Lord Tugendhat (Chairman) Baroness Bonham-Carter of Yarnbury Baroness Coussins Lord Foulkes of Cumnock Baroness Henig Lord Jopling Lord Lamont of Lerwick Baroness Quin Earl of Sandwich Lord Trimble Baroness Young of Hornsey Examination of Witness Professor Richard Baldwin, Graduate Institute, Geneva Q198 The Chairman: Professor Baldwin, thank you for coming to give evidence to us. I am sorry that we kept you waiting a little but you heard what was going on and I hope that you found it sufficiently interesting to justify the delay. As I think you know, this is a formal meeting of the Committee, and therefore everything is taken down and used in evidence. I think you are aware of the ground that we are going to cover. We have a number of questions to ask you, and I dare say that there might be some supplementaries. I will kick off. What in your view are the main factors that have led the EU and the US to make another attempt to strike a deal at this point in time; and given the track record in the past, what do you feel are the chances of success now? Professor Richard Baldwin: Okay, I am going to have to take a long look at this to have a view of how the world of trade has changed, which is essential to understanding what is going on. There are really two key issues. First, there is a sea change in trade in the nature of trade. That has led to a sea change in the nature of trade governance. This started around 1990 and led to a series of outcomes, mostly bilateral. TPP and TTIP are an aspect of knitting these sea changes in trade, which led to the sea changes in governance, a bit

3 2 together. The second point is that it is a US view I would not call it geostrategic as to how to deal with China in the World Trade Organisation. I am very much not of the TTIP is to confine China opinion as I think the US is driven by a variety of goals, but to a large extent its aim is to get China to stand up and play a leadership role in the WTO, and that is how they view TPP. Let me just take you through that very quickly. Around 1990 the ICT revolution changed the nature of trade in the sense that it allowed stages of production that were done within a factory to be dispersed overseas. This has always gone on between rich countries: the US and Canada and the auto industry, and western Europe and the Common Market and single market were essentially production-sharing agreements. What changed in the 1990s is that this could happen more in the south US-Mexico, Germany-Turkey, Japan-Thailand, etc. It was a global change, driven by the ability to co-ordinate complex activities overseas. If you think about that for a second, what was going on inside a factory was not just goods moving between production bases. It was that ideas, knowhow, training, capital and people were moving inside rich company factories. Those flows are now international trade. The nature of trade has changed because the trading system is being used to make things, not just sell things. That meant that two significant forms of discipline were needed. The first thing was to connect factories across borders, so things such as infrastructure services, telecommunications, temporary visas, capital flows, investment insurances and intellectual property right assurances were the flows of knowledge, technology, capital and people which had now to cross borders, and they needed new assurances for those. I like to call those supply-chain disciplines. The second was that companies started to put their tangible and intangible assets in other people s jurisdictions. That was just fine when it was just the US and Canada, or France and Germany, because they had a framework for dealing with that.

4 3 But once you started to put in developing countries, you had to put the assurances of those intangible assets in a trade agreement. So the nature of trading agreements changed, which was primarily developed through a series of bilaterals between Japan and its factory economies, the US and its factory economies, and not so much in the EU, because most of the factory economies are inside the EU. Apart from Turkey, most of the outsourcing that is done is done with central and eastern Europe, so the Common Market or the single market really is the outsourcing agreement. The very nature of this kind of networked international production makes it sensible to knit together some of these agreements. So that is the sea change. There is a very strong logic to having regional agreements underpinning production chains. That has developed in various places: it turned into NAFTA in North America and it is knitting itself together in different ways in Asia. One of the major motives of US companies in TPP is to knit those things together. I am going through TPP and I will come back to TTIP in a second, because they are very related. The point about that was that the US was a little behind in Asia so Japan had these deep agreements with a series of their factories and the US did not. The US was interested commercially in these types of agreement. You then add to that the fact that China has essentially completely transformed its role in the world economy but had not changed its role in the WTO. The US found it very frustrating, I believe, that China would not treat itself like a developed country in the WTO and would not, for example in the Doha round, step up to the plate and make lots of concessions. I believe and this is a sort of Fred Bergsten view of the world which I have talking about for a number of years that the US is using the TTIP to make China demandeur. Once China has something to negotiate for in the WTO it will expand the Doha agenda. With the additional issues on the table we will be able to finish Doha and get the 21st-century issues going forward. Those are the two things that led to TPP.

5 4 What is TTIP? To my mind it is a quite clear reaction to TPP. Take my point about the new trade governance. There are no global governance rules on these issues there are some, but they are not as deep as they need for the production sharing. If the only game in town is TPP, when they become multilateralised, those will be the basis of it, and those are essentially US rules. People in the US, for instance, just assume that TPP will look like US- Korea. So it will essentially be the US template. I had discussions with De Gucht and his chef de cabinet, Marc Vanheukelen, and some other people about this a few years ago. They did not think that TPP was going to happen, but once it happened I think that they realised that the European template has also to be at the table when these things get multilateralised. So I view TTIP as a reaction. Both the US and the Europeans are interested in doing it. Commercially, there has always been an interest in it, but commercially, as you pointed out in the question, this is the third time we have tried to do it. I did a study for the European Commission 10 or 15 years ago on the gains of TAFTA, as we called it back then the transatlantic free trade agreement. There is a high-level interest that this might rewrite the rules of the world trading system in a way that is pro-europe and pro-north America. I do not know whether that will happen it is a geostrategic thing. I do not think that TPP will happen unless TTIP happens, and I do not think that TTIP will happen unless the leaders heads of states get involved and view it more as a foreign policy thing than an economic thing. The Chairman: In many ways that is a very interesting disquisition, and you have covered quite a number of the questions that we have. Lord Lamont was going to ask a question about the regional trade deals, but I think that has been covered. Lord Lamont of Lerwick: I do not want to ask anything. The Chairman: Lady Coussins has a supplementary question.

6 5 Q199 Baroness Coussins: I just wanted to press you more on the timeliness of TTIP. We have had lots of evidence from all sorts of witnesses, who have used quite dramatic language about the timeliness of TTIP, describing it as a once in a generation opportunity and now or never. Is that true? Why is it now or never, and what is the worst that could happen if we did not have a TTIP now? Professor Richard Baldwin: I do not see that at all, I must say. When politicians get interested in opening up world trade and investment flows, that is a good time and you should always seize it. This idea that China, Brazil, India the BRICs are going to redesign the world trading system in a way that is not favourable for the North Atlantic community is a fear they seem to have, and so maybe this is about seizing that in a very political way. Practically, however, I do not see it at all. The US, Canada and the EU have been negotiating for 60 years on all these issues, and there are all sorts of other forums that are leading to regulatory convergence, investment measures and all sorts of things like that. I do not see it as a disaster. It would be a very good idea, because this knitting together at the multilateral level of this deeper discipline would be good for countries other than the big ones. The situation now is that if you are in the US, Japan or the EU, you are sitting fairly well for these production networks. The people outside have the problem. Knitting it together at the multilateral level would be very good and TTIP would be a step towards that. Lord Foulkes of Cumnock: Very briefly, is it feasible to have it completed by the end of this year? Professor Richard Baldwin: Absolutely not. Lord Foulkes of Cumnock: How long do you think it will take? Professor Richard Baldwin: That was another thing on which I have a little bit of a roundabout. If you do not mind if I take a few minutes on this I will answer all the other questions.

7 6 The Chairman: If you could be brief, as we have a lot of questions and some business after this. Professor Richard Baldwin: Absolutely. What I meant to say round about is that there is an essential background. There are some tariffs between the US and the EU. They are mostly on small-volume, difficult things, and they have resisted 60 years of GATT negotiations for the reasons we all know. It is about textiles, apparels, motor cars and agricultural stuff. Motor cars are not small that is a big thing. But mostly it is about a regulatory convergence or a harmonisation. I invite you to think about it as the single market programme but asking the US to join. Maybe a little closer would be the European Union Economic Association Agreement, and asking the US to join. Or just go back to the single market programme. We were going to come to a regulatory convergence, but it started a process of regulatory convergence that is still going on. That is the best that TTIP will do: start a process in which, first, the regulations stop diverging and the existing ones start to move, or we get mutual recognition. That is a process, and the best we can hope with TPP is to set in place a framework for continuing going forward. There will be an event for the tariffs there has to be an event. If the tariffs come down that will be signed, and it has to be passed by Congress and the EU and all that sort of stuff. But for the big things it is about starting a process, so I do not think it will be done at the end of this year or anything. The US is interested in TPP first, which will take at least until the end of the year. Until they nail that down, we will not get the energy in TTIP. So I do not see it getting done by the end of this year, and probably not even by the end of next year. On the other hand, who cares? People are discussing the hard issues and making progress, and a lot of this stuff can be done without signing a free trade agreement. Huge amounts have been done by the transatlantic business dialogue without any legislative changes, so to a certain extent the gain is talking and moving forward, trying to get a thing.

8 7 Q200 The Chairman: You said in your opening remarks that one of the attractions of the TPP for the United States was enshrining American standards in the WTO down the line, and I can see that. But that is not the case with TTIP, of course, so what interest do you think they have in simply bringing European standards to the table, which is much more bilateral rather than a ripple effect? Professor Richard Baldwin: There is a lot of business interest between the two, and that is what is driving it, but it is clearly nowhere near as strong as the business interest in TPP. The TPP is not about them trying to push their standards on everybody. It is just that they cannot conceive of any other standards, and there are these standards in their deep agreements NAFTA, Korea, Australia, Peru. They have their standards, and they are just taking the US template and applying it to TPP. When they come to Europe, I think they realise that the template will not be the same. They are not trying to force the template; they are very much of the view that EU-Canada, EU-Japan, TTIP and TTP the old quad that used to run the WTO will have formulated, more or less, a basis of 21st-century trade disciplines, and then it opens up to multilateralisation. So this idea that China will then have a lot to negotiate for as it gets multilateralised is in no way diminished by the existence of TTIP. That secondary big-think view is actually strengthened if it is not just the US but all the other quads. The Chairman: I think Lord Trimble felt that his question had been covered. Q201 Lord Lamont of Lerwick: Could I just ask you a fundamental question about the sea change you described as happening in the early 1990s and trade becoming much more part of the production chain? Presumably, however, that change applies only to part of trade, not all of it I do not know whether you could quantify that. Assuming that what you said is more and more the case, do you think the way in which policymakers have traditionally

9 8 looked at trade has to be modified? Do our notions of competitiveness and Ricardian ideas of comparative advantage have to be modified in any way according to your theory? Professor Richard Baldwin: Absolutely. I am writing a book called Misthinking Globalisation, where I explain my belief that policymakers around the world are misthinking the implications of globalisation. On the quick technical question, this global value chain revolution, which is another word for a sea change, has affected a handful of industries, mostly electrical, mechanical machinery and textiles, and some service stuff is going on as well. It has not affected all industries, and it certainly has not affected all countries. Let us come back to what it means for competitiveness. Probably the best way to think about it is that the notion of national competitiveness or comparative advantage, as we like to call it, has been denationalised. The traditional conception of how trade competes is that Britain produces, say, a jet engine, which should really be thought of as a bundle of British labour, capital and technology and the institutional framework on which it is all made. Then it goes overseas and competes with an American jet engine, which is a bundle of American labour, capital, technology, etc. All that is being stirred around. The main thing in my mind, if I had to point to one thing, is that the know-how is staying inside firms but crossing borders. So you get the products becoming a bundle of several countries comparative advantage, in particular moving inside the boundary of a firm. In essence, the boundaries of technology are no longer national. Let us suppose that we want to understand British performance and we stack it against British features. That misses the point that a great deal of the competitiveness of Britain s products depends on other countries technology, labour, etc. So the whole notion of trade competitiveness has changed. I am not the only one to say this by a long shot; there are a number of interesting papers on it. The CPR did a study, edited by David from Nottingham where we looked at competitiveness and value chains, and how that changes. So that is the first thing.

10 9 The second thing is that I noticed in your question that you referred to stumbling blocks and building blocks. That is also a 20th-century concept that needs to be écarté put to the side. Trade agreements in the old days were mostly about trade preferences or trade discrimination, if you want. These trade agreements are not about that. I come back to the single market. When we were doing it in the 20th century everybody said Fortress Europe! What are we going to do?. In the end there was no Fortress Europe. The single market was good for Japanese and American exporters. To a certain extent that is what these trade agreements are. There are still some tariffs, for example in agriculture, and there will still be some preferences, which could hurt some countries textile and apparels are another area. But for most of the mainstream industries it is not about us or them but more about whether we have PC with Microsoft Windows or do we have Apple with the ios operating system? They are not really against each other. There are gains to getting more people into one, and if you have one you are happy if that is the one that wins, so it is more like systems competition rather than providing preferences. I do not view these things as stumbling blocks or building blocks but more like a regulatory convergence or unilateral reforms which so happen to be put into regional trade agreements. The econometric evidence shows that, by the way, and I would be happy to talk about that. The Chairman: I think this almost covers part of the question Baroness Quin was going to ask. Q202 Baroness Quin: Yes, it does, but perhaps I can pick up on something you said earlier on. We have had a lot of evidence from people representing different sectors of the economy talking about what they see as the economic benefits of TTIP. You gave us a rather different slant in looking at it as a foreign policy issue more generally. You mentioned that many of the aims that America has in this negotiation are to try to bring China more into the international system on terms that the US would find satisfactory. Do you think that will

11 10 actually happen, and can you say a little more what specific aims the US has with regard to China? Professor Richard Baldwin: First of all, I do not think the US is of one mind on China by any means. There are definitely people in the US who think of TTP as a way of corralling China, setting up the supply chain rules all around Asia except for the main supply chain person, which is China, which will either have to unilaterally adapt to it or make concessions to modify it. That is the anti-china or hard China group. The other looks at China as the world s largest exporter which pretends that it is a developing country in the WTO and does not have the same standards, and they find that ridiculous. After all, when we did special and differential treatment in the GATT in 1947, we did not have in mind the largest manufacturer the biggest exporter in the world. That was not what we had in mind. We had small, delicate countries trying to do good. The goal is that the US wants China to take a leadership role in the WTO. That is the positive thing. Will it work? Yes, it will and I think it already has. For example, China recently asked to join the plurilateral on services, which is a bit of a revolution. It is hard to know what is inside China and what is not, but the new regime certainly seems interested in property right protections that they were not interested in before. To a certain extent China is starting to become a headquarter economy and starting to do this offshoring, and it wants protection for its companies and intellectual property rights. It pretty soon sees that there will be Chinese brand name goods that it will want IP protection for. So it is hard to know whether China is changing from a factory economy to a headquarter economy and getting ready for it itself, or if it is the pressure of it. However, I do think that this is changing China s attitudes already, and it will work in some sense. The Chairman: Lord Jopling is going to ask about the WTO, which again is something you touched on in your earlier answers.

12 11 Lord Jopling: So much has been covered that I wonder The Chairman: I agree. Lord Sandwich. Q203 Earl of Sandwich: I had a vision of an atomic structure when you were talking about trade agreements around the world, with each one bouncing against the other. In that context it has been very interesting to see how the WTO itself is developing. Do you think that the recent Bali agreement was a kind of blazon of fire or a meteor coming through this structure? What are the consequences of TTIP for third countries, seen through that prism of light, if you see what I mean? Professor Richard Baldwin: Let me talk about Bali. I wrote a column on Vox called The Bali Ribbon, in which I described the Bali agreement as more of a ribbon than a package because it took together things that were being done anyways, wrapped a ribbon around it and said, Aha! We have done something. For instance, I have heard it claimed that the US Congress will not have to pass any legislation at all in order to pass the Bali package and that was part of the goal. That tells you what it was; it really was not very much. In fact, it is only very differently related to the real goal of the Doha round, which was to rebalance the trading system. I think we learnt from Bali that everything that could be done has been done, but it is a long way from what Doha was supposed to have done. It prevented the organisation from being completely moribund, but it is a long way from a spark. In particular, my view of the Doha round is that it is not self-balancing: the agenda does not have something for everyone around the table. When the Doha round agenda was set in 2001, China was not China. In particular, China acceded at the meeting at which the Doha agenda was set, and it had made massive concessions in its accession talks. So Doha s agenda was set up with nothing from and nothing for China. That was That made sense, because it was supposed to be done in three years, but it was not done in three years, and then China happened. Now it is

13 12 impossible to think about Doha with nothing from and nothing for China. But the agenda has no red meat for Chinese mercantilists. Of course it is a systemic thing, and they are very interested in trade, but what is the thing that China really wants out of Doha? It is not there, because it was not set on the agenda. We need to have something to expand the agenda, and those are the 21st-century issues that we will come to. Bali is not a disaster; it is in a sort of holding pattern. But if you also think this through, nothing can happen in the WTO on these issues until TTIP and TPP are done or dead. The US in particular will negotiate in the WTO even on an agenda-setting thing and in TTIP, and in TPP. Until we have the Your second question is on the implications for third countries. Some of this is easy and some of it is hard. The easy part has to do with the old-fashioned tariff protections. If preferences are given on textiles, apparel, agricultural, that will hurt the third countries that are left out. Clearly countries in Central America and the Caribbean are very concerned about some of those topics. Those are very easy to think through, and probably important for the small countries involved, but Europe could presumably counter that by unilaterally improving the GSP preferences and things like that, so it could be offset. The systemic ones are a little harder. My country now is Switzerland. I went through this TTIP thing a few years ago when the US and Switzerland were trying to negotiate a free trade agreement, or start it, so I wrote a book with Gary Hufbauer, and I was the Swiss economist. The whole thing was killed by small things. For Switzerland, the single market has meant that it has to mimic everything the European Union does in terms of regulation. If there are any regulatory changes, Switzerland has to adopt them. So Switzerland has adapted to this regulatory convergence within Europe through hegemonic harmonisation, and that is what the rest of the world will have to do. The problem for the developing countries is that we get this US transatlantic, transpacific set of high-standard rules but are they the right rules for developing countries? They will not

14 13 have a choice. They obey those rules or they do not export, just like Switzerland. It is more or less hegemonic harmonisation. Altogether, however, I think it will be a good thing for them, just as the single market increased exports from third countries into the European Union and investment. It is a very positive thing. You could very much say that central European countries were not really ready for the acquis communautaire, but when they joined, they took on this huge mass of advanced country regulation, and in the end it was probably pretty good for them. Lord Jopling: Can I follow that? I am intrigued by what you say about Switzerland s position of having to conform to the surrounding regulations. If the United Kingdom was to leave the European Union, is it your view that we would be in exactly the same situation as Switzerland, unable to sit in on the discussions but having to conform? Professor Richard Baldwin: My view of that whole thing, whether it is the UK, Catalonia or Scotland, is that basically they would join the European Economic Association. Switzerland is not in that organisation, but it mimics it with those bilateral accords. The basic deal there is that you get to participate in the single market in terms of mutual recognition and no barriers, but you have to follow the acquis. It is not quite that they have no representation. They have no vote, but there is a comitology, a process of developing standards in which Swiss countries participate all the time. To a large extent Swiss companies are also European companies, so Nestlé France may be doing the negotiations. In any case, you cannot live in a tightly connected, isolated world. Just take manufacturing services it is the same. Companies cannot pretend to make their own soup in one part of the pot. They have to follow these rules. It is quite clear to me that if anyone left the EU who is in this supply chain network, they would have to follow the acquis as it develops. Q204 Baroness Coussins: We have seen the CEPR studies on the potential economic impact of TTIP, both on the EU as a whole and on the UK economy, although I am always

15 14 worried that these figures are always qualified by being described as the best-case scenario figures. I would quite like to know what the likely figures are rather than just the best-case scenario ones. Can you tell us what the key assumptions were behind the models you used in those studies so that we can make a better assessment of how to look at those predictions? Also, looking at key previous trade agreements, how would you say the predictions have stacked up against the outcomes in practice? Professor Richard Baldwin: First, let me say that it is not a CEPR study; it was published by CEPR but it is a study by a team of people associated with CEPR. The lead guy is Joe Francois, who is a professor in Linz, Austria. I just became the director of the CEPR, so I am a little sensitive to that. What is in that? Let me say that it is a very hard thing, and not a clear thing. It would be a little like asking what the implications are for the financial regulations that have happened since I would say, Well, it would be 100 million. That is a gross simplification of what is going on. To the extent that TTIP involves regulatory changes, we do not know what they will be and which are different by industry; and these things interact with each other, so it is really very difficult to know what is going to happen. I will tell you how they did this. They surveyed businesses on both sides of the Atlantic and asked what sort of barriers there are apart from the obvious ones like tariffs, and got a qualitative ranking. They then lined that up against actual trade flows sector by sector, saw where there were little flows compared to what you would have expected and tried to associate that with the answers of business. In essence, they associated missing trade with businesses perception of where the barriers are, sector by sector. They are not looking at a tariff and saying, It s going to go from 15% down to 0%; we know what that s going to do to prices and to the quantities. They are laying out, in a very reduced way, the implications of these regulations. The assumption is then that these regulations are going to be reduced by 10% or 25%, and they

16 15 run through what happens to trade and look at it. That is essentially what is going on; they allow different types of adjustment in terms of scale economies and capital stocks, which I would be happy to talk about. What will actually happen goes back to my view of what will actually come out of TTIP a process of regulatory convergence rather than an event. Therefore I believe that those numbers will be realistic, but over a medium run, such as between now and the end of the decade, not soon. We will not be able to agree any kind of regulatory harmonisation across the Atlantic in a realistic timeframe. Just to bring you back to your history, remember that the European Union tried to harmonise standards between 1968 and 1986 through oldfashioned negotiating, for instance on the standards for steel vessels. It never worked, because it took too long, everybody had a veto, and the standards were evolving all the time, so by the time they agreed them they were out of date anyway. TTIP will not come to that kind of agreement if they could not agree it inside the EU. They will have to agree a process of regulatory convergence in which the costs of these regulatory things will melt over time. I do not know if I answered your question, but at least I talked for a little while. Baroness Coussins: What about the second part of the question, which was about how accurate previous predictions have been? Professor Richard Baldwin: I am going to be unsatisfactory about this as well. The trouble is that these are always saying, The world is on this status quo. All we re going to do is change a few barriers and then we ll be better off by so many hundreds of billions. Now you say, Let us go back and look at what we did for NAFTA. The trouble is that the world they projected for NAFTA the status quo world was nothing like what actually happened, because a thousand things happened. What did NAFTA do? Sorting out what NAFTA did is really very difficult. I will be a little more positive by saying that at least when it comes to export flows, they were not terrible. In terms of the income gains it is basically impossible to

17 16 say how much this will add to people s income. You can look at sectoral effects and maybe trade effects, but there are too many effects in the economy to go all the way back to wages and incomes. Things affect things, which affect things in the economy. Prices affect companies, which affect wages, which affect prices the whole thing is too complicated to say, This caused that. So I would take with a large grain of salt any particular numbers on the overall numbers, but if you look at the CEPR studies saying that the biggest sectors that will be hit are motor vehicles, chemicals and processed food, you can take that to the bank. That is correct. There are these big barriers, a lot of trade and the possibility of some sort of harmonisation going on. The Chairman: Baroness Young has a question, although in a sense you have answered part of the question she was going to ask. Q205 Baroness Young of Hornsey: I think you have answered the bulk of the question I was going to ask, but one related thing that arises from your comments is the way you interpret TTIP as perhaps more foreign policy than economic benefits. Do you think there is anything in that for consumers? I take absolutely what you said in response to Baroness Coussin s question. I noticed that you also referred to the question of income. Will people with high incomes or with low incomes benefit more? Is it possible to say based on previous studies? Professor Richard Baldwin: Let me just characterise your characterisation of what I said. I think that the driving force is geopolitics, or high-level politics, but there is an enormous business interest on both sides. With the Swiss-US free trade agreement we found that everybody was interested, but it was killed by peanuts, chocolate and beef. Some 8,000 farmers in Switzerland alone could kill that agreement. So there is a huge business interest, but there are these very hard special-interest nuts. To overcome them we need Angela

18 17 Merkel to say, This is a systems competition between the Atlantic economies and China, and then they will overcome the peanut guys. Income-wise, when you talk about the income effects of these kinds of agreements, you are basically talking about price effects. The question is ultimately, will this affect prices in ways that line up with the differences in consumption bundles of rich and poor people? Rich and poor people consume different things; in particular, rich people consume a lower fraction of their income, so anything that lowers prices of consumption tends to favour lower-income people. Lower-income people spend more of their income on food, and the most protected bits left in the economy are food, on both sides of the Atlantic. If they actually make progress on liberalising the food trade, it will be more favourable for people with low incomes, but it will all work through the price effects. Unfortunately, the big barriers are usually associated with extremely strong special interests. History shows that those bits will be left aside or dealt with in tariff-rate quotas so that there is not very much effect. Baroness Young of Hornsey: Just to be clear though, in terms of empirical evidence, because that is what we are looking for, is there anything from previous studies which you would say perhaps we should not take with a grain of salt or which would be more illuminating? Professor Richard Baldwin: The trade agreements that primarily lowered tariffs are much easier to trace through. You lower the tariff and it is like lowering sales tax or something you can see what happens to the price. At least in rich countries there is a systematic bias of protection towards labour-intensive goods, which, for whatever reason, tend to be overrepresented in low-income people s budgets: shoes, clothes, food things like that. As a consequence, in the US, for instance, when we were trying to sell the Uruguay round I was working for the Bush senior Administration at the time we were pointing out the gains to low-income people because it was liberalising textiles, apparel and shoes that was the

19 18 argument, and it has. If you go to developing countries, it usually works the other way round, because a tariff tends to protect manufacturing, and so it works the opposite way in many developing countries. In rich countries, because the labour-intensive and food are protected, if it liberalises, it helps out. Those could be quantified. If you had Francois, he could do those kinds of studies for you. It is all in the model: he just has to look at the price effects by sector, and he can tell you what impact it would have on any particular consumption bundle. Q206 Lord Foulkes of Cumnock: The Commission has said that it does not want labour and environmental standards to be compromised by this deal. Is that compatible with regulatory convergence? Professor Richard Baldwin: When the US talks about labour and environment it is very specific, and it is really a conflict between the Democrats and the Republicans in the US. They have a famous May 10th compromise, whereby labour and environment must be in all US trade agreements. On environment, they are essentially insisting that countries sign up to five multilateral environmental agreements, so I do not see that as harming anything. Health and safety might be a different issue because of washing chickens with chlorine and things like that. The US tends to have looser standards than the EU; GMO would change as well. But real environmental things would not change that is not what the US is asking for, although on health and safety it may be. As for labour, this is a strange thing in the US. As you probably know, the US does not adhere to the ILO core standards. The Democrats are using trade agreements as a way of forcing the US into those. It has been a longstanding trip, all the way through from 1994, when it was put into site agreements and NAFTA. The idea is to bind the US into standards that almost every other country in the world already agrees to. That will not level it down. The political game in the US is to get the US more or less to agree to the core ILO things on

20 19 prison labour, rights to organise, and stuff like that. It is not Europe going down; first of all, I think there will be very little change on environment between the US and EU because of what they are after. The race to the bottom on standards is more of a concern with things like food, health, safety and the precautionary principle, but I would not have called those either labour or environment. Q207 Baroness Bonham-Carter of Yarnbury: I am not sure whether you were in the room at the time, but we just had a very positive description from the previous interview of the investor state dispute settlement negotiated with Canada under CETA. Should a similar mechanism be pursued in the investment chapter of TTIP? We heard concerns from other witnesses that such an inclusion might not be a good thing. An example would be that a US shale gas producer could take legal action against France because it prohibits its exploitation. Professor Richard Baldwin: First of all, eight EU members already have bilateral investment treaties with the United States in which these things exist already, so it will not change for them. That is essentially what people are doing with putting investment into these agreements: they are taking bilateral investment agreements and putting them into these treaties. For a lot of countries it would not change anything, but for others it could change things. Ultimately, when you sign this agreement you have to realise that you are making law, and in a slightly different way. If this gets signed by the EU, it is enforceable through courts that are no longer under the control of the UK Parliament or the European Parliament or anything, so you do not have a right to change your mind afterwards these things get locked in. You have to be a little careful about what rights you grant or not. You have created a parallel system of law which can be enforced through a parallel system of courts, and you are doing that because you want to encourage investment. You want to make the companies comfortable placing their investments abroad. The plus is that that encourages production-sharing, moving and technology and all that. The downside is that it definitely

21 20 changes lawmaking in certain areas. My advice is to be very careful of what is in there, because once it is in there, you have to change the treaty to change the laws. It is not just passing another law in Parliament. Baroness Bonham-Carter of Yarnbury: That sounds like very good advice. Would your advice go so far as to say that it should be excluded? Professor Richard Baldwin: No. It is less of an issue between the US and Europe. The bilateral investment treaties really bite when the US is investing in Colombia, for example, and if something goes wrong, an American company has to go through the Colombian courts, which they may not trust. So they do not make the investment and Colombia loses. That is the big thing. The investment going across the Atlantic is enormous and has been for decades, without these investment rights, except in the eight countries that have them. I think overall that they are okay, but you have to Baroness Bonham-Carter of Yarnbury: Tread carefully. Professor Richard Baldwin: Tread carefully and put in some provisos. I do not think that if you did these, all of a sudden there would be a huge flow of US investment into Europe or European investment into the US where it did not happen before. The systems of law are roughly equivalent and roughly reliable or not, as is any system of law. The Chairman: Thank you very much indeed. You have covered a lot of ground and your answers embraced a lot of the questions which we had originally put down. Thank you very much, Professor Baldwin.