According to the Department of Labor’s August 2 jobs report, 12 million U.S. workers remain unemployed. In manufacturing and construction alone, 1.8 million people were out of work. Given that past trade agreements have had a deep and lasting impact on U.S. jobs, the officials negotiating the Transatlantic Trade and Investment Partnership (TTIP) must focus on policies that create jobs, rather than destroy them.1
In order to produce an agreement that will create more jobs than it costs in the United States and Europe, TTIP negotiators must be willing to replace past trade models based on the North American Free Trade Agreement (NAFTA) with models built on transparency, democracy, fairness, strong labor standards, and social and environmental safeguards. Negotiators should also condition each country’s participation on its adoption, implementation, and effective enforcement of fundamental human rights reflected by International Labor Organization (ILO) conventions and jurisprudence. The model must also include eliminating the forced transfer of technology and production in return for market access, often referred to as offsets or offset-like transactions, and eliminating investor-to-state dispute mechanisms. Negotiators must refrain from adopting any provision that would encourage austerity measures and other policies that result in job losses. And they need to adopt effective measures to prevent currency manipulation.
In this respect, U.S. negotiators should begin their discussions by considering the following two proposals2:
Include explicit reference to ILO conventions and accompanying jurisprudence and reduce obstacles for filing labor complaints
The EU and many of its member states have adopted a variety of mechanisms that reflect a deep commitment to strong labor standards as reflected in ILO conventions and jurisprudence. This commitment is demonstrated in various ways, including national laws, the EU Constitution, EU directives, and ratification of core ILO conventions. While the United States has only adopted two of the core ILO conventions (some interpretations of national law conflict with international labor standards), it has approved the ILO Constitution by its membership in the ILO (which explicitly references the freedom of association, a core labor standard) and the 1998 Declaration of Fundamental Principles and Rights at Work.
Given the high level of labor standards in both regions, U.S. and EU negotiators should agree on the incorporation of ILO conventions and accompanying jurisprudence in an enforceable labor chapter. Indeed, if these two regions cannot incorporate such a provision, it would send a cynical message to the world about basic commitments to fundamental human rights and the inability to ever negotiate a clear, unambiguous, and strong labor chapter in a trade and investment agreement. Sadly, it would also represent a failed opportunity for the United States and the EU to assert their leadership role in the world when it comes to setting high standards for fundamental human rights.
Failure to include a labor chapter that incorporates ILO conventions and jurisprudence would also represent a missed opportunity to provide parties with greater predictability and a clearer understanding of what is required under the labor chapter. Current U.S. and EU trade models lack certainty in how they are applied. For example, under the U.S.–Peru Free Trade Agreement (FTA), labor standards are limited to the ILO’s 1998 Declaration on Fundamental Principles and Rights at Work. While some stakeholders argue that the declaration incorporates ILO conventions, others do not share this position. The addition of a footnote to the Peru FTA, specifically excluding conventions, raises further confusion and uncertainty. In order to provide clarity and predictability, based on tripartite established standards and interpretations, explicit language must be included that clearly states that the labor standards and rights in the TTIP are those in ILO conventions and their accompanying jurisprudence.
It is also imperative that these ILO core rights and standards be effectively adopted into national law before any agreement can be signed, let alone implemented. Failure to abide by these fundamental human rights leads to market distortions with respect to labor costs. Wages can be artificially suppressed if workers do not enjoy core labor rights to form unions, to engage in collective bargaining, and to be free from discrimination, forced or prison labor, child labor, or unsafe or unhealthy workplaces.
Some European countries fall significantly short of honoring these core standards.3 We are reminded of our own experience with NAFTA and the thousands of jobs that have been lost to Mexico, where wages are kept artificially low because many workers do not enjoy core labor standards. The TTIP must not replicate this disaster with some EU member states.
Negotiators should ensure upward harmonization of labor and employment laws, regulations, policies, and directives so that both regions compete on a level playing field—a level playing field that incorporates ILO conventions. It is noteworthy that EU directives recognize the critical importance of labor unions in successful industries and in building prosperous national economies. National laws in EU member states such as Germany are “designed to give organized labor a significant voice in industrial decisions and to give individual employees significant job security.”4 Germany and other member states, as well as the EU itself, accept unions as an essential element of a tripartite relationship with business and government.
End market-distorting programs that encourage the transfer of technology and production for market access
Offsets are government-mandated programs that force the transfer of technology and production to one country from another in return for market sales.5 For example, in return for purchasing U.S. military jets, the U.S. company producing the jets agrees to transfer production or technology directly or indirectly related to the jets to the buyer’s country. Offsets and offset-like activities result in sizable market distortions.6 Although little information is kept on the impact of offsets in the U.S. defense industry (even less is kept for civil markets), what is known is alarming.
According to a U.S. government report on the defense industry, in 2011, U.S. firms reported entering into offset agreements valued at several billions of dollars.7 During 2011, reported offset agreements ranged from a low of 25 percent of the defense export sales contract value to a high of 100 percent.8 During 1993–2011, “associated offset agreements were valued at $83.73 billion.”9 Between 2009 and 2011, the four industry sectors with the greatest offsets, representing 47.4 percent of offsets transactions based on value, were related to aerospace, including aircraft manufacturing, aircraft parts, aeronautical systems, aircraft engine, and engine parts manufacturing.10
Offsets continue to cost the United States thousands of jobs each year. According to the Bureau of Industry and Security concerning the defense industry, “offset transactions during 2009-2011 could have created or sustained 32,775 employment opportunities if the work associated with those transactions were performed in the United States.”11 Of course, the same report attempts to demonstrate that these lost job opportunities are more than compensated for by jobs supported by the transactions. But that conclusion is based on pure speculation that all work related to the sales contract is conducted in the United States. It also fails to consider the loss of work over the long term, as offsets assist other countries in developing their own industries that compete directly with the United States.
The use of certain forms of offsets has already been recognized by both the United States and the EU as a prohibited trade-distorting mechanism. The 1992 U.S.–EU Agreement on Trade in Large Civil Aircraft addressed the issue of market-distorting demands of transfers of production and technology in return for sales. Interpreting Article 4.3 of the GATT Agreement on Trade in Civil Aircraft, the agreement stated:
Article 4.3 does not permit Government-mandated offsets. Further, they will not require that other factors, such as subcontracting, be made a condition or consideration of sale. Specifically, a signatory may not require that a vendor must provide offset, specific types or volumes of business opportunities, or other types of industrial compensation.12
In 2004, the United States exercised its right to terminate the agreement at roughly the same time it filed its WTO subsidy claim against the EU. The EU subsequently filed a subsidy claim against the United States.
U.S. domestic policy already discourages the use of offsets in the defense industry. The U.S. government considers offsets to be “economically inefficient and trade distorting,” and prohibits “any agency of the U.S. government from encouraging, entering directly into, or committing U.S. firms to any offset arrangement in connection with the sale of defense articles or services to foreign governments.”13
While EU policy on offsets is not as definitive as U.S. policy, the European Defense Agency issued a code of conduct on offsets agreed to by participating member states. The code states that the participating member states “share the ultimate aim to create the market conditions, and develop a European DTIB (European Defense Technological and Industrial Base) in which offsets may no longer be needed. Nonetheless, the present structure of the European DTIB and our early open market efforts require, in the short term, evolving offsets…”14
Despite the acknowledged market-distorting impact of offsets, some European countries continue to have well-established offset programs aimed at developing their own leading-edge industries.15 For example, in Norway:
The supplier must undertake to carry out industrial co-operation equal to a minimum of 100% of the value of the basis of calculation. For all acquisitions, a substantial part of the Commitment must be covered by binding contracts with the Norwegian industry prior to the Armed Forces entering into an agreement with the supplier.16
TTIP language prohibiting the use of offsets is not only critical to eliminate this market-distorting activity between EU member states and the United States, it is also critical to prevent both regions from being subject to offset demands from countries such as China. Few countries are as assertive as China in building an aerospace industry through the transfer of technology and production from Western aerospace companies.17
According to the U.S.-China Economic and Security Review Commission:
…Chinese firms have used their leverage to extract offsets — agreements to transfer some of the aircraft production along with related expertise and technology — as part of the deals…China nurtures its domestic aviation and aerospace industry by exploiting the international competition already in the industry.18
TTIP negotiators should agree to strong language prohibiting offsets. An expanded definition of offsets is needed, which would include any formal or informal mechanism relied upon to require the transfer of technology and/or production in return for market access or sales. The provision should explicitly cover both defense and commercial industries. It should also include strong and effective enforcement mechanisms. And finally, the provision should also protect both the United States and the EU from countries like China that force them to compete with each other to see who will transfer more technology and production to obtain a sale.
1. See Robert Scott, “Signing Trade Deals Is a Terrible Jobs Strategy,” Working Economics (Economic Policy Institute blog), February 13, 2013, http://epi86dev.wpengine.com/blog/signing-trade-deals-terrible-jobs-strategy/.
2. Other critical proposals provisions with respect to investor-to-state dispute mechanisms, government procurement, services, and several others.
3. E.g., Bulgaria; see International Trade Union Confederation, Countries at Risk: Violations of Trade Union Rights, 2013, http://www.ituc-csi.org/IMG/pdf/survey_ra_2013_eng_final.pdf.
4. William Keller, ed., International Labor and Employment Laws, BNA, vol. I, 1997, p.42
5. For more information on offsets, see Owen Herrnstadt, “Offsets and the Lack of a Comprehensive U.S. Policy: What Do Other Countries Know That We Don’t?” Economic Policy Institute, Briefing Paper No. 201, April 17, 2008, http://www.sharedprosperity.org/bp201/bp201.pdf.
7. U.S. Department of Commerce, Bureau of Industry and Security, Offsets in Defense Trade: Seventeenth Study, February 2013, http://www.bis.doc.gov/index.php/forms-documents/doc_download/687-seventeenth-report-to-congress.
12. See Presidential Commission on Offsets, 2001, 17–18.
13. Ibid.; Defense Production Act Amendments of 1992 (Pub. L. 102-558, Title I, Part C, Sec. 123).
14. A Code of Conduct on Offsets Agreed by the EU Member States Participating in the European Defence Agency, European Defence Agency (version approved on May 3, 2011)
15. The following example was found in European Defence Agency, Offsets, http://www.eda.europa.eu/offsets/viewpolicy.aspx?CountryID=NO. Other examples can be found at this website as well.
16. European Defence Agency, Offsets, http://www.eda.europa.eu/offsets/viewpolicy.aspx?CountryID=NO.
17. See testimony of Owen Herrnstadt, U.S.-China Economic Security Review Commission, May 2010.
18. U.S.-China Economic and Security Review Commission, 2005.