As Delivered

Thank you Chairman Endzins for the kind introduction. I am delighted to be here today and to address such a distinguished audience of Latvian entrepreneurs. On behalf of the U.S. government, I would like to thank the organizers of this wonderful event for giving me the opportunity to address you on the very important topic of the Transatlantic Trade and Investment Partnership.

When I arrived to teach at Georgetown University nearly 20 years ago, I met my first, and still favorite, Latvian, an economist by the name of George Viksnins. At the time, George was an advisor to the Latvian government helping manage the transition to a market economy, the restoration of the Bank of Latvia and the introduction of the Lats. Although elderly at the time, George displayed enthusiasm of a much younger man when he talked about opportunities ahead for Eastern Europe, and the Baltic States in particular.

Although he has since passed away, I believe that George would have been equally enthusiastic about the prospect of the Trans-Atlantic Trade and Investment Partnership (T-TIP) if he were alive today. T-TIP is an historic opportunity, and it has taken a very long time to reach this point.

In 1947, the United States joined together with 23 nations, including seven European states, to create the General Agreement on Tariffs and Trade (GATT). Through a secession of Rounds, driven primarily by trans-Atlantic cooperation and resolve, the GATT succeeded in establishing essential rules and reducing tariffs on manufactured goods to the lowest levels in recorded history. In 1995, the World Trade Organization (WTO) was created, which established a framework and commitments in the areas of services, intellectual property, investment, and agriculture, to name a few. Since that time, however, the substantive progress of WTO negotiations to reduce trade barriers has been extraordinarily challenging.

I believe that the reason for the creation of the WTO and its subsequent lack of progress both stem from the same cause, namely, a fundamental shift in the nature and pattern of international trade.

During the GATT years, the vast majority of manufactured goods were exported by developed countries, the U.S., Europe and Japan, in particular. Since the mid-1990s, the center of gravity for manufacturing exports has shifted to emerging markets, China especially.

The exports of the U.S. and Europe, meanwhile, have shifted over to high-tech manufacturing and services – business services, such as communications, financial and computer services, as well as royalties and license fees for creative works and technology. Moreover, foreign direct investment is a critical vehicle for the delivery of many of these services.

The United States is the world's largest exporter of services, and it runs a substantial trade surplus in services. In 2011, U.S. exports of private services exceeded $600 billion, and sales through foreign affiliates exceeded $1 trillion. Taken together, international sales of services by U.S. companies are on the order of $1.7 trillion a year, an amount equal to approximately 11 percent of U.S. GDP. Services trade accounts for approximately 30 percent of U.S. exports and 15 percent of U.S. imports. Europe is the largest service-exporting region of the world.

For this reason, it is crucial that the United States and Europe break down barriers to trade in services and insist upon protections for intellectual property and foreign direct investment worldwide.

In the WTO, however, this proposition is a hard sell. Governments of certain emerging market economies are quite content with the status quo, in which our markets are open to their manufactured goods, while they maintain high trade barriers both in manufactures and services and minimal protections for foreign investments and technology. Yet today the emerging markets are large enough that we cannot just ignore this imbalance as we did during the GATT years. In light of this imperative, the United States and its major trading partners in both the European and the Asia-Pacific regions, have decided to move ahead – not to exclude the emerging markets but to provide new impetus to multilateral negotiations and to set the high standards that will hopefully become the global norm.

President Obama spoke of this goal in his State of the Union Address last month. In reference to China's role in Asia, he said "We should write those rules. We should level the playing field."

In addition to this shift in the pattern of trade that I have just described, the nature of international trade has also changed with the rise of global value chains. Driven by a combination of lower trade barriers and improvement in information technology, the factories of the 21^st century are no longer monolithic, but are fragmented and distributed throughout the world. This shift has several important implications:

• First, small and medium size enterprises have unprecedented opportunities to participate in global markets by plugging into global value chains.
• Second, competition for links in global value chains can be fierce, and even small barriers to trade can put a country and its companies on the sidelines.
• Third, trade is increasingly affected by the "behind-the-border" policies such as standards and regulations affecting compatibility across markets.

This third point is arguably where the greatest positive potential for T-TIP lies. The beauty of the Trans-Atlantic relationship is that both sides have high standards and strong regulations. It is not a question of level. The tragedy is that, all too often, differences in standards and regulations lead to compliance costs that exclude firms – particularly the small ones – from operating in each other's markets. Let's be clear: no one is talking about lowering standards or restricting the ability of regulatory agencies to act in the best interest of the health, safety or environmental quality of their countries. T-TIP aims only to mitigate the unnecessary costs serving no other purpose but to inhibit international trade. The agreement might mean harmonization or mutual recognition, if appropriate, but in any event, it should mean transparency and mutual consultation when it comes to introducing new standards and regulations.

So how much do our economies stand to gain from T-TIP? This is a hard question to answer.

As a general observation, according to a well-respected academic study of existing free trade agreements worldwide (by Jeffrey H. Bergstrand and Scott L. Baier), a free trade agreement (FTA) will, on average, increase two member countries’ trade by about 86 percent after 15 years. Bilateral trans-Atlantic trade was $1.06 trillion in 2013. So applying such an estimate would yield a large number by any standard.

In actuality, T-TIP may turn out to deliver more or less. One reason it might deliver less is that trans-Atlantic tariffs and other trade barriers are already fairly low. The European Union (EU) commissioned a study in 2011 that predicted (based on a detailed simulation model) that trans-Atlantic trade would increase by about $450 billion, or roughly a 30 percent increase. That same model predicted a gain of about $125 billion in U.S. gross domestic product (GDP) and a gain of over $150 billion in EU GDP.

Then again, one reason T-TIP might deliver more is that it is meant to be a comprehensive agreement, and if it is successful on the regulatory front, the outcome would be quite a bit deeper than the average FTA. In any case, the estimated gains are larger than any trade agreement the U.S. has signed since NAFTA.

In closing, I wish to add that I am thrilled to be able to visit Riga to discuss T-TIP and other key economic issues with Latvian counterparts. I am happy to take questions that you may have today. Thank you.