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Toward a Transatlantic Energy Alliance? Liberalization of Energy Trade in the Transatlantic Trade and Investment Partnership

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Co-authored by Jesper Packert Pedersen, fellow with the German Marshall Fund

Negotiations over a transatlantic free trade agreement have kicked into gear as US and EU negotiators met for the third time in December and began in earnest to flesh out the details of what has recently been referred to as "an economic NATO": a reinforced partnership between the two largest economies of the world through the Transatlantic Trade and Investment Partnership (TTIP). Advancing the energy agenda within TTIP is a win-win proposition for both the United States and the European Union, with global consequences that will benefit climate, boost economies, create jobs, and contribute to the openness of the global energy market: key to global stability in the coming decades.

The European Union's primary goal is to increase liberalization of notoriously restricted US energy exports. EU negotiators have expressed particular interest in US crude oil exports and liquefied natural gas (LNG).

Allowing US crude oil exports would improve global market liquidity. Antiquated legislation such as the 1920 Merchant Marine Act, also known as the "Jones Act," which limits water-borne shipment in the United States to US-made, -owned and -operated vessels only, has irked Europeans for decades. The EU is now attempting to address this market barrier as part of TTIP negotiations. The debate has also intensified lately in the United States with key players in the administration as well as Congress calling to loosen the restrictions on export.

Concluding TTIP would also imply unrestricted US LNG exports to Europe. Now, the EU should be conservative about its expectations when it comes to direct supplies from the United States. The price points in Asian markets are currently far more attractive and will likely remain the preferred destination for US gas exports. Yet, simply by increasing liquidity on the global LNG markets, the United States could further improve European energy positions by enhancing the negotiating power of the buyers, especially those in Central Europe and the Baltic still exposed to a single supplier.

The European Union also emphasizes "an open, stable, predictable, sustainable, transparent, and non-discriminatory framework for traders and investors in raw materials and energy," including increased trade liberalization on US energy exports, and bringing a broad scope of energy issues such as access, distribution, trade, and sale under WTO-style international market principles. This approach is a deliberate attempt to establish international principles for third parties, including Russia, the OPEC, and other key energy exporters far beyond the transatlantic marketplace and the immediate scope of the TTIP agreement itself. This should be a welcome development, as international energy trade is one of the least governed -- and liberalized -- sectors in international commerce.

Another key aspect of the TTIP negotiations is advancing energy efficiency. The American shale revolution is unlikely to be reproduced in Europe and the competitive advantage the United States currently enjoys from significantly cheaper energy particularly in energy intensive industries is relative. The United States and European Union cannot compete directly with low Asian labor costs, but they can compete by lowering energy intensity, increasing efficiency, and boosting productivity. Therefore energy efficiency gains are critical for the transatlantic economies. On that front, Europe retains a competitive edge, as the energy intensity of advanced European economies is way below that of the United States.

TTIP could strengthen the market maturity of relevant products and services. These sectors are generally more susceptible to classic trade instruments such as lowering or eliminating tariffs, since many relevant products are manufactured goods and appliances, but also non-tariff barriers such as divergent standards and specifications in the European and US markets, including multiple certification procedures for the same product. TTIP should address such barriers head-on. The European Union has proposed building on an APEC agreement lowering tariffs on a list of environmental goods, and rooting out protectionist measures such as "Buy American" provisions, which have been curbed at the federal level in the United States, but attached to a rapidly increasing amount of state-level infrastructure projects in recent years.

Finally, while the highly fossil fuel import-dependent EU has a lot to gain from energy trade liberalization, the benefits would be significant for the United States too, well beyond the economic gains. As the United States contemplates how much gas it will allow for unrestricted export and whether to abolish its oil embargo-era restrictions on crude oil exports, it is worth bearing in mind that the signals the United States sends to Asian and Middle Eastern suppliers about openness of energy markets matter. The US and Canadian approach, together with key allied suppliers like Australia, could bolster Asian allies and partners' energy security and would reinforce perceptions of US reliability as an Asia-Pacific power. Furthermore, US gas exports to China could add further depth to the economic interdependence of the two.

It is in the eminent interest of North America and Europe to see open and liquid energy markets develop across the Atlantic, and eventually in Asia and indeed globally as the best way to fuel economic growth in the future. A long tradition of US opposition to resource nationalism must now be implemented at home.

David Koranyi is deputy director of the Dinu Patriciu Eurasia Center at the Atlantic Council. Jesper Packert Pedersen is a Ron Asmus fellow with the German Marshall Fund and a partner at Rasmussen Public Affairs.