ANALYSIS/OPINION:
The just-initiated U.S.-European Union trade negotiations — now called the Transatlantic Trade and Investment Partnership — face many obstacles, some understandable, many not. Unfortunately, the biggest obstacle — the Obama administration’s demand to exclude financial services from the agreement — makes the least sense of all, and it greatly undermines the entire enterprise.
It is hard to understand how a framework for resolving trans-Atlantic regulatory disputes could possibly exclude the largest sector of both parties’ economies. Indeed, the U.S. and Europe have 70 percent of world trade in financial services today. Stories appear almost daily of some new role for banks trading in some new line of business thanks to permission granted by the Federal Reserve. The energy sector is heavily implicated — commodities first and foremost — even before one considers the financing of new energy infrastructure.
No less important is the need to eliminate or at least minimize the discontinuities between government regulation on both sides of the Atlantic. For example, it is almost impossible to conceive of a successful “resolution” of a large but failing international financial company without cross-border cooperation. The relevant agencies have been hard at work trying to tie up loose ends, but the political boost of an international mechanism for solving problems would certainly help.
Virtually every financial institution seems to want financial regulation to be included in the negotiations. The lone holdout appears to be the Treasury Department, which asserts that the U.S.-EU trade negotiations would undermine the Dodd-Frank Act for reforming Wall Street and protecting consumers.
This is a most curious contention. More than 60 percent of Dodd-Frank has yet to be implemented by regulation, and both the completed rules and the unfinished ones are subject to enormous agency discretion. One of the key paradoxes of Dodd-Frank is the contrast between the sheer volume of rulemakings it requires (more than 400) and the accompanying lack of specific statutory guidance for the relevant agencies to follow.
In this context, the lack of close coordination between multiple agencies should be of greater concern than the fact that the law requires interagency coordination in the first place.
The Europeans worry, for example, about how to navigate the problem of multiple U.S. independent agencies, which outnumber even their allegedly disorganized European counterparts. These include important agencies such as the Federal Reserve, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Energy Regulatory Commission.
The White House argues that it cannot deal with them, but surely a trade negotiation that involves congressional approval can focus the needed coordination of these multiple agencies — and that is why it is so important to include financial regulation.
Inclusion will not undermine Dodd-Frank’s substance, either. The pressure has been rising within both liberal and conservative circles, as all recognize that Dodd-Frank worsened the problem of Too Big To Fail. As a result, the relevant agencies have just proposed a new set of rules on capital requirements to tighten recently finalized rules issued last year. So nothing in Dodd-Frank is set in concrete yet; nor could it be threatened by better international coordination.
As indicated above, the key is to develop a process for managing Dodd-Frank as well as other relevant financial statutes. The trans-Atlantic negotiations are not going to decide every rule on derivatives, credit swaps or capital requirements. But if negotiations can develop a framework that provides for an interactive regulatory resolution mechanism between all important sectors of the economy, it will have performed a heroic task.
The driving force behind growth in both the U.S. and the EU is the relative freedom of each party’s internal markets. To create a framework for a trans-Atlantic common market would be the biggest score of all. As President Obama himself said in a 2010 op-ed, “We are each other’s closest partners. Neither Europe nor the United States can confront the challenges of our time without the other.”
In light of these factors, it is difficult to see any reason for the Treasury’s position other than sheer bureaucratic turf protection. Treasury’s power was greatly magnified by the (Republican) White House in the last financial crisis. Once the White House gives up power to a large agency in an emergency, it is very hard — but equally essential — to get it back.
• C. Boyden Gray has served as White House counsel, U.S. ambassador to the European Union, special envoy for Eurasian energy and special envoy for European Union affairs. “Arbitrary and Capricious” runs monthly.
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