In mid-February, the EU and the US agreed to launch negotiations aimed at sealing a Transatlantic Trade and Investment Partnership (TTIP). Like Yogi Berra, cynics might be tempted to dismiss the project as déjà-vu all over again. After all, this is hardly the first such initiative the two sides have launched. In 1990, they signed a Transatlantic Declaration; in 1995, a New Transatlantic Agenda; in 1998, a Transatlantic Economic Partnership; and in 2007, they established a Transatlantic Economic Council (TEC), a body that was supposed to give political impetus to freeing up commercial relations across the Atlantic. Past attempts to lower the barriers that impede trade and investment across the Atlantic are a story of rising ambition, but frustratingly elusive results. So why bother?

Part of the answer is that the scale of the transatlantic economy makes the effort seem worthwhile. Despite the rise of China and other emerging economies, the transatlantic axis remains the largest bilateral commercial relationship in the world. Although the data indicates that the EU and the US now trade more goods with Asia than they do with each other, such figures are misleading. One reason is that they are distorted by the increasingly global nature of supply chains (so that finished goods like iPhones show up as Chinese exports, even though the value added to an iPhone in China is tiny). Another reason is that they ignore trade in services and foreign direct investment (FDI). Yet FDI has been growing faster than trade in goods for years; sales generated by foreign outlets outstrip those derived from cross-border trade; and services account for a rising share of transatlantic commerce.

The transatlantic economy, then, is larger than a casual look at the data for ‘visible trade’ might suggest. Despite the rise of Asia, moreover, the axis has tightened, not loosened, in recent years. Trading across borders is important, but it is a less intimate relationship than establishing a physical presence to produce and sell goods and services in another country. And it is the second mode which dominates the transatlantic economy. US firms are the largest foreign investors in the EU, and vice versa. Taken together, the investment of American firms in the EU and of European firms in the US approaches $3 trillion. Despite the economic difficulties they have experienced since 2008, the EU and the US still meet most of the leading criteria that influence where businesses want to invest: they offer wealthy consumers, skilled workers, political stability and predictable business environments.

Yet for all its value, the transatlantic economy is still riddled with barriers to trade and investment. Tariffs, though low on average (at 4 per cent), have not been eliminated, and remain astronomical for certain goods – notably in the agricultural sector. Eliminating tariffs, however, would still not free up the transatlantic economy, because the principal barriers to trade and investment now lurk ‘behind the border’. Examples of non-tariff barriers that clog up transatlantic commerce include: regulations (such as the EU’s ban on imports of genetically-modified foods); burdensome customs procedures (particularly in the US since 9/11); different product standards; curbs on foreign ownership of companies (in, for example, the US maritime freight sector); subsidies (notably to aircraft manufacturers); public procurement markets that are still closed; and so on.

The size of the transatlantic economy means that even a partial reduction of some of these barriers could yield non-trivial economic gains, mainly through the ‘dynamic effects’ of increased competition on productivity. A recent study by the European Centre for International Political Economy (ECIPE) estimates that eliminating tariffs alone would yield GDP gains of 0.5 per cent for the EU and 1 per cent for the US. Such gains are not to be sniffed at. It is misleading, however, to think of the TTIP as providing a boost to growth and jobs at a time when economic activity (particularly in Europe) is so weak. Set aside the time-lag that will elapse before a deal – if one is reached – enters into force. Even if such a lag did not exist, trade deals are long-term, supply-side measures: they are not a solution to the short-term, demand-side weakness that afflicts much of Europe.

So what are the prospects for an agreement to lower trade and investment barriers? Seasoned observers caution that such barriers are notoriously difficult to get rid of. In many policy areas, trade-impeding barriers reflect conflicting regulatory approaches – for example, the EU’s ‘precautionary principle’ versus the US’s reliance on risk-based scientific evidence – that remain deep-seated. If such barriers had been easy to dismantle, they would have been a long time ago. The TTIP may therefore struggle to avoid the fate of previous such initiatives, which have tended to get bogged down in technical detail, resulting in a loss of political interest at the top; have become hostage to trivial-sounding but often rancorous disputes that cannot be resolved, like trade in chlorine-rinsed chicken; and have consequently delivered far less market opening than originally hoped for.

Set against this, optimists counter that the political stars appear to be better aligned than for a long time. The intellectual case for lowering barriers to transatlantic trade and investment is arguably more widely accepted than it has ever been by politicians and businesses on both sides of the pond. Cheerleaders are more numerous, refuseniks more muted. President Obama, who took little interest in transatlantic trade during his first term of office, mentioned it in his State of the Union address on February 12th. The rise of China has provided further impetus. The US and the EU recognise that there is more to the TTIP than just transatlantic relations. In addition to promoting a trade liberalisation agenda at a time when the Doha Round is moribund, a successful TTIP would influence behaviour, regulations and technical standards in third countries such as China.

How should the success of the TTIP be measured? The TTIP should not be judged relative to an idealised but unrealistic outcome. It is wholly unrealistic to expect the result to be a transatlantic free trade area (which would imply the complete elimination of tariffs), let alone an enlarged version of the EU’s single market (which would imply full freedom of movement for people, goods, services and capital across the Atlantic). A successful TTIP would make steps towards a free trade area (by reducing, but not eliminating, tariffs), and modest ones towards a single market (perhaps by delivering some mutual recognition of regulations, reaching some agreements on common technical standards, and by improving market access in services). But it would fall short of both. The test of the TTIP is not whether it eliminates all barriers, but whether it lowers some of them.

The prospects for a successful outcome would be greatly improved if the two sides could agree on some rules of engagement. First, they should not allow the best to be the enemy of the good: better to focus on credible objectives and deliver than to be unrealistically ambitious and fail to do so. Second, to provide a sense of purpose and momentum, the two sides should commit to early tariff cuts, before proceeding to the more difficult barriers ‘behind the border’. Third, they should identify the regulatory and other issues on which progress is least likely and agree to set them aside for the time being. Fourth, they should refrain from linking unrelated issues by making progress on one conditional on the other. If the EU and the US fail to observe such rules of engagement, the TTIP is more likely to produce finger pointing and recrimination than any substantive market opening.

Philip Whyte is a senior research fellow at the Centre for European Reform.

The British have the least living space per head, the most expensive office rents and the most congested infrastructure of any EU-15 country. Thanks to a rapidly growing population –  the result of a healthy birth-rate and immigration – these trends are worsening steadily. At the same time, the British economy is languishing in a prolonged slump brought on by a collapse of demand. The answer is obvious: Britain needs to build more. Unfortunately, the obstacles to development are formidable. Britain’s supply-side problems are of a different character to those holding back other struggling European economies, but arguably no less serious.

Britain is generally considered a flexible, economically liberal economy, in which insiders have few opportunities to rig the system for their own benefit. To the extent that supply-side problems are considered a significant obstacle to economic growth, attention generally centres on the country’s patchy skills base. A high drop-out rate from secondary school and weak vocational training are no doubt real constraints on the UK economy, but there is an equally, if not more, serious one. Housing, commercial property and infrastructure are central to a country’s economic and social well-being. The UK’s essentially rigged market for land and its restrictive planning system are as big an obstacle to economic growth as restrictive labour markets and protected professions are in Southern Europe.

The number of new homes built each year in Britain has lagged far behind demand from a growing population for 30 years. Despite faster population growth, house construction is currently running at half the level of the 1960s. At the same time the average size of homes built in Britain is now the smallest in the EU. The result of these two trends has been a steady fall in the amount of living space per head. Property prices relative to average household incomes have come down a bit since 2007, but remain very high. Moreover, the problem is not just restricted to the residential sector: Britain has the highest office rents in the EU. Firms in cities such as Manchester pay more than in Frankfurt or Milan. And transport infrastructure is very expensive to build in Britain, which is one reason why there is too little of it.

Britain is small and densely-populated, but does not suffer from particularly acute land scarcity. Around 13 per cent of the UK is built on, a lower proportion than in countries with a similar population density such as Germany, Belgium or the Netherlands. Britain’s problem is that the supply of new housing and commercial space is uniquely unresponsive to increases in property prices. Alone among the countries that experienced a house price boom in the run up to the financial crisis, Britain had no construction boom. The number of houses being built picked up only slightly, despite UK house prices rising by more than in any other developed countries except Ireland.

This situation has far-reaching economic and social consequences for the UK. Massive house price inflation has aggravated the UK’s already high levels of inequality by shifting wealth from the young (and property-less) to the old (and propertied). The poor availability of affordable housing undermines labour mobility – people are unable to move to where jobs are available because they cannot afford accommodation. Those on welfare are discouraged from working (as they then lose access to subsidised housing).  Congested, expensive infrastructure combined with pricey commercial property pushes up the cost of business, depresses investment and holds back economic growth.

The two reasons for Britain’s land-use woes – a complex planning system and insufficient land for development – are inter-related. A major constraint on the supply of land is the existence of a protected ‘greenbelt’: land around cities on which development is very tightly controlled. There are also strict controls over building on other so-called green-field sites. The market for land is essentially rigged in favour of landowners, who pay no tax on their land holdings and hence pay no penalty for sitting on it, waiting for the artificially-created scarcity to push prices up further. With no revenue from land taxes, local authorities are unable to capture any increase in the value of land that takes place when planning permission is granted. As a result, they have little incentive to open up land for development. 

The UK should, of course, redevelop so-called ‘brownfield’ sites – vacant or derelict buildings and land. But this will only ever comprise part of the solution to its land use crisis. By its very nature, brownfield land is concentrated in parts of the country where people do not want to live. And it is often very expensive to redevelop, not least because the government has stipulated that 60 per cent of new homes must be built on brownfield sites. There is no alternative to building on the green-belt, much of which is neither beautiful nor green. The greenbelt was originally established to combat urban sprawl, but is now an obstacle to sensible development. For example, allowing London to expand by between two and three miles in each direction would easily solve the city’s land-use problems. Increasing that proportion of the UK’s surface area under development by between 1 and 2 percentage points would address the country’s  land constraints  and would not involve concreting over England’s ‘green and pleasant land’. Urban sprawl could easily be prevented by good quality town planning.

The sanctity of the greenbelt, and green-field land more generally, has much to do with vested interests perpetuating a system which rewards speculation. Many Britons have profited from land scarcity (and the tax-free property price gains it has led to), and are determined to defend those gains. They may complain about their children being unable to buy a house, but at the same time will staunchly oppose new development. For their part, landowners are a powerful and politically well-connected lobby; many of the biggest sit in the House of Lords (the country’s upper house). They have a big stake in inflated land prices and are well-placed to resist the taxation of land.

A land tax would involve property owners paying a percentage of the value of their land in tax each year. If the value of their property rose, so would the amount of tax paid on it. This would achieve a number of things. First, local authorities would have a financial incentive to change land from agricultural to residential (and commercial) use as they would profit from the increased value of the land this would cause. Second, it would make it more expensive to speculate on future rises in land values, and some of those gains would be captured by the government. Third, construction companies would not be able to sit on large amounts of land (so-called land banks), and drip feed the market, maintaining prices at artificially high levels. Instead, land would have to be developed or sold, which together with the increased availability resulting from the freeing up of greenbelt land, would bring down the price of developing land and with it the cost of housing, commercial property and infrastructure. Lower land costs would also increase competition by reducing barriers to entry to the construction sector: for example, at present housing building is dominated by a small number of big players.

Supply-side measures are rarely a quick solution to a demand-side crisis. That is certainly the challenge facing other struggling European economies. Spain and France suffer from inflexible labour markets, Germany from over-regulated product and services markets, Italy from both. Academic research shows that addressing such problems improves economic performance in the longer term, but it provides no immediate boost to demand. However, the UK is almost certainly an exception. Addressing Britain’s biggest supply-side problem (its rigged market for land) could provide a more immediate economic stimulus by releasing massive pent-up demand, as well as lift growth potential.

Britain should turn its weaknesses into strengths. Other struggling European countries have a surfeit of housing and infrastructure and poor demographics. For example, boosting construction in Spain would do no good – Spain has far too many unsold houses and it is now suffering from net emigration (more people are leaving the country than arriving). In Italy and Germany, populations are stagnant, although there is more scope to boost spending on infrastructure than in Spain. France’s population is growing, but as a result of persistently strong public investment, it already has very good physical infrastructure. And thanks to a rational planning system and plenty of land, it does not suffer from a housing shortage. Unlike Britain, these countries have few low-hanging fruit.

Far-reaching reform of the greenbelt and the introduction of land taxes could open the way for a boom in housing and commercial development. Local authorities and the national government could agree to set aside a proportion of the funds raised through land taxes to fund investment in infrastructure. Moreover, land taxes would make the tax system fairer by taxing unearned income. And by redistributing money from the wealthy (who save a high proportion of their income) to construction sector workers (who save little of it), it would provide a further boost to economic activity. The current Conservative-Liberal government has pushed through modest reforms of the planning system, but has shied away from opening up the greenbelt and has no intention of introducing a land tax. 

An economy in which speculation is rewarded and wealth is increasingly concentrated in the hands of those with property risks stagnation. It faces an uphill battle to hold on to its young or attract skilled immigrants. Britain needs to strike a better balance between the interests of existing property-owners and the rest of the country. This includes acknowledging that the value of land is determined by the activities of society as a whole and not the landowner, and hence needs to be taxed accordingly.

Simon Tilford is chief economist at the Centre for European Reform.