Who Benefits from a Transatlantic Free Trade Agreement?

Who Benefits from a Transatlantic Free Trade # 2013/04 # Agreement?

From a purely economic standpoint, the US and the entire EU will profit from a dismantling of tariffs and non-tariff

Policy Brief Policy trade barriers between both regions. The real gross domestic product per capita would increase in the US and in all 27 EU member countries. Also when one looks at labor markets, the positive effects on employment predominate: Two million additional jobs could be created in the Organization for Economic Co-operation and Development (OECD) zone over the long run. The public welfare gains of these economies admittedly do stand in contrast with real losses in income and employment in the rest of the world. On balance, how- Dr. Ulrich Schoof Program ever, the beneficial effects on economic welfare prevail. Shaping Sustainable Economies

Phone: +49 5241 81-81384 Email: ulrich.schoof@ bertelsmann- Focus stiftung.de Along with the US and the UK, crisis- Dr. Thieß Petersen Program ridden Spain would also be a big Shaping Sustainable winner from a comprehensive free Economies trade agreement. On the other hand, Phone: the countries that are not part of this +49 5241 81-81218 free trade agreement would have to Email: thiess.petersen@ expect losses in real earnings, which bertelsmann- could be substantial in some cases. stiftung.de

Prof. Gabriel Felbermayr, Ph.D. ifo Institut München

Phone: +49 89 9442-1428 Email: [email protected] 4 Since the 1990s, a free trade agreement a bilateral free trade agreement between between the US and European Union (EU) the EU and the US will also affect the rest

3 has been discussed time and again. At of the world (called third-country effects). least since the beginning of 2013, The study here is limited and only consid- negotiations regarding a transatlantic free ers economic issues. More far-reaching trade agreement seem to be within reach. aspects such as questions of data protec- The goal for this type of free trade tion, consumer protection and protection agreement is to remove barriers to trade of intellectual property are expressly not between allied partners, thereby addressed here. intensifying the exchange of goods and services between participating economies. This study considers two scenarios. In the Deepening of trade is linked with the first the tariff scenario - we calculate expectation that production, employment what the economic consequences would and income will increase in the countries be if all tariff-type trade barriers between

Policy Brief # 201 # Brief Policy that are party to a free trade agreement, the EU and the US were dismantled. In the thereby raising the citizens’ material second scenario - the liberalization sce- standard of living. However, would this nario - not only tariffs, but also all non- also be the case in the event of a yet-to-be- tariff trade barriers are abolished between negotiated “Transatlantic Trade and the parties to the agreement. Both scenar- Investment Partnership” (TTIP)? Which ios are compared with a situation in which economies would actually profit from an there is no transatlantic free trade agree- agreement, which would not? ment. The effects that result exclusively from removing the tariff and non-tariff trade barriers are calculated with the help 1. Regarding the method of a model developed by the ifo Institute for analyzing free trade agreements (for a of calculation detailed description, see Felbermayr et al. 2013).

The goal of the simulations presented here Experiences with existing free trade is to assess the economic effects of a free agreements are taken into consideration trade agreement between the 27 EU in the estimation of trade effects that can member countries and the US. The inves- be expected. Examples of such agree- tigation seeks to determine what the ef- ments include the North American Free fects will be on international trade flows, Trade Agreement (NAFTA, which involves quantities of goods and services produced Future Social Market Economy Market Social Future the US, Canada and Mexico) and the EU as (in other words, the real gross domestic Tariff and Non-tariff Trade Barriers: Trade barriers are product), and labor measures that limit the exchange of goods and services markets. It not only between countries. Tariff barriers primarily consist of tariffs on considers the coun- importing products from abroad. Non-tariff trade barriers tries that would be restrict the importation of goods and services from abroad by signing the agree- means other than tariffs. Examples include quality standards, ment, but 126 coun- shipping and labeling requirements, technical or legal tries in all. This requirements for imported products, and import restrictions comprehensive ap- ranging from import quotas to bans on imports. Non-tariff trade proach takes into barriers also include subsidies of a country’s own exports 02 account the fact that through tax advantages or financial assistance. well as numerous bilateral agreements 2. Consequences for 4 4 4 that the US and EU have with other coun-

/0 /0 /0 tries that have a common market with free Foreign Trade 3 3 3 traffic of goods and services without trade barriers. With the help of econometric es- timates, we can make statements about Removal of trade barriers between the EU the effects that the removal of trade bar- and US makes imports less expensive on riers will have on international trade—not both sides. Declining trade costs lead to an only between the parties to the agreement, increase in trade activities between the but also for the rest of the world. The fig- two regions. At the same time, pre- ures we determine for the effects of free existing trade agreements—in other words, trade agreements on trade are then inte- the North American Free Trade Agree- grated into a simulation model that in- ment, for example, and/or the trade be- cludes 126 countries, in order to simulate tween member states of the EU—lose value the trade-creating and trade-diverting ef- because the preferred status of the respec- 201 201 201 # # # Brief Brief Brief Policy Policy Policy fects that a transatlantic free trade agree- tive trading partner is less relevant. Thus, ment might have on the economies under the price for intensifying trade relation- consideration. The related exports and ships between the US and EU is a reduc- imports, in turn, have an impact on the tion of trade activities within the EU and a real gross domestic product numbers and decrease in foreign trade relationships the level of employment in the individual with most third countries. These effects economies. are illustrated by the example of Germany and a few selected trading partners (see The following section briefly summarizes Fig. 1). Since the tariffs in transatlantic the economic effects that would result in foreign trade are already very low, dis- the event of a free trade agreement be- mantling the tariff barriers to trade (tariff tween the EU and US. For this purpose, scenario) has only a very minor effect on the actual economic reality of the year trade flows. By contrast, a comprehensive 2010 is compared with a hypothetical real- free trade agreement that also removes ity in which we assume that the two sce- the non-tariff trade barriers (liberalization narios regarding a transatlantic free trade scenario) would have considerably agreement (tariff scenario and liberaliza- stronger impacts. tion scenario) were already in full effect in 2010. Thus, any adjustment processes, which would realistically occur after the 3. Effects on Economic

signing of a free trade agreement, are ex- Economy Economy Economy Market Market Market Social Social Social Future Future Future plicitly omitted. The following briefly Welfare Worldwide summarized consequences are therefore long-term effects. In addition, it should be noted that all results presented in the fol- In regard to people´s material living con- lowing section exclusively describe the ditions, trade flows are less relevant than isolated effect of a free trade agreement. In the trend in the real gross domestic prod- other words, in economists’ jargon, these uct per capita. This figure - hereafter re- are “ceteris paribus” calculations (Latin for ferred to as “real per capita income” - is an “all other things being held constant”). indicator of the gains or losses in economic welfare, which are related to a transatlantic free trade agreement. Because a tariff scenario alone has only minor effects 03 4 on trade, the following section will only Other EU countries that profit from this deal with the comprehensive free trade treaty well above average are small econ-

3 agreement. Figure 2 shows how the long- omies such as the Baltic States. Small term per capita income would change for countries tend to export and import a all 126 countries as the result of a transat- larger proportion of their gross domestic lantic free trade agreement. The following product than large economies, because the main developments can be observed in latter have a large domestic market and this regard: The US shows the greatest are therefore less strongly tied to the in- growth in real per capita income. There, ternational division of labor. Since they the long-term gross domestic product per are more strongly integrated in foreign capita grows by 13.4 percent. The EU as a trade, small economies also profit to a whole also shows gains in economic wel- greater degree from declining trade costs. fare. In the case of a comprehensive trans- Most of the southern European countries atlantic free trade agreement, the real per in crisis derive a greater-than-average Policy Brief # 201 # Brief Policy capita income in all 27 member countries benefit from the free trade agreement. In is on average almost five percent higher that regard, Spain shows the greatest gain than without this agreement. Great Britain in income because it can replace the rela- shows the largest growth in income. tively expensive imports from European There, the real per capita income grows by countries with cheaper imports from the almost ten percent over the long term. The US. The related surge in purchasing power main reason for this growth: Great Britain increases the real gross domestic product already has a high trade volume with the per capita. Thus, a transatlantic free trade US and therefore profits particularly well agreement would not widen the gap be- from a dismantling of trade barriers with tween the crisis-ridden southern European the US. countries and the other EU member states.

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04 In general, we determined that this free trade agreement with the US that will 4 4 4 agreement does not increase income dif- lose value as the result of a transatlantic

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ferences within the EU. free trade agreement. Shrinking exports 3 3 3 would cause long-term real per capita in- The EU countries that benefit less than come declines by 7.2 percent in Mexico average from a free trade agreement be- and by as much as 9.5 percent in Canada. tween the EU and US include the large In Japan long-term real per capita income economies of Germany and France. In fact, would decline by almost six percent. of all the 27 EU countries, after the Czech Losses in real income also occur in Euro- Republic, France is the country that shows pean countries that do not belong to the the smallest increase in real income per EU. capita due to its relatively small trade in goods with the US. Other big losers include developing na- tions. The intensification of trade relations While the US and EU member countries between the EU and US reduces develop- 201 201 201 # # # Brief Brief Brief Policy Policy Policy benefit from a transatlantic free trade ing countries’ exports to these regions. In agreement, most other countries suffer particular, because of their geographical from trade redirection effects. The intensi- location, countries in North and West fication of trade relationships between the Africa that previously had strong trade re- EU and US results in these economies im- lations with the EU would have a hard porting fewer goods and services from the time finding alternative markets for their rest of the world. This affects Canada and export products. In this regard, however, it Mexico to a particularly large degree be- should also be taken into account that cause these two countries currently have a economic growth in the countries that are

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05 4 party to the transatlantic free trade which is then reflected in a corresponding agreement might result in an increased reduction in the unemployment rate.

3 demand for products from the rest of the While the unemployment rate in the world, which would then also increase ex- OECD declines by an average of 0.45 per- ports from developing countries. These centage points, in the four countries in effects on growth - in other words, the dy- crisis, the decline ranges from 0.57 per- namic effects of a free trade agreement - centage points in Italy to 0.76 percentage are not considered in the above calcula- points in Portugal. In general, we observed tions. Therefore, the negative impacts on that countries currently affected by above- real per capita income could in fact be average unemployment would see an lower. Regardless of that, however, we de- above-average decline in unemployment termined that the world as a whole profits in the wake of a transatlantic free trade from the free trade agreement at issue agreement. This agreement would there- here: The average real per capita income fore have a converging effect on the labor Policy Brief # 201 # Brief Policy rises by almost 3.3 percent. In view of this markets as well. Like the effects on social global growth in income, there is a possi- welfare, there are also losers when we bility–at least, theoretically–that the win- look at the labor markets. In the OECD ners of the transatlantic free trade agree- countries that are not included in the ment will compensate the losers. transatlantic free trade agreement, jobs are lost. On balance, however, the job- creating effects predominate, resulting in about two million more jobs over the long 4. Labor Market term. Effects

Economic growth stimulated by intensifying foreign trade also affects labor markets. Because of the relatively small effect on trade from just abolishing tariffs, there are no labor market effects worth mentioning in the tariff scenario. On the other hand, a comprehensive trade agreement between the US and

Future Social Market Economy Market Social Future EU would result in a considerably greater increase in employment in the economies that are party to the agreement (see Fig. 3). The US and the UK benefit to a particular degree, with almost 1.1 million and 400,000 additional jobs created, respectively. For the crisis-ridden southern European countries as well, there is an above-average posi- 06 tive effect on employment, 5. Conclusion and agreement, and for demonstrating readi- 4 4 4 ness to compromise in multilateral negoti-

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Economic Policy Conse- ations. Transatlantic trade and investment 3 3 3 partnerships could and should serve as an quences impetus, and not as a hindrance, on the multilateral negotiations that have stalled in the Doha Round. Intensifying trade between the US and EU would have positive effects on income and employment in the participating economies, especially with a comprehensive Further Reading agreement that eliminates non-tariff barriers as well as tariffs. A transatlantic • Felbermayr, Gabriel et al., Dimensionen trade and investment partnership (TTIP) und Auswirkungen eines Freihandelsab- would therefore be an important tool and kommens zwischen der EU und den USA, 201 201 201 # # # Brief Brief Brief Policy Policy Policy vehicle for increased growth and competi- Studie im Auftrag des Bundesministeri- tiveness in the European Union, which is ums für Wirtschaft und Technologie, End- still burdened by the financial and debt bericht, Munich 2013. crisis in many places - and therefore by economic recession. Meanwhile, a trade agreement of this sort does not increase the economic disparities among EU member countries. Southern Europeans, who are particularly affected by the financial crisis, would benefit more than average according to the scenarios that are used as a basis here. Since a precise scope of an agreement is hard to assess, however, the economic convergence idea for Europe should be checked repeatedly during the negotiations, and should not be lost from sight.

Improvements in social welfare in the US and EU do indeed stand in contrast with identifiable real income losses in third countries, including a number of develop- Economy Economy Economy Market Market Market Social Social Social Future Future Future ing countries. These negative effects need to be avoided or reduced. Traditional trading partners of the two large economies, in particular, should be included in negotiations or get an early opportunity to con- clude similar, compatible agreements with these economies, if this has not already happened. At the same time, the real gains in social welfare for the western in- dustrial countries should be an incentive for adequately compensating losers of the 07 4 Policy Brief 2013/02: Green and fair economy –

/0 a holistic concept for a sustainable economy 3 Solution approaches based purely on economics do not lead to optimal success–at least, not in the medium to long term. Rather, a sustainable economy requires an equal consideration of the ecological and social dimen- sions. The green economy concept, or, better said, the green and fair economy concept, is in principle suitable for, if not avoiding an economic and financial crisis as experienced in the last five years, at least moderating its Policy Brief # 201 # Brief Policy negative effects. The important thing here is to inte- grate the design of the concept as much as possible at the political, economic and individual level.

Policy Brief 2013/03: A European Social Market Economy? - Index Results The ‘highly competitive social market economy’ represents the targeted common economic order of the European Union as it is stated as a goal in the Lisbon Treaty. Yet, this endeavor requires a mutual understand- ing of which institutions constitute a modern social market economy. The results of the Index of Modern Social Market Economies (IMSME) show congruence around a liberal market economy, but great diversity in

Future Social Market Economy Market Social Future principles indispensible for a social market economy.

Bertelsmann Stiftung Upcoming releases: Carl-Bertelsmann-Straße 256 D-33311 Gütersloh www.bertelsmann-stiftung.de • Better Employment Opportunities for Older Workers Dr. Thieß Petersen Phone: +49 5241 81-81218 [email protected]

Eric Thode Phone: +49 5241 81-81581 [email protected] 08 ISSN-Nummer: 2191-2467