TTIP: SMALL GAINS, HIGH RISKS ?
Prof. Gabriel Felbermayr, PhD Ludwig Maximilians Universität München
13th Munich Economic Summit
May 16, 2014
Ifo Center for InternaQonal Economics
AGENDA
1. Mul/lateral Deadlock
2. Underu/lized Trade Poten/als 3. TTIP: Substan/al Possible Gains 4. Trade Diversion and Losers 5. From TTIP to the WTO 2.0
AGENDA
1. Mul/lateral Deadlock
2. Underu/lized Trade Poten/als 3. TTIP: Substan/al Possible Gains 4. Trade Diversion and Losers 5. From TTIP to the WTO 2.0
Ifo Ins/tut
SINCE 1995: VERY LITTLE PROGRESS ON WTO LEVEL
Source: Heritage Founda/on.
Freedom to trade internaQonally, WTO average, Index 0-‐10.
4
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000 2005 2011
WTO
Ifo Ins/tut
Source: Heritage Founda/on.
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000 2005 2011
SINCE 1995: VERY LITTLE PROGRESS ON WTO LEVEL Freedom to trade internaQonally, WTO average, Index 0-‐10.
WTO
123 members
159 members
Ifo Ins/tut
Source: Heritage Founda/on.
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000 2005 2011
Singapore (9.3)
Germany (7.9)
China (6.6) Russia (5.9)
Venezuela (3.4)
WTO Average
6
USA (7.7)
HETEROGENEITY AMONGST WTO MEMBERS Freedom to trade internaQonally, WTO average, Index 0-‐10.
WTO
AGENDA
1. Mul/lateral Deadlock
2. Underu/lized Trade Poten/als 3. TTIP: Substan/al Possible Gains 4. Trade Diversion and Losers 5. From TTIP to the WTO 2.0
EU-‐US TRADE: STILL SOME UNTAPPED POTENTIAL ? Ifo Ins/tut 8
22,4%
23,0%
0% 5% 10% 15% 20% 25%
Hyp. Benchmark
Obs. EU-‐US trade
US GDP
EU GDP
Shares in World GDP, current USD, 2012
Source: World Bank, ifo calcula/ons.
?
Ifo Ins/tut 9
Shares in World GDP, current USD, 2012
1,4%
22,4%
23,0%
0% 5% 10% 15% 20% 25%
Hyp. Benchmark
Obs. EU-‐US trade
US GDP
EU GDP
Source: World Bank WDI, WTO Interna/onal Trade Sta/s/cs 2013, ifo calcula/ons.
US Exports to EU: 455 World GDP: 71,697
EU Exports to US: 550 USD bn.
EU-‐US TRADE: STILL SOME UNTAPPED POTENTIAL ?
Ifo Ins/tut 10
Shares in World GDP, current USD, 2012
10,3%
1,4%
22,4%
23,0%
0% 5% 10% 15% 20% 25%
Hyp. Benchmark
Obs. EU-‐US trade
US GDP
EU GDP
Source: World Bank, WTO Interna/onal Trade Sta/s/cs 2013, ifo calcula/ons.
AssumpQons • No trade costs • Iden/cal preferences • Na/onal product
differen/a/on
EU-‐US TRADE: STILL SOME UNTAPPED POTENTIAL ?
Ifo Ins/tut 11
Shares in World GDP, current USD, 2012
10,3%
1,4%
22,4%
23,0%
0% 5% 10% 15% 20% 25%
Hyp. Benchmark
Obs. EU-‐US trade
US GDP
EU GDP
Source: World Bank, WTO Interna/onal Trade Sta/s/cs 2013, ifo calcula/ons.
Trade costs ∆: 8.9%
EU-‐US TRADE: STILL SOME UNTAPPED POTENTIAL ?
Missing trade puzzle
BREAK DOWN OF TRADE COSTS WITHIN OECD Ifo Ins/tut 12
3%
6%
7%
8%
14%
21%
0% 5% 10% 15% 20% 25%
Security
Informa/on
Language
Policy barriers
Currency
Transporta/on
Source: Anderson and van Wincoop (JEL, 2004), p. 693; US trade with industrialized countries.
total: 74%
Ad valorem tax equivalents
Tariffs: 2.5% NTMs: 5.5%
HAVE TRADE AGREEMENT REDUCED TRADE COSTS ? Ifo Ins/tut 13
Trade elasQcity
3 7
Baier & Bergstrand (JIE, 2007) -‐25 -‐10
Baier & Bergstrand (JIE, 2009) -‐43 -‐17
Baier & Bergstrand (JIE, 2009) -‐29 -‐12
Egger et al. (AEJ, 2011) -‐50 -‐19
Magee (BEP, 2003) -‐108 -‐37
Note: All es/mates from published papers, significant at the 1% level; comprehensive recent samples (year 2000-‐2005; >100 countries; all no/fied RTAs); all es/mates from published refereed ar/cles.
Causal average effects, changes in ad valorem trade costs (%pts)
HOW HAVE TRADE AGREEMENTS ACHIEVED THIS ? Ifo Ins/tut 14
3%
6%
7%
8%
14%
21%
0% 5% 10% 15% 20% 25%
Security
Informa/on
Language
Policy barriers
Currency
Transporta/on
… through formal policy changes and changed incenQves
Tariffs and NTMs
Private and public investment
Source: Anderson and van Wincoop (JEL, 2004), p. 693; *Egger et al. (AEJ, 2011), assuming a trade elas/city of 7.
total: -‐19%pts*
EVALUATING AN AGREEMENT THAT DOES NOT YET EXIST Ifo Ins/tut 15
Ex post performance of standard CGE models disappoin/ng: „models dras-cally underes-mated the impact of NAFTA on North American trade” (Kehoe, 2005)
• Right trade model? • How define an appropriate scenario ex ante?
ifo Approach
− „Guess“ likely/realis/c scenario? − Use measured effects of past agreements.
AssumpQon: TTIP lowers trade costs by as much as exisQng agreements have
ADVANTAGES OF THE ifo APPROACH Ifo Ins/tut 16
1. Top-‐down strategy on trade costs ! No need to es/mate non-‐tariff measures (NTMs) ! Comprehensive measure
2. Data-‐defined scenario for TTIP ! Capturing „actual“ direct and indirect effects ! Poli/cal feasibility
3. Easily applicable on very large country samples ! 173 countries, i.e., 29,756 country pairs
AGENDA
1. Mul/lateral Deadlock
2. Underu/lized Trade Poten/als 3. TTIP: Substan/al Possible Gains 4. Trade Diversion and Losers 5. From TTIP to the WTO 2.0
Ifo Ins/tut 18
Source: updated ifo calcula/ons; *Cos/not & Rodriguez-‐Clare (2014), Handbook of Int‘l Econ.
EU: + 3.9%: EUR 1.005 p.a./cap.
LONG-‐RUN EFFECTS ON REAL PER CAPITA INCOME, EU 28 Base year 2012, equivalent variaQon, %
Large? Total gains from trade for Germany ~52.9%
for 2011*
EU28: WHAT SHAPES THE WELFARE EFFECTS?
Ifo Ins/tut 19
Source: updated ifo calcula/ons.
AUT
BEL
BGR
CYP
CZE
DEUDNK
ESP
ESTFIN
FRA
GBR
GRC
HRVHUN
IRL
ITALTU
LUX
LVA
MLT
NLD
POL
PRT
ROU
SVKSVN
SWE
23
45
6
EV (%
)
9.5 10 10.5 11log per capita income in international dollars
AUT
BEL
BGR
CYP
CZE
DEUDNK
ESP
ESTFIN
FRA
GBR
GRC
HRV HUN
IRL
ITA LTU
LUX
LVA
MLT
NLD
POL
PRT
ROU
SVKSVN
SWE
23
45
6
EV (%
)
20 40 60 80 100Merchandise trade over GDPIniQal trade openness
AUT
BEL
BGR
CYP
CZE
DEUDNK
ESP
ESTFIN
FRA
GBR
GRC
HRVHUN
IRL
ITALTU
LUX
LVA
MLT
NLD
POL
PRT
ROU
SVKSVN
SWE
23
45
6
EV (%
)
9.5 10 10.5 11log per capita income in international dollars
AUT
BEL
BGR
CYP
CZE
DEUDNK
ESP
ESTFIN
FRA
GBR
GRC
HRV HUN
IRL
ITA LTU
LUX
LVA
MLT
NLD
POL
PRT
ROU
SVKSVN
SWE
23
45
6
EV (%
)
20 40 60 80 100Merchandise trade over GDPIniQal per capita income
Ifo Ins/tut 20
POTENTIAL CHANGE IN REAL PER CAPITA INCOME Long-‐run effects, %, base year 2012
Source: updated ifo calcula/ons.
4.9 3.9
World: + 1.6
RoW: -‐0.9
AGENDA
1. Mul/lateral Deadlock
2. Underu/lized Trade Poten/als 3. TTIP: Substan/al Possible Gains 4. Trade Diversion and Losers 5. From TTIP to the WTO 2.0
TTIP: TRADE CREATION AND TRADE DIVERSION Ifo Ins/tut 22
Ceteris paribus results from introducQon of TTIP, base year 2012
Source: ifo calcula/ons.
• Trade up in all 56 EU-‐US links (e.g., USA-‐GER: +98%)
• Trade down between EU/US and third countries (e.g., GER-‐BRA: -‐8%; USA-‐CHN: -‐33%)
• Trade up between many third countries (e.g., CAN-‐CHN: +46%)
Trade CreaQon
Trade Diversion
• Trade down in EU (e.g., FRA-‐GER: -‐24%) • Trade down within exis/ng EU/US bilaterals
(e.g., USA-‐MEX: -‐16%)
Preference Erosion
Ifo Ins/tut 23
POTENTIAL CHANGE IN REAL PER CAPITA INCOME
Source: updated ifo calcula/ons.
-‐1.0
-‐0.5
-‐2.0
-‐0.3
-‐0.5
-‐2.6
-‐1.7
-‐0.1
-‐3.1
-‐1.6
-‐0.8
Long-‐run effects, %, base year 2012
NEGATIVE THIRD COUNTRY EFFECTS ?
• Preferen/al tariff liberaliza/on discriminates (Viner, 1950)
• Lower trade costs: discriminatory, but welfare gains more likely
• Regulatory cooperaEon – „Spillovers“ conceivable – Everything depends on rules of origin (RoO) … ! WTR 2012: evidence points towards discriminaEon
Ifo Ins/tut 24
Theory and evidence
But large PTAs affect trade policy incenQves of countries… • Mul/lateral reform (Bali 2013!)
• Further crea/on, deepening and consolida/on of PTAs
AGENDA
1. Mul/lateral Deadlock
2. Underu/lized Trade Poten/als 3. TTIP: Substan/al Possible Gains 4. Trade Diversion and Losers 5. From TTIP to the WTO 2.0
Ifo Ins/tut
EU AND US TRADE AGREEMENTS IN THE FUTURE: OVERLAP
Source: WTO and USTR, current nego/a/ons as announced at WTO.
26
FROM TTIP TO WTO 2.0 ?
• Asenuate nega/ve effects of trade diversion and minimize complexity (e.g., RoO)
• Ensure mutual compatability of agreements
! Free trade, plurilateral governance amongst OECD countries
! Other major plurilaterals with wider coverage: e.g., TiSA
Ifo Ins/tut 27
The logic for consolidaQng our deep mega regionals
• An ambi/ous, open core
• Openness of TTIP is decisive: „make trade, not war“
A world trade order of different „speeds“ ?
THANKS FOR YOUR ATTENTION
SINCE 1995 WE HAVE THE WTO… Ifo Ins/tut 29
• But, in the meanQme, world trade has changed – Growing role of global produc/on chains – Trade in increasingly complex products – New distribu/on channels – …
• The need for improved global governance – Services, mobility of people – Standards & norms – Intellectual property rights – Defend freedom of the new global common: internet – …
! Is the WTO – as we know it – able to deliver on this?
Ifo Ins/tut
Source: Polity IV project (polity IV index +8 to +10), ifo Berechnungen.
0
10
20
30
40
50
60
70
1960 1970 1980 1990 2000 2010 2012
Share of fully democraQc GATT/WTO members
30
HETEROGENEITY AMONGST WTO MEMBERS
REFERENCES • Anderson, James and Eric van Wincoop (2004), Trade Costs, Journal of Economic
Literature 42(3); 691-‐751. • Egger, P., Mario Larch, Kevin Staub, and Rainer Winkelmann, 2011, „The Trade Effects of
Endogenous Preferen/al Trade Agreements“, American Economic Journal: Economic Policy 3: 113-‐143.
• Felbermayr, G., M. Larch, L. Flach, E. Yalcin, S. Benz and F. Krüger, „Dimensions and Effects of a Free Trade Agreement Between EU and US", ifo Forschungsberichte 62, 2013. (in German; study for the German Federal Ministry for Economics and Technology).
• Felbermayr, G. and M. Larch, 2013, "The Transatlan/c Trade and Investment Partnership (TTIP): Poten/als, Problems and Perspec/ves ", CESifo Forum 14 (2): 49-‐60.
• Felbermayr, G. and M. Larch, 2013, "Transatlan/c Free Trade: Ques/ons and Answers From the Vantage Point of Trade Theory", CESifo Forum 14 (4), forthcoming.
• Felbermayr, G., B. Heid, and S. Lehwald,, 2013, „Transatlan/c Trade and Investment Partnership (TTIP): Who Benefits From a Free Trade Deal?“, Bertelsmann Founda/on.
• Fontagné, L., J. Gourdon and S. Jean, 2013, “Transatlan/c Trade: Whither Partnership, Which Economic Consequences?”, CEPII Policy Brief 1.
• Francois, J., et al., 2013, Reducing Transatlan/c Barriers to Trade and Investment: An Economic Assessment, Report for the European Commission.
Ifo Ins/tut 31
1,3%
24,6%
28,0%
0% 10% 20% 30%
Gravity norm
EU-‐US trade
US GDP
EU GDP
EU-‐US TRADE POTENTIAL AND THE REALITY Ifo Ins/tut 32
Shares in World GDP, 2009
Source: World Bank, WTO-‐OECD TiVA Sta/s/cs, ifo calcula/ons.
US Exports to EU: 327 World GDP: 58,704
EU Exports to US: 422 In VA terms (2009)
0%
20%
40%
60%
80%
100%
120%
140%
3 4 5 6 7 8
TRADE COSTS IN EU-‐US TRADE Ifo Ins/tut 33
… ad valorem tax equivalents, %
Source: ifo calcula/ons.
Trade elasQcity
74% for US trade with OECD countries,
Anderson & van Wincoop (2004, JEL)
VA-‐trade, 2009
HOW MUCH DO TRADE AGREEMENTS LOWER TRADE COSTS? ECONOMETRIC EVIDENCE
Ifo Ins/tut 34
0% 10% 20% 30% 40% 50% 60% 70%
3,0 3,5 4,0 4,5 5,0 5,5 6,0 6,5 7,0 7,5 8,0 8,5 9,0
0.68 (B&B, 2007) 1.15 (ifo, 2011) 1.52 (C&S, 2010)
Average trade cost savings from exisEng trade agreements
Trade elasQcity Sources: C&S: Cipollina and Salva/ci, 2010, Review of Interna/onal Economics, B&B: Baier and Bergstrand (2007, 2009), Journal of Interna/onal Economics, Ifo es/mates (Egger et al., 2011, American Economic Journal).
Point esQmates
CHANGES IN REAL PER CAPITA INCOME Ifo Ins/tut 35
Long-‐run effects, equivalent variaQon, %
Source: updated ifo calcula/ons.
EU28: WHAT SHAPES THE WELFARE EFFECTS?
Ifo Ins/tut 36
Source: updated ifo calcula/ons.
-4-2
02
46
EV
(%)
-20 -10 0 10 20 30Change in share of trade over GDP, % points
TTIP
RoW II
RoW I
Welfare change (EV, %)
Change in trade openness, % points
T-‐TIP: BIG EFFECTS. WHY ? Ifo Ins/tut 37
1. Comprehensive trade cost measures
2. Ambi/ous „catch-‐all“ scenario to gauge poten/als
3. Lower trade costs save ressources: higher welfare gains than from tariff reform
4. EU and USA are top export desEnaEons for most countries
5. No mul/lateral spillovers from bilateral coopera/on
6. Trade diversion due to EU cutoms union or NAFTA partly undone
7. Trade creaEon and trade diversion are linked, so are gains and losses (-‐> redistribu/on effects)
DIFFERENCES BETWEEN ifo AND CEPR STUDIES
Ifo Ins/tute 38
ifo CEPR
AggregaQon 130 countries, macro view 10 regions, 40 sectors
Trade costs Comprehensive defini/on Poli/cs, transporta/on
Scenario Trade cost reduc/on as in exis/ng agreements
Zero tariffs, some lowering of certain NTBs
NTBs Trade costs, bilateral Trade costs, rents, mul/-‐ lateral spill-‐overs
ReallocaQon Intra-‐sectoral Inter-‐sectoral
Focus Poten/als „Realis/c“ effects
Market Structure Monopolis/c compe//on Perfect compe//on
Ifo Ins/tut
METHODS: EU COMMISSION VS ifo
CalibraQon • Expenditure shares • Broad trade costs
EU Commission ifo
NTBs • Bosom-‐up • Top-‐down, trade costs
TTIP Scenario
• No tariffs • ad hoc reduc/on of
iden/fied NTMs • Spill-‐over effects
for third countries
• No tariffs • Trade costs (policy-‐
induced, others) fall as in exis/ng agreements)
39
Approach
• CGE Model • New Quan/ta/ve Trade Theory
AggregaQon • 10 regions • 173 countries
Ifo Ins/tut
TTIP: EU COMMISSION vs. IFO – LONG RUN EFFECTS
Source: ifo.
EU Commission
Germany +3.48%
ifo
+0.48% EU +3.94%
+0.39% USA +4.89%
+0.03% China -‐0.50%
ASEAN +0.89% -‐0.07%
World +0.14% 1.58%
(real per capita income, 2012 baseline)
(GDP in 2012 prices(?), 2027 baseline)
40
HÄUFIGE MISSVERSTÄNDNISSE Ifo Ins/tut
• Der EU-‐US Handel ist heute schon barrierefrei. FALSCH. Die HandelspotenQal ist nur zu 8-‐10% ausgelastet.
• Geringer gegenwär/ger Handel der USA mit EU macht hohe Wohlfahrtsgewinne der USA „unmöglich“. FALSCH. In allen bekannten Modellen korreliert das Handelsvolumen im Ausgangsgleichgewicht negaQv mit der Höhe der möglichen Handelsgewinne.
• Die Höhe der vom ifo berechneten Effekte ist unglaubwürdig. FALSCH. Die moderne Literatur beziffert den Wohlfahrtsgewinn durch Handel mit 30-‐50% für Deutschland (CosQnot & Rodriguez-‐Clare, 2004).
• Die ausgewiesenen bilateralen Handelseffekte sind nicht konsistent mit den Wohlfahrtseffekten. FALSCH. Was für die Wohlfahrt zählt ist nicht der Wert des Handels (Menge x Preis), sondern allein Menge und Qualität.
41
Ifo Ins/tut
AIM 1: FREE TRADE IN THE OECD (TTIP + TPP + BILATERALS)
Source: WTO and USTR, current nego/a/ons.
42
AIM 2: OPEN CLUB AND „WTO 2.0“
?
Ifo Ins/tut
PTAs OF EU AND US IN 1990
Source: WTO and USTR.
43
Ifo Ins/tut
Source: WTO and USTR.
44
PTAs OF EU AND US IN 1990