study: transatlantic trade and investment partnership (ttip) who benefits from a free trade deal?...
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Transatlantic Trade and Investment Partnership (TTIP)Who benefits from a free trade deal?
Part 1: Macroeconomic Effects
3
Contents
1. Introduction 4
2. Commentsonthestudymethod 5
3. TTIP-Scenarios 9
4. Wheredoestradegrow,wheredoesitshrinkandbyhowmuch? 13
4.1 EffectsonGermanforeigntrade 13
4.2 EffectsonEUtrade 16
4.3 EffectsinNorthAmerica 19
5. Howdorealpercapitaincomeschange? 21
5.1 EffectsintheEU 21
5.2 EffectsontheUSAandthirdcountries 26
6. Whathappensinthelabormarkets? 31
6.1 Searchunemploymentandforeigntrade 31
6.2 Twomillionnewjobs 34
7. Summary 42
Literature 45
Figures-andTables 47
GlobalEconomicDynamics(GED) 48
Imprint 50
Contents
Transatlantic Trade and Investment Partnership (TTIP)Who benefits from a free trade deal?
Part 1: Macroeconomic Effects
Prof. Gabriel Felbermayr, Ph.D.Benedikt HeidSybille Lehwald
4
Introduction
1. Introduction
ThisfirstpartofthestudyisdevotedtothemacroeconomiceffectsofaTransatlanticTradeand
Investment Partnership (TTIP) between the European Union and the USA. For this purpose,
empirical models of the world economy were used to clarify two essential scenarios: (i) the
eliminationoftariffsintradebetweentheEUandtheUSA,and(ii)aliberalizationthatgoesfar
beyondjusteliminatingtariffsatascalethatcanbemeasuredforcomparableandactuallyexisting
free-tradeagreements.Ourapproachdiffersfromthetraditionalwayofdealingwithsubjectinthat
thecomprehensivescenario(ii)isdefinedusingmeasurableexperiencewithsimilaragreements,
notguessesaboutwhatisconsideredpoliticallypossible.Ourresultsthusshowpotentialsagainst
whichthesuccessoftheagreementcanbemeasuredexpostfacto.
Theapproachusedinthisfirstpartofthestudyismacro-economicinnature,meaningthatthe
analysisusesaggregateddatabycountry.Itlooksatthechangesinworld-widetradeflows,real
percapita incomeandunemployment. Insodoing, it identifiescountriesthatwouldgainfrom
TTIPand those thatwould lose.Thesecondpartof the study ismicroeconomic innatureand
examinesthedisaggregatedeffectsindetailforGermany.Forexample,estimatesoftheTTIPeffect
onindividualregions,industries,educationallevelsandoccupationalgroupsarepresented.
After a discussion of the methods used and a more detailed description of the scenarios, we
examinetheTTIPeffectsonthestructureofworldtrade.Weanswerthequestion“Wheredoes
tradegrow,wheredoesitshrinkandbyhowmuch?”WethenturnourattentiontoTTIPeffectson
realpercapitaincome,i.e.,percapitaGrossDomesticProduct(GDP),whichenablesglobalwelfare
effectstobequantified.Finally,wereportontheresultsofamodelsimulationthatallowsusto
quantifytheeffectsonunemploymentrates.
5
Comments on the study method
2. Comments on the study method
ToobtainreliablenumbersfortheGDPeffectofatransatlanticfree-tradeagreementonallEU
member states essentially requires (a) an appropriate theoretical model framework and (b)
reasonablescenarios.Forthispurpose,weuseacomputablegeneralequilibriummodelthatwas
developedat the ifo Institut to analyze the free-tradeagreement.1The fundamental innovation
of the model is that it combines econometric and simulation-based methods. This enables us
to ensure that the trade costs, whose reduction are the ultimate concern of every free-trade
agreement,areproperlyestimatedandconsistentlyappliedwhencalculatingmeasurementsof
welfare.To thatend,observedreal-world trade flowsandempiricalproxies for the factors that
determinetradecostsareused.Thestrengthofthemodelliesinthefactthatitsbasicscenario
isexactlyreproduced:Thisappliesessentiallytobilateraltradeflowsbetweenalargenumberof
countries,realincomeandunemploymentrates.Inthesimulationoftheliberalizationscenarios,
specificelementsoftheestimatedcostsoftradearechangedandtheeffectsontradeflows,real
incomeandunemploymentarethencalculated.
TheapproachdiffersfromcommerciallyavailableCGE(computablegeneralequilibrium)models
frequentlyusedtoestimatetheeffectsoftradeliberalization.Infact,mostexistingTTIPstudies
alsouseCGEmethods.2Insuchstudies,tradecostsaretypicallynotestimatedconsistentlyfrom
modeltomodel.Othermodelingdifferencesconsistinthecountrybreakdownandthetreatment
of unemployment. In our approach, we consider all countries for which bilateral trade data is
available.Thereisnoregionalaggregationoritisonlyperformedafterwards,tobetterclarifythe
results.Inmanymodelvariants,wealsoassumefrictionalunemployment,whicharisesfromthe
explicitmodelingofthejobsearchprocessbyemployeesandemployers.Thismodelingapproach
wasrecognizedin2010withtheNobelPrizeandofferstheadvantagethatitreflectsthemost
importantcharacteristicsofnationallabormarketinstitutionsquitewell.
On thisbasis, the initial equilibrium for126countrieshasbeencalibrated insuchaway that
the model reproduces the bilateral trade flows observed in 2007 (before the economic crisis)
betweencountrypairs(ourdatabaseincludes15,750suchpairs)andallGDPstatisticsforthat
year.3Themodelisalsoexactly“calibrated”forthereferenceyear,anditincludesnotonlythe27
EUmembercountriesbutvirtuallyalleconomicallyrelevantcountriesintheworld.
1 ThismodelisexplainedindetailinFelbermayretal.(2013).
2 ThisappliestotheCGEstudiesonTTIPforSweden(Kommerskollegium,2013),Austria(FrancoisandPindyuk,2013),France(Fontagne and Gourdon, 2013), and for the study by the European Commission (Francois et al., 2013). These studies werefrequentlycriticized in thepastbecause theexante forecasts regarding tradeandwelfareeffects typically turnedout tobesubstantiallytoolowintheexpostevaluation.Hosny(2013)describesthedesignoftheregularCGEmodels;Ackermannofferscriticism(2006).
3 Unfortunately the modeling of frictional unemployment is only possible for those countries that have comparable data onunemploymentratesandforregulatinglabormarkets;seealsosection6.
6
Comments on the study method
Afurtheradvantageofthisstructuraleconomicmethod,i.e.,onethatassumesanexpliciteconomic
theory, is that unlike the usual econometric methods, which don’t bother to have a grounded
theoretical modeling (called reduced form estimates), it offers the possibility of analyzing the
consequencesofacontrafactualimplementation,suchasaTTIPagreement,beforeoneactually
takesplace.Thisismadepossiblebytheadditionalstructureoftheunderlyingeconomicmodel.
Reducedformestimationgenerallyallowsretroactiveanalysis,i.e.,afterimplementation,sothat
economicmeasurescanonlybedesignedafterwards,inordertobeabletoreacttospecificpartly
negative accompanying effects that have already occurred. Finally, structural modeling allows
TTIPanalysiswithouthavingtouseacentralassumptionofalmostallreducedformestimates:
that thegeneral equilibriumeffects canbe considered ignorable.4That iswhy for agreements
likeTTIP,whoserealgoalistochangethegeneralequilibrium(changethetradeflowsbetween
all participating partners, raising welfare in the participating countries), it is essential to use
structuralmethods.
Understandinghowtomodelbilateraltradecostsisveryimportantforthediscussionthatfollows
inthisstudy.Themodernliteraturemakesaveryclearandimportantpoint:Tariffsandothertrade-
policybarriers,incomparisontonaturalfrictionslikethesheergeographicaldistancebetweentwo
tradingparties,areofrelativelysmallimportance.5Andthequantitativeroleoftariffbarriersin
transatlantic trade is really negligible, compared to other trade costs.6 An exact measurement
ofexistingtradecostsishoweverofgreatimportanceincalculatingtheeffectsofliberalization
scenarios: Felbermayr et al. (2013) show that the welfare gains from trade liberalization are
disproportionatelyhigherifthetradecostsarealreadylowintheinitialequilibrium.
Figure 1 shows schematically how the trade costs between two countries can be allocated to
individualcategories.First therearethetariffswhich,asalreadymentioned,playonlyasmall
role relative to the other trade barriers. The remaining trade costs are then classified under
theheading“non-tariff”tradebarriers.Theseincludealargenumberofpotentiallyveryvaried
elements. First there are protectionist trade policy measures, which make access to domestic
markets more difficult for foreign suppliers. It includes such classic instruments as import
quotas, but also administrative and regulatoryhurdles thatdiscriminate against foreign firms.
It can also include the necessity to obtain approval for products separately for both markets,
done frequently by applying different approval conditions and procedures, different standards
toenvironmental,healthorconsumerprotectionpolicy;differentindustrystandards,packaging
regulationsandinformationrequirements;regulatingaccesstopublicprocurementoreconomic
policydevelopmentprograms,suchasgovernmentexportcreditinsurance;andsoon.
4 ThisassumptioniscalledSUTVA(StableUnitTreatmentAssumption)ineconomicliterature.Itisacomponentoftheestablishedreducedformmethods,whichareappliedtopolicyevaluationasstandards.
5 SeeBaierandBergstrand(2001).
6 Seethestudiesmentionedinnote2andFelbermayretal.(2013).
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Comments on the study method
Besides non-tariff barriers based on trade policy, there are additional trade costs that, while
politically induced, have nothing to do with trade policy in the strict sense. For example,
instrumentsofinfrastructure,educationorlabormarketpolicyorindustrialpolicymeasurescan
beusedtochangetradecosts.Someexamplesaretheexpansionoftransportationoptionsorthe
prominenceofforeignlanguagesinschoolcurricula.
The last cost category in Figure 2 describes the so-called “natural” barriers. These are due to
geographicdistance,lack(orpresence)ofacommonlanguage,sharedcolonialpast,commonlegal
traditions,sharedcurrency,etc.
Empirically,alltradecostsbetween126countriesareestimatedinsuchawaythatatradeflow
equation (gravitation equation) is structurally derived from the simulation model that is used
later.Bydeterminingtradeelasticities,thematrixofbilateraltradecosts(126countriestimes126
countries)canbeestimated.Togetherwithmultilateraltradecostvariablesandgrossdomestic
production of the countries, this matrix replicates the expectation value of the trade actually
observedbetweenallcountries..
Source: Schematic representation by ifo Institut
Figure 1: Modeling trade costs
„Natural“barriers
Other policies
Trade policy
Non-tariffs barriers
TariffsTrade costs overall
8
Comments on the study method
Adetailedrepresentationoftheempiricalmodelwouldoverwhelmthisstudy.Insteadletussimply
mentionherethateconometricestimationofthegravitationequationhasmadegreatprogressin
recentyears, includingtheground-breakingworkofAndersonandvanWincoop(2003;2004).
Theyshowthatthetradecostswithinotherpairsareimportantformakinganaccurateestimate
oftradecostswithinacountrypair.Forexample,howmuchgeographicaldistancerestrainstrade
between twocountriesalsodependson theaveragedistanceof these twocountries fromtheir
othertradingpartners.Anadditionalproblem,forwhichtherearenowgoodsolutionmethods,
is thepresenceof countrypairs inwhich there isno trade. In theolder literature, thiswasa
problem.Eggeretal.(2011)andFelbermayretal.(2013)accordinglyusenon-linearmethodsfor
estimatingthegravitationequation.Theseeconometricproceduresalsounderlietheestimatesin
thisstudy.Finally,itisimportanttoconsiderthattradecostsarethemselvesdependentontrade
volumes.Thisappliesespeciallytothelikelihoodthatafree-tradezonewillbecreatedbetween
twospecificcountries.Toobtainaccurateestimatesanyway,instrumentvariableshavetobeused.7
Theestimatethendeliverstwoimportantresults:first,amatrixoftradecostsbetweenallcountry
pairsandsecond,theaverageeffectofafree-tradezoneonbilateraltrade.
7 Whentradecostsarethemselvesdrivenbytradevolumes,theycannotbetreatedas„exogenous“.Thishasimplicationsfortheeconometricstrategy;see,forexample,theworkofEggeretal.(2011).
9
TTIP-Scenarios
3. TTIP-Scenarios
How does a free-trade agreement work in general, and a Transatlantic Trade and Investment
Partnership(TTIP)inparticular?Suchagreementshaveadirecteffectontradecostsbetweenthe
twocountries involvedbecausetheyreducethetariffbarriersandcertainnon-tariffbarriersto
trade.Becausethescaleoftheeffectsdependsontherelatedmacro-economicvariablesonwhich
theamountoftotaltradecostsaredependent,itisimportanttoestimatetheunderlyingtradecost
matrixaccurately.Indirecteffectsthenresultinthegeneralequilibriumthroughfeedbackfrom
pricesandincome.Thecentralissueinthiscontextcanbestatedthisway:owisthetradecost
matrixchangedbyTTIP?
We consider two scenarios:
• Tariffscenario:Inthiscase,weassumethatthetradecostmatrixdescribedaboveischanged
sothatthetradecostsbetweentheUSAandEuropeancountriesarereducedbytheextent
ofthetariffsnowbeingappliedinthesebilateralrelationships.Certainexceptionsforspecial
productsmayremaininforce,butonaverage,areductiontozeroorvirtuallyzeroforallgoods
seemsreasonable.Theaveragetariffrateintransatlantictradeamountstoabout3.5%.Thatis
howmuchtradecostsbetweentheEUandUSAarereducedinthetariffscenario,whiletrade
costswithothercountrypairsremainunaffected.
• Comprehensiveliberalizationscenario:Inthiscase,weadaptthetradecostmatrixsothatthe
resultingsimulatedchangeintradeflowscorrespondstotheeconometricallymeasuredtrade
creationfromobservedfree-tradeagreements.
Thetariffscenariorequiresnoadditionaldescription.Thecomprehensiveliberalizationscenario,
ontheotherhand, issubstantiallymorecomplex.Thereductionof thestatedbarriersreleases
realresourcesthatcanbeusedforusefulactivities,whichresultdirectlyinwelfaregainsforthe
economiesaffected.Thatappliesregardlessofhowthenon-tariffbarriersareultimatelyreduced:
bymutualrecognitionofdifferentstandards,byharmonizationorbyeliminationofmeasuresthat
arepurelydiscriminatoryinnature.
Incomparisonwiththecomprehensive liberalizationscenario, theeliminationof tariffsmainly
meansthatthetransferofincomefromtheconsumertothestateisreversed.Whiletariffs,besides
havingthisdistributioneffect,alsocausealossofwelfare,thelossisverylowwhenthetariffsare
aslowastheyareinthiscase.8
8 SeeFelbermayr,JungandLarch(2013).
10
TTIP-Scenarios
Inordertodistinguishourapproachfromotherstudies,lookatFigure2.Thisshowsthroughthe
blankareasinwhichtradecategoriesthetransatlanticagreementwillleadtoareductionoftrade
costs.
First, the import tariffs appliedbetween the EU andUSAwill disappear, just like in the tariff
scenario.Howcanthechangeinnon-tariffbarriersbemodeled?Thereisaproblemwiththisin
thescientificliterature,becausethedefinitionandquantificationofnon-tariffbarrierscontinues
tobedisputed.9Oneparticularcircumstancecreatesspecialdifficulties:Evenwhenitispossible
toclearlydistinguishnon-tariffbarriersfromtariffbarriers,itremainsunclearwhichcomponents
ofthenon-tariffbarrierscaninfactbeinfluencedbyfree-tradeagreements.Inthiscontext,the
literaturespeaksof“actionability”andseeksto identifythosewhich, inthe jungleof themost
variedtradepolicymeasures,canbechangedinsomecircumstances.Thereisnosystematicand
generallyrecognizedwayofdoingthat.Inasecondstep,theremustbeawayofclarifyingthe
extenttowhichafree-tradeagreementcouldlowerthenon-tariffbarriers.Thereisnorecognized
methodofestimationforthiseither;thestudiesuseestimatesbyexperts.
Ourapproachisdifferentandavoidsallspeculation.Fromthegravitationequationthatweare
alreadyusingtoquantifythetradecostmatrix,weobtainaneconometricestimateforthetrade
creation effects of existing free-trade agreements, such as the European Union or the North
American Free-trade agreement (NAFTA). For all sectors and on average for all participating
countries,thedatashowthattheexistingagreementsincreasetradeinaggregatebyabout80%.10
Thisnumberreflectsthestatusquoof2007,butisstableovertime.Itreflectsthefactthattrade
agreementsarenotreachedbetweenrandompairsofcountriesorregions.Instead,theprobability
ofhavinganagreementishigherifthereisalreadyarelativelylargeamountoftradebetweena
countrypair.11Inaddition,itconsidersthird-countryeffects,aswellastradecreationthatresults
indirectlyfromachangeintheGDPsofallcountries.
9 SeeAndersonetal.(2008).
10 This value deviates from the one used in the industry analysis. That is due to the choice of a larger aggregation level formacroeconomicconsideration (theaggregatevalue isnot thesameas theaverageof the industryvalues)and isbasedonadifferenteconometricstrategy(solvingthe“endogeneityproblem”).
11 Itispossiblethatagreementsareonlysignediftradestimulationbetweentwocountriesisexpectedforreasonsthathavenothingtodowithtradepolicy(e.g.,economicgrowth).Inthatcase,apositivecorrelationwouldexistbetweenthetradevolumeandthepresenceofanagreement,butitshouldnotbeinterpretedasacausalrelationship.Inthiscontext,itistermeda“spurious”correlation.
11
TTIP-Scenarios
Theeconometricestimatenotonlyallowsaccurateparameterizationofabaseequilibriumfora
largenumberofcountries,italsooffersareasonablescenario.Thetradecreationof80%byalready
existingdeepagreementsjustmentionedinourviewalsorepresentsarealisticorderofmagnitude
for theaggregateeffectofa transatlantic free-tradeagreement. It canagainbeconcluded that
mereeliminationoftheremainingtariffsbetweentheEUandtheUSAwouldneversufficetobring
about tradecreationof thismagnitude. Instead, the figuresshowthat the lion’sshareof trade
creationmustcomefromloweringnon-tariffbarriers.
Thiscanbeunderstoodusingasimpleexample:Inthegravitationmodel,thereisapartialanalytic
multiplierconnectionbetweenthechangeinbilateraltradeandthechangeinallvariabletrade
costs,inwhichthemultiplieristheelasticityoftrade.Iftradethenincreasesby80%andtrade
elasticityis5,12thentradecostsmusthavefallenby80%:5=16%.Thetariffsoutsidethefree-
trade agreement amount to 3.5%. That means that the non-tariff barriers must have fallen by
16%–3.5%=12.5%.
Whilethisexampleisnaturallyhighlysimplified,itneverthelessmakesclearthatourapproach
requiresnodeterminationofthe“actionability“ofbarriersandnospeculationonthescaleofcost
reductions.Instead,weassumethatTTIPwillhaveapproximatelythesameeffectsontradecosts
thatotherfree-tradeagreementshavehad.Inthatway,thoseeffectsthatareespeciallydifficult
toquantifyarealsotakenintoaccount,reflectedundertheheading“otherpolicies.”Moreover,
our scenario definition reflects the fact that the stimulation of trade by reducing trade policy
12 AndersonandvanWincoop(2004)provideanoverviewofestimatesoftradeelasticity.
Source: Schematic representation by ifo Institut
Figure 2: Change in trade costs from TTIP
„Natural“barriers
Other policies
Trade policy
Non-tariffs barriers
TariffsTrade costs overall
12
TTIP-Scenarios
barriers leads to secondary and tertiary effects from greater public and private investment in
furtherimprovementsintradeinfrastructure.
Theaveragetrade-creatingeffectoffree-tradeagreementsinourstudyismeasuredatabout80%.
Thisissubstantiallyhigherthancalculatedinotherstudies.13Thedifferenceisduemainlytothe
differentscenariodefinition:Becausewebaseourdeepliberalizationscenarioonthemeasured
effectsinrealdata,ourresultsarehigher.Twootherdifferencesarealsoimportant,however:First,
thefocusontradecostsallowsustoreproducethestatusquooftheinitialequilibriumwithavery
terseformulationofthedemandsideofthemodel.Butbecausetradecostchangescontributein
anon-linearwaytochangesintradeflows,ourmodelismorereactivethanothersthatachieve
theresultingequilibriumbyfixingconsumptionweightsspecifictoeachcountry.14Second,our
approachmakesitpossibletoactuallyinclude126countriesintheanalysis.Thatmeansthatwe
don’thavetoperformanyregionalaggregationsthatassumeafrictionlessexchangeofgoods.For
example,tradewithintheEUisaffectedbytradecostsinourmethod,whichreflectsreality.This
alsoresultsinastrongreactionbythemodelstotransatlantictradeliberalization.
Inallscenarios,weadoptthefollowingthoughtexperiment.Weknowtheworldasitisrepresented
intheinitialequilibriuminthedata.Nowweadaptthetradeflowsinsuchawaythatthetrade
costsbetweentheEUstatesandtheUSAdecreasetotheextentthatthetradegainsoinduced
between the participating countries corresponds to the empirically measured effect of already
existingagreements.Because theseagreementshaveexistedonaverage forquiteawhile,our
approachresultsinthesimulatedeffectsofTTIPreflectingthecompleteexpressionofalldirect
andindirecteffects.
Inthesimulationmodelused,thereisarelativelysimpleconnectionbetweenthewelfaregainsof
acountryfromthenewagreement,thechangesinacountry’sopennessingeneralandso-called
tradeelasticity.Themodelfollowscurrentresearchindoingthis.15Tosummarize,itcanbesaid
thatthegreaterthetrade-creatingeffectofanagreement,themorerealpercapitaincomerises;
thegreater the tradeelasticity, themore thenewrelativecapacity forcompetingonpricewill
changetradeflowsbutthelowerthepercapitaincomegainswillbe.Theleveloftradeelasticity
actuallyreflectshoweasilythegoodsofdifferentcountriescanbesubstitutedforeachother.The
easierthesubstitution,theless“valuable”internationaltradewillbe.
13 Cf.note2.
14 Usingsuchweighting,thetraditionalmodelsrepresentthetradeflowsobserved.Inourapproach,thisisachievedbythetradecostmatrix.
15 Arkolakis et al. (2012) present a simple formula that can be used to quantify the trade gains and has minimal informationrequirements.
13
Where does trade grow, where does it shrink and by how much?
4. Where does trade grow, where does it shrink and by how much?
TTIPwillleadtoanoticeablechangeinglobaltradestructure.Weassumeinourambitiousscenario
thattradebetweentheUSAandtheEUmemberstatesincreasesonaverageexactlytotheextent
wehavemeasuredinthedataoncomparableexistingagreements.
The intertwining of countries through trade is an important indicator of cooperation, not only
in trade policy but also in many other political areas. For example, a weakening of the trade
relationshipsamongEUmemberstatescouldbeconsideredcriticalbecauseitcoulddiminishthe
interestofindividualcountriesintheEuropeanunificationproject.
4.1 Effects on German foreign trade
Table1showsthecalculatedratesofchangeofbilateral tradevolumesand itsmost important
tradingpartnersinEuropeandtheworld.Thefiguresindicatehowtradevolumeswouldappear
incomparisonwithactuallyobservedvolumesiftherehadalreadybeenanagreementbetween
the EU and USA in 2010. We are thus comparing the factual, observed reality of 2010 with a
counterfactualreality inwhichweassumethat theagreementalreadyexisted.Bydoingsowe
avoidhavingtoproposeforecastsoffuturetradevolumes(i.e.,quantitiesandprices),whichwould
beassociatedwithforecastingerrors.Andweavoidmodelingspecificphase-inpaths,sincedoing
sowouldalsobeextremelyspeculative.
ThefirstlineofTable1showsthatinthetariffscenario,GermanexportstotheUSAwouldrise
by1.13%andimportsby1.65%.ThatmeansthatGermany’stradesurplusofaboutUSD30billion
woulddeclineslightly.Lookingatthedeepliberalizationscenario instead,exportsandimports
showverysimilaradaptationsthatineachcasearemorethan90%.Wefindasaresultastrong
increaseintradeflowsbetweenGermanyandtheUSA.Thisstronggrowthshouldbeunderstood
inthecontextoftheassumedscenarios.Asexplainedabove,itincludesboththeeliminationof
tariffsandthereductionofnon-tariffbarriersthatcanbedirectlyinfluencedbypolicyaswellas
thosewhichresultfromtheeffectsofloweringpoliticalbarriersonothertrade-creatingvariables,
suchasdirectinvestments.
14
Where does trade grow, where does it shrink and by how much?
TheGermany-USAexampleshowsquiteclearlythatanagreementthatresultsonlyinlowering
tariffscannottriggeranysignificanttrade-creatingeffects.Ontheotherhand,acomprehensive
anddeepagreementhasmuchstrongereffects.
Table 1 also shows very forcefully that Germany’s trade with its other trading partners could
decline sharply in someareas. Theportents of these trade effects are consistentlynegative in
boththetariffandcomprehensiveliberalizationscenarios.Inprinciple,TTIPwouldsignificantly
alterthetradediversioneffectscurrentlyinforceintheEU.Suchalterationsoccurredinthepast
becausetradeamongtheEUcountriesthemselvesisbarrier-free,whiletradebytheEUcountries
withtheUSAissubjecttobothtariffandnon-tariffbarriers.Thelevelingofthebarrierswiththe
USAthusleadstoadeclineintradethatcameaboutasaresultofpreferentialtreatmentofintra-
Europeantradeflows.ThisismosttrueforGreatBritain,whichhasrelativelylownaturaltrade
barriers(language,culture)withtheUSA,sothat loweringpolicyfrictionleadstostrongtrade
creationanddiversion.
Interestingly, TTIP leads to an expansion of Germany’s exports to Japan, and does so in both
assumedscenarios.This is related to the fact that thecompetitivenessofGermanexporters is
increasedbytheavailabilityofcheaperintermediateproductsfromtheUSA.Moreover,thereisa
reductionofcompetitivepressureontheJapanesemarketbecauseitsexportsgobacktotheUSA.
TheeffectonGermany’stradewithChinaisnegative,however,atleastinthedeepliberalization
scenario.Adeclineinbothexportsandimportsofabout13%istobeexpectedineachcase.
Table 1: Change in German foreign trade with traditional partner countries
Exporter Importer 2010* Trade volumes (in USD millions)
Comprehensive liberalization %
Tariff scenario %
GER USA 83,553 93.54 1.13
USA GER 51,645 93.56 1.65
GER GBR 72,052 –40.91 –0.70
GBR GER 43,583 –40.93 –0.57
GER FRA 109,223 –23.34 –0.38
FRA GER 76,518 –23.34 –0.24
GER ITA 74,245 –29.45 –0.37
ITA GER 52,687 –29.45 –0.55
GER JPN 17,487 4.81 2.40
JPN GER 24,891 4.76 –1.68
GER CHN 67,728 –12.68 2.19
CHN GER 92,536 –12.71 –2.94
GER = Germany, GBR = Great Britain, FRA = France, ITA = Italy, JPN = Japan, CHN = China.
Source: ifo Institut
15
Where does trade grow, where does it shrink and by how much?
NextweexamineGermanforeigntradewiththeGIIPScountries(Greece,Ireland,Italy,Portugal
andSpain).Thisisofinterest,giventhecurrentcrisisintheEuropeanUnion.ThedatainTable
2confirmwhatwasalreadyevidentinTable1:theGIIPScountriesarenoexception–theirtrade
withGermanywilldropduetoTTIP.Theeffectsareverysmall,ifyoulookatthetariffscenario,
butaresubstantialifthemoreambitiousscenarioisassumed.
Finally,weconsiderthechangeinGermany’stradewiththeBRICScountries(Brazil,Russia,India,
China,SouthAfrica).Asshown inTable3, theeliminationof tariffsbetween theEUandUSA
causesGermany’sexportstotheBRICSgenerallytoriseslightly.Thereasonliesintheincreased
pricecompetitivenessofGermanyduetocheaperimportsofintermediateproductsfromtheUSA.
ImportsfromtheBRICS,ontheotherhand,declinebecausethecompetitivepressureinGermany
increasesfromtheintensifiedpresenceofAmericancompanies.Ifadeepliberalizationscenario
isassumed,bothexportsand importsundergo increased tradediversion:Germanexports that
previouslywenttotheBRICSnowgototheUSA;andGermanyreplacesimportsfromtheBRICS
withimportsfromtheUSA.ThisoccurseventhoughthetradebarrierswiththeBRICShavenot
changednominally.Tradediversionisdrivensolelybythechangeinrelativetradecosts.
Table 2: Changes in German foreign trade with the Peripheral EU (GIIPS)
Exporter Importer 2010* Trade volumes (in USD millions)
Comprehensive liberalization %
Tariff scenario %
GER GRC 6,655 –29.94 –0.14
GRC GER 2,322 –29.93 –0.95
GER IRL 5,195 –34.87 –0.64
IRL GER 10,662 –34.85 –0.16
GER ITA 74,245 –29.45 –0.37
ITA GER 52,687 –29.45 –0.55
GER PRT 10,306 –29.90 –0.31
PRT GER 5,385 –29.88 –0.55
GER ESP 39,590 –33.71 –0.47
ESP GER 26,142 –33.71 –0.57
GER GIIPS 135,991 –30.96 –0.39
GIIPS GER 97,197 –31.22 –0.52
GER = Germany, GRC = Greece, IRL = Ireland, ITA = Italy, PRT = Portugal, ESP = Spain, GIIPS = Greece, Ireland, Italy, Portugal, Spain.
Source: ifo Institut
16
Where does trade grow, where does it shrink and by how much?
4.2. Effects on EU trade
Next, we look at the change in EU trade with countries in their geographic vicinity. We look
especiallyatthecountriesoftheMaghreb,withwhichtheEUhasafree-tradeagreement(Euro-
MediterraneanAgreement),andthetwosuccessorstatestotheSovietUnionforwhichwehave
data(RussiaandBelarus).
Table 4 shows that in the tariff scenario, EU exports to the countries bordering on the
Mediterranean(Morocco,Tunisia,AlgeriaandEgypt)orthesuccessorstatestotheSovietUnion
would increase, while imports from these countries would decrease. This in turn reflects the
increasedcompetitivenessofEuropeancompanies.Ifthecomprehensiveliberalizationscenario
isconsidered,however,traditionaltradediversioneffectspredominate:EUexportstoandimports
fromtheMaghrebcountriesorEasternEuropedecline.Giventhemassivedropinbarriersbetween
theEUandUSAinourscenario,theeffectsarenoteasilypredictable.
Table 3: Change in German foreign trade with the BRICS countries
Exporter Importer 2010* Trade volumes (in USD millions)
Comprehensive liberalization %
Tariff scenario %
GER BRA 12,951 –7.58 2.41
BRA GER 8,844 –7.92 –3.67
GER RUS 32,512 –7.51 1.64
RUS GER 20,362 –7.17 –1.20
GER IND 10,866 –8.96 2.36
IND GER 7,859 –9.26 –2.30
GER CHN 67,728 –12.68 2.19
CHN GER 92,536 –12.71 –2.94
GER SAF 8,274 –3.96 1.24
SAF GER 6,719 –3.73 –1.20
GER BRICS 132,331 –10.06 2.03
BRICS GER 136,320 –10.93 –2.61
GER = Germany, BRA = Brazil, CHN = China, RUS = Russia, IND = India, SAF = South Africa, BRICS = Brazil, Russia, India, China, South Africa.
Source: ifo Institut
17
Where does trade grow, where does it shrink and by how much?
WethenshowthattradebytheGIIPSstateswiththeUSAincreasessharplyinallcases.Table5
showsthatthisisespeciallytruewithcomprehensiveliberalization.Thegrowthrates,withthe
exceptionofIrelandwheretransatlantictradeisalreadyhighlydeveloped,areonthesamescale
asforthebilateralrelationshipoftheUSAwithGermany.
Table 4: Changes in EU trade with EU neighboring countries
Exporter Importer 2010* Trade volumes (in USD millions)
Comprehensive liberalization %
Tariff scenario %
EU MAR 18,028 –5.14 0.94
MAR EU 11,775 –5.39 –0.38
EU TUN 14,818 –4.75 1.33
TUN EU 13,287 –4.41 –0.82
EU DZA 21,656 –4.33 4.11
DZA EU 28,641 –0.98 –0.98
EU EGY 19,851 –5.81 1.35
EGY EU 10,584 –7.67 –0.15
EU RUS 109,586 –7.83 1.57
RUS EU 195,846 –7.75 –1.15
EU BLR 8,641 –5.91 2.59
BLR EU 7,662 –14.34 –0.42
EU = European Union, MAR = Morocco, TUN = Tunisia, DZA = Algeria, EGY = Egypt, RUS = Russia, BLR = Belarus.
Source: ifo Institut
Table 5: Change in trade of GIIPS countries with the USA
Exporter Importer 2010* Trade volumes (in USD millions)
Comprehensive liberali-zation %
Tariff scenario %
USA GRC 1,559 90.43 1.95
GRC USA 917 90.45 0.60
USA IRL 8,022 77.03 1.44
IRL USA 28,424 77.06 1.40
USA ITA 13,254 91.77 1.71
ITA USA 28,151 91.75 1.00
USA PRT 1,068 90.56 1.78
PRT USA 2,053 90.59 1.01
USA ESP 11,575 80.18 1.62
ESP USA 8,724 80.16 0.99
GRC = Greece, IRL = Ireland, ITA = Italy, PRT = Portugal, ESP = Spain.
Source: ifo Institut
18
Where does trade grow, where does it shrink and by how much?
Finally, we examine the change in the trade relationships of Great Britain. This is of special
interestbecauseGreatBritain,unlikeothermembersoftheEuropeanUnion,alreadyhasavery
highdegreeofeconomicintegrationwiththeUSA,andthenewdefinitionofGreatBritain’srolein
theEUisoftendiscussedwithreferencetoitsstrongrelationshipswiththeUSA.
Table6showsthatinthecaseofatransatlanticagreement,bothexportstotheUSAandimportsby
GreatBritainfromtheUSAwouldgrowsharply.Thisisespeciallyevidentforthecomprehensive
liberalization scenario. Trade with Canada would be only slightly affected. In comparison, it
appearsthatintegrationofGreatBritainintheEUwouldbenoticeablyweakerinsomeareas.In
otherwords,throughthetransatlanticagreement,havingGreatBritainremainintheEuropean
CustomsUnionwouldbe lessvaluable forbothGreatBritainandtheotherEUmemberstates.
Giventhisbackground,thediscussionofGreatBritain’sexitfromtheEUcouldtakeonadditional
energy.
Table 6: Change in Great Britain’s trading relationships
Exporter Importer 2010* Trade volumes (in USD millions)
Comprehensive liberalization %
Tariff scenario %
GBR USA 49,347 60.56 0.98
USA GBR 42,184 60.61 1.38
GBR CAN 9,400 –1.45 2.67
CAN GBR 15,929 –1.41 –0.15
GBR GER 43,583 –40.93 –0.57
GER GBR 72,052 –40.91 –0.70
GBR FRA 26,610 –36.41 –0.52
FRA GBR 34,002 –36.39 –0.52
GBR ITA 15,268 –41.47 –0.51
ITA GBR 23,191 –41.46 –0.82
GBR ESP 13,710 –45.01 –0.61
ESP GBR 15,690 –45.00 –0.84
GBR IRL 21,788 –45.97 –0.78
IRL GBR 19,420 –45.94 –0.43
GBR JPN 6,277 –13.05 2.25
JPN GBR 13,243 –13.07 –1.95
GBR CHN 9,545 –27.56 2.04
CHN GBR 48,619 –27.57 –3.21
GBR = Great Britain, CAN = Canada, GER = Germany, FRA = France, ITA = Italy, ESP = Spain, IRL = Ireland, JPN = Japan, CHN = China.
Source: ifo Institut
19
Where does trade grow, where does it shrink and by how much?
4.3. Effects in North America
Table7examinesthechangesintradeinNorthAmericaandbetweentheUSAandtheBRICS.A
fewimportantinsightsarestriking.First,TTIPleadstotradediversioneffectswithintheNorth
American Free Trade Area (NAFTA) between USA, Mexico and Canada. In the comprehensive
liberalizationscenario,bothexportsandimportsdeclineforNAFTApartnercountrieswithinthe
region.ThetwoNAFTAcountrieswhosepositionisnotimprovedbyTTIP,MexicoandCanada,
intensifytheirtrade.Thatisanimpressiveexampleoftradediversioneffectsbetweencountries
notdirectlyaffectedinanywaybyTTIP:TheaccessofthesecountriesespeciallytotheUSmarket
becomeslessattractivedueto increasedcompetitionfromtheEU, leadingtoasubstantialrise
intradebetweenthem.Whatmakesthiseffectsostrongisthatthetradebarriers,asweknow,
betweenMexicoandCanadahavealreadybeeneliminated.
Interestingly, TTIP leads to an expansion of trade between the EU and Canada. Geographic
circumstancesaredecisiveforthisresult.BecauseofitsclosenesstotheUSA,Canadaisespecially
affected by trade diversion effects involving the USA. This effect leads to creating trade with
theEUcountriesthataregeographicallyfartheraway,sothattransportcostsarelower,andthe
changeintherelativecoststructuresleadstoreplacementoftheAmericanmarketwiththeEU.
ThiscircumstancemeansthatfinalizationofanagreementbetweentheEUandCanada,currently
undernegotiation,wouldstrengthenthetradeofthecountriesinvolvedwitheachotherbutnot
eliminatethenegativetradediversioneffects.
20
Where does trade grow, where does it shrink and by how much?
Table 7: Change in trade between USA and Canada
Exporter Importer 2010* Trade volumes (in USD millions)
Comprehensive liberalization %
Tariff scenario %
EU CAN 43,565 14.53 2.82
CAN EU 34,965 10.07 0.00
USA MEX 142,763 –15.99 –0.82
MEX USA 221,803 –16.04 1.33
USA CAN 193,554 –9.32 –0.55
CAN USA 271,268 –9.32 1.61
MEX CAN 18,965 83.53 3.10
CAN MEX 6,692 83.63 3.11
USA BRA 26,762 –29.45 –0.95
BRA USA 20,116 –29.72 –2.24
USA RUS 7,878 –29.40 –1.69
RUS USA 16,674 –29.16 0.28
USA IND 15,174 –30.51 –0.99
IND USA 29,214 –30.75 –0.84
USA CHN 83,873 –33.35 –1.16
CHN USA 327,554 –33.38 –1.50
USA SAF 5,993 –26.69 –2.07
SAF USA 8,331 –26.53 0.27
USA BRICS 139,681 –31.78 –1.17
BRICS USA 401,889 –32.69 –1.38
EU = European Union, CAN = Canada, MEX = Mexico, BRA = Brazil, RUS = Russia, IND = India, CHN = China, SAF = South Africa.
Source: ifo Institut
21
How do real per capita incomes change?
5. How do real per capita incomes change?
TheTTIPeffectsontradeflowspresentedthusfaressentiallyresult,ashasalreadybeenpointed
outabove,fromtheadaptationoftradecostsandtheresultingchangeinproductioncosts,input
pricesandincomepositionsofthecountries.
5.1 Effects in the EU
Whataretheeffectsofeliminatingthetransatlantictradebarriersonrealpercapitaincomeinthe
EU?DoesTTIPresultingreaterdiscrepanciesinlivingconditionsinEuropeordoesitpromote
convergence?Toanswerthisquestion,wefirstlookattheunambitioustariffscenarioandthen
describetheeffectsofdeepliberalization.
Tariff scenario
Themodelsimulationsnowshowthatatransatlanticfree-tradeagreementwouldnotcontribute
tocausinggreaterdivergenceinlivingconditionsinEurope.Infact,theoppositeismorelikely.
Figure3showsthechangeinrealpercapitaincome(whichisidenticaltorealGDPpercapita)in
allEUmembercountriesiftariffsbetweentheEUandtheUSAareentirelyeliminated.
Thechangeinrealpercapitaincomerangesbetween0.03%(Luxemburg)and0.58%(Lithuania).
For Germany, the value is 0.24%. In the non-weighted EU27 mean, the gain is 0.27% and the
standarddeviationis0.13%.Theseeffectsaresmallbecausethetariffsthatstillexistbetweenthe
EUandUSAarealreadylow(theweightedaverageis2.8%).
Theillustrationabovemakesthefollowingpointsclear:First,allmembercountriesoftheEUbenefit
fromtradeliberalization.Inthetariffscenario,thatwasnotnecessarilythecasebecausetheEUhad
togiveuptariffrevenues.Thatmeans,inthetariffscenario,lessincomeisavailablefordistribution.16
Second,howmucheconomiesbenefitdependsontherealtradestructureoftheindividualcountries,
theirsizeandtheirgeographicalposition.Thosethatexportarelativelylargeamountobtainrelatively
highergains.ThisaccountsforthesomewhathigherbenefitsinGreatBritain,forexample.Higher
incomesinthesecountriesagainresultinincreaseddemandforgoodsfromothercountriesinthe
EU.HowtheseeffectsaredistributedinEuropedependsessentiallyoninnerEuropeantransport
routesand thus thegeographical locationof thecountries.Finally, it also turnsout that smaller
countriestendtogainmorethanlargeones.TheexampleoftheBalticcountriesisespeciallytelling
inthisregard.Smallercountriesaremoreinvolvedintheinternationaldivisionoflaborandtherefore
gainmorefromlowertradecosts.Theeffectsillustratedincludetheseaspects.
16 ItisassumedthatthetariffsrevenueoftheEUisdistributeduniformlytoallEUcountries.Thatisnotactuallythecase,butalltariffrevenuesfromtradewiththeUSAaccountforlessthan0.1%ofEUGDPsothatasubstantialdistortionoftheresultisnotlikely.
22
How do real per capita incomes change?
Figure4correlatespercapitagrowthwiththe levelofrealpercapitaGDPfor2011.Thecloud
diagramshowsanegativecorrelationthatisalsoconfirmedbystatisticalanalysis.Theredline
isalinearregressionequation.Itcanbereadasfollows:thelogofFrenchpercapitaincomeis
about 10.5. The statistical model forecasts an increase in real per capita GDP for this country
of0.23%(whichishigherthanthespecificcalculationsforFranceor0.17%;i.e.,Franceprofits
belowaverage).Foracountrywitha50%lowerpercapitaincomethanFrance(suchasPoland
orHungary,forexample,wherethelogofpercapitaincomeisabout10.0),thestatisticalmodel
forecasts growth of 0.33%.17 This shows that the transatlantic agreement would contribute to
convergenceinEurope:Countriesthatcurrentlyhavealowerpercapitaincome(suchasRomania)
gainmorethanthosethathavehigherincomes(suchasLuxembourg).Thereisalargedegreeof
scatterbutthestatisticalfindingisunambiguous.
17 Thecoefficientofthelogofpercapitaincomefor2011intheregressionequationis–0.21;therelevantstandarddeviationis–0.05.Thusthecorrelationisstatisticallysignificantatthe1%level.Thisfindingdoesnotdependonthedataweighting.
Source: ifo Institut
Figure 3: Change in real per capita income in the EU27, tariff scenario
0.00–0.20 0.21–0.50 0.51–1.70
0.17
0.24
0.31
0.310.22
0.27
0.11
0.16
0.19
0.28
0.12
0.17
0.15
0.17
0.260.38
0.23
0.37
0.24
0.30
0.30
0.58
0.49
0.50
0.40
0.33
0,03
23
How do real per capita incomes change?
Deep liberalization
Ifwemovefromthetariffscenariotoanambitiousscenariothatbesideseliminatingtariffs,also
includesa reductionofnon-tariff barriers, the resultingpicture isdifferent.Asalsoexplained
above,itisimportanttorealizeherethatthedeepscenario,inadditiontotrade-policyliberalization
steps,alsoincludesinducedeffects(e.g.,fromtheexpansionofdirectinvestmentsorthereduction
ofeconomicpolicyuncertainty).
Source: Caculations: ifo Institut
Figure 4: Trade gains and status quo per capita income, tariff scenario
SVK
AUT
FIN
EST
LUX
MLTPRT
BEL
BGR
CYP
CZEDNK
HUN
POL
ROM GBR
SWE
NLD
ESP
SVN
DEU
GRC
LTU
IRL
ITA
LVA
FRA
9,5 10,0 10,5 11,0 11,50,0
0,1
0,2
0,3
0,4
0,5
0,6
Basisjahr 2011; Line shows linear regression.
trad
ing
prof
it pe
rcen
tage
logarithmical per capita income
24
How do real per capita incomes change?
Figure5reproducesFigure1forthecaseofadeepagreement.Onaverage,thegainsaresome
23timeshigherthaninthetariffscenario.MoststrikingisthedeviationinLuxembourg,which
profitsagreatdeal fromincreasedtradingbyitsEuropeantradingpartnerswithUSAwithout
havinglargetradeflowswithAmericaitself.Germanyalsoshowsgainsthatare20timeshigher
thaninthetariffscenario.TheEuropeanaveragegainis4.95%withastandarddeviationof1.58%.
OnecountrythatbenefitsrelativelylittleisFrance(2.64%).ThereasonisthatFrancehasrelatively
littletradeingoodswiththeUSA.Evenso,thegainsareintheclearlyvisiblerange.
Thecountriesthatprofitmostaregenerallythosethatalreadyhavehighrelativetradevolumes
with the USA. This explains the large gain by Great Britain. The Scandinavian countries and
Spainalsogetaboveaveragegains.However,inthelatterinstance,itisduetothefactthatSpain
replacesrelativelyexpensiveEuropeanimportswithimportsfromtheUSA,whichhasawelfare-
increasingeffect.
Source: ifo Institut
Figure 5: Change in real per capita income in the EU27, deep liberalization
0.00–3.00 3.01–6.00 6.01–10.00
2.64
4.68
6.55
9.706.93
5.03
3.63
4.43
5.28
4.92
2.71
2.58
3.31
4.21
4.434.61
4.83
5.13
6.24
3.73
7.30
5.05
5.44
5.72
6.24
5.03
0,03
25
How do real per capita incomes change?
Figure5suggeststhataboveall,thesmallerperipheralcountriesobtainaboveaveragegainsfrom
tradeliberalization.Thereasonforthisisthesameasinthetariffscenario.However,withthenon-
tariffbarrierseliminated,thestimulationofinner-Europeandemandfromsupplierrelationships
withlargecountriesthatobtainrelativelystrongbenefitsplaysasubstantiallylargerrole.
Figure6againcorrelatestheprojectedgrowthinpercapitaincomewithitscurrentlevel.Again,
the correlation is negative. The minus sign is driven entirely by Luxembourg, however. With
or without Luxembourg, no statistically significant connection between the two values can be
demonstrated.18
18 Theregressioncoefficientofthelogofpercapitaincomein2011amountsto–0.80forastandarddeviationofthesamesize.
Source: Calculations: ifo Institut.
Figure 6: Trade gains and Status Quo per capita income, deep liberalization
SVK
AUT
FIN
EST
LUX
MLT
PRT
BEL
BGRCYP
CZE
DNK
HUN
POL
ROM
GBR
SWE
NLD
ESP
SVN
DEU
GRCLTU
IRL
ITA
LVA
FRA
9,5 10,0 10,5 11,0 11,52
4
6
8
10
Basisjahr 2011; Line shows linear regression.
trad
ing
prof
it pe
rcen
tage
logarithmical per capita income
26
How do real per capita incomes change?
Conclusion
Itcanbeconcludedthatthetransatlanticfreetradeinitiativedoesnotexpandtheincomegap
within Europe. The modest tariff scenario actually shows that the agreement leads to more
convergence:i.e.,thepoorer,oftenperipheralcountriesprofitmorethanthericher,centralones.
However,insuchascenario,theaveragegainsfromtheagreementarelow.Anagreementthat
alsosignificantlylowersnon-tariffbarriersleadstomuchhigherwelfaregains.Alsointhiscase,
thereisanegativecorrelationbetweenthestatusquoincomeofEUmembersandtheirgains,so
thatadditionalconvergenceresults.However,thecorrelationhereisnotareliableoneunderthe
usualstatisticalassumptions.
5.2 Effects on the USA and third countries
Onecentralpointofcriticisminthedebateaboutanyfree-tradeagreementinvolvesitseffect
onthirdcountries. Ifa fewcountries teardownthetradebarriersamongthembutmaintain
tariffandnon-tariffbarriersagainstcountriesoutsidetheagreement,thereistradecreationthat
supportswelfareamongthepartnersbutatthesametime,tradewiththirdpartiesisdiverted.
Inthetariffscenario,itcanintheoryactuallyleadtothepartnercountriesobtainingabsolutely
nobenefit fromtheagreement:The lost tariff income is larger (inmonetary terms) than the
advantagesofimprovedmarketaccess.Andtypically,thosecountriesthatdonotparticipatein
theagreementlose.Infact,itiseventheoreticallypossibleforrealglobaltotalincometofall,
ifthegainsobtainedbyparticipantsintheagreementaresmallerthanthelossesofthosewho
remainoutside.
Theeffectsoflowernon-tariffbarriersaredifferentthanthoseoflowertariffs.Thereareseveral
reasons for this: Tariffs distribute income — essentially from consumers to producers. Their
harmful side effect is how they distort consumption and production decisions. This causes
damagetotheeconomythatrisestothesquareofthetariffs,butwhenthetariffsareverylow
(closetozero),theyarenegligible.Non-tariffbarriersdonotresultinanyincomedistribution;
instead they generate direct economic costs. To make products fit for a foreign market,
bureaucratic, regulatoryandadministrative ruleshave tobe respected,delaysoccurand the
marketriskrises.Thesecostsareassociatedwiththeuseofresourcesbutareofverylittleor
nousetotheconsumer.Inthisway,evenverysmallnon-tariffbarriersreducethepurchasing
powerofconsumersandthustheirrealincome.
27
How do real per capita incomes change?
Anadditionaldifferencebetweentariffandnon-tariffbarriersisimportantinthisconnection.
Non-tariffbarriersassumevariousforms,butoneimportantwaytoliberalizethemistounify
productstandardsorallowautomaticdomesticacceptanceofproductsthatareallowedforuse
abroad.Thatcanalsoassistthirdcountries:Ifaproductsatisfiesthestandardsofonemember
countryinafreetradezone,itmaythenbeallowedforsaleinallcountriesofthezone,evenif
itcomesfromathirdcountry.Withtheadoptionofstandards,thirdcountriescanminimizethe
tradediversioneffectsthatareharmfultothem.
Inordertoquantifytheglobaleffects,werefertothemodelusedintheprevioussection.This
modelwascalibratedandsimulatedfor126countries,sothat itcanbeusedforanalyzingthe
effects.Firstletusturntothetariffscenario.
Tariff scenario
Figure7showsthechangeinrealpercapitaincomeinallcountriesconsidered.Themodelcovers
virtuallyallthecountriesoftheworld,exceptforsomegapsmainlyinAfrica.Countriesthatprofit
fromthetransatlanticagreementareshowninblue,whilethosethatlosefromitareshownin
beige.OnecountrycoloreddarkblueistheUSA.There,realpercapitaincomerisesby0.8%just
fromloweringtariffs.Comparedtoothercountries,thetotaltradebarriersoftheUSAarerelatively
low.Thatisduetolanguage,currencyandageneralpolicyofopennesstoforeigntrade,andthe
resultisthattariffcutscanhaveastrongpositiveeffect.
ThefigureshowsthatthewinnersinthefreetradezoneareessentiallylimitedtotheUSAand
EUmemberstates.Otherthanthose,thereareonlyisolatedcountriesinwhichtheaveragereal
incomerises.Thesearecountriesthatbenefitdisproportionatelyfromadditionalexportsbecause
ofanimprovedeconomyintheEUorUSA.ExamplesareBrazil,KazakhstanandIndonesia,which
areimportantsuppliersofrawmaterialstoEuropeandtheUSA.Thesecountriesproducegoods
likenaturalgasorcottonforwhichthereareveryfewgoodsubstitutes.Interestingly,thegainsfor
KazakhstanorBrazilarehigherthantheaveragerealincomegainsinEurope.Thatshowsthatthe
complicatedinternationalinterweavingoftheflowofgoodscanalsoresultinsurprisingeffects.
CountrieslikeNorwayorJapanseenonoticeablechangesintheirpercapitaincome.
28
How do real per capita incomes change?
Themainlosersfromeliminatingtariffsarethedevelopingcountries.Theyexperiencedramatic
lossesinmarketsharefromintensifiedcompetitionontheEUorUSmarkets.Alternativemarkets
withsimilarmarketpotentialaregeographicallyfarapart.Thisisaproblemespeciallyforcountries
inNorthandWestAfrica,whichtraditionallytradeintensivelywithEurope,especiallyFranceand
Belgium.ThelistoflosersisledbyIvoryCoastandGuinea.TheirexportstoEuropearepushed
outbygoodsfromtheUSA.EastAfricacomesoutalittlebetter,mainlyduetoitsproximityto
otherlargemarketslikeChinaorAustralia/NewZealand.Buttheretoo,significantlossescanbe
experiencedbycountriessuchasUgandaandTanzania.
Overall,itshowswhatwastobefeared:IftariffsbetweentheUSAandEUfall,therelativebarriers
tomarketentryfacedbydevelopingcountriesbecomeonaveragehigher.Itisexactlythepoorer
countriesthatsuffer,someofthemtoaremarkableextent.EuropeandtheUSAwouldhaveto
moderate these negative effects through the quick signing of a “Doha light” compromise. The
resourcesfordoingsoarealreadyavailableinprinciple:ThroughtheEU-USAagreement,despite
lossesinmanythirdcountries,theworldbecomesonaveragericherbysome0.1%.
Source: ifo Institut
Figure 7: Change in global real per capita income, tariff scenario
–7.5 bis –4.1 –4.0 bis –1.9 –1.8 bis –0.1 0.0 bis 0.2 0.3 bis 0.5 0.6 bis 1.7
–0.7
0.8
–1.1
–1.4
–1.2–2.2 –1.0
–1.1
–1.5–0.2
–1.1–0.1
–0.9
–0.4 –2.0
0.5
–0.3
0.0
–0.2–2.1
0.30.0 0.4
0.30.2
0.40.2
0.30.2
–2.5–2.3
–3.3
0.7
1.10.3 –1.3
–0.9–1.7
–1.8 –0.9
–0.2
–0.2
–3.10.1
–2.8
–0.4 0.0
–0.6
–0.8
–1.6–2.4
–2.3
–1.1
–1.9–4.1
–4.4–7.4
–6.4 –3.0
–4.4
–4.1
–1.7
–3.3
–1.0–1.8
–2.2–4.4–2.3
–2.1
–0.2
1.7–2.2
–0.9–0.3
0.20.2
0.3 0.30.20.2
0.40.1
0.3
–1.3
0.50.5
0.0
29
How do real per capita incomes change?
Deep liberalization
Finally,letustakealookattheeffectsofdeepliberalizationbetweentheEUandUSA.Itstrade-
creatingeffectsare,asdescribedintheEU27example,severalordersofmagnitudegreaterthan
thosecreatedonlybyeliminatingtariffs.Thisnecessarilymeansthatthetradediversioneffects
arealsomoreintense.Thetrendisforcountriesthatremainoutsidetoloseevenmoresignificantly.
Allthesame,itisclearthatthestrongerrecoveryinthetransatlanticeconomycanalsomakethe
demandeffectinthirdcountriesevenmorepronounced.
Figure 8 shows the calculated effects. As in the simulations already discussed, this is an “all
otherthingsbeingequal”effect,i.e.,itincludesonlythoseeffectsthatcanbetracedbacktothe
transatlantic agreement. In the caseofnon-tariff barriers,however, it is very likely thatmany
countries,especiallythetraditionaltradingpartnersoftheEUandtheUSA,willadoptthesame
standards and regulations. Under certain circumstances, it is even realistic for countries that
alreadyhavefree-tradeagreementswiththeEUorUSAtoindirectlyparticipateinnegotiations
betweentheEUandUSA,sothattheirconcernsaretakenintoaccount.Thisdoesnotshowupin
thecalculations,sothenegativewelfareeffectsmaybeexaggerated.Theydoclearlyreflectthe
trend,however,andindicatewherethereisaneedtoact.
ItisevenmoreobviousthaninthetariffscenariothatthetraditionaltradingpartnersofEurope
andtheUSAarehurtbytheagreement.ThelossesthatwouldbeexperiencedbyCanada,Mexico,
Japan, Australia, Chile or Norway are substantial in this scenario. These countries are highly
motivatedto imitate theeliminationofnon-tariffbarriersbetweentheEUandUSAor improve
theirpartiallyexistingbilateralagreementswiththeUSAandEU,ortoenterintosuchagreements.
Therearemanysignsthatexactlysucheffortsarenowunderway.
Fortheworldingeneral,deepliberalizationbetweentheEUandUSAmeansariseinaverage
realincomeof3.27%.Thatputsenoughmoneyonthetabletocompensatethelosers.Itcanbe
hopedthattheagreementincreasesthewillingnessofdevelopingandemergingcountriestoenter
intocompromisesintheDohaDevelopmentAgenda.Atthesametime,theindustrialcountries
shouldalsobereadytomakecompromises,becauseasubstantialintensificationoftheeconomic
relationshipsbetweentheUSAandEUwouldmakethenecessaryresourcesavailable.
30
How do real per capita incomes change?
Source: ifo Institut
Figure 8: Change in global real per capita income, deep liberalization
–9.5 bis –6.1 –6.0 bis –3.1 –3.0 bis 0.0 0.1 bis 3.0 3.1 bis 6.0 6.1 bis 13.4
–9.5
13.4
–7.2
–4.2
–4.7–4.4 –3.4
–2.7–2.6
–2.2–1.7
–1.6
–5.6 –1.8
2.1
–3.2
–3.9–2.1
7.3–3.9 6.2
3.74.7
9.76.9
6.6
2.6
–1.7–0.6
–0.4
–0.5
–1.65.0 –2.2
–1.1–1.4
–0.8 –0.3
–0.4
–0.2
–1.3–0.2
–2.2
0.7 –5.9
–7.4
–2.0
–2.8–3.5
–2.7
–4.0
–3.0–2.8
–2.6–2.6 –2.6
–3.1
–2.6
–2.8
–1.5–2.2
–1.5
–4.0
–1.2–0.6
–4.1
–3.2
–3.3–2.5
2.62.6
4.9 4.42.64.2
4.62.7
4.8
–2.6
5.75.4
–1.3
–0.8–0.5
–0.7
5.1
31
What happens in the labor markets?
6. What happens in the labor markets?
Whiletheprevioussectionofthestudyilluminatedthetradeandwelfareeffectsofbothscenarios,
and the labor market effects were intentionally abstracted, the following section devotes its
attentiontothedecidedlyaggregatedemploymenteffectsofeliminatingtariffsaswellasofadeep
liberalizationscenario.Forthis,themethodologyofourstructuralmodelofforeigntrademustbe
expandedwithanexplicitmodelforthelabormarketsinthecountriesaffected.
6.1. Search unemployment and foreign trade
Themodelusedsofardoesnotexplicitlymodeltheeffectsonthelabormarketbecauseitwas
developed in order to analyze trade flows. In the academic literature about evaluating trade
liberalizationefforts, there isa long traditionof refraining fromexplicitmodelingof the labor
market.Onereasonmaybethelonglackofagenerallyacceptedmodelforlabormarketsandtheir
underlying institutions and frictions. However, at the latest when Christopher Pissarides, Dale
MortensenandPeterDiamondwerehonoredwiththe2010NobelPrizeinEconomicSciencesfor
theirground-breakinginsightsinmodelingsearchunemployment,alargersegmentofthepublic
finallyrealizedthatagenerallyacceptedmodelhasbeenfound.Whatdifferentiatessuchmodels
isthattheydepartfromtheassumptionappliedinclassicaleconomicsthatthewagesofworkers
adaptaslongasittakesforallthoseseekingworktohaveajobofferedbyacompany.19Obviously,
this assumption contradicts the empirical fact of the existence of involuntary unemployment.
Instead, these models assume that the unemployed first have to look for vacant positions and
only find a job with a degree of probability. Likewise, employers must assume costs in order
tofindanemployee.Theserangefromthecostsofanadinanewspaperoron-lineplatformto
theassessmentcenters,selectioninterviewsandhiringandtrainingcoststhatnewemployees
generate. A company’s unfilled positions are likewise only filled with a degree of probability.
These frictions associated with the search lead to search (or frictional) unemployment; even
duringaneconomicboom,therewillalwaysbeacertainnumberofunemployedwhocontinue
tolookforajob.Moreover,labormarketinstitutionsnaturallyaffecttheunemploymentrate.Ifa
countryhasagoodemploymentagency,moreunemployedwillfindjobsandunemploymentwill
be lower.Andwage replacementpayments such asunemployment benefits have an influence
ontheunemploymentrate.Amajoradvantageofthismodelingapproachisthatalltheselabor
marketinstitutionscanbereproducedwithinthemodelframework.Moreover,themodelexplains
thesimultaneousexistenceofjobopeningsandunemployedpeople.
19 Foranintroductiontothesemodels,seePissarides(2000).
32
What happens in the labor markets?
Recent globalization research has taken advantage of these modeling approaches, in order to
introducethemintoexistingapproachestotheoreticalmodelingoftradeflowsbetweencountries.
AmongthepioneersinthisareawereDavidsonandMatusz(1999).Themostrecentcontributions
inthisfieldarebyHelpmanandItskhoki(2010)aswellasFelbermayretal.(2011).HeidandLarch
(2013)havetakenupthesetheoreticalstudiesandmadethemaccessibletoempiricalquantitative
analysis.20Atthecore,thisempiricalstructuralmodelconsistsofanexpansionofthemodelswe
usedtoanalyzetradeflowsforthetariffandTTIPscenariosintheprevioussectionsofthestudy
forexplicitmodelingof the labormarket.Theresults that followarebasedspecificallyonthis
methodologicalapproach.Giventheirextensivesimilarity,therewillbeonlyashortdiscussionof
theadaptedmethodologyinthepagesthatfollow.
Theempiricalstrategyisanalogoustothepreviousone:wesetthemodelusingtheobserveddata
insuchawaythatthetradeflowsobservedinthebasescenarioarereplicatedintheexpected
value.Thedifferenceisthatwenowsetthemodelexplicitlyfortheobservedunemploymentrates.
Moreover,wetakeintoaccountthefactthatindifferentcountries,therearedifferentincentives
to taking a job, which result from differences in wage replacement payments (the average
unemploymentbenefits,measuredasapercentageoftheaveragewage).21Thenweanalyzethe
effectsofthetariffanddeepliberalizationscenarios.Now,however,wecanexplicitlyinvestigate
thenetemploymenteffectsof these scenarios, andcalculate the firmnumberof jobs that are
createdorlost.Moreover,wecanalsoobservethechangeinrealwages.
From this sketch of themethodology it becomes clear thatwhile the analysis frameworknow
allowsexplicitinvestigationofthelabormarket,itis“bought”atthepriceofasubstantiallyhigher
requirement for data. We additionally need comparable information on unemployment rates,
employmentlevelsandthewagereplacementpayments.Concretely,weusethelabormarketdata
from2010;thewagereplacementratesarehoweverfrom2009,becausetheyarecompiledonly
everytwoyears.Theseareunfortunatelyavailableonlyforadatasetof28OECDcountries.22Being
limited to these industrialized countries guarantees that the labor markets are comparable, at
leasttotheextentthatotherfactors,suchasinformalemploymentorsubsistencefarming,asare
commoninLatinAmerica,AfricaandlargepartsofAsia,forexample,donotdistorttheanalysis.
Arepresentationofthelabormarketstructuresofthesecountriesisunfortunatelynotpossible,
giventhe(lackof)availabledata.
20 Theworkscitedabovearenotacompleteoverviewoftheliterature;forthat,seeHeidandLarch(2013).Thereisalsoanexactdescriptionofthemodelframeworkused.
21 Calculationofwagereplacementpaymentsismorecomplicatedthandescribedhere.WeareusingOECDdatathatcalculatesanaveragewagereplacementratefromacombinationofdifferentworkerlifesituations(familystatus,numberofchildren,etc.).Thesefiguresprovideagoodapproximationoftheaveragelevelofunemploymentbenefitsforacross-sectionofcountries;fordetailsseeOECD(2010).
22 Thecountriesare:Australia,Austria,Belgium,Canada,CzechRepublic,Denmark,Finland,France,Germany,Greece,Hungary,Iceland, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, South Korea, Spain, Sweden,Switzerland,Turkey,UnitedKingdomandUnitedStates.
33
What happens in the labor markets?
Table8showstheunemploymentratesused. Inthedata for2010, theeffectsof thecontinuing
financial,governmentdebtandeurocrisisarequiteevident:Spainhadthehighestunemployment
intheOECDat20%.Germany,intheEuropeancomparison,hadarelativelylowunemployment
rateof7.46%,whiletheunemploymentrateintheUSA,atjustbelow10%,reachedahistoricalpeak.
Table 8: 2010 unemployment rates
Country 2010 unemployment rate in percent
Australia 5.23
Austria 4.39
Belgium 8.29
Canada 8.01
Czech Republic 7.28
Denmark 7.46
Finland 8.40
France 9.36
Germany 7.06
Greece 12.53
Hungary 11.16
Iceland 7.56
Ireland 13.64
Italy 8.42
Japan 5.03
Netherlands 4.45
New Zealand 6.53
Norway 3.61
Poland 9.62
Portugal 10.79
Slovakia 14.37
South Korea 3.72
Spain 20.06
Sweden 8.37
Switzerland 4.54
Turkey 11.88
United Kingdom 7.75
United States 9.63
Source: OECD Labour Force Statistics (2010)
34
What happens in the labor markets?
Toensurethecomparabilityoftheresultswiththoseintheprevioussection,despitehavingfewer
countriescovered,weconsidered,whenparameterizingthemodel thatgrossomodo, thesame
aggregatedtradecreationeffectsbetweentheEUandUSAareachievedinbothscenariosasinthe
modelwiththe126countrieswithouttakinglabormarketfrictionsintoaccount.
6.2 Two million new jobs
Whateffectdoeseliminationofthetradebarriersintransatlantictradehaveontheunemployment
rate?Howmany jobsarecreated?Andhowdorealwageschange?Toanswer thesequestions,
weconsider first theunambitious tariff scenarioandafterwardsdescribe theeffectsofadeep
liberalization.Atthispointwewouldliketopointoutthatourmodelhasintentionallyremoved
theeconomy-inducedchangesintheunemploymentrateandonlyinvestigatesthelong-termor
accumulatedeffectsoftradeliberalizationontheunemploymentrate.Thatmeansthatthenumbers
presentedbelowaretobeconsideredlong-termresultsorequivalenttochangesinemployment
independentoftheeconomiccycle.Thatmeans,forexample,thata1percentagepointdropinthe
unemploymentratereducestheunemploymentrateduringbothanupswingandadownswingof
theeconomyby1percent.
Tariff scenario
Table9showstheresultsofeliminatingtheexistingtariffs.Thesecondcolumnshowsthepercentage
change in employment. Inversely, column 3 shows the changes in the unemployment rate.
However,thisisthechangeinpercentagepoints.Concretelythismeansthatthetariffelimination
wouldlowertheunemploymentrateinGermanyby0.11percentagepoints.Itbecomesclearthat
employmentrisesinallEUcountriesaswellastheUSA.However,thechangesareverysmalland
fortheEUstatesrangearound0.1percentagepoints.AnexceptionistheUnitedKingdom,which,
becauseofitsspecialclosenesstotheUSAbasedonlanguageandculture,asmentionedabove,
profitsinparticularwithareductionofitsunemploymentrateby0.34percentagepoints.Onthe
otherhand,inthecountriesthatdonotgainfromtariffreduction,unemploymentrisesslightly.
ThiscanbeexplainedbyrelativehighertradecostsbetweenthesecountriesandtheEUandUSA.
Theserelativelyhighertradecostsleadtoasmallertradingvolume,i.e.,lessdemandforproducts
fromthesecountries,whichreducesproductionintheaffectedcountries.Thisweakeneddemand
translatesdirectly intoa loweremploymentdemand fromcompanies in theaffectedcountries,
whichleadstoincreasedunemployment.Conversely,thenowrelativelylowertradecostsinthe
USAandEUmeangreaterdemandforgoodsfromtheEUandUSA,whichtranslatesintonew
hiresandultimatelyintoalowerunemploymentrate.
35
What happens in the labor markets?
Whenweweighttheindividualchangeswiththegrossdomesticproduct,thereisareductionin
theunemploymentratesinthe28countriesof0.11percentagepoints.
Inatrademodelwithoutaggregatedemploymenteffects,alladaptationsoccurinpricesandwages.
Inourmodel framework,aportionof theseeffects isdiverted intoquantities, i.e.,employment
effects;howevereveninthismodelframework,theyalsoresultinchangesin(real)wages.Real
wagesinthismodelframeworkarealsoanadequatemeasurementofwelfare.Hereweseethat
inGermany,realwagesrise0.54%,intheUSA0.93%.Here,too,theUnitedKingdomprofitsmost
witharealwageincreaseof1.72%.Thecountriesnotaffectedbythetariffreductionmust,onthe
otherhand,acceptsmallerrealwagecuts.Overall,however,realwagesrise0.59%intheOECD,so
thatevenconsideringaggregatedunemploymenteffects,enoughprofitsareachievedinprinciple
tooffsetthedisadvantagedcountriesthroughtransferpayments,forexample.
Evenwithconsiderationoftheemploymenteffects,itappearsthatthetotaleffectsofonlytariff
eliminationareveryslight,andcomparedtotheeconomicfluctuationsoftheunemploymentrate,
shouldbeconsiderednegligible.
Figure10finallyofferssomeinsightintotheeffectsofthetariffreductiononconvergencewithin
theEU.Itshowsonthexaxistheunemploymentratesin2010andontheyaxisthereduction
ofunemployment rates through tariff reduction. It is immediatelyclear that inallEUmember
countries, theunemploymentratesinks, i.e.,allcountriesprofitdirectlyfromarevivalof their
employmentmarkets.Thestraightlinedrawnisaregressionline,anditshowsapositiverise.23
This should be interpreted as follows: the higher the unemployment rate in an EU member
country, thegreater thereductionof theunemployment rate fromtariff reduction.Thismeans
thattariffeliminationcontributestoaconvergenceofthelabormarketsituationwithintheEU:
Thecountrieswiththemostprecariouslabormarketsituationsprofitmost.Thegraphshowsthe
exceptionalsituationoftheUnitedKingdom,which,despiteitsrelativelylowunemploymentrate,
benefitsthemost.
23 Theincreasecoefficentisnotsignificantof0differentbasedontheUnitedKingdomoutlier.Aregressionlinewithoutthatoutlierisatthe5%significancelevelof0differentandalsoshowsaclearlypositiverise.
36
What happens in the labor markets?
Table 9: Change in employment, unemployment rates and real wages, tariff scenario
Country Percentage rise in employment
Change in unemployment rate in percentage points
Percentage change in real wages
Australia –0.12 0.11 –0.56
Austria 0.07 –0.07 0.32
Belgium 0.02 –0.02 0.09
Canada –0.15 0.15 –0.71
Czech Republic 0.11 –0.10 0.53
Denmark 0.13 –0.12 0.63
Finland 0.21 –0.19 0.97
France 0.12 –0.11 0.54
Germany 0.12 –0.11 0.54
Greece 0.20 –0.17 0.93
Hungary 0.15 –0.13 0.70
Iceland –0.12 0.11 –0.56
Ireland 0.24 –0.21 1.14
Italy 0.16 –0.15 0.72
Japan –0.03 0.03 –0.14
Netherlands 0.09 –0.08 0.40
New Zealand –0.08 0.07 –0.37
Norway –0.12 0.12 –0.55
Poland 0.15 –0.13 0.69
Portugal 0.22 –0.19 1.02
Slovakia 0.14 –0.12 0.66
South Korea –0.03 0.03 –0.15
Spain 0.20 –0.16 0.92
Sweden 0.18 –0.16 0.85
Switzerland –0.11 0.10 –0.50
Turkey –0.11 0.10 –0.51
United Kingdom 0.37 –0.34 1.72
United States 0.20 –0.18 0.93
Average (GDP–weighted) 0.13 –0.11 0.59
Source: Calculations: ifo Institut
37
What happens in the labor markets?
Deep liberalization
Letusnowlookatthedeepliberalizationscenario.Table10reportsthecorrespondingresults.It
isimmediatelyclearthattheeffectsforEUcountriesareaboutfourtimesaslargeasinthetariff
reductionscenario.Forexample,inGermanytheunemploymentratedropsby0.43percentage
points, which corresponds to an increase in employment of 0.47%. In the USA, the decline in
unemploymentis0.71percentagepointsandintheUnitedKingdom,even1.27percentagepoints.
Countriesaffectedbythebankandgovernmentdebtcrisisalsodoespeciallywell:Unemployment
inSpaindrops0.62percentagepoints,inGreeceandPortugalbyabout0.7percentagepointsand
inIrelandevenby0.84percentagepoints.TheeffectforIrelanddespitethecommonlanguage
withtheUSAissmallerthanintheUnitedKingdomisduetotherelativelymarginalpositionof
IrelandincomparisontotheUnitedKingdom.
Source: Calculations: ifo Institut
Figure 9: Reduction of the unemployment rate and 2010 unemployment rate, tariff scenario
Line shows linear regression.
Austria
Belgium
United Kingdom
Sweden Spain
Netherlands
Slovakia
Greece
Portugal
Poland Hungary
Ireland
Italy
Germany FranceDenmark
Finland
Czech Republic
0 5 10 15 20 250,00
0,05
0,10
0,15
0,20
0,25
0,30
0,35
Unemployment rate in 2010
Redu
ctio
n of
the
unem
ploy
men
t rat
e pe
rcen
tage
38
What happens in the labor markets?
Evenwithconsiderationofthequantitative(oremployment)effects,theimpactonprices,here
realwages,andthusonconsumerwelfare,issubstantiallylarger:InGermanyrealwagesare2.19%
higherandinthecountriesseverelyaffectedbythecrisisjustmentioned,atleast3%higher.It
isthusapparentthatdeepliberalization,besidesprovidinghigherpositiveemploymenteffects,
offerssubstantiallyhigherwelfareeffectsthandoes justeliminatingtariffs.However, thereare
alsolosersinthisscenariowithintheOECD:It isthosecountriesthatarenotpartoftheTTIP
agreement.However,evenintheircase,onaverage,therealGDP-weightedwageincreaseis2.34%,
sothattherearesufficientprofitsavailableforthethirdcountriesthatdon’tparticipatetobeable
tobecompensatedfortheirrealwagelosses.Onaverage,theOECDunemploymentratefallsby
0.45percentagepoints.
This is especially remarkable: The implementation of TTIP is thus not a zero-sum game but
generates real welfare gains from the elimination of real trade costs, so that (in principle) all
countriescanbenefitfromthisreduction.
Theunderlyingmechanismisthesameasinthetariffscenario:Theincreaseinexportdemand
triggered by the reduction of trade costs leads to more hiring by companies, which directly
causestheunemploymentratetofall.Atthesametime,thiscausesconsumptionofgoodstorise
domestically,basedonthehighernumberofpeopleworking,whichagaincausesmoredemand
for imports from other TTIP member countries. These positive spillover effects in the general
equilibrium with consideration for trade intertwining between countries reinforce the pure
reductionoftradecosts.
Figure11,analogoustoFigure10,providesacleardescriptionof theconvergencebetweenEU
membercountries:Thegraphslookverysimilarbutthevaluesontheyaxisaremuchhigher.It
isalsoevidentherethatthehighertheunemploymentrateinanEUmembercountrybeforeTTIP,
theloweritwillbeafterimplementationofadeepTTIPagreement.24
24 Theslopecoefficientforthisgraphislikewisenotsignificantfrom0differentbecauseoftheUnitedKingdomoutlier.Aregressionlinewithoutthisoutlierisatthe5%significancelevelof0differentandalsoshowsaclearpositiveslope.
39
What happens in the labor markets?
Table 10: Change in employment, unemployment rate and real wages, deep liberalization
Country Percentage rise in employment
Change in unemployment rate in percentage points
Percentage change in real wages
Australia –0.47 0.44 –2.14
Austria 0.28 –0.27 1.33
Belgium 0.09 –0.08 0.42
Canada –0.60 0.56 –2.75
Czech Republic 0.46 –0.42 2.14
Denmark 0.54 –0.50 2.54
Finland 0.81 –0.75 3.84
France 0.47 –0.43 2.22
Germany 0.47 –0.43 2.19
Greece 0.78 –0.68 3.68
Hungary 0.60 –0.53 2.81
Iceland –0.46 0.42 –2.12
Ireland 0.97 –0.84 4.61
Italy 0.62 –0.57 2.90
Japan –0.11 0.11 –0.53
Netherlands 0.35 –0.34 1.65
New Zealand –0.30 0.28 –1.40
Norway –0.46 0.44 –2.12
Poland 0.58 –0.53 2.75
Portugal 0.85 –0.76 4.03
Slovakia 0.56 –0.48 2.63
South Korea –0.13 0.12 –0.58
Spain 0.78 –0.62 3.65
Sweden 0.72 –0.65 3.37
Switzerland –0.43 0.41 –1.96
Turkey –0.42 0.38 –1.94
United Kingdom 1.38 –1.27 6.60
United States 0.78 –0.71 3.68
Average (GDP–weighted) 0.50 –0.45 2.34
Source: Calculations: ifo Institut
40
What happens in the labor markets?
Conclusion – 2 million jobs with deep liberalization
Generally,theviewexpressedinthepreviousanalysesisconfirmed:Whileapuretariffelimination
wouldhavepositivewelfareandemploymenteffectsfortheEUandUSA,thepositiveeffectsof
deepliberalizationaremanytimesgreater.ItisalsoclearthatanyfearsaboutEUcountriesdrifting
fartherapartasaresultoftheliberalizationeffortsareunfounded;onthecontrary,theagreement
contributestowardharmonizingthelabormarketsituationsandlivingconditionswithintheEU.
Thisemphasizesthespecialsignificanceofacomprehensiveliberalizationingivingadetectible
stimulustotheeconomiesonbothsidesoftheAtlantic.
Finally,inTable11weprovideanoverviewofthenetadditionaljobscreatedinbothscenariosin
theOECD,i.e.,conversionofthechangesintheunemploymentrateintojobs.Adeepliberalization
willcreateabout181,000newjobs inGermany,andmorethanamillion in theUSA.Thetotal
amount showsagrowth in employment in allOECDcountries ofmore than2million jobs; in
the lessambitioustariffscenario,abouthalfamillion.Thesenumbersmakeitespeciallyclear
thatthedeepliberalizationgeneratesimportantemploymentstimuli.Itshouldalsobeconsidered
in this context that positive spillover effects based on psychological factors (boom mood after
Source: Calculations: ifo Institut.
Figure 10: Drop in the unemployment rate and the 2010 unemployment rate, deep liberalization
Line shows linear regression.Sweden
Austria
Belgium
United Kingdom
Spain
Netherlands
Slovakia
Greece
Portugal
Poland Hungary
Ireland
Italy
Germany FranceDenmark
Finland
Czech Republic
0 5 10 15 20 250,0
0,3
0,6
0,9
1,2
1,5
Unemployment rate in 2010
Redu
ctio
n of
the
unem
ploy
men
t rat
e pe
rcen
tage
41
What happens in the labor markets?
comprehensiveliberalization)werenotincludedinourmodeling.Itisprobablethattheseeffects
wouldmakethefiguresevenmorepositive.
Table 11: Number of jobs created in both scenarios
Country Deep liberalization Tariff scenario
Australia –52,332 –13,591
Austria 11,638 2,828
Belgium 4,062 873
Canada –101,854 –26,176
Czech Republic 22,278 5,527
Denmark 14,623 3,646
Finland 20,066 5,134
France 121,566 29,921
Germany 181,092 44,831
Greece 34,277 8,766
Hungary 22,613 5,691
Iceland –769 –201
Ireland 18,115 4,549
Italy 140,979 35,538
Japan –71,833 –19,030
Netherlands 29,535 7,121
New Zealand –6,606 –1,748
Norway –11,541 –3,001
Poland 93,333 23,466
Portugal 42,521 10,878
Slovakia 12,995 3,259
South Korea –29,841 –7,912
Spain 143,098 36,457
Sweden 32,515 8,241
Switzerland –18,224 –4,640
Turkey –94,831 –24,625
United Kingdom 400,203 106,134
United States 1,085,501 276,623
Jobs created in the OECD 2,043,178 518,558
Source: Calculations: ifo Institut
42
Summary
7. Summary
In this study we examined the macroeconomic effects of a transatlantic trade and investment
partnership(TTIP)betweentheEUandUSA.Twoscenarioswereexamined:(i)theeliminationof
tariffsintransatlantictrade,(ii)adeep,comprehensiveliberalizationoftradeinwhichregulatory
barriers to market access are also reduced. To do so, an empirical approach was chosen that
applies to the agreement of those trade-creating effects that can be measured in comparable,
alreadyexistingfree-tradeagreements.Bydoingso,thedirectquantificationofnon-tarifftrade
barriersandspeculationabouttheirremovalaspartoftheagreementcanbeavoided.
Themostimportantresultscanbesummarizedasfollows:
1. Trade between the USA and Germany is not significantly strengthened by eliminating
tariffs.Reductionofnon-tariffbarriersaboveandbeyondtariffsaspartofacomprehensive
liberalization scenario has much bigger effects. The growth to be expected is in the 90%
range.
2. ForotherEUcountries,tradegrowthofasimilarscalecanbeexpected.Inallcasesitwastrue
thatgrowthfromsimplyeliminatingtariffsisnegligible.
3. Germany’stradewithitstraditionaltradepartnersinEuropedeclinessharplyinsomeareas
inthecomprehensivescenario(e.g.,withFrance:–23%).Thisisduetothereversalofthetrade
diversioncausedintheEuropeanCustomsUnionanddomesticmarket.Similareffectsexist
alsofortheotherEUcountries,forexampleforGreatBritain.Thetradepolicyintertwiningof
EUcountriesamongthemselvesdeclines.
4. Germany’stradewiththeBRICScountries(Brazil,Russia,India,China,SouthAfrica)would
dropbecauseofthecomprehensiveagreementbyabout10%relativetotheinitialequilibrium.
Giventhemassiveexpansionoftransatlantictrade,thisisaslighteffect.USAtradewiththe
BRICScountrieswouldhoweverdeclinemoresharply(30%).
5. EU trade with neighboring states in North Africa or Eastern Europe would decline by an
averageof5%fromthecomprehensiveagreement.Thisresultsfromthecircumstancethatthe
TTIPpartiallydevaluesexistingpreferenceagreements.
6. Afree-tradeagreementbetweentheUSAandEUhasimportantwelfareeffectsonthecountries
directlyinvolvedandoncountriesthatareonlyindirectlyaffectedbytheagreement.Within
theEUaswelltherearedifferencescuttingacrossthecountries.WithinEurope,theBaltic
statesbenefitmostfromeliminatingtariffsintradewiththeUSA.Relativehighgainsarise
alsoinGreatBritainandinthecountriesborderingtheMediterranean.Germanycanexpectan
43
Summary
increaseinrealpercapitaincomeof0.24%.LocatedattheotherendareFrance,theBenelux
countriesandAustriawithitsneighbors.Theaverageis0.27%.
7. Reducingnon-tariffbarriershasclearlygreatereffectsonrealpercapitaincomesinEurope
than justeliminatingtariffs. ItnowcanbeseenthatGreatBritainwouldespeciallybenefit
fromtheinitiative(growthof9.70%).TheScandinavianmemberstates,theBalticcountries
andSpainseeabove-averageincreases.Germanyprofitsat4.68%abitlessthantheaverage,
whichis4.95%.France,with2.64%,gainsrelativelylittleincomparison.
8. DroppingtransatlantictariffstozerogivesthemosthelptothepoorerEUmembercountries.
Memberstateswhosepercapitaincomein2011was50%belowthatofFrancecouldexpect
welfaregainsthatareabout0.1%higherthanthoseofFrance.Inthecaseofreducingthenon-
tariffbarriers,noconvergenceeffectcanbestatisticallyproven.
9. TheUSAgainssubstantiallymorethantheEU.Inthetariffscenario,therealpercapitaincome
risesabout0.8%;inadeepliberalizationofnon-tariffbarriers,thegainsrisetoabout13.4%.
ThesehighgainsresultfromthefactofalreadylowtradebarrierswiththelargeEuropean
countrieslikeGreatBritainbutalsoGermany.
10.LiberalizationoftradebetweentheEUandUSAleadstotradecreationbetweenthepartners
buttoevidenttradediversionintradewiththirdcountries.Withpuretariffelimination,the
countries of West Africa, which traditionally trade a lot with Europe, lose up to about 7%.
However,therearealsowinnersamongthethirdcountries:Brazil,KazakhstanandIndonesia
havehigherpercentagegainsthanEuropefrompositiveindirecteffects.Welfarerisesbyabout
0.1%.
11. If thenon-tariffbarriersbetweenEUandUSAare liberalized inaddition to the tariffs, the
percapitaincomeinaglobalaveragerisesagood3.27%.Thetradediversioneffectsare,in
comparisontothecustomsscenario,onlyinsignificantlylarger,butdistributedamongthird
countriesinadifferentway.NowthetraditionaltradingpartnersoftheUSA,suchasMexico,
Canada and Chile experience substantial losses; likewise Australia, Japan and Israel each
losebetween9.5and5.5%.Thesecountriesthereforehavestrongincentivestoparticipatein
negotiatingtheliberalizationofnon-tariffbarriers.
12.Ifsearchunemploymentisconsideredinthemodelcalculations,itappearspossible,atleast
fordatareasonsonlyfortheOECDcountries,thatTTIPleadstoariseinemploymentanda
declineinunemploymentintheUSA,EUandonaverageallOECDstates.Inthetariffscenario,
the effects are small; with comprehensive liberalization, they are noticeably larger. In the
OECDaverage,theunemploymentratefallsbyabout0.5percentagepoints.
44
Summary
13. TTIPleadsinsomecountriestojoblosses.Intheambitiousscenario,theseamounttoupto
100,000jobs(inCanada).IntheOECDaverage,however,atotalof2millionadditionaljobs
arecreated.Eveninthetariffscenario,thegrowthinjobsamountstohalfamillionjobs.
14. Realwagesinthedirectlyaffectedcountriesriseonaverage;intheOECDaverage,through
adeepTTIP,theyrisebyabout2.3%,withthegrowthinGreatBritain,IrelandorUSAhigher
than,forexample,inGermany.
15. Incountrieswheretheunemploymentrateintheinitialequilibriumishigherthanaverage,
TTIP leads to an above-average decline in unemployment. This applies both to a simple
loweringoftariffsaswellastodeepliberalization.TTIPthereforealsoleadstoconvergence
onthelabormarketswithintheOECD.
45
Literature
Literature
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47
Figures and Tables
Figures and Tables
Figures
Figure1: Modelingtradecosts 7
Figure2: ChangeintradecostsfromTTIP 11
Figure3: ChangeinrealpercapitaincomeintheEU27,tariffscenario 22
Figure4: Tradegainsandstatusquopercapitaincome,tariffscenario 23
Figure5: ChangeinrealpercapitaincomeintheEU27,deepliberalization 24
Figure6: TradegainsandStatusQuopercapitaincome,deepliberalization 25
Figure7: Changeinglobalrealpercapitaincome,tariffscenario 28
Figure8: Changeinglobalrealpercapitaincome,deepliberalization 30
Figure9: Reductionoftheunemploymentrateand2010unemploymentrate,
tariffscenario 37
Figure10: Dropintheunemploymentrateandthe2010unemploymentrate,
deepliberalization 40
Tables
Table1: ChangeinGermanforeigntradewithtraditionalpartnercountries 14
Table2: ChangesinGermanforeigntradewiththePeripheralEU(GIIPS) 15
Table3: ChangeinGermanforeigntradewiththeBRICScountries 16
Table4: ChangesinEUtradewithEUneighboringcountries 17
Table5: ChangeintradeofGIIPScountrieswiththeUSA 17
Table6: ChangeinGreatBritain’stradingrelationships 18
Table7: ChangeintradebetweenUSAandCanada 20
Table8: 2010unemploymentrates 33
Table9: Changeinemployment,unemploymentratesandrealwages,tariffscenario 36
Table10: Changeinemployment,unemploymentrateandrealwages,
deepliberalization 39
Table11: Numberofjobscreatedinbothscenarios 41
48
Global Economic Dynamics (GED)
About the Authors
Prof. Gabriel J. Felbermayr, PhD, LeiterdesForschungsbereichesAußenhandel
ifoInstitut-LeibnizInstituteforEconomicResearchattheUniversityofMunich
SybilleLehwald
ifoInstitut-LeibnizInstituteforEconomicResearchattheUniversityofMunich
BenediktHeid
ifoInstitut-LeibnizInstituteforEconomicResearchattheUniversityofMunich
About the project Global Economic Dynamics (GED)
TheGlobalEconomicDynamics(GED)projectoftheBertelsmannFoundationisintendedto
contributetoabetterunderstandingofthegrowingcomplexityofeconomicdevelopments.
Byusingthemostup-to-datetoolsandmethodsformeasuring,forecastingandmodeling
globaleconomicdynamics,theprojectseekstomaketheireconomiceffectsandtheirpolitical
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Global Economic Dynamics (GED)
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