TAFTA/TTIP: What Are The Benefits? What Are The Costs?

from the profits-before-people dept

As we draw near to the conclusion of TAFTA/TTIP's first year of negotiations, the detailed differences are starting to emerge between the US and EU. But one thing they both take for granted is that it's a good idea. "Good" in this context is essentially about money: the argument is that concluding a trade deal between the US and EU will boost both their economies, increase companies' profits, create employment and generally make people better off. Of course, since all of those are in the future, the only way to justify those kind of claims is to model the likely effects of TTIP on the various economies -- of the US, EU and rest of the world.

That's precisely what a study entitled "Reducing Transatlantic Barriers to Trade and Investment; An Economic Assessment" aimed to do (pdf). Although it's not the only study, it's indubitably the most quoted -- its figures crop up in most articles about the benefits of TAFTA/TTIP. That's largely because it was paid for by the European Commission, and therefore forms the "official" predictions of the benefits that are likely to flow from the agreement:

An ambitious and comprehensive transatlantic trade and investment agreement could bring significant economic gains as a whole for the EU (€119/$165 billion a year) and US (€95/$131 billion a year). This translates to an extra €545/$750 in disposable income each year for a family of 4 in the EU, on average, and €655/$910.

Usually, those figures are repeated without further comment or analysis. That's unfortunate, because there are a number of important assumptions behind them. For example, the use of the phrase "ambitious and comprehensive" is no mere rhetorical flourish: it refers to the most optimistic scenario considered in the study -- in other words, the best-case outcome. Significantly, it not only assumes that all remaining tariffs will be removed -- since these are already low (around 4%), the benefit from doing so is slight -- but also many "non-tariff barriers", economist-speak for regulations and standards. Of course, what industry regards as "barriers", citizens may see more as protections.

The other fact that is almost never mentioned is that the Commission's figures quoted above all refer to 2027, and are the predicted gains from TAFTA/TTIP after it has been in place for 10 years. Leaving aside the difficulty of predicting the US and EU economies in 2027, it also means that the claimed increases in GDP -- 0.39% for the US, and 0.48% for the EU -- are cumulative gains over ten years, and amount to less than 0.05% extra GDP added per year.

Those figures not only refer to the "ambitious and comprehensive" scenario -- in other words, they are an upper bound on what is likely to be obtained -- but also fail to take into account key costs associated with the changes that TAFTA/TTIP would bring about. It's perhaps not surprising that the European Commission's own analysis does not include these -- after all, they reduce the already-small benefits yet further. But clearly, in considering whether to proceed with TTIP, politicians and the public need to have the full picture, and that includes the likely costs as well as the likely benefits.

Fortunately, estimates for those costs have now been produced in some new research. It has been commissioned by the Confederal Group of the European United Left/Nordic Green Left (GUE/NGL) political group in the European Parliament. That group has an obvious political agenda, but then so does the European Commission. What's important is to have a range of analyses of the benefits and costs of TAFTA/TTIP so as to be able to form an overall, independent opinion drawing on them all.

The report "Assessing the Claimed Benefits of the Transatlantic Trade and Investment Partnership (pdf) offers a critical analysis not just of the European Commission's study, but of three others too. It examines their underlying econometric models in great detail to expose the assumptions made and data used. Here's its summary:

All of the four scrutinized studies report small, but positive effects on GDP, trade flows and real wages in the EU. GDP and real wage increases are however estimated by most studies to range from 0.3 to 1.3 %, even in the most optimistic liberalization scenarios. These changes refer to a level change within 10 to 20 years (!), annual GDP growth during this transition period would thus amount to 0.03 to 0.13 % at most.

That confirms that the very low GDP boost from TTIP, as predicted by the European Commission's study, is also a feature of the others. That's interesting for economists, but for non-specialists the new report's chief virtue is that for the first time it estimates the likely costs of TTIP. It points out that there are several major classes of these, largely ignored in the four studies considered:

Adjustment costs are mostly neglected or downplayed in the TTIP studies. This refers in particular to macroeconomic adjustment costs, which can come in the form of (i) changes to the current account balance, (ii) losses to public revenues, and (iii) changes to the level of unemployment.

These are costs associated with the changes brought about by TAFTA/TTIP. For example, removing tariff barriers necessarily reduces the income received by governments; the GUE/NGL study considers this in various scenarios, and comes up with a cost over 10 years of around €30/$40 bn for the EU economy. Costs are not calculated for the US, unfortunately, but it is likely that a similar figure would apply there too.

There are also significant labor adjustment costs, as some industries take on new workers, while others make them redundant. The report estimates these at around €10/$14 bn over the first ten years of TTIP. There will also be concomitant losses as a result of lower income tax and social security contributions from those who lose their jobs -- another €7/$10 bn.

That makes a total of €47/$64 bn. On top of that, there are two other important classes of costs. One is those arising out of corporate sovereignty payments. These can reach billions of euros/dollars per award, and are likely to become common given that there are 75,000 companies that could use an ISDS chapter in TTIP to sue the US or EU. The amount potentially involved is hard to quantify at this stage, as are the associated "social costs" of removing non-tariff barriers:

the elimination of [non-tariff barriers] will result in a potential welfare loss to society, in so far as this elimination threatens public policy goals (e.g. consumer safety, public health, environmental safety), which are not taken care of by some other measure or policy. Though subject to considerable insecurity, these types of adjustment costs might be substantial, and require careful case-by-case analysis. As we will see in the following, although the social costs of regulatory change are of particular relevance for the analysis of TTIP because of its emphasis of regulation issues, they have not been dealt with properly by the four scrutinized TTIP studies.

In other words, the cost of removing or harmonizing regulations and standards is not fully included in the calculation of whether TAFTA/TTIP is worth pursuing. Once again, that reveals that TTIP is currently seen purely through the optic of business -- whether profits are increased, not whether society must pay a corresponding, or even higher, price to make that possible.

While some will doubtless argue about the details of the new GUE/NGL analysis, it has the valuable function of reminding us that TAFTA/TTIP is not just about corporate profits, but also concerns the 800 million people who make up the citizenry of the US and EU. Until they are included in the equation, and their potential losses and gains factored in, any claims about TTIP's "benefits" -- even the tiny ones that the European Commission's analysis comes up with in its "ambitious and comprehensive" agreement -- must be regarded as simplistic, one-sided and incomplete.

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Filed Under: benefit, cost, economics, tafta, ttip