Why TAFTA/TTIP Isn't Worth It Economically, And How We Can Do Much Better

from the doing-it-by-numbers dept

As recent posts on Techdirt have made clear, resistance to TAFTA/TTIP is growing on many fronts. In countering that, supporters of the negotiations unfailingly cite the "unique opportunities" or "huge benefits" of the deal. There's no denying that potentially TAFTA/TTIP will be huge: the European Commission's pages on the negotiations point out that the US and EU trade €2 billion every day (around $2.7 billion). They also note the following important facts about investment between the two regions:

Total US investment in the EU is three times higher than in all of Asia.

EU investment in the US is around eight times the amount of EU investment in India and China together.

Of course, those impressive figures completely undermine the case for including corporate sovereignty provisions in TAFTA/TTIP, since investors are clearly happy to put their money into the US and EU even in the absence of ISDS mechanisms.

But what counts is not just the present size of the trade and investment between the US and EU, but the future gains that TAFTA/TTIP would bring. This is clearly the central question about the negotiations, because if those benefits are small, there is no point making painful concessions of the kind that will be required to conclude the deal. And yet, surprisingly, there is precious little in the way of rigorous research into what the effects of TTIP would be on the US and EU economies. It's true that figures about the benefits are regularly trotted out by those involved, but these come almost exclusively from one source: econometric modelling carried out by the Centre for Economic Policy Research (CEPR) in London (pdf), and paid for by the European Commission. Here are its key claims about the benefits of TAFTA:

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

Those figures of €119 billion a year (about $160 billion) for the EU and €95 billion a year (about $130 billion) for the US are uncritically quoted in most articles about TAFTA. That's a pity, because they are misleading in the extreme. For example, the passage quoted above speaks of "€119 billion a year" as if this would be the gain from TTIP each year. But a footnote on page 3 of the CEPR study, where a table lays out the predicted change in GDP, explains:

Note: estimates to be interpreted as changes to a projected 2027 global economy.

That is, the €119 billion figure is the extra GDP that would be seen in 2027 as the result of TTIP being in place for the previous ten years, compared to the situation in 2027 without the agreement: it is a cumulative GDP gain. That means the other figure often thrown around -- that TAFTA will increase the GDP of the EU and US by around 0.5% is similarly misleading: it refers to the cumulative GDP gain after ten years. In terms of how much TAFTA would add to GDP each year, that would be far less -- roughly 0.05%, a rather different matter. Here's what the economist Dean Baker has to say on this misdirection, in a blog post on the TTIP negotiations with the provocative title: "Why Is It So Acceptable to Lie to Promote Trade Deals?"

Implying that a deal that raises GDP by 0.4 or 0.5 percent 13 years out means "job-creating opportunities for workers on both continents" is just dishonest. The increment to annual growth is on the order of 0.03 percentage points. Good luck finding that in the data.

He goes on to make a great point about the impact of strengthening intellectual monopolies in these trade agreements:

there are reasons to believe the growth effect could go in the opposite direction. The model used by the London CEPR does not assume any negative growth impact from higher prices for drugs or other goods that might be more costly due to stronger patent and copyright protections coming out of the deal.

These will likely be a drag on growth. Economists tend to like patents and copyrights (probably because their friends and family members benefit from them), but that doesn't change the fact that they lead to market distortions and have major economic costs. If the price of a drug rises by 1000 percent because we imposed stronger or longer patent protection it has the same effect in the market as if we imposed a 1000 percent tariff on the drug.

Nor is this the only negative factor that is ignored in the CEPR projections. A study by a group of economists at the Austrian Foundation for Developoment Research, commissioned by the Confederal Group of the European United Left/Nordic Green Left in the European Parliament, points out that a number of major costs have been omitted when calculating the overall benefit of TTIP (pdf). The most important of these are the costs that arise from TAFTA's stated aim to eliminate "non-tariff barriers", or "non-tariff measures", by harmonizing regulations and standards. As the researchers point out:

All studies, but particularly the Ecorys study, assume that a reduction of NTMs [non-tariff measures] is welfare-enhancing. This ignores that NTM such as laws, regulations and standards pursue public policy goals. They correct for market failures or safeguard collective preferences of a society. As such they are themselves welfare-enhancing. The elimination or alignment of an NTM thus will imply a social cost for society. This applies equally to NTM elimination, harmonization and mutual recognition.

In other words, eliminating or harmonizing regulations may well produce a boost for companies, which no longer need to worry about stringent health and safety standards, say, but represent a loss for society, which suffers through increased health costs. Many of the supposed gains from TAFTA/TTIP are actually counterbalanced by similar losses that society as a whole will be forced to accept.

It's also worth emphasizing that the "€119 billion a year" figure that is used by supporters of TAFTA is what the CEPR research calls an "ambitious, comprehensive agreement" -- in other words, the most optimistic prediction. Strangely, no one ever talks about the other figures in the study -- the less optimistic, more realistic ones. Naturally, those would produce even lower growth than the tiny 0.05% extra GDP per year discussed above.

Because mainstream media unquestioningly accept this "€119 billion a year", and fail to challenge the assumptions that lie behind it, we don't know how the US and EU negotiators would attempt to justify TAFTA given the extremely small economic benefit predicted by the European Commission's research. Presumably, they might say that it's better than nothing at a time when both the US and EU are keen to boost their economies and create jobs.

But that's not really true, because it ignores the fact that there are other ways of achieving this goal that don't involve placing companies above nations through corporate sovereignty provisions, or require massive changes to regulations on both sides of the Atlantic. For example, a report commissioned by the Omidyar Network, entitled "Open for Business: How Open Data Can Help Achieve the G20 Growth Target" (pdf), claims that:

implementation of open data policies including in areas corresponding to G20 agenda items could increase G20 output by around USD 13 trillion over the next five years. This would boost cumulative G20 GDP by around 1.1 percentage points of the 2% growth target over five years.

That would work out as an extra GDP boost per year of around 0.22% -- four times what TAFTA might offer in the most optimistic case. And of course, open data initiatives do not require negotiations or concessions: governments can implement them unilaterally for very little cost. Or how about this new report on "climate-smart development"?

Government policies that improve energy efficiency and public transport could increase global economic output by more than $1.8 trillion per year, and also save lives, reduce crop losses and tackle climate change, according to new analysis released today from the World Bank and the ClimateWorks Foundation.

The increased economic output (pdf) works out at $242 billion for the US, and $271 billion for the EU, both in 2030. In this case, a collateral benefit of taking this route is that it would help to improve the environment and tackle climate change, too -- not something that can be claimed for TTIP. The current negotiations between the US and EU are being presented as a "once-in-a-generation" chance to boost transatlantic economies. They are nothing of the sort. TAFTA/TTIP is merely one of a number of ways of achieving that, and, as the above discussion indicates, not even a very good one.

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Filed Under: economic projections, economics, predictions, tafta, trade agreements, ttip