TTIP Is Not Your Father’s Free Trade Agreement: It Has Potential to Benefit All

From the very beginning, the objective of TTIP has been to forge a different kind of trade agreement — one that more closely reflects the nature of modern trade, where — to take one example — the value of imported inputs contained in the value of exports has increased from 20 to 60 percent over the last 20 years. The reduction of tariffs followed by the proliferation of cross-border supply chains and transnational investment — economic globalization, essentially — means that there is now greater potential for protectionism to lurk behind the border in the form of rules and regulations that may have discriminatory effects on imports or foreign companies. Accordingly, the emphasis of trade liberalization has shifted from reducing protectionist barriers to harmonizing — to the extent possible — rules and regulations. Noting the shift in emphasis, former WTO Director General Pascal Lamy put it this way: “TTIP isn’t about trade trade-offs, but a process of regulatory convergence, which is a totally different ball game.”

The public debate surrounding TTIP has been slow in acknowledging the new negotiating emphasis and its potential for broadly increasing trade and growth. In fact, at the outset of the negotiations in 2013, a common reaction to the CEPR study I co-authored for the European Commission was that there would be adverse impacts on third countries (Viner-type trade diversion impacts on countries outside the agreement).² In the couple of years since then, trade experts have begun to express more positive views about these so-called spillover effects.

First, there is the view that progress toward a bilateral agreement between two of the world’s major trading players will inspire renewed interest in multilateral liberalization. Second, with the availability of more and better economic data, the significance of global value chains has become increasingly apparent, as has recognition that lowering trade costs in some parts of the value chain (i.e., through bilateral agreement) tends to lower costs for producers and consumers in other parts of the value chain (i.e., in countries outside the pact), as well.

Importantly, regulatory coherence generates benefits in other ways. First, there are the lower production costs. When producers don’t have to produce different versions of the same product for different markets and can sell the same product in both, they are better able to achieve economies of scale and harness the associated cost savings, which get passed on in the form of lower-prices, higher wages, more research and development, new and better quality products, and more investment. Also, when planning production schedules, companies need to forecast how much of each somewhat differently designed and produced model of essentially the same product will be produced for, and sold in, each of the different markets. This is an inherently uncertain process, the risks of which are mitigated if there are no differences in design or production processes mandated by regulatory or standard divergences. Having to produce specific models and varieties for specific markets reduces the scope for economies of scale, which deprives the economy of those potential efficiencies.

Meanwhile, regulatory costs constitute barriers to entry that can produce sclerotic, inefficient markets. For example, larger producers are more capable than smaller producers of absorbing the costs of regulatory compliance. A $1,000,000 compliance cost constitutes a much smaller share of a large firm’s total costs than it does a small firm’s. While tariffs are set on an ad-valorem basis, the costs for entering a new market are often fixed — think, for example, of the cost of obtaining a certificate upholding standards for each particular market. For a large company, a $50,000 certification expense to demonstrate compliance and enter a new market is just a cost of doing business, while it may be a prohibitive barrier to a smaller firm. In that regard, complicated regulatory schemes and their associated costs are a form of protection for large firms in that they make it difficult for new entrants to launch formidable challenges.

This is an important issue because over last 20 years, transatlantic trade has in fact become more concentrated in large MNEs. In addition, supporting SMEs in general, and encouraging them to export, in particular, are important components of growth. Indeed, the importance of SMEs is reflected in the fact that there is an entire chapter devoted to these entities in the evolving TTIP agreement.

TTIP (and its composition) is a totally different ballgame, so how do we go about getting a ballpark idea of the magnitude of the potential gains from regulatory coherence? At the firm level, it’s not an easy task. The data are limited and there has been no formal survey of producers, asking them to quantify the impacts, and even if there were, the results would fail to capture the gains from the firms that would enter the market once the costs have been lowered.

Some firms have been offering their own estimates of potential gains. The president of BMW of North America, Ludwig Willish, reports that attainment of common EU‑U.S. automotive regulations standardization, through TTIP, could save BMW $500 million per year. 

It is also difficult to estimate the macroeconomic effects of TTIP — on the world as a whole and on the countries not included in the agreement. Nevertheless, estimates were produced in the CEPR 2013 analysis.

While quantifying the effects of lower tariffs is a pretty straight-forward exercise, non-tariff barriers or non-tariff measures (NTMs) are complex issues to model. First of all, there is no readily available data on existing NTMs, and the mere collection and measurement of these barriers are difficult, resource-consuming exercises. Further adding to the complexity is the fact that not all NTMs or regulations are discriminatory trade barriers. Nor can all regulatory barriers be removed by negotiation. Nevertheless, trade negotiations can serve as an efficient channel through which to lower the cost of diverging regulatory processes.

A major contribution to the task of modeling the impact of the TTIP was the preparatory work in the 2009 Ecorys study on ad-valorem equivalents of EU‑U.S. NTMs.² The impact analysis did set out to measure the global and bilateral effects of the removal of both tariffs and NTMs. The method for modeling NTM reduction was to consider half of the estimated tariff equivalences of the measured NTMs as “actionable” and half of those (i.e., 25% of the ad-valorem values) were assumed to be reduced through TTIP. (This was considered the “Ambitious” scenario.) Second, half of the reduction in costs stemming from increased EU‑U.S. regulatory integration (i.e., 12.5%), was then assumed to spill-over to third countries. This spill-over can be thought of as cost reductions associated with having to comply with only one standard, regulation or certification requirement, when exporting to both the European Union and the United States (or, as an effect of the common EU‑U.S. standard becoming the global standard).

Table 1. Estimated GDP–effects of an Ambitious T‑TIP

Source: Reducing Barriers to Trans-Atlantic Trade and Investment, CEPR 2013

The estimated gains from increased trade between the European Union and the United States are increases in GDP of €119 billion and €94 billion for the EU and U.S. economies, respectively. The estimated effect on the rest of the world is shown to be positive and of a similar magnitude: €99 Billion, which corresponds to an overall increase in global GDP (not counting the European Union or the United States) of 0.14%. Looking more closely at the country- and region-specific effects, there are no estimated decreases in GDP anywhere, and the estimated relative effects for ASEAN (0.89% of GDP) and Eastern Europe (0.33% of GDP) are both well above average.

Thus, it appears that TTIP is truly a win-win-win.

Notes:
¹ CEPR (2013), “Reducing Trans-Atlantic Barriers to Trade and Investment- An Economic Assessment”, Report prepared by Joseph Francois, Miriam Manchin, Hanna Norberg, Olga Pindyuk, Patrick Tomberger for the European Commission , under implementing Framework Contract TRADE10/A2/A16
² Ecorys (2009), “Non-Tariff Measures in EU-US Trade and Investment — An Economic Analysis”. Report prepared by K. Berden, J.F. Francois, S. Tamminen, M. Thelle, and P. Wymenga for the European Commission, Reference OJ 2007/S180-219493

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Economics, Geopolitics, and Architecture of the Transatlantic Trade and Investment Partnership.