TTIP: Political and Economic Rationale and Implications

The Transatlantic Trade and Investment Partnership will reduce tariffs and lower regulatory hurdles that currently impair trade between the EU and the US. However, TTIP has been controversial from the outset. Non-governmental organisations are concerned about lowered health and environmental standards, unions fear a further weakening of labour conditions, and economists debate whether or not there will actually be any noticeable impact on employment and GDP growth. This Forum, featuring contributions by the speakers at the 2015 Intereconomics conference, presents a balanced overview of both the prospective benefits as well as the possible drawbacks to the potentially monumental trade agreement.

TTIP: Definition, Rationale and Significance

Jacques Pelkmans

The Transatlantic Trade and Investment Partnership (TTIP) is a comprehensive bilateral trade and investment negotiation between the US and the EU with strong regulatory features. The intention is to achieve not only a comprehensive but also a “deep” agreement, with much lower costs of market access and bilateral trading than today. Technically, for such agreements to comply with the World Trade Organization (WTO), with all its disciplines and care to remain as non-discriminatory as possible, they are legally free trade agreements (FTAs), even if the elimination of tariffs between the two parties is only one of several characterising features. The emphasis in TTIP is on regulation, insofar as differences in regulation, especially with respect to the instruments and enforcement, can be more cumbersome than necessary, thereby rendering bilateral trade more costly than it needs to be. In some sectors, such unnecessary costs can be high.

In other words, the core of TTIP is about the unnecessary costs of technical barriers to trade (TBTs), sanitary and phytosanitary (SPS) barriers (in food and feed regulatory instruments), and other regulatory barriers in goods and services markets. Furthermore, the partnership aims at preventing, where possible, new unduly costly barriers from arising. TTIP is meant to become an advanced trade agreement, but most of the issues are neither new nor unique to TTIP. It is also not about the objectives (“levels”) of health, safety and environmental protection. Less ambitious forms of addressing TBTs and SPS barriers are routinely undertaken in the world economy – at the WTO level under the WTO TBT and SPS Agreements, in force since 1995 – as well as bilaterally or regionally in FTAs. In such agreements and in the TBT/SPS Committees in Geneva, great care is taken not to impede upon the national right to regulate while still reducing trading costs by obeying certain good regulation principles and WTO disciplines. Careful WTO case law by the WTO Appellate Body has given much authority to such efforts. TTIP also includes issues related to intellectual property rights (IPRs), especially with regard to food products and beverages with geographical indications (GIs), and public procurement discrimination, as well as its effective openness.

It is important to stress that the emphasis on many regulatory features is nothing new and is not a special feature of TTIP. The WTO has a large number of special agreements besides the General Agreement on Tariffs and Trade (GATT) and General Agreement on Trade in Services (GATS) which, for the most part, comprise regulatory features. These include certain customs procedures (including pre-shipment inspection or customs valuation), TBTs, measures against plant and animal diseases (SPS), disciplines about local trade conditions of investment (TRIMs) and disciplines for intellectual property rights (TRIPs). The WTO, which is now 20 years old, is therefore long familiar with the combination of trade and investment, on the one hand, and regulation, on the other.

When FTAs are WTO-plus, it is mostly these regulatory features which are enhanced. TTIP falls squarely in the category of the WTO-plus types of FTAs. Is it as special or novel as some contend? Does it move into uncharted territory and hence put the regulatory achievements of the EU at risk? The short answer is no. In terms of substance and scope, TTIP is comparable to CETA, the Canada-EU Comprehensive Economic and Trade Agreement, which is not yet ratified. Some EU proposals for certain aspects of TTIP go further than have been negotiated in FTAs elsewhere. On the other hand, CETA also has novel features, and not all of these are likely to appear in TTIP. And although the EU-Korea FTA of 2011 is somewhat less ambitious, it is still an advanced FTA, not least because of its four sectoral (regulatory) annexes.1 TTIP is supposed to lead to a “living agreement” led by a Regulatory Cooperation Body, but this is not really very different from the FTA with Korea. The latter has active working parties on the four sectoral annexes, on customs procedures and rules of origin, on trade in goods (mainly on TBTs), on government procurement, on GIs, on SPS, on sustainable development, on trade in services, on trade remedies, and one on outward processing zones on the peninsula. The substance of TTIP is therefore nothing more than a logical next step in how the EU has tried to develop its FTAs since about 2006. Also, the scope of horizontal and sectoral policy or regulatory domains in TTIP is surely rather wide, but no more so than in CETA and not radically different from the EU-Korea or EU-Singapore FTAs. Incidentally, from what we know of the Trans-Pacific Partnership (TPP) thus far, it also deals with many regulatory issues and its scope is rather broad, though presumably less deep and binding than what TTIP is aiming for.

The main difference in TTIP is the size of the two economies. The only other bilateral coming somewhat close is the ongoing negotiation between the EU and Japan. The only regional one that is larger is the TPP, which still has to be ratified (and that is not entirely sure). The EU and the US have traditionally been the leaders and protectors of multilateralism. Their leadership is not yet finished, but it has been diminished as the economic rise of the BRICS and the large membership of WTO nowadays have reduced the dominance of the two. In the near future, the Atlantic “bi-gemony” is bound to decline even further. Yet today, the importance of a common, credible and deep initiative of the two overshadows any other FTA. Economic size is therefore the only argument that renders TTIP unique.

TTIP is a potentially important regulatory trade and investment agreement, no less and no more. In order to succeed, the challenges to be met consist of regulatory leadership for a number of horizontal and sectoral chapters as well as the difficulties in overcoming systemic or traditional differences in the instruments of domestic regulation which cause stubborn and costly TBTs as well as other costly regulatory barriers. The objectives of EU and US regulation are not at issue, but more often than not, the “levels” of protection are similar, which should make it easier to address the unnecessary costs of the instruments or seek forms of “equivalence” (given similar objectives).

Understanding the scope of TTIP

It is useful to grasp the scope of the TTIP agenda. Figure 1 distinguishes three columns of TTIP negotiation issues, besides the customary “chapeau” of objectives and principles. The first column, market access, comprises the traditional tariffs and customs matters, origin rules, government procurement, and services (curiously, without sectoral services annexes, unlike e.g. CETA). The original idea of an FTA is to remove tariffs for trade between the two parties, but this is now merely a relevant but certainly not prominent element of TTIP.2 Outside agriculture, US and EU tariffs are low (with very few peaks), and indeed many are already zero. However, even in this classical market access column, regulatory issues play a significant role (particularly in services).

The second column is entirely focused on regulatory issues – more precisely, on whether the costs of differences in regulation or its technical enforcement for bilateral trade can be substantially lowered. This is the hard core of TTIP. Based on a history of more than two decades of consultations, exchanges on regulatory regimes, mutual recognition agreements (MRAs) regarding conformity assessment results and a string of specialised bilateral successes on overcoming regulatory barriers, the motivation to increase ambitions is found in these areas. The primary focus is on TBTs and SPS questions, as well as on sectoral committees of regulators going further and attempts to address such issues horizontally in a Regulatory Cooperation Body.

The third column contains selective regulatory features as well, e.g. IPRs and GIs, investor-to-state dispute settlement (ISDS), and competition and state-owned enterprises. However, it does not entirely live up to its label “rules”.3

What TTIP is not

So far, there has been much “campaigning” about TTIP and rather little analysis and in-depth policy debate.4 The campaigning is the consequence of highly exaggerated and often misplaced social media accusations, gone unchecked or at first ignored by policy makers. This has become so extreme that there seems to be no connection between these campaigns and the emerging policy debate on TTIP. The two seem to move in a parallel fashion. The campaigns appear immune or uninterested in the (belated) counterarguments and the firm rejection of the “myths about TTIP”.5 An unusually large number of documents have become available on TTIP, including negotiation papers, but their download rates are low. If there is any dialogue at all, it is a dialogue of the deaf.

The practical effect is that TTIP opponents create “straw men” which caricature TTIP and which can be fought vigorously, presumably to please NGO members or impress national and EU lawmakers. The many straw men out there turn TTIP into what it is decisively not and make TTIP more intrusive than what it is or indeed could possibly be. TTIP in and of itself does not change the objectives of regulation, that is, the levels of protection against risks towards safety, health, the environment or consumer (or saver, or investor) detriment. Why do campaigners turn against TTIP with such unreasonable vigour when they could have done the same – but never did – with respect to the EU-Korea, CETA or EU-Japan negotiations, or indeed the WTO SPS and TBT agreements and the latter’s 25,000 notifications of new technical regulations by WTO parties over 20 years?

These FTAs and the TBT agreement work, not only because objectives of regulatory protection are never at stake, but also because national or EU regulators do not like to be governed by trade rules, and they are legally bound to give primacy to the levels of protection enacted in such agreements. Key terms such as harmonisation (very rare in practice outside the EU), mutual recognition, “equivalence” and MRAs (for conformity assessment) are all already in the TBT agreement, and they have been used for decades. There are around 140 MRAs6 in the world (including one between the US and the EU from 1998) and some equivalence agreements (e.g. the US-EU Veterinary Agreement of 1998, which works partially,7 and one on aircraft certification between the US and the EU from 2009). Both veterinary and aircraft safety matters are sensitive areas.

In the “Regulatory cooperation” column of Figure 1, TTIP is more of the same, but even deeper than previous agreements. This is difficult, precisely because national (or EU) regulators wish to be (and should be) in control, even when the overall framework is a trade agreement. It is puzzling to observe that all kinds of sentiments that could have played just as large a role in e.g. aircraft certification or selected food issues under equivalence are suddenly played up to enormous proportions now that TTIP is being negotiated. Most of the campaign material of the various anti-TTIP groups seems to be based on a profound lack of trust. Some NGOS fear that EU (or US) regulators cannot withstand multinational business lobbying, given their “disproportionate” influence. But why would that be true now and not in the two prior decades of EU-US regulatory cooperation? Have campaigners forgotten that the Trans-Atlantic Business Dialogue, consisting of CEOs of large EU and US companies, attempted for a decade with great efforts and creativity to reduce the costs of regulatory barriers after the Madrid US-EU summit of 1995? And that, despite this highest level of engagement by the business elites, rather little was accomplished because regulators were loath to follow? Why would a Regulatory Cooperation Body – which cannot of course make laws but can merely prepare initiatives for national legislators to adopt or reject – suddenly be more influenced by business than it has been in the past and, for that matter, more than by very noisy and assertive NGOs, labour unions and consumer groups like the European Consumer Organisation? Why would this set-up be fundamentally different from what has already been happening for years under EU-Korea? True, in the EU proposals for TTIP regulatory cooperation and TBTs, there are stronger incentives to come to joint proposals than in e.g. CETA, and there are more sectoral groups, but the practical difference to the outcome of the many working groups under EU-Korea is not a priori all that different, and if it were, it still has to be approved by the lawmakers, with consultation and impact assessment first. Moreover, as CETA has shown, such EU proposals may not be accepted so easily in North America and are likely to be watered down.

Moreover, the straw men created often narrow TTIP down to only one or two topics, with the greatest prominence given to ISDS. The scope illustrated in Figure 1 is conveniently ignored, as are the costs of rejecting TTIP on the basis of only one of its elements. But is ISDS in TTIP the problem? If one wishes to focus on ISDS, the answer is that the genuine and far more problematic issues related to ISDS are not in TTIP.

The huge and painful inconsistencies of some German politicians and NGOs in declaring themselves uncompromisingly against ISDS become apparent when one realises that ISDS originates from Germany, which has many BITs (bilateral investment treaties) comprising ISDS. These outdated BITs should be the first and foremost target. The CETA approach to ISDS constitutes a welcome modernisation, with no less than 11 concrete improvements,8 even though one might reasonably take the view that this is still not enough of an improvement. However, if the CETA approach or a further improved version of ISDS were to be accomplished in TTIP and Germany were to oppose it, the odd situation would arise that the country would continue to apply its large stock of old and biased pro-investor BITs – often with developing countries – while rejecting a much better ISDS in TTIP with a developed country, with more guarantees for the “right to regulate” and safeguards against improper conduct by investors. Why do critical German MPs and others not turn against their own outdated (130+) BITs?

Rather than fight TTIP, it would be more reasonable to devise a programme for urgently addressing the 1300 BITs of EU countries, BITs which are far less “balanced” and provide scope for frivolous claims by clever investors. Furthermore, non-European countries could be urged to upgrade and balance their more than 1700 BITs, which frequently contain outdated ISDS provisions. That would do much more good, also for developing countries, than caricaturing TTIP solely because of (a much improved) ISDS, while carelessly ignoring 20-plus other important areas in TTIP with known potential.

There is also another side to what TTIP is not. TTIP is not a “growth machine”,9 although initially some advocates, including EU Commissioner De Gucht, asserted as much, without much hard economic underpinning. It is anyway an illusion to believe that one single policy (EU trade policy), and indeed one element of EU trade policy (namely, only TTIP) can generate a lot of growth, even when the negotiations are very ambitious. Moreover, while Atlantic trade and investment runs into barriers at times and in some sectors, it should also be acknowledged that much of Atlantic economic intercourse is free and has been exploited quite well.

Pursuing TTIP will not generate a growth miracle, although it is likely to generate a modest addition to EU GDP. TTIP also has to be assessed in terms of alternatives. There is a spectrum of growth policies for the EU including the earnest further deepening of the single market; the pursuit of structural reforms in the working of markets in member states (e.g. services) and taxation; the more aggressive upskilling and applied education of low-skilled workers in countries such as Italy, Portugal and Greece, which in the longer run would add sizeable percentage points to GDP;10 and greater budgetary expenditure by countries with current account surpluses, for example on infrastructure.

The rationale of TTIP

TTIP has six distinct, though interrelated, rationales: greater bilateral trade potential, greater bilateral investment potential, greater confidence in bilateral regulatory cooperation, global strategic and diplomatic positioning, greater competitiveness for TTIP firms in global value chains, and a “guardian” of Atlantic economic interdependence. Given space constraints, here are just a few words on each of these rationales.

Like all trade agreements, TTIP is ultimately driven by “growth and jobs”. In terms of trade, the North Atlantic potential seems to be underused,11 and more than two decades of experience on TBTs and SPS (bilaterally and in the WTO) as well as in services generated a conviction that much more bilateral trade would be possible if the unnecessary costs of regulatory differences could be addressed. The second rationale (greater investment) was far less important, at least initially. Foreign direct investment (FDI) in both the EU and the US is largely free, and the bilateral stocks of FDI are by far the biggest in the world. There is still more potential, due to a few restrictions (e.g. US in air transport and coastal shipping) and the fact that in some countries the investment climate is weak (e.g. Italy underperforms in attracting US FDI relative to many other EU countries). Nevertheless, the investment chapter in TTIP was originally regarded as secondary. These arguments have not changed, but ISDS – a term hardly known by anyone except specialised lawyers only three years ago – has been catapulted into a critical issue.

Greater regulatory cooperation offers a significant opportunity, in the light of ample experience since the 1990s.12 This explains the considerable ambition in the second pillar of Figure 1. This process is bound to be difficult and slow, and it has to be given time for trust to be built up. One also has to invest serious resources into detailed comparative analyses on equivalence at all required levels of detail, as has been done in the automobile sector. In chemicals, dogmatism and mistrust (“the systems are too different”) dominate, rather than the assumption of a similar analytical perspective with profound investments in fact-finding and verifying testing, e.g. on whether workers and citizens are similarly protected against a risky substance in the EU and US (if yes, equivalence might be granted).13 Global positioning of the EU and US in the WTO and in world diplomacy (the fourth rationale) can also be enhanced through TTIP, as discussed by Hamilton and Blockmans.14

Greater competitiveness of EU and US firms in global value chains (GVCs) would almost certainly follow from a successful TTIP. Much of transatlantic trade is intra-firm trade, linked with value chains for additional components, and components trade with or between affiliates of EU and US companies in both economies. Recent progress in value-added trade statistics shows that the significance of value chains in transatlantic trade is even greater than formerly suggested. In simple words, more is made (with goods and services input) not just “in” the TTIP region but “by” TTIP producers. Especially here, the lowering of costs of unnecessarily cumbersome enforcement procedures (not less enforcement) and more equivalence agreements (where possible) form a direct contribution to the strengthening of TTIP firms in GVCs. This matters all the more now that the TPP and other mega-regionals might negatively affect such competitiveness. The sixth rationale concerns the proper management of the very deep transatlantic economic interdependence in trade, FDI, IPRs, ideas and persons. This interdependence needs a permanent “guardian”, and the parties should not continue to rely on ad hoc fire extinguishers, as has been the case so far. The interdependence is too valuable to be disrupted.

What TTIP could do better

The design of TTIP can be improved. I shall emphasise three points of improvement. First, TTIP seems to underplay services. This is hard to understand. When it comes to cross-border services and FDI in services (mode 3 of the GATS), the bilateral relationship between the US and the EU is overwhelmingly the strongest in the world. But this does not mean that there are not many problematic and costly barriers, both to cross-border services and to mode 3 in some services sectors. Financial services in TTIP are resisted by the US Treasury, courier services cannot benefit from cabotage (which here results in a major competitive disadvantage), parts of transport are taboo for foreigners (the mercantilist Jones Act in shipping and the US ban on takeovers in air transport), and professional services could benefit from a regulatory arrangement or even a mutual recognition agreement under TTIP. Services are also becoming ever more important in GVCs, and hence what matters for the US and the EU is the supply of high-quality services throughout the TTIP area.

Second, the TTIP mentality to determinedly tackle the unnecessary costs of regulatory differences has not trickled down in all areas, whether US or EU. Rather than genuinely attempting to lower regulatory costs without affecting the objectives, regulators fall back far too easily on what is easy or safe for them. This is often defended in generalities, through suggestions that the “levels” or “standards” of protection require a cautious stance, whereas TTIP is about the instruments and technical procedures. Such meekness reflects a “trenches” mentality rather than creativity and a search for fact-finding and alternatives.

Third, TTIP ought to be opened to third countries. The net balance of trade diversion and positive “spillovers” may be negative for some countries.15 TTIP political leaders should begin with a declaration in early 2016 that TTIP, once concluded, will be open and that modalities will be offered.

• 1 On the automotive, chemicals, pharma and medical devices sectors.
• 2 In D. Hamilton, J. Pelkmans (eds.): Rule-Makers or Rule-Takers? Exploring the Transatlantic Trade and Investment Partnership, Rowman & Littlefield International, London 2015, we made a choice not to include a separate chapter on tariff removal, except for agro-food tariffs and tariff-rate quotes, which are dealt with analytically in T. Josling, S. Tangermann: Agriculture, food and TTIP: possibilities and pitfalls, in: D. Hamilton, J. Pelkmans, op. cit.
• 3 The rules referred to are multilateral or plurilateral rules, possibly to be upgraded in TTIP, that serve as an example.
• 4 In this limited space, there is no room to discuss the slowly emerging policy literature about TTIP. D. Hamilton, J. Pelkmans, op. cit., is the first comprehensive volume on TTIP. However, a series of solid contributions that has gone too little noticed has been solicited by the trade (INTA) and internal market (IMCO) committees of the European Parliament, and, on specialised topics, by its Legal, Industry, Environmental and Economic committees.
• 5 See, for example, European Commission: The top 10 myths about TTIP, Publications Office of the European Union, Luxembourg 2014.
• 6 For a survey of their approaches and substance, see J. Pelkmans, C. Kauffmann, A. Correia de Brito: Mutual Recognition Agreements: concepts, stocktaking and case studies, OECD, Paris, forthcoming.
• 7 See T. Josling, S. Tangermann, op. cit.
• 8 See F. Mustilli, J. Pelkmans, S. Woolcock: The Comprehensive Economic and Trade Agreement [CETA] between Canada and the EU: survey and assessment, study for the INTA committee of the European Parliament, forthcoming, for detail. For a more elaborate legal view, see also C. Tietje, F. Baetens: The Impact of Investor-State Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership, study prepared for the Dutch Ministry of Foreign Affairs, 2014.
• 9 See also F. Mustilli: Estimating economic gains of TTIP, in: Intereconomics, Vol. 50, No, 6, 2015, pp. 321-327.
• 10 See J. Varga, W. Roeger, J. in ’t Veld: Growth Effects of Structural Reforms in Southern Europe: The case of Greece, Italy, Spain and Portugal, European Economy Economic Papers 511, December, 2013.
• 11 For example, see the trade intensities exercise in P. Egger, J. Francois, M. Manchin, D. Nelson: Non-Tariff Barriers, Integration and the Trans-Atlantic Economy, in: Economic Policy, Vol. 30, No. 83, 2015, pp. 539-584.
• 12 See P. Chase, J. Pelkmans: This time it’s different: turbo-charging regulatory cooperation, in: D. Hamilton, J. Pelkmans, op. cit., for elaboration and the full list of regulatory cooperation initiatives since the Madrid EU-US summit.
• 13 See D. Elliott, J. Pelkmans: Greater TTIP ambition in chemicals: why and how, in: D. Hamilton, J. Pelkmans, op. cit., for elaboration.
• 14 D. Hamilton, S. Blockmans: TTIP’s Broader Geostrategic Implications, in: D. Hamilton, J. Pelkmans, op. cit.
• 15 For more on the direct and indirect spillovers of TTIP, see A. Lejour, F. Mustilli, J. Pelkmans, J. Timini: Economic Incentives for Indirect TTIP Spillovers, CEPS Special Report No. 94, October 2014.

TTIP Must Protect Jobs, Workers and Public Services

Thea M. Lee

Increased trade between the United States and the European Union has the potential to spur job creation and income growth for workers on both sides of the Atlantic – but only if our negotiators have the courage to adopt a new model that focuses on decent work, shared prosperity and equitable development.

Unfortunately, the U.S. has a long history of negotiating agreements that ignore these goals in favor of policies that benefit corporations and shareholders, while disempowering workers and communities and undermining democratic institutions. These flawed trade deals combine extraordinary protections for investors with enhanced deregulation, which has contributed to stagnant wages, precarious employment, increased inequality and a weaker relationship between citizens’ policy preferences and the policies implemented by our government.

Unions on both sides of the Atlantic want the Trans-Atlantic Trade and Investment Partnership (TTIP) to embody a new set of pro-worker objectives. In 2014, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) and the European Trade Union Confederation published a joint statement urging the TTIP negotiators to adopt an “open, democratic and participatory” process.1 The document reflects the importance of building a strong, united coalition.

In the U.S., we have recently completed negotiations on the Trans-Pacific Partnership (TPP), a trade agreement between the U.S. and 11 other Pacific Rim countries. Over the past five years, the American labor movement has provided the Obama administration with concrete proposals to adjust U.S. trade positions so that they create decent jobs, protect the environment and ensure safe imports. Unfortunately, the administration has ignored most of our proposals, and so it appears TPP will mostly benefit the largest global corporation, while working families are left behind.

We recognize that, given the history of U.S. trade deals, even negotiating TTIP is fraught with risks to workers. However, we maintain an open mind as we continue to work with coalition partners in the U.S. and throughout Europe to shape a new trade model. Should TTIP live up to its potential, it could earn support from progressive American constituencies, including labor.

Unfortunately, the TTIP negotiations remain shrouded in secrecy. While officials are quiet about the specifics of the agreement, they admit it has little to do with tariffs and much more to do with “regulatory harmonization”.2 Under this flawed framework, policy measures that reflect societal choices about how to solve problems and balance risks, including worker and environmental protections, procurement standards, intellectual property rights, and financial regulations, risk being reduced to “trade barriers”.

Meanwhile, global corporations brazenly search for ways to “overcome regulatory sovereignty”.3 One way is using closed-door trade negotiations to secure rules that would be defeated if they were open to public scrutiny or democratic accountability. Past agreements have required governments to adopt policies that ensure market access and favorable terms for foreign corporations, regardless of the needs or priorities of local communities. They have also granted investors extraordinary rights to challenge state policy choices. This leaves communities with less influence over the decisions that shape their lives and constrains governments’ ability to adopt progressive policies.

Trade agreements should aim to build a prosperous, equitable society for all – including working people and the poor. Unfortunately, past deals have fallen remarkably short of that goal, and TTIP is in danger of repeating mistakes of the past. This article will focus on the potential treatment of investor-to-state dispute resolution, public services, financial services, procurement and labor protections. There are numerous other areas – including consumer protections, access to medicines and environmental regulations – that are also vulnerable under the current trade regime.

ISDS

The investor-to-state dispute settlement (ISDS) process has drawn heavy criticism, as it gives foreign investors the extraordinary ability to bring claims against governments for action that harms current or even future profits. Instead of engaging with domestic procedures, foreign investors bring these claims directly to private international tribunals. While these panels cannot directly reverse policy, they can order states to choose between reversing policy and paying monetary compensation.

ISDS is increasingly being used to target regulations designed to benefit the public. Germany is currently facing a claim brought by the Swedish company Vattenfall over the decision to switch from nuclear energy to renewables.4 The company is demanding compensation for both current and future profits stemming from the closure of two nuclear power plants.

Considering a complex problem with wide-ranging social implications through the narrow lens of investor rights is inherently problematic. The danger is compounded by the fact that ISDS panels are structurally biased in favor of investors.5 Arbitrators have a direct financial stake in the system. Unlike judges, arbitrators are individually selected and paid by the investor bringing the claim and the government defendant. Issuing investor-friendly legal interpretations and rulings both expands the overall caseload and increases the likelihood the arbitrator will be selected again in the future. There are no strict conflict of interest rules, so many arbitrators rotate between deciding cases and representing companies bringing claims.

Democratic justice systems have corrective mechanisms. Erroneous judgments can be appealed, rogue judges can be impeached and legislatures can pass or repeal laws in response to unintended interpretations. Conversely, it is extremely difficult to appeal ISDS judgments for any reason, private arbitrators cannot be impeached and there is no legislative body with the authority to override rulings that contradict democratic decisions.

Even if the state wins, defending a case costs an average of $8 million. Given the expense and potential for biased decision-makers, governments can be pressured to change regulations or drop new proposals at the mere specter of an ISDS case. In fact, Vattenfall first threatened a lawsuit against Germany years earlier over proposed regulations on coal-fired power plants, which were subsequently modified.6

On 16 September 2015, the European Commission revealed a new proposal dubbed an “Investment Court System”, which is intended to address many of the criticisms of ISDS.7 Indeed, the proposal seeks to eliminate much of the pro-investor bias, limit conflicts of interest and establish an appellate mechanism. These important changes represent an improvement over the current model. Nevertheless, the new proposal retains an overly broad definition of investment, fails to impose any obligations on investors, fails to adequately protect non-discriminatory regulatory measures from challenge, and leaves unchanged the unequal justice created by an investor-only “court”. The new proposal – while an improvement over previous models – does not address the fundamental concern that ISDS provides special, privileged justice for a select few.8

This spring, an ISDS panel split 2-1 in Bilcon v Canada, with the majority deciding a mining company deserved compensation for being denied a permit to expand a quarry. Two arbitrators concluded that Canadian taxpayers should pay the corporation, in part because government decision-makers put too much weight on “core community values”. In dissent, the third arbitrator noted the perverse effect the decision would have on regulators’ ability to respond to community opposition and promote responsible environmental stewardship. It is not clear that the new proposal would prevent a similar case from advancing or being similarly decided under TTIP.

In 2014, the French multinational Veolia challenged a package of Egyptian labor reforms that include raising the minimum wage. The U.S.-based energy company Lone Pine Resources recently launched a claim for $250 million against Canada because Quebec banned fracking, a practice that has been linked to earthquakes and contaminated drinking water.

When critics try to raise these issues with trade negotiators, they are assured that ISDS has been “fixed”. But ISDS is intrinsically and fundamentally flawed. As Joseph Stiglitz recently wrote, its true goal is to restrict governments’ ability to regulate corporate behavior, achieving “by stealth – through secretly negotiated trade agreements” what could not be attained “through an open political process”.9

Critical public services

Public services, including health care, education, sanitation services, transportation, infrastructure and water management, play a critical role in alleviating poverty and ensuring equitable access. They are essential to addressing market failures and ensuring sustained economic growth, which is negatively impacted by high levels of income inequality.10 The U.S. and the EU should be exchanging best practices and adopting policies that result in the highest possible quality services. Many European countries have particularly robust state-provided services, and there is much to be learned from comparing experiences, ideas and outcomes.

Unfortunately, if the TTIP rules reflect the language in prior agreements, public service provisions could be subjected to restrictive policies that favor deregulation and privatization. Privatization has often resulted in declining quality, deteriorating working conditions and wages for service workers, and exclusion of the poor and those too geographically isolated to make delivery profitable. The rules in current trade agreements not only promote private provision of public services, they also make it difficult and often costly for governments to reverse a decision to privatize if the results negatively impact service provision.11 For example, we understand that education services are receiving particular attention in the TTIP negotiations.12 Private education providers are eager for access to the European market, although their performance record in the U.S. is sometimes abysmal.13

TTIP should protect and promote public services, but it is not clear it will do so. Absent firm commitments to ensure protections, it presents a serious threat to effective, equitable public services. Service commitments should only be made on a “positive list” basis. Positive lists ensure that states only commit the services they truly intend to commit and leave policy space open for services yet to be invented that negotiators cannot even contemplate today. There is no evidence that pre-committing a yet-to-be-invented service to the rules of a trade agreement leads to the best possible policy outcomes.

Financial services

Unfortunately, TTIP appears poised to open financial services to the same restrictive requirements that other services are currently subjected to under trade agreements. This has troubling implications for the maintenance of balanced economic policy making that ensures sustainable, stable growth.14 Antiquated and often unclear rules risk not only delaying needed reforms to rein in the excesses of the past decades but could actually prevent sensible measures that would ensure stability. Past trade agreements have included language that promotes long-discredited Washington-consensus era policies. Recent deals have placed limitations on the use of capital controls, which even the International Monetary Fund has concluded can be useful to alleviate market volatility.15 Given the precarious conditions in Greece and other eurozone countries and the incomplete efforts to rein in Wall Street deregulation in the United States, it is critical that TTIP protect governments’ ability to provide and sustain stable financial services.

ISDS already presents a threat to governments’ ability to guard against economic crises. Argentina has the dubious distinction of being sued at least 51 times, most of these suits related to the country’s financial collapse of 2001-02.16 There are several pending claims against Greece over measures the country implemented that were required to secure an international loan package to stabilize the economy.17 Making explicit financial services rules commitments in TTIP will heighten this danger.

Public procurement

In the past, trade agreements have limited public procurement programs, making it difficult or impossible for government contracts to state even a preference, let alone a requirement, for local companies or local employment. In addition, such commitments have never made clear that preferences can be given to businesses that adhere to enhanced human rights or environmental standards.18 Governments should be able to tackle social problems like youth unemployment, climate change or a legacy of discrimination by attaching standards to public contracts. The growing movement to include human rights due diligence in government purchasing, which could protect labor standards throughout the supply chain, could also be undermined by restrictive trade rules.

Labor protections

Workers on both sides of the Atlantic face hardship, with high levels of unemployment and inequality, increasing precarious work, and reduced social protections. TTIP must not become a vehicle to promote failed policies centered on austerity and labor “flexibility”. Already, there is a push in both the EU and the U.S. to undermine worker protections and cut back on public services and investment. The result has been a spiral of economic contraction, sparking increasingly frenzied cuts and job losses.

Worker protections are not just critical to ensuring that workers are treated with respect. Strong protections for freedom of association and collective bargaining are critical to tackling income inequality19 and thereby ensuring sustained economic growth.20 Unfortunately, the U.S. has ratified only two of the International Labour Organization’s core labor rights, and anti-union legislation at the state and federal levels continues to violate workers’ internationally recognized rights. Corporations spend heavily to deter unionization and demonize unions. For example, in Chattanooga, Tennessee, corporate and political influence prevented workers at a Volkswagen plant from organizing a union. American and European labor unions need to work together to ensure that TTIP strengthens important industrial relations, for example via co-determination and works councils.

At its best, TTIP could be an opportunity to move beyond the “lowest common denominator” approach to labor rights and create truly people-centered rules. Unfortunately, labor commitments in trade agreements are too often treated as an afterthought to commercial provisions, not a central mechanism through which to achieve shared, stable growth and to reduce inequality.

The AFL-CIO will continue to work with our union counterparts and other social justice allies throughout Europe to advocate for strong labor and environmental standards and to ensure that transatlantic negotiations do not undermine shared prosperity, democratic accountability or regulatory integrity. But if TTIP does not meet that standard, we will have no choice but to oppose it.

• 1 European Trade Union Confederation and the American Federation of Labor – Congress of Industrial Organizations: TTIP Must Work for the People, or It Won’t Work at All, Declaration of Joint Principles, 2014.
• 2 D. Mullaney: Opening Remarks, Speech at TTIP Round Seven Press Conference, 3 October 2014, available at https://ustr.gov.
• 3 See, e.g., S. Poe: Trade on the Forefront: U.S. Chamber President Chats with USTR, FreeEnterprise.com, 30 July 2013; and M. Stoller: NAFTA Origins: The Architects Of Free Trade Really Did Want A Corporate World Government, PopularResistance.org, 25 February 2014.
• 4 N. Bernasconi-Osterwalder, M. Dietrich Brauch: The State of Play in Vattenfall v. Germany II: Leaving the German public in the dark, International Institute for Sustainable Development, December 2014; and N. Bernasconi-Osterwalder, R.T. Hoffmann: The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the new dispute Vattenfall v. Germany II, October 2013.
• 5 P. Eberhardt, C. Olivet: Profiting from injustice, Transnational Institute and Corporate Europe Observatory, November 2012.
• 6 Ibid.
• 7 European Commission: Commission proposes new Investment Court System for TTIP and other EU trade and investment negotiations, Press release, 16 September 2015.
• 8 The AFL-CIO continues to review this recent proposal and will have more to say at a later date.
• 9 J.E. Stiglitz: Developing countries are right to resist restrictive trade agreements, The Guardian, 8 November 2013.
• 10 See, e.g., J.E. Stiglitz: The Price of Inequality, W. W. Norton & Company, New York 2012.
• 11 AFL-CIO: AFL-CIO Response to Request for Comments on the “Trans-Atlantic Trade and Investment Partnership” Federal Register (April 1, 2013) Docket Number USTR-2013-0019, 10 May 2013.
• 12 G. Maslen: Universities at risk under free trade agreements, University World News, No, 353, 4 February 2015.
• 13 For-Profit Education Scams, New York Times, 23 March 2012.
• 14 Warning from Civil Society: TTIP Threatens to Undermine Financial Reform, Global Policy Forum, 1 October 2014.
• 15 International Monetary Fund: The Liberalization and Management of Capital Flows: An Institutional View, 14 November 2012.
• 16 N. Buxton: Legalised Profiteering? How corporate lawyers are fuelling an investment arbitration boom, Transnational Institute and Corporate Europe Observatory, 10 November 2011.
• 17 P. Eberhardt, C. Olivet, op. cit.
• 18 Given that such requirements may be challenged as specifying the “process” under which the good or service is provided rather than the “product” to be provided, it remains unclear whether a bidder wishing not to comply with the responsible purchasing criteria could successfully challenge the criteria as an unfair barrier.
• 19 F. Jaumotte, C. Osorio Buitron: Inequality and Labor Market Institutions, International Monetary Fund Staff Discussion Note, July 2015.
• 20 See, e.g., J.E. Stiglitz: The Price …, op. cit.

Estimating the Economic Gains of TTIP

Federica Mustilli

The 2013 launch of the negotiations between the EU and US for a deep trade and investment partnership has stimulated a controversial debate on the economic modelling used to quantify the economic gains of TTIP.

The economic methodology and its ability to accurately estimate the economic impact of the partnership has been scrutinised not only in academic circles but also in policy circuits. Indeed, criticism of the economic methodology has even been used in advocacy by NGOs and ultimately in the streets of e.g. Brussels and Berlin, where TTIP is heavily criticised or even rejected.

Besides modelling techniques, what really matters in the assessment of the overall agreement is the extent to which trade negotiators will make progress on the regulatory cooperation chapter and the several related sectoral chapters. TTIP is not only, and indeed not even primarily, about removing tariffs: it is about reducing unnecessary differences in non-tariff (essentially “regulatory”) measures so as to boost the goods and services exchange without compromising the current level of health, safety or environmental protection that each country or sub-federal government is expected to ensure to its citizens.

The potential for the economic gains of TTIP hinges mainly on two aspects: understanding the assumptions, such as with regard to non-tariff measures (NTMs)1 and their removal or reduction, and the quantitative results that econometric techniques can provide. Unfortunately, both tasks are far from easy.

The present paper will discuss the main contributions to the literature on estimating the impact of trade and investment liberalisation between the EU and US on key economic variables in the long run.

We have selected six studies that animate the current debate on economic gains and modelling: CEPR,2 Bertelsmann,3 CEPII,4 Capaldo,5 Egger et al.6 and Felbermayr et al.7 Although it provides detailed estimates on the potential effects of TTIP, we do not discuss ECORYS as a separate study, as it serves as the foundation of the CEPR paper.8

We begin with a comparison of the modelling applied by the studies and the economic results they generate for the EU and US. We will then examine the main assumptions made by the studies and explore how they influence the results.

The econometric modelling: a comparison

Our discussion of these six studies focuses on two aspects: the econometric techniques applied to compute the economic results, and the underlying assumptions. The latter can be subdivided into two groups of assumptions: (i) those concerning the definition and quantification of NTMs, the resulting estimation of trade costs (other than tariffs), and an analysis of how actionable they are; and (ii) those concerning third country spillovers and the treatment of the labour market.

Basic CGE Modeling

With respect to methodology, it is commonly argued that the current state of the art in assessing the impact of liberalising trade flows is the Computable General Equilibrium (CGE) model. CGE models are quantitative tools describing the interactions among several markets and the impacts that an economic shock (such as a free trade agreement) could have on economic variables, such as GDP and trade flows, as well as the intersectoral adjustment for workers and capital. Characteristic of these models is the full flexibility of goods and input prices, assuring in the longer run that demand and supply are in equilibrium. If, in the long run, the labour supply is fixed, the model cannot estimate changes in unemployment (or the creation of new jobs) but only job reallocation adjustments (among the sectors and between high and low-skilled jobs) in the short to medium run.

The inability to model changes in unemployment, together with the difficulty of including foreign direct investments and their impact on the new equilibrium, renders the technique difficult to digest for policy makers and stakeholders. They are generally keen to find out whether the successful conclusion of TTIP could lower unemployment in EU member states without generating more than marginal job losses in any specific sectors.

This approach was pursued in the first attempt to assess TTIP, undertaken before the official launch of the negotiations. The CEPR report was commissioned to support the European Commission Impact Assessment of the TTIP proposal.9 It is the first time that a quantitative analysis underpins the Commission’s request to the European Council for a mandate to negotiate. The assignment to CEPR was expected to provide an assessment of the quantitative impact of the agreement at a moment when the actual content and the degree of ambition of TTIP was still under discussion.

The model, supported by the 2007 Global Trade Analysis Project database, estimates long-term (through 2027) increases in GDP growth of 0.48 per cent for the EU and 0.39 per cent for the US, larger trade flows (for the EU, a 28 per cent increase in bilateral exports), and job reallocation effects of the work force, resulting in upward pressure on real wages. These positive but modest results are foreseen only if the agreement were to reach a high level of ambition. What does that imply?

Due to the regulatory nature of the agreement and the low level of tariffs (with some exceptions), the report tackles the difficult task of quantifying the costs of NTMs across the Atlantic on goods and services by turning them into ad valorem equivalents (AVEs).

Once the AVEs are calculated, they cannot be treated as pure tariffs: most of them represent regulatory differences that cannot be entirely cancelled during trade negotiations. Some of them must remain in areas for which regulations on both sides of the Atlantic assure different but legitimate levels of citizen protection (e.g. health, safety, environment, etc.). That is why, according to the ECORYS background study, the degree of actionability of non-tariff barriers between the EU and US is limited, even in the most ambitious scenario, which is why the study sets it at 50 per cent. By actionability, CEPR refers to the extent (expressed in a percentage share) to which the identified costs of an NTM or regulatory divergence can potentially be reduced (through various methods), under the assumption of a TTIP agreement that will address these barriers.

These results have been debated in the CEPII study.10 The study applies a multi-sector CGE model called MIRAGE supported by a different dataset on NTMs. The quantification of average protection in cross-border trade in services is computed through gravity estimates for nine service sectors in 65 countries instead of by running estimates from business surveys, as was done in the CEPR study. Regardless of the different ways of calculating AVEs,11 overall results on long-term increases in GDP do not change significantly, ranging from 0.3 per cent (both for the EU and US) in the reference scenario to 0.5 per cent with the inclusion of harmonisation spillovers.12 Bilateral EU exports would increase in the long run by 49 per cent, mainly from agro-food products.

The debate which has emerged since the publication of the CEPR report has persuaded some of its authors to upgrade the exercise. Egger et al. once again uses a multi-sectoral CGE approach, but the study calculates the AVEs as the NTM reductions induced by previous preferential trade agreements.13 The different assumption allows the authors to judge the effect of fully liberalised trade flows without imposing a limit on actionable NTM removals. Of course, assuming a much higher level of liberalisation inevitably brings higher gains if the underlying methodology does not change. Indeed, the authors estimate a 2.27 per cent increase in EU GDP in the long run and a 0.97 per cent increase in US GDP (exclusive of spillovers). The results of the model indicate an increase of bilateral trade flows that could reach 80 per cent.

Structural general equilibrium model

A second group of studies, Bertelsmann and Felbermayr et al., applies a different approach by estimating a structured single-sector trade model that, compared to the traditional CGE approach, allows a certain flexibility in the inclusion of the labour market.14 The model does not allow sector-specific results, nor relocation across different factors or skill groups. The reason for this approach is to conduct an exercise that precisely simulates the trade flows that can take place between the two economies by assuming a degree of liberalisation equal to previous deep agreements such as NAFTA or the European Union. In order to do so, gains are not foreseen in the long run but are estimated relative to the 2012 baseline.

In doing so, they avoid the complexities of how to calculate NTBs and treat them as pure unobserved trading costs. In Felbermayr et al., they hold that by simulating trade flows from other trade agreements in which the EU and US participate, the potential of TTIP could be either underestimated because TTIP will be more ambitious and can deliver higher welfare gains or overestimated if past regional trade agreements (RTAs) have already lowered part of the existing NTMs.

In Bertelsmann, increases in real income are country-specific and relatively large, ranging, in a deep liberalisation scenario, from 3.66 per cent for Belgium and Luxembourg to 9.70 per cent for the UK. In their mapping, Spain and northern countries (the UK, Denmark, Finland and Sweden) will gain more (six per cent to almost ten per cent) compared to the rest of the EU countries (zero to six per cent). The US seems not to gain significantly, reaching an increase in real income of only 0.8 per cent.15 Felbermayer et al. estimates lower but still relatively high gains: an average increase for the EU of 3.9 per cent, (ranging from 2.25 per cent for Belgium to 5.56 per cent for Spain) and 4.89 per cent for the US.

The UN Global Policy Model

A different and isolated view is found in Capaldo, which, by applying the UN Global Policy Model (GPM), claims to estimate the impact of TTIP without estimating potential trade flows derived from the removal of tariffs and non-tariff barriers (basically the essential point of a trade agreement).16

The GPM reflects instead a demand-driven macroeconometric approach that, according to the author, presents the following advantages. First, the model does not evaluate how the economy reaches an equilibrium after a policy change (removing tariffs and cutting NTMs) but analyses the impacts of its subsequent effect on demand. Once demand is affected, all the other variables in the economy will be, too. Second, it describes how each region in the world will be affected at the macro-level. Finally, it is possible to estimate employment effects, as the model incorporates non-constant relations between GDP growth and unemployment growth.

The results of the model indicate a negative impact on GDP by 2025, specifically -0.5 per cent for northern economies, -0.48 per cent for France and -0.29 per cent for Germany. In this respect, Capaldo includes the phrase “European disintegration” in his title, as trade diversion effects, according to his exercise, will negatively affect current trade integration among EU member states.17 Shrinking trade flows will bring about an increase in unemployment, resulting in around 600,000 job losses across the member states.

Although the CGE criticisms brought up in the study are understandable, the attention that the study has received is not due to the merits of the model or its simulation. Rather, the acclaim is entirely the result of a deep mistrust of studies which show positive economic impacts from TTIP. Although economists differ on TTIP’s empirical economic effects, there is widespread recognition of and respect for the many difficulties of doing solid work on TTIP. However, the technical debate does not show much confidence in the Capaldo model. Indeed, a model approach to a trade agreement that excludes tariffs and NTM costs yet “imports them” from the very CGE models it sharply criticises, is hardly coherent.18

Economic gains and driving assumptions

Quantifications of non-tariff measures

Table 1 provides an overview of the various studies’ estimates of the economic gains from TTIP. The main methodology employed to estimate these gains is the quantification of NTMs and their degree of actionability.19 The exercise consists of comparing actual bilateral trade flows presumably distorted by the presence of regulatory divergence with the potential trade flows. The comparison, estimated through a set of gravity equations, delivers the AVEs.20 The ultimate goal is to understand the extent to which the AVEs can actually be removed, thus unlocking the liberalising trade potential.21

In the CEPR study, the methodology applied consists of the quantity-based approach proposed by Berden 22 They apply a five-step approach based on a large sectorial survey aimed at collecting bilateral NTMs (converted into AVEs) for each pair of bilateral trade flows. The final results relied on more than five thousands responses combined with the OECD FDI restrictiveness indicators and data from the Global Trade Analysis Project.

In the CEPII study, different approaches to quantify NTMs in goods and services have been combined.23 The results are based again on a quantity-based approach.

The effects of trade liberalisation on trade flows can also be proxied by the observed effects of already existing trade agreements. This is why the authors of Bertelsmann apply a top-down approach, assuming that increasing trade due to TTIP will replicate the increasing trend already observed in agreements in which the two signatories are already involved (like NAFTA or the EU). While this approach represents an ingenious way of avoiding the laborious quantifications and the discussion on the degree of actionability, the simulation exercise can only replicate the average gains achieved in previous RTAs without addressing the peculiarities of TTIP and its different possible degrees of ambition.

The approach is also defended in Felbermayer et al., which stresses that RTAs are induced by the existence of unobserved trade costs due to NTMs. Assuming that RTAs have successfully lowered NTMs between the signatories, the authors use their average effects to estimate a trade costs matrix.

The importance of evidence from existing agreements has also been recognised by Egger et al. The authors apply a two-step approach to quantify trade cost equivalents (TCEs) by first estimating levels of NTMs using historical values on the depth of existing agreements. These values can then be turned into TCEs. The approach seems similar to the top-down methodology applied by Felbermayer et al., but there is a crucial distinction that makes the former more cautious in the TCE quantifications. Indeed, while the depth of previous agreements is further analysed in Egger et al. to determine how much of it can be attributed to the consequences of TTIP for the countries directly involved, in Felbermayer et al., the average effects of previously concluded FTAs directly proxy the scope of TTIP.

The discussion on how to quantify NTMs cannot be continued with Capaldo, simply because this aspect is totally neglected. Being a study on the potential effects of TTIP on overall consumption and not on TTIP itself, the trade flows that modify demand are adopted from the CEPR study.

Labour market

Table 2 provides an overview of the main assumptions of the various studies with regard to NTMs, actionability, labour market and spillover effects. Discussions on labour market effects are more crucial for the acceptance of economic modelling than other assumptions. TTIP is generally described as a project aimed at delivering more growth. Thus, stakeholders want to have estimates of unemployment changes that CGE techniques fail to deliver. Indeed, CGE as applied by CEPR, CEPII and Egger et al. relies on markets with imperfect competition and flexible prices. This implies that wages move to ensure that the labour market is always in a long-run equilibrium in which the labour supply (which is fixed by region) is always equal to demand. Trade liberalisation scenarios do not deliver employment effects in these models. In reality, however, it is quite often the case that production increases and more labour is demanded. As a result, wages increase. This is the typical labour market effect. However, changes in real wages or intra-sectoral job reallocations can be translated into changes in employment. CEPR estimates real wage increases in the EU ranging from 0.34-0.51 per cent for unskilled labour and 0.34-0.50 per cent for skilled labour.

An interesting variation is proposed by Bertelsmann, which includes a search-and-matching framework that allows for the long-run existence of frictional unemployment. Countries with market frictions can experience increasing unemployment as the reallocation effects driven by lower prices and wages cannot immediately re-equilibrate the market. However, as Raza et al. point out, it is unclear why the model simultaneously delivers real wage increases and positive employment effects, as the latter can only be possible in the presence of a real wage decrease.24

Finally, the mechanism through which Capaldo comes to the conclusion that TTIP will lead to strong job losses across Europe is based solely on the demand side while ignoring the effects on supply. The model can predict trends in employment based on a relationship between employment and growth that is not constant over time. According to his estimates, the TTIP scenario will bring job losses due to GDP contraction following the reduction of net exports.

Third-country spillover effects

The regulatory cooperation process that TTIP can stimulate by removing NTMs can, due to the importance of the two economies, create spillovers in third countries, most likely in neighbours like Mexico, Canada or Turkey, but also in other countries only indirectly linked to the EU and US.25

CEPR postulates spillover effects to third countries that can, in turn, improve the total estimated gains from TTIP. Direct spillover effects are an automatic result, without requiring any further action on the part of third countries, if TTIP regulatory convergence falls under most favoured nation treatment. This should enlarge third countries’ trade possibilities. While spillover effects are foreseen to be positive for mature or emerging economies in the orbits of the US and EU, there is increasing concern that setting up a regional regulatory framework involving, for instance, common standards or harmonisation processes may increase the intra-regional exchange of goods and services while de facto excluding developing economies that are not able to comply with the agreed upon levels.26 In the CEPR study, the conjectured spillovers are 20 per cent of the direct gains, but there is no explanation for such a figure. Indirect spillovers are also a possibility if third countries adopt the (TTIP) regulatory standards or procedures agreed to by the EU and US. Such “policy-induced spillovers” would occur if the agreed upon harmonisation or mutual recognition in TTIP were also to be adopted by third countries. CEPR postulates indirect spillovers to be half of the scale of the direct spillovers, i.e. ten per cent of the original decrease in NTM costs.

The positive effects of spillovers are also emphasised by Egger et al. They argue that the mutual recognition of standards or successful regulatory cooperation would lead them to revise their estimated per cent change of real income to 1.13 per cent for the US and 2.97 per cent for the EU. Again, while the benefits are driven by easier access to bigger markets for third countries, the order of magnitude is very difficult to foresee. CEPII also includes estimates with a spillover effect due to full harmonisation.

Felbermayer et al. use the same parameters introduced by the previous studies and agree that regulatory spillovers can have a positive impact on the overall welfare effect generated by TTIP for third countries. For example, once they are active, spillovers of ten per cent bring the unweighted average from 0.9 per cent to 2.9 per cent. However, the authors do not see a solid theoretical foundation to quantify them; moreover, they support the view that, given the size of the TTIP signatories, a larger share of trade will take place between them, likely resulting in trade diversion effects for third countries (especially the ones that are unable to meet the higher global standards, assuming TTIP establishes new ones).

Through a simple exercise, Lejour et al. explore the incentives for third countries to join potential standards set by TTIP. Among them, they noticed that mutual trade-in-value-added relations in goods can provide information with which to identify countries that can be involved.27

Conclusions

Several studies have attempted to estimate the potential economic gains of TTIP. In this paper, we have surveyed the main results of and assumptions behind the most frequently discussed and debated contributions. We can conclude that CGE models, despite their limitations, represent the state of the art in assessing the partnership. Other supply-driven models, however, deliver results that are in the same order of magnitude, leading us to conclude that the economic gains will likely be positive but not big.

The assumptions used by a study, especially those concerning the inclusion of non-tariff measures, can influence the final economic gains probably to a greater degree than the econometric strategy adopted. Given the nature of the agreement, more research is also needed to better understand its short-term effects on the labour market and how to deal with the regulatory spillovers that can potentially lead to trade diversion effects in third countries.

• 1 Non-tariff measures refer to regulatory divergences, in particular, technical barriers to trade and sanitary and phyto-sanitary measures. See K. Berden, J. Francois: Quantifiying Non-Tariff Measures for TTIP, CEPS Special Report No. 116, July 2015.
• 2 J. Francois, M. Manchin, H. Norberg, O. Pindyuk, P. Tomberger: Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment, CEPR, Report prepared for DG Trade, European Commission, 2013.
• 3 G. Felbermayr, B. Heid, S. Lehwald: Transatlantic Trade and Investment Partnership (TTIP): Who benefits from a free trade deal?, Part 1: Macroeconomic Effects, Bertelsmann Stiftung, 2013.
• 4 L. Fontagné, J. Goudron, S. Jean: Transatlantic trade: Whither Partnership, Which Economic Consequences?, CEPII, Policy Brief No. 1, 2013.
• 5 J. Capaldo: The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability, Global Development and Environment Institute, Working Paper No. 14-03, Tufts University, 2014.
• 6 P. Egger, J. Francois, M. Manchin, D. Nelson: Non-Tariff Barriers, Integration and the Trans-Atlantic Economy, in: Economic Policy, Vol. 30, No. 83, 2015, pp. 539-584.
• 7 G. Felbermayr, B. Heid, M. Larch, E. Yalcin: Macroeconomic potentials of transatlantic free trade: A high resolution perspective for Europe and the world, in: Economic Policy, Vol. 30, No. 83, 2015, pp. 491-537.
• 8 K.G. Berden, J. Francois, M. Thelle, P. Wymenga, S. Tamminen: Non-Tariff Measures in EU-US Trade and Investment – An Economic Analysis, ECORYS, Report prepared for DG Trade, European Commission, 2009.
• 9 J. Francois et al., op. cit.
• 10 L. Fontagné et al., op. cit.
• 11 While NTMs in goods and agricultural products are higher than in services in the ECORYS and CEPR studies, US services look more protected than goods in the CEPII study. However, the estimations of AVEs in services provided by CEPII are much higher than the ones used in ECORYS.
• 12 The inclusion of regulatory spillovers can increase the overall gains, as we will explain later in the text.
• 13 P. Egger et al., op. cit.
• 14 G. Felbermayr, B. Heid, S. Lehwald, op. cit.; and G. Felbermayr, B. Heid, M. Larch, E. Yalcin, op. cit.
• 15 Trade diversion effects are assumed to be large, especially for a neighbouring country like Canada, which is exepcted to experience a GDP loss of nine per cent.
• 16 J. Capaldo, op. cit.
• 17 Ibid.
• 18 There is the more theoretical point of whether Keynesian models are suitable for these questions. A recent neo-Keynesian contribution by Ganelli and Tervala shows that unilateral trade liberalisation generates an adverse effect on terms of trade, reducing welfare. This forms an incentive to negotiate trade agreements. The authors show that a multilateral agreement generates strong positive effects. The next question is then whether bilateral (TTIP) negotiations are powerful enough to turn this into positive results. See G. Ganelli, J. Tervala: Value of WTO Trade Agreements in a New Keynesian Model, IMF Working Paper WP/15/37, 2015.
• 19 For a detailed and authoritative technical overview, see K. Berden, J. Francois, op. cit.
• 20 These are often defined as trade cost equivalents.
• 21 In this paper, we only discuss quantification of NTMs based on the quantity approach. The price-based approach has not been exploited to estimate trade agreements like TTIP (and is extremely demanding in terms of data). See J.M. Dean, J. Signoret, R. Feinberg, R. Ludema, M. Ferrantino: Estimating the Price Effects of Non-Tariff Barriers, The B.E. Journal of Economic Analysis & Policy, Vol. 9, No. 1, pp. 1-41.
• 22 K. Berden et al., op. cit.
• 23 For goods, see H. Kee, A. Nicita, M. Olarreaga: Estimating Trade Restrictiveness, in: Economic Journal, Vol. 119, No. 534, pp. 172-199, 2009. For services, see L. Fontagné, A. Guillin, C. Mitaritonna: Estimations of Tariff Equivalents for the Services Sectors, CEPII Working Paper 2011-24, 2011.
• 24 W. Raza, J. Grumiller, L. Taylor, B. Tröster, R. von Arnim: Assess_TTIP: Assessing the Claimed Benefits of the Transatlantic Trade and Investment Partnership (TTIP), ÖFSE, Vienna 2014.
• 25 For details on TTIP spillovers, see A. Lejour, F. Mustilli, J. Pelkmans, J. Timini: Economic Incentives for Indirect TTIP Spillovers, CEPS Special Report No. 94, October 2014.
• 26 A. Mattoo: An EU-US trade deal: Good or bad for the rest of the world?, voxeu.org, 10 October 2013.
• 27 A. Lejour, op. cit.

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