Policy Brief. Transatlantic Trade: Whither Partnership, Which Economic Consequences? Summary. Lionel Fontagné, Julien Gourdon & Sébastien Jean - PDF

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No 1 September 2013 Policy Brief Transatlantic Trade: Whither Partnership, Which Economic Consequences? Lionel Fontagné, Julien Gourdon & Sébastien Jean Summary The Transatlantic Trade and Investment Partnership

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No 1 September 2013 Policy Brief Transatlantic Trade: Whither Partnership, Which Economic Consequences? Lionel Fontagné, Julien Gourdon & Sébastien Jean Summary The Transatlantic Trade and Investment Partnership (TTIP) is much more than another preferential trade agreement project: it aims to link the world s two biggest economic entities. The initiative seems motivated by the stalemate in multilateral negotiations, the competition between trade agreements, and the willingness of the two partners to retain their leading positions in world trade, or at least to limit their loss of infl uence. Given the limited average level of the import tariffs 2% in the US and 3% in the EU these duties in most cases are not the most important stake (exceptions are a few sensitive products, mainly some dairy products, some clothing and footwear, and some steel items for the US, and meat products in the EU). Much more signifi cant at the macroeconomic level are negotiations on non-tariff measures, regulation in services, public procurement, geographical indications, and investment, all of which are contentious. We fi rst review the main issues at stake in each case and then use a computable general equilibrium model to assess the economic impacts of an agreement. Not all aspects of the negotiations can be incorporated in the model but it does account for the restrictive impact of non-tariff measures on trade in goods and of regulatory measures on trade in services. The corresponding levels of protection provided by the non-tariff measures are much higher on average than those provided by the tariffs, and they differ signifi cantly across sectors, confi rming their sensitivity in these negotiations. Our central scenario combines progressive but complete phasing-out of tariff protection accompanied by an across-the-board 25% cut in the trade restrictiveness of non-tariff measures, for both product and service sectors with the exception of public and audiovisual services. We fi nd that trade between the two signing regions in goods and services would approximately increase 50% on average, including an upsurge of 150% for agricultural products. Eighty percent of the expected trade expansion would stem from lowered non-tariff measures. Both partners to the proposed agreement would reap non-negligible GDP gains, in the long run, corresponding to an annual increase in national income of $98bn for the EU and of $64bn for the US. Transatlantic Trade Since 2000, more than 10 regional trade agreements have come into force annually. 1 However, the Transatlantic Trade and Investment Partnership (TTIP) announced in February 2013, for which negotiations began July 8, 2013, is unique. It concerns the world s two biggest economic entities entering what is presented as an ambitious and comprehensive partnership, an agreement that will have considerable economic consequences extending far beyond the economies concerned. Although political debate since the initiative was announced shows that unquestionably much more than the economy is at stake, this Policy Brief is aimed at providing an assessment of the possible economic impacts. 2 Figuring out what the agreement might look like is challenging even the odds of a successful outcome are actually diffi cult to fi gure out. However, based on agreements already signed by the two parties with other countries, and on public declarations and preparatory work, we can speculate about its general features. Before doing so, we conjecture about why such a project has been proposed now. 1 Why now? The European Union (EU) and the United States (US) are each other s main trading partner: hence it is no surprise that they would consider about a bilateral trade deal. One might ask why pursue such an initiative if, in the absence of an agreement, these regions have established such important trade and investment relationships? The business community has frequently stressed how much more could be achieved were remaining (often non-tariff) barriers removed. Thus the relevant question is not why, but rather why now? While early projects in this direction are almost as old as the European Community, the most recent two decades have been especially rich in initiatives to enhance transatlantic economic cooperation. Several targeted agreements have been signed, including the US-EC Mutual Recognition Agreement (MRA) and its six sector annexes in 1998, and the US-EC understanding on Safe Harbor Principles for Data Privacy Protection in A number of institutions have been built to foster dialogue and cooperation including the Transatlantic Business Dialogue (TABD), the Transatlantic Consumer Dialogue (TACD), and the Transatlantic Economic Council (TEC) set up in 2007, in the wake of what has come to be known as the Merkel initiative for a new transatlantic partnership. Yet, high-profi le political initiatives such as Sir Leon Brittan s 1998 proposal for a New Transatlantic Marketplace, 3 have so far been unsuccessful. (1) The annual fi gure is more than 20 if (as the World Trade Organization WTO does) agreements for trade in goods and trade in services are counted separately. (2) This is not the first study quantifying the potential economic impact of a TTIP Agreement. See Baldwin and Francois (1997), for a pioneering evaluation. Assessments of the TTIP include Francois et al. (2013), BIS (2013), and GED (2013). (3) The proposal included a phasing-out of all tariffs on industrial goods by 2010, free trade in services and a bilateral treaty on foreign direct investment. Agriculture and audio-visual services were excluded. The TTIP is also an attempt by both the EU and the US to retain as much as possible their leadership in world trade. For many years, willingness to further liberalize transatlantic trade has been one of the strongest drivers of multilateral initiatives. The multilateral arena provided an appropriate space to advance the EU-US trade partnership: evolution of the trade rules called for jointly by both partners had every chance of producing a multilateral agreement, as illustrated by the Uruguay Round negotiation settlement. However, the context has changed: the economic clout of the large emerging countries, especially China, means that the success of any future important agreements will depend on their support. The resulting stalemate in multilateral negotiations is arguably one of the main reasons why an initiative such as the TTIP has emerged: the fact that multilateral negotiations are unlikely to reach completion in the near future makes bilateral talks more attractive at a time when global value chains are ubiquitous, and are promoting calls from the business community for an update of trade rules. Another reason is a form of competition among agreements. While regional trade agreements (RTAs) have proliferated since the early 2000s a move to which the EU and the US took an active part there is now a trend towards the forging of more important agreements. The multiplicity of projects in Asia, not least those involving China, the largest being the Regional Comprehensive Economic Partnership (RCEP) project or ASEAN+6, and the increasing size of the TransPacifi c Partnership (TPP) and the EU- Japan FTA are examples of this trend which seems driven at least partly by emulation. As Bergsten (1996) shows, the fear of being crowded out of the export markets as a result of trade agreements between partners i.e. trade diversion effects has proven a powerful motivation to engage in new negotiations. Beyond these purely trade policy related motivations, the TTIP is also an attempt by both the EU and the US to retain as much as possible their leadership in world trade. The gigantic weight of the transatlantic relationship in the world economy is frequently emphasized, based on the claim that the partners account for almost half of world GDP, and a third of world trade. These orders of magnitude should be put in perspective using ASEAN+6 as a reference even though negotiations among these members are by no means as ambitious as the TTIP (Figure 1). Strictly speaking, the TTIP would affect only trade between the EU and the US, which in 2011 represented 4.4% of world trade (excluding intra-eu trade). The corresponding fi gure for the ASEAN+6 countries is 16%. Gauging the importance of these trade areas based on countries total trade fl ows offers a useful complementary viewpoint. In 2011, the EU (including intra- EU) and the US jointly accounted for an overwhelming 43% of world trade in goods, 4 signifi cantly more than the ASEAN+6 share (27%); excluding intra-eu trade, though, it accounted for 28% compared to 34% for ASEAN+6. Thus, these leading positions are already being challenged, and the main aim of the TTIP is to reduce the parties loss of infl uence in world trade. (4) This fi gure is the sum of exports and imports of the US and the EU with all countries as a share of world trade (exports + imports). 2 CEPII Policy Brief No 1 September 2013 Policy Brief Figure 1 Shares in world trade of goods: comparing the EU-US pair to ASEAN+6, (percent) Panel A: including intra-eu trade Panel B: excluding intra-eu trade Projections Projections ,4 2,4 ASEAN+6 total exports US+EU total exports Intra-ASEAN+6 exports Intra-(US+UE) exports Source: CHELEM-CEPII for Projections for from Fontagné and Fouré (2013). The trends in shares are quite remarkable. After hovering for 25 years around 40%, the EU-US share in world trade (excluding intra-eu trade) declined sharply in the 2000s while the ASEAN+6 share has continued to increase steeply. CEPII s long-term prospective scenarios suggest that these trends are likely to persist in the present and immediately succeeding decades, resulting in these areas accounting for similar shares of world trade in 2035 when intra-eu trade is included, around 32% (Fontagné and Fouré, 2013). Excluding intra-eu trade, though, the EU and the US would jointly account for only 22% of world trade in 2035, compared to 37% for ASEAN+6, and trade between the latter s members (17%) would dwarf that between transatlantic partners (2.4%). This reorientation of the world economy toward Asia has been acknowledged and a transatlantic partnership will not reverse it. However, it may allow the signatories to continue to play leading roles in world trade through the setting of infl uential norms, standards, and other rules. This is probably where the main benefi ts lie for the US and EU in the long run. 2 Whither partnership? Defi ning the contours of an agreement is an important negotiation, as the recent tense discussions around the EU negotiating mandate shows. From the outset, offi cial declarations from both sides have emphasized the need for negotiations to be comprehensive and ambitious, in line with the recommendations of the High-Level Working Group (HLWG) set up in November 2011; nevertheless contentious issues abound. Natural blueprints for the negotiations are given by the most recent and comprehensive agreements with South Korea already signed by both parties (KORUS, enforced in 2010, and KOREU, enforced in 2012; Schott and Cimino, 2013 review their respective provisions in relation to a possible TTIP agenda). Another useful comparison on the EU side can be made with the ongoing but close to completion negotiations with Canada. On the EU side, the undisclosed negotiating mandate given by the Council of the EU to the European Commission was a fi rst important attempt to defi ne the scope of the negotiation. It has been made public that cultural services (the audiovisual sector) have been excluded from the negotiation mandate because of opposition from France backed by other Member States. 5 The remaining substantive content of the negotiation is discussed below. 2.1 Tariffs According to CEPII and ITC estimates using the MAcMap-HS6 database, tariff duties on bilateral trade average 2.2% in the US and 3.3% in the EU, in ad valorem equivalent terms (Table 1). Therefore, this is not an area of major contention and the negotiations should aim at completing tariff liberalization for all products (upfront in most cases), with the exception of the most sensitive products, for which tariff rate quotas are likely to be proposed. In relation to US imports of European products, average protection amounts to 1.7% for manufactured products, and 6.6% for agricultural products. Dairy produce is the most sensitive sector, with a 22% average tariff duty (including 40% on yogurts and 33% for unripened cheese), in a sector where European exports are often competitive. Protection is also signifi cant for a number of articles of apparel, on knitted fabrics, and on shoes, with sector averages close to or above 10% in all these cases. Specifi c steel items are also signifi cantly protected, and potentially sensitive. On the European side, protection is focused mainly on agricultural products (12.8%, compared to 2.3% for manufactured products). The meat sector is the most sensitive, with average protection of (5) A fi nal compromise might be eventually to add these services to the negotiation mandate; according to a European Commissioner: As regards audiovisual services, what is really at stake in this sector is the digital revolution of the media environment. We do not want to treat it now, but come back to the matter at a later stage (EU website Transatlantic Trade and Investment Partnership: Commissioner Karel De Gucht welcomes Member States green light to start negotiations ). CEPII Policy Brief No 1 September Transatlantic Trade Table 1 Average tariff protection on bilateral trade between the EU and the US (ad valorem equivalents in percent, 2010) Tariffs applied by the US on imports from the EU Tariffs applied by the EU on imports from the US Agriculture Industry Overall Source: MAcMap-HS6. Note: more details on bilateral tariff protection are given in a post on CEPII s blog (in French): 45% in a sector where American producers are very competitive and accounted for nearly 20% of world exports in The bovine meat sector is particularly affected, with a 146% ad valorem equivalent duty on frozen edible bovine offal, 97% on frozen boneless meat and 75% on fresh boneless meat according to our estimates, despite non-tariff issues (especially hormones) being of the utmost importance in this case (see discussion below). Bioethanol is another potentially important sensitive sector. In several other highly protected sectors, such as dairy produce, milled products, and sugar, the competitive position of the US is not strong. In the manufacturing sector, protection is low for most products but is far from negligible for clothing (with average protection in excess of 11%) and footwear (9.4%), and for transport equipment products (7.8% on average), with a 10% duty on most individual automobiles. 2.2 Non-tariff measures and regulatory convergence Non-Tariff Measures (NTMs) include import bans, certifi cation requirements on a wide variety of products ranging from toys to cars, to pacemakers, information on the properties of chemical substances, labeling and packaging requirements, upper limits on the concentration of pesticide residues, and meat traceability requirements. In goods, these hurdles include Sanitary and Phyto- Sanitary (SPS) regulations, and Technical Barriers to Trade (TBTs). Needless to say, the consequences of these individual measures differ widely, and a complete analysis would require case-by-case examination. In most cases, the corresponding regulations have a legitimate purpose, such as ensuring consumer information, improving product safety, or preserving the environment. However, cross-country differences in such measures can, deliberately or not, impose additional costs to exporters. 6 Some of these costs may stem from substantial differences, others may be the result of different modalities of application, whether certifi cation methods, labeling requirements, or ways of measuring technical characteristics (such as the volume of a vehicle s polluting emissions or requirements related to quality management in the production of medical devices). (6) Recall that SPS and TBTs are managed under the umbrella of the WTO. In a nutshell, the general principles are scientifi c evidence, transparency, notifi cation, and non-discrimination. Countries that consider that a measure unduly hampers their exports can raise their concern in a dedicated WTO committee. Technical standards can be resolved to an extent by mutual recognition, a solution often adopted in the EU to cope with the different standards of Member States, but in some cases also for differences between the EU and a series of partners, as a follow-up to the completion of the Single Market. There are mutual recognition agreements with the US for six areas: electromagnetic compatibility, medical devices, telecommunications equipment, electrical safety, recreational craft, and pharmaceuticals. 7 This is not to say that all standards (e.g., design of plugs for electrical appliances) are mutually recognized, 8 rather that certifi cation provided on one side of the Atlantic is valid on the other side. Conformity assessment procedures and designation of accredited bodies are key issues here. 9 This prudent approach has not proved entirely satisfactory: the private sector considers its impact too limited (e.g. for medical devices). 10 Were an ambitious transatlantic agreement to be signed, this might open two possibilities: either extending the coverage and improving the functioning of the current EU-US mutual recognition agreement, which would be a very conservative approach, or embarking on a real mutual recognition of standards (i.e. extending beyond accreditation bodies) between the two parties. Examples invoked by the private sector to support the latter approach are vehicle safety belts and other automobile components. The mutual recognition of standards is more complex in relation to SPS measures which often mirror differences in collective preferences. In fact, even the most conservative approach (mutual recognition of accreditation bodies) is not part of the existing agreement on food products. The diffi culty with SPS standards is that perception of risk on the two sides of the Atlantic differs: there is huge resistance to genetically modifi ed organisms (GMOs) in Europe, while the US has major concerns about unpasteurized cheese. Thus, the simple formula what s good for us is good for you does not apply. In most cases, then, for SPS, mutual recognition faces insuperable political obstacles, and this applies also to the harmonization of standards. This leads to two possibilities. In the fi rst, differences in perception are irreducible since the product involved raises concerns related to traceability or externalities. In the second, the product is perfectly identifi able and verifi able, and there are no externalities. Examples are GMOs in the fi rst case, and (chlorine-rinsed) chicken in the second. Products for which differences are reconcilable will be used as strategic assets in the negotiations but it is unlikely that a contentious case such as GMOs, having already been submitted to WTO (7) See Agreement on mutual recognition between the European Community and the United States of America, Offi cial Journal of the European Communities, , L 31/3. (8) This Agreement shall not be construed to entail mutual acceptance of standards or technical regulation of the Parties and, unless otherwise specifi ed in a Sectoral Annex, shall not entail the mutual recognition of the equivalence of standards or technical regulations, Article 4, op.cit.. (9) This Agreement specifi es the conditions by which each Party will accept or recognise results of conformity assessment procedures, produced by the other Party s conformity assessment bodies or authorities, in assessing conformity to the importing Party s requirements, Article 2, op.cit.. (10) This is due in part to the
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