The questionable economic gains from the Transatlantic Trade and Investment Partnership (TTIP)

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The questionable economic gains from the Transatlantic Trade and Investment Partnership (TTIP)

Introduction

The Transatlantic Trade and Investment Partnership (TTIP) is a bilateral trade agreement currently being negotiated between the USA and the European Commission (EC) on behalf of the European Union (EU). One of the main reasons for Parliamentary cross-party support for TTIP is the belief propounded by the EC that the treaty will bring considerable economic benefit to the UK.

The EC’s claims for economic gain are underpinned by the impact assessment it commissioned from the Centre for Economic Policy Research (CEPR).[1] However, as we outline in more detail below, CEPR’s findings, and the EC’s use of them, are problematic for a number of reasons. First, the results of the impact assessment have been misinterpreted or misrepresented by the EC so that the economic benefits are substantially exaggerated. Second, the methodology of CEPR’s impact assessment is flawed. And third, the EC’s statement that the CEPR is an independent research body is disputable.

The EC’s misrepresentation of economic growth figures

1.1 Inconsistencies within the EC’s report on CEPR’s impact assessment

In its Key Findings section, CEPR’s impact assessment report claims that

An ambitious and comprehensive transatlantic trade and investment agreement could bring significant economic gains as a whole for the EU (€119 billion a year) and US (€95 billion a year). This translates to an extra €545 in disposable income each year for a family of 4 in the EU, on average, and €655 per family in the US.[2] (our italics)

However, in the main body of the same report it is clear that the figure of 119 billion euros relates to “a projected 2027 economy”[3] – in other words to the potential impact of TTIP 10 years after its implementation. This means that the figures in the Key Findings are erroneous – that 119 billion euros is not the extra gain that TTIP would bring each year but the cumulative benefit that might be accrued by 2027, compared to the same period without such an agreement. (If represented as an annual figure over these 10 years, the projected growth would be 11.9 billion euros per year.)

Similarly, returning to the extra €545 of disposable income that CEPR suggests the average family might expect from TTIP, this figure does not refer to an annual gain but represents the total increase in disposable income across 10 years: “That equates to an average of 60 euros extra per person, per year, for a family of four”- or an extra cup of coffee per month.[4]

In its own statements on TTIP, the EC draws on the figures given in the Key Findings section of CEPR’s report, and appears not to have studied the body of the report that shows these figures to be erroneous. Yet these incorrect figures are strangely similar to those reported in a 2010 assessment commissioned by the EC, an assessment that has since been seen as the most likely to be used by the EC as an economic base for all further studies and analyses for policy formulation purposes.[5] This 2010 study showed that the removal of non-trade barriers (i.e. standards for goods and services and regulatory differences) between the EU and US could lead to an annual gain of 122 billion euros.[6]

It is a matter of grave concern that either TTIP is based on a misunderstanding (and exaggeration) of the projected growth it may bring, or that the potential for growth is being misrepresented in the desire to garner support for the agreement.

1.2 The failure to take costs into account

The EC suggests that TTIP, through removing barriers to trade, will reduce costs to businesses. What is not mentioned is that the removal of regulatory barriers to trade will also create costs – although it is extremely hard to provide an authoritative assessment of what these costs will be, and their consequences. Potential costs include loss of government income from at-the-border taxes; loss of intra-EU trade as a result of a shift to trading with the US; the negative economic impact of additional imports from the US; costs of strengthened intellectual property rights protection (such as higher costs for medicines due to increased patent protection); and costs associated with claims using investor protection provisions (even when the UK wins).[7]^,[8],[9]

In addition, some researchers suggest that calculations about economic gain have stemmed from a one sided view of economic mechanisms and fail to take into account what the social and environmental costs of TTIP will be, and who will bear them.[10]

1.3 Misleading optimism

In addition to using the wrong figures for the projected economic gains from TTIP, the EC also downplays the fact that these figures from CEPR reflect the most optimistic scenario.

The EC uses the figures projected for the most ambitious version of the treaty in which it is assumed that 100 percent of tariffs, 25 percent of non-tariff barriers (NTBs) and 50 percent of government procurement restrictions will be eliminated. This is despite the TTIP negotiators’ aim that as much as 80% of the economic gains from the treaty will come from the reduction of NTBs. This is a highly optimistic assumption, not least because, according to CEPR, the most ambitious scenario assumes that 50 percent of total NTBs will be ‘actionable’ or removable. Therefore, abolishing 25 per cent of NTBs would mean having to remove half rather than just one quarter of existing actionable, non-tariff restrictions to trade. This will be extremely difficult given, for example, the considerable difference between EU and US standards in some areas, and the reticence to compromise in some sectors.[11]

A less ambitious or partial agreement is estimated by CEPR to bring an increase in GDP of 68.2 billion euros over 10 years (as opposed to the 119 billion euros figure for the same period that is given for the most ambitious scenario).[12]

Notably, the optimistic use of CEPR’s findings by the EC’s information campaign, such as the treatment of estimates as incontrovertible evidence for economic gain (as opposed to debatable predictions), or the papering-over of many difficult, politically sensitive aspects of TTIP, reflects the EC’s admission of the need for ‘strong political communication’ if the treaty is going to be ratified.[13]

Methodological issues

The economic analysis of TTIP has been described as “particularly difficult”.[14] This is partly because the majority of the economic gains from TTIP are assumed to come from reducing NTBs rather than tariffs.[15] Unlike tariffs, NTBs are hard to quantify.

CEPR’s research uses a computable general equilibrium (CGE) model to simulate the impact of TTIP. This is a standard tool for trade economists looking at tariffs. The EC describes the CGE model used by CEPR as state of the art. However, CGE is still in the relatively early stages for modelling non-tariff barriers.[16] Additionally, the general forecasting record of CGE models is extremely poor. For example, in relation to trade, the CGE modelling ex ante forecasts for the NAFTA agreement (effectively the model for TTIP) suggested gains of over 10% for real GDP, employment and real wages of over 10%. The ex poste assessments made a number of years later indicated negligible gains.

In addition, the use of a CGE model in CEPR’s study has been criticised for failing to distinguish between different approaches to trade liberalisation (such as mutual recognition of standards versus regulatory harmonisation) that vary in terms of how difficult they are to implement, and have different economic implications. Such modelling may therefore provide even more inaccurate predictions of future outcomes (e.g. than in the case of NAFTA) than CEPR acknowledges. [17]

The doubtful independence of CEPR

The EC describes CEPR as independent research organisation.[18] However, CEPR’s website shows that it receives financial support from central banks and ‘corporate members’, including HM Treasury (see Appendix for full list), while Platinum Membership is available for those who want “an active influence on CEPR’s research and policy direction”.[19] This kind of relationship between CEPR and corporations throws up questions about the initial aims and assumptions informing CEPR’s research, and the extent to which these may have influenced the study’s design – and ultimately its findings.

Conclusion

Many MPs and MEPs have been convinced of the value of TTIP on the basis of claims from the EC that the treaty will bring significant economic benefits to the UK. However, careful reading of the evidence that the EC draws on suggests that the economic gains have been significantly exaggerated.

TTIP includes a range of measures such as investor protection provisions and the establishment of a permanent and undemocratic Regulatory Co-operation Council that many agree will have devastating consequences – not least for the NHS and public health. And yet the EC is asking us to accept the imposition of these proposals in exchange for an economic gain that is either negligible or a matter of fantasy.

[1] http://trade.ec.europa.eu/doclib/docs/2013/march/tradoc_150737.pdf

[2] http://trade.ec.europa.eu/doclib/docs/2013/march/tradoc_150737.pdf, p.vii.

[3] http://trade.ec.europa.eu/doclib/docs/2013/march/tradoc_150737.pdf, p.3

[4] http://www.earthwatchmedia.org/ttip-estimated-economic-benefits-for-european-citizens/

[5] http://www.ecorys.nl/contents/uploads/factsheets/350_1.pdf p15

[6] http://ntm.ecorys.com/images/downloads/ntm_book_final.pdf

[7] http://speri.dept.shef.ac.uk/2013/11/19/export-led-growth-failure-economic-rebalancing/

[8] http://stopttip.net/trade-background/busting-the-economic-arguments/

[9]https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/260380/bis-13-1284-costs-and-benefits-of-an-eu-usa-investment-protection-treaty.pdf

[10] http://www.akeuropa.eu/_includes/mods/akeu/docs/main_report_en_325.pdf

[11] http://blogs.lse.ac.uk/usappblog/2013/12/17/eu-us-free-trade/

[12] http://trade.ec.europa.eu/doclib/docs/2013/march/tradoc_150737.pdf p2.