The Transatlantic Trade and Investment Partnership (TTIP) is a proposed bilateral trade agreement between the United States of America and the European Union. Negotiations between the two parties began in July 2013 with the intention of increasing export and investment flows between the two largest advanced industrialized economies, which already account for 45% of global GDP, through a process of liberalization. The trade agreement would also seek to support and create high quality jobs for people in both economies. At the core of the agreement are three pillars; Eliminating tariff and non-tariff barriers to trade, opening the public and private markets, and introducing a mechanism for the regulation of the investor-state disputes.
Despite the positive intentions of the agreement, the TTIP has come under serious scrutiny from media outlets and political parties, with many forming an active wall of opposition. Polls conducted across Europe have shown that the majority oppose the agreement and local authorities have gone so far as to label themselves “TTIP-free zones.” Outcry has been particularly concentrated in Germany where 150,000 Germans marched in Berlin in order to highlight their disapproval in addition to the Berlin based “Stop TTIP” campaign which has the support of 48 groups and 2.3 million signatures. The sentiment being that there is a lot to lose and little to gain. Within the agreement is serious tariff and regulation reforms to the agricultural sectors. This has been met with strong disdain from countries such as France, Romania and Poland where protection of the agricultural industry is high. European based newspapers have even claimed that TTIP will lead to 600,000 European job losses, a declining GDP and a net fall in EU exports. This is a direct contradiction of the proposed outcomes by EU-US joint reports to date.
To determine the validity of the concerns, it is necessary to look at the situation with grounded economic theory. Currently, tariffs imposed by the EU on US imports are higher in every industry. Of particular note are the tariffs in the food industry. Despite the US being the largest agricultural exporter in the world, a small fraction (roughly 7%) of agricultural exports is Europe bound. This is because of the high tariff rate imposed by the EU, which stands at 14.6%.
The benefits of a reduction in tariffs are clear. Import tariffs imposed by large economies such as the US and EU distort the relative efficiencies of the markets and result in the creation of deadweight loses not just at home but also on a global scale. These deadweight losses at home are marked as triangles b and d, whilst foreign losses are the areas marked e and f in the graphs below.
Consumer surplus falls due to higher prices and reduced variety. Tariffs themselves are often seen as a simple source of revenue for governments but this is not very applicable to developed economies like those involved in TTIP. Instead a key motivation behind tariff implementation is that those who benefit from them are concentrated, whilst those who lose out are often nation-wide. In this case, the agricultural sector such as the one found in France benefit from tariff protection. A reduction in those tariffs would allow the import of agricultural products from the US, which are produced more cheaply and more efficiently, this would mean that consumers would be able to get their food for cheaper prices and the deadweight loss from tariff implementation would fall. The caveat to this would be that French farmers would lose out. The artificial distortions in efficiency that are created through tariffs would no longer be present and French farmers would suffer due to their inefficient production compared to the US. This would result in lost jobs. It becomes understandable therefore why those employed in the agricultural sector across Europe are so against the TTIP and their concentration allows for unity.
However, the loss of jobs should be a short run phenomenon. In the medium to long run, labour should be able to move out of the agricultural sector, where there are inefficiencies into sectors where the EU has a comparative advantage such as machinery and pharmaceuticals. The issue then becomes one of the mobility of labour within the EU and how easy it is to move between jobs and sectors. Another pro-tariff argument is that the home country benefits from a terms of trade gain, represented by the area e. This is when the ratio of export prices to import prices improves meaning that the home country is either gaining more from exports or paying less for imports. It is possible for this terms of trade gain to outweigh the deadweight loss so that the home country overall benefits from trade and indeed there appears to be a theoretical optimal tariff rate. However, the gain in home welfare comes at the expense of foreign welfare, a phenomenon labelled as “beggar thy neighbour.” This is often followed by reciprocated tariffs. As we can see in the tables, the US and the EU both place tariffs on each other thereby negating each other’s terms of trade gain. So the optimal decision is to reduce the tariff rates for both economies together. As the EU has higher tariffs on US imports than the other way round, the US has more to gain from an elimination of tariffs.
When considering the impact of non-tariff barriers to trade, similar arguments can be employed. The proposed reduction in non-tariff barriers to trade will reportedly contribute 80% to the boost in European GDP that the TTIP will create. Current non-tariff barriers are estimated to increase costs by as much as 73%, which makes it very difficult for small businesses to operate. We have seen that EU tariffs are greater than US tariffs but the converse is true when it comes to non-tariff barriers.
The most common non-tariff barrier is an import quota, which restrict the quantity of imports into a country by issuing licenses or quota rights. By imposing a quota, the foreign export supply curve shifts inwards and intersects with the home import demand at a higher intersection. This then translates to a higher price in the home market as illustrated below with the US sugar market. This results in similar effects as a tariff; reduced consumer surplus, a deadweight loss, higher producer surplus and a rent which goes to selected firms as opposed to the government as was the case with tariffs. These rents are earned by the importers due to the difference in world price and home price and the use of that arbitrage. The net effect of quotas is a welfare loss. Therefore, a reduction in the use of quotas and other similar non-tariff barriers would reduce this net welfare loss and improve the consumer surplus. Naturally, those who benefit from quota rents would lose out but the economy as a whole would benefit.
A second component of Non-trade barriers that is more contentious is that of harmonizing regulation across the US and the EU. Currently firms have a difficult time operating in both economic zones due to the differences in restrictions and red tape. The TTIP would seek to collaborate to ensure regulation is constant across both economic regions. The issue with this is that they would adopt the least stringent rules, which is those that the US use. Many believe that the environmental impact of such a decision would be very negative especially in the agricultural industry where the US is more liberal with their use of chemicals. There will therefore be issues whereby firms will be producing and selling goods with respect to their own private costs and demand curves without considering the wider negative externalities and social costs that are occurring. This welfare loss is illustrated by the shaded triangle in the graph below.
In conclusion, the Transatlantic Trade and Investment Partnership presents itself as a strong movement towards a more liberalized economic partnership between the United States of America and the European Union. There are however some clear winners and losers of the various aspects of the deal. A fall in tariff and non-tariff trade barriers allows for a reduction in welfare loss for the economies of both as a whole but those that have experienced and become dependant on protectionist policies in the past will suffer. This should however be a short run phenomenon as the displaced workers transition into sectors that are more efficient. More cause for concern is the impact of lax red tape. Although firms will benefit and capitalise on reduced costs, there will be a wider social cost that will no longer be internalised within the firms, which will create a welfare loss. The TTIP offers an opportunity for the two economies to work together to liberalize trade and boost their respective GDPs. A reduction in barriers to trade ensures that they will be preferential trading partners for each other instead of potential partners outside the agreement with whom their may still be restrictive barriers to trade. The negative press regarding a potential fall in GDP and job losses seems unjustified when considering the economic implications in the long run, however there is strong justification for the negativity surrounding the unified regulatory standards which would create a welfare loss.