Economic Benefits of TTIP

Prof. Gabriel Felbermayr, PhDLudwig Maximilians Universität München

Warsaw School of EconomicsNov 30, 2015

Ifo Center for International Economics

POLAND: HOW TRADE MATTERS FOR INCOMEIfo Institut 2

Income gains from moving from „autarky“ to status quo of 2008

USAGBRITAESPFRA

SWENLDDEUPOLAUTBELSVNCZE

HUNSVK

57%

Source: Costinot and Rodriguez-Clare (2014)..

POLAND: HOW TRADE MATTERS FOR INCOMEIfo Institut 3

Income gains from moving from „autarky“ to status quo of 2008

USAGBRITAESPFRA

SWENLDDEUPOLAUTBELSVNCZE

HUNSVK

10%24%

27%31%32%

46%48%

53%57%

64%71%

80%87%

91%96%

Source: Costinot and Rodriguez-Clare (2014)..

• WTO rules negotiated 1986-2004 to fit XXth century trade• International production sharing: new issues, requiring new rules

APPROPRIATE RULES FOR XXIst CENTURY TRADEIfo Institut 4

• Complementarities between trade in final goods, trade in inputs, trade in services, investment, mobility of workers and data

• Protection on intellectual property• Coherent regulation, to enable gains from specialization• Problems of multiple taxation through tariffs• Just in time practics: trade facilitation• Contract enforcement• Moral hazard issues related to political risk

Which forum/platform for trade policy reform?

TTIP AMBITIONS

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„comprehensive“ agreement „contributing to global rules“

• Market access: going „beyond what the U.S. and the EU have achieved in previous trade agreements“

• Investment: „highest levels of liberalization and of protection“• Regulatory cooperation: „ambitious SPS-plus“ and „ambitious

TBT-plus“ chapters; regulatory council

Feb 2013: Recommendation of a High-Level Working Group

After 11 rounds: high-flying ambitions not all achievable

EVALUATING AN AGREEMENT THAT DOES NOT YET EXIST

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Ex post performance of standard CGE models disappointing: „models drastically underestimated the impact of NAFTA on North American trade” (Kehoe, 2005)

• Right trade model?• How define an appropriate scenario ex ante?

ifo Approach

- „Guess“ likely/realistic scenario?- Use measured effects of past agreements.

Assumption: TTIP lowers trade costs by as much as other already existing deep agreements have (e.g., all US agreements, EU, EU-CHL, …)

GERMAN VICE CHANCELLOR SIGMAR GABRIELIfo Institut 7

Voodoo Economics

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LEADING STUDIES

Source: ifo.

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Bertelsmann/ifo: Felbermayr et al., 2013b

BMWi/ifo: Felbermayr et al., 2013a

EU COM/CEPR: Francois, Norberg, et al., 2013. EU Com

Economic Policy: Felbermayr et al., 2015 ifo 1

CESifo WP/ifo: Aichele, Felbermayr, Heiland, 2014 ifo 2

CEPII: Fontagné, Gourdon, Jean, 2013

Economic Policy: Egger, Francois et al., 2015 KOF 1

KOF 2

… and a growing number of more studies

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DIFFERENT APPROACHES, DIFFERENT OUTCOMES

Source: ifo.

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Multi SectorSpilloversNTMs top-down

World 1.32% +0.14%1.58%

KOF 1ifo 2 EU Comifo 1 KOF 2

EU +2.27%+2.12% +0.48%+3.94% +2.97%

USA +0.97%+2.68% +0.39%+4.89% +1.13%

China -0.27%-0.23% +0.03%-0.50% +0.26%

ASEAN +0.38%-0.19% +0.89%-0.07% -0.47%

Germany +1.43%+2.48%+3.48% +2.32%

Poland +1.74%+3.51%

approx. EUR 200

per person and year

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POLAND: DETAILED TRADE EFFECTS

Source: ifo2 (Aichele et al., 2014.)

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Ifo 2 (Aichele et al., 2014)

USA - EXP

USA - IMP

GER EU CHN RUS-30%

20%

70%

120%

170%

220% 210%190%

-5% -4% -1%

1%

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ZOOMING IN: EFFECTS OF TTIP ON AGGREGATES IN POLAND

Source: ifo.

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GDP

Imports

Exports

548

215

211

558

220

217

TTIP 2014

+1.7%

+2.9%

+2.1%

bn USD, 2014

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POLAND: REAL GDP PER CAPITAEFFECTS OF DIFFERENT SCENARIOS (%)

Source: Aichele et al., 2014.

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Tariff only

Deep

Deep + dir. spillovers

0.1

1.5

1.7

1.9

2.2

2.3

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EFFECTS ON LONG-RUN REAL PER CAPITA INCOME, %

Source: ifo 2, Aichele et al., 2014.

Positive net global effects

+2,7%+2,1%

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Ø Non-TTIP: -0,03%

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MORE (?) AND BETTER JOBS

Source: ifo.

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• Displacement effects (Felbermayr et al., 2013)About 1% of labor force1/3 across sectors, 2/3 within sectors

• Labor market effects (Bertelsmann-ifo, 2013)+93 000 Jobs for Poland (=0.5% more jobs)+0.69% real wage

• Better jobs (Felbermayr et al., 2015): Newly creaed jobs arepaying higher salariestend to be more secure

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SECTOR EFFECTS15

Business services nec

Construction

Machinery nec

Chemicals

Agriculture & Food

Paper

Electricity

Mineral products

Wood

Mining

Textiles

Petroleum

Electronics

Water

Air transport

Trade

-20%-15%-10%

-5%0%5%

10%15%20%25%

GDP share Change through TTIP

Initial shares (%) and rates of change (%), value added, top industries

Source: ifo 2, Aichele et al., 2014.

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SOME „THREATS“ AND WHAT THEY REQUIRE

Source: ifo.

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Adjustment costs:displacement effects

short-run in naturesocial policy (European

Globalization fund)

Higher inequality- Higher competition

threat to weak- Market access

opportunity for strong

Crucial for ‚right‘ incentivesfiscal and social policy

Constraints on regulatory autonomy

Reciprocal constraints on uncoordinated, arbitrary, discriminatory policies are the reason for free trade agreements.

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THANK YOU FOR YOUR ATTENTION

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BACKUP

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FREQUENT MISUNDERSTANDINGSIfo Institut

• Ifo assumes an overoptimistic scenario.WRONG. The scenario is benchmarked to the average of other agreements and is therefore, by construction, feasible.

• Because current US-EU trade is low, welfare gains from TTIP cannot be large.

WRONG. In all known models, initial trade volumes correlate negatively with the size of potential gains from trade.

• The size of ifo gains is implausibly high.WRONG. Modern data-based research attributes the gains from trade for Germany at 30-50%.

• Bilateral trade effects are inconsistent with the welfare effects.WRONG. What matters for welfare is not the value (price x quantity) of trade flows, but quantity and quality only.

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ADVANTAGES OF THE ifo APPROACHIfo Institut 20

1. Top-down strategy on trade costs No need to estimate non-tariff measures (NTMs)Comprehensive measure

2. Data-defined scenario for TTIP Capturing „actual“ direct and indirect effects Political feasibility

3. Easily applicable on very large country samples 173 countries, i.e., 29,756 country pairs

4. Perfect theory-econometrics-data matchParameters estimated on baseline date, using

structural relationships from the modelConfidence intervals easily computed

MACRO- vs. MICRO-PERSPECTIVEIfo Institut 21

• Single-sector approach• Simple, transparent, low data requirements,

established in scientific literature• No stance on patterns of comparative

advantage, sectoral trade patterns, and value added networks, …

MACRO

• Multi-sector approach• Closer to CGE tradition, high data

requirements• Patterns of comparative advantage, sectoral

trade patterns, and value added networks are modelled but fixed

MICRO