TTIP Update XXIV
In an early update, I wrote about the leak of the European Commission's communication strategy for "overcoming public scepticism" about TAFTA/TTIP. The key section was probably the following:
Making sure that the broad public in each of the EU Member States has a general understanding of what TTIP is (i.e. an initiative that aims at delivering growth and jobs) and what it is not (i.e. an effort to undermine regulation and existing levels of protection in areas like health, safety and the environment).
That clearly hasn't succeeded - we've seen increasing discussion and concern about how there could be a regulatory race to the bottom, and about the elevation of corporations to the same level as nations through the unbridled power of the investor-state dispute settlement (ISDS) mechanism. The failure to control the narrative about the latter has led to the European Commission's consultation on ISDS - although, as I noted in my previous update, that's largely a PR exercise, and won't make any substantive difference to what the Commission and its negotiators will do.
However, in one respect, the Commission's communication strategy is going according to plan: the vast majority of reporting on TTIP accepts at face value not just the figures that are being bandied around for the supposed gains from TTIP, but the larger underlying assumption that there will in fact be gains at all. Part of the problem is that there is strikingly little research into the benefits and costs of TTIP. That's truly extraordinary: no one would think of setting up a business without investigating both exhaustively, by trying to forecast the outcome of various alternatives. And yet the European Commission wants us to buy into the largest global trade agreement ever attempted with far less research or justification than most of us would need before even buying a second-hand car.
It is doing that by rolling out the same numbers every time it talks about the claimed benefits: those found in research which it paid for, from the Centre for Economic Policy Research (CEPR). I've talked about these in earlier updates, and discussed why they are not at all what they seem - and certainly not the massive gains the European Commission keeps talking about. But my view hardly carriers much weight against the economists that put it together. What we need is another qualified team to look critically at the assumptions and results. Fortunately for us, the Confederal Group of the European United Left/Nordic Green Left (GUE/NGL) has commissioned a group of researchers to do precisely that.
Now, it might be claimed that its report, "Assessing the Claimed Benefits of the Transatlantic Trade and Investment Partnership" [.pdf] inevitably brings with it an agenda. But exactly the same is true of the research carried out on behalf of the Commission. What's important is that we have a range of views on the economic impact of TTIP, and that we don't just assume one study is the last word on the matter - which is essentially where we are today. What makes the new study, which has been put together by the Austrian Foundation for Development Research, particularly valuable is that it does not restrict itself to the main CEPR work, but looks at all the available studies, of which there are now four - still a frighteningly small number given what is at stake. Here's the basic result:
All of the four scrutinized studies report small, but positive effects on GDP, trade flows and real wages in the EU. GDP and real wage increases are however estimated by most studies to range from 0.3 to 1.3 %, even in the most optimistic liberalization scenarios. These changes refer to a level change within 10 to 20 years (!), annual GDP growth during this transition period would thus amount to 0.03 to 0.13 % at most.
This confirms what I wrote in Update XXI: the possible benefits are really very small. What's important to note here is that that this emerges from four separate analyses. However, the new study GUE/NGL mentions another crucially important effect of TTIP - one that I've rather underestimated:
According to three studies, TTIP benefits will however come at the cost of reducing bilateral trade between EU Member States. In a deep liberalization scenario, intra-EU trade could fall by around 30 %. The reason for this is that these EU countries’ exports will be substituted for by cheaper Extra-EU imports.
This makes sense: as the barriers to selling in the US drop, so more EU trade will take place with it. However, one of the collateral effects will be that EU countries sell less to each other, since they can presumably make more money sending their goods overseas. This leads to a paradoxical effect: a treaty that is partly being sold on the basis that it will strengthen the EU, will actually hollow it out, as intra-EU trade diminishes. That means people who support TTIP because they believe it will re-inforce Europe will need to think again: TTIP might actually be the final blow that leads to the disintegration of the European Union, turning it into a looser economic grouping.
That's one important fact to emerge from this analysis; arguably even more important is the new work the Austrian team have carried out to address what is perhaps the biggest flaw in the European Commission's argument that TTIP will bring huge benefits - the fact that the corresponding costs are not calculated to allow an overall balance to be drawn. Again, it is extraordinary that the Commission is asking people to support TAFTA without revealing the costs that are likely to be involved. Here's one important category of them:
Adjustment costs are mostly neglected or downplayed in the TTIP studies. This refers in particular to macroeconomic adjustment costs, which can come in the form of (i) changes to the current account balance, (ii) losses to public revenues, and (iii) changes to the level of unemployment.
The first of these is unlikely to be major, but the other two could well be. After all, if tariff barriers are eliminated, there is bound to be some loss of government revenue:
We would thus estimate cumulated income losses to be in the order of €20 billion over a period of 10 years, also depending on tariff exemptions and phase-in periods for sensitive goods.
Three of the studies assume that there will be no permanent unemployment as a result of TTIP (quite a big assumption, given the current economic situation), while one predicts unemployment will be reduced. But even in that case, there is likely to be worker displacement, as the effects of TTIP are felt differently in different industries. This will lead to temporary unemployment, retraining, and probably downgrading of jobs. All of these impose costs on the economy:
A rough calculation yields annual expenses for unemployment benefits of between €0.5 – €1.4 billion during a TTIP implementation period of 10 years. Thus a cumulative €5 – €14 billion might be necessary to finance a part of the adjustment costs on the labor market, with additional costs for re-training and skills-acquisition not included in this amount. To this amount, a further loss of public revenue from foregone tax income and social security contributions between €4 - €10 billion has to be added.
The final category of costs is perhaps the most important, because it exposes another massive assumption in the European Commission's figures:
Another type of costs ignored refers to the regulatory change resulting from TTIP. All studies, but particularly the Ecorys study, assume that a reduction of NTMs [non-tariff measures] is welfare-enhancing. This ignores that NTM such as laws, regulations and standards pursue public policy goals. They correct for market failures or safeguard collective preferences of a society. As such they are themselves welfare-enhancing. The elimination or alignment of an NTM thus will imply a social cost for society. This applies equally to NTM elimination, harmonization and mutual recognition.
This is something else I had not appreciated. The removal of "non-tariff barriers/measures" is one of the most contentious areas of TTIP since those "barriers" are things like health and safety regulations. The fact that their removal is being treated as "welfare-enhancing" - improving the lot of society - is a truly outrageous redefinition of both society and welfare. It might well boost the bottom lines of companies that pollute the environment, say, but that can hardly been called "welfare enhancing". Thus what are currently being counted as *benefits* are probably actually costs, as the Austrian economists go on to point out:
the elimination of NTMs will result in a potential welfare loss to society, in so far as this elimination threatens public policy goals (e.g. consumer safety, public health, environmental safety), which are not taken care of by some other measure or policy. The analysis of NTMs in the Ecorys study completely ignores these problems. Instead, it is assumed that around 50 % or 25% of all existing NTMs between the EU und the US are actionable, i.e. can be eliminated or aligned to some international standard, while CEPR assumes a 25% actionability level. This includes sensitive sectors such as foods & beverages, chemicals, pharmaceuticals and cosmetics or automotives. In order to arrive at its optimistic welfare estimations, strong reductions/alignments of NTMs in precisely those sectors are necessary, where the safeguarding of public policy goals is perhaps most crucial. It is highly doubtful that such high levels of actionability could be implemented without any losses to the quality of regulation in the public interest. Though subject to considerable uncertainty, the incurred social costs of TTIP regulatory change might be substantial, and require careful case-by-case analysis.
That's putting it mildly.
As I hope you can see, this is a really important contribution to the TTIP debate, since it not only examines existing studies, and subjects them to an extremely detailed analysis running to dozens of pages, but it also raises crucial issues that have so far been almost completely ignored. Key among those are the costs of TTIP - which turn out to include aspects that somehow have been magically transformed into benefits, simply by ignoring their true impact on the public.
That's just one among many reasons to take a look at this work. Although the technical critique of the impact assessment studies are hard going unless you are an economist, the report's authors have very thoughtfully provided not just one, but two summaries: a condensed one, and an extended version. These do not require any technical econometric knowledge and should be read by anyone who wants to form a more balanced view on what the real benefits and costs of TTIP are likely to be.
Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+
Making sure that the broad public in each of the EU Member States has a general understanding of what TTIP is (i.e. an initiative that aims at delivering growth and jobs) and what it is not (i.e. an effort to undermine regulation and existing levels of protection in areas like health, safety and the environment).
That clearly hasn't succeeded - we've seen increasing discussion and concern about how there could be a regulatory race to the bottom, and about the elevation of corporations to the same level as nations through the unbridled power of the investor-state dispute settlement (ISDS) mechanism. The failure to control the narrative about the latter has led to the European Commission's consultation on ISDS - although, as I noted in my previous update, that's largely a PR exercise, and won't make any substantive difference to what the Commission and its negotiators will do.
However, in one respect, the Commission's communication strategy is going according to plan: the vast majority of reporting on TTIP accepts at face value not just the figures that are being bandied around for the supposed gains from TTIP, but the larger underlying assumption that there will in fact be gains at all. Part of the problem is that there is strikingly little research into the benefits and costs of TTIP. That's truly extraordinary: no one would think of setting up a business without investigating both exhaustively, by trying to forecast the outcome of various alternatives. And yet the European Commission wants us to buy into the largest global trade agreement ever attempted with far less research or justification than most of us would need before even buying a second-hand car.
It is doing that by rolling out the same numbers every time it talks about the claimed benefits: those found in research which it paid for, from the Centre for Economic Policy Research (CEPR). I've talked about these in earlier updates, and discussed why they are not at all what they seem - and certainly not the massive gains the European Commission keeps talking about. But my view hardly carriers much weight against the economists that put it together. What we need is another qualified team to look critically at the assumptions and results. Fortunately for us, the Confederal Group of the European United Left/Nordic Green Left (GUE/NGL) has commissioned a group of researchers to do precisely that.
Now, it might be claimed that its report, "Assessing the Claimed Benefits of the Transatlantic Trade and Investment Partnership" [.pdf] inevitably brings with it an agenda. But exactly the same is true of the research carried out on behalf of the Commission. What's important is that we have a range of views on the economic impact of TTIP, and that we don't just assume one study is the last word on the matter - which is essentially where we are today. What makes the new study, which has been put together by the Austrian Foundation for Development Research, particularly valuable is that it does not restrict itself to the main CEPR work, but looks at all the available studies, of which there are now four - still a frighteningly small number given what is at stake. Here's the basic result:
All of the four scrutinized studies report small, but positive effects on GDP, trade flows and real wages in the EU. GDP and real wage increases are however estimated by most studies to range from 0.3 to 1.3 %, even in the most optimistic liberalization scenarios. These changes refer to a level change within 10 to 20 years (!), annual GDP growth during this transition period would thus amount to 0.03 to 0.13 % at most.
This confirms what I wrote in Update XXI: the possible benefits are really very small. What's important to note here is that that this emerges from four separate analyses. However, the new study GUE/NGL mentions another crucially important effect of TTIP - one that I've rather underestimated:
According to three studies, TTIP benefits will however come at the cost of reducing bilateral trade between EU Member States. In a deep liberalization scenario, intra-EU trade could fall by around 30 %. The reason for this is that these EU countries’ exports will be substituted for by cheaper Extra-EU imports.
This makes sense: as the barriers to selling in the US drop, so more EU trade will take place with it. However, one of the collateral effects will be that EU countries sell less to each other, since they can presumably make more money sending their goods overseas. This leads to a paradoxical effect: a treaty that is partly being sold on the basis that it will strengthen the EU, will actually hollow it out, as intra-EU trade diminishes. That means people who support TTIP because they believe it will re-inforce Europe will need to think again: TTIP might actually be the final blow that leads to the disintegration of the European Union, turning it into a looser economic grouping.
That's one important fact to emerge from this analysis; arguably even more important is the new work the Austrian team have carried out to address what is perhaps the biggest flaw in the European Commission's argument that TTIP will bring huge benefits - the fact that the corresponding costs are not calculated to allow an overall balance to be drawn. Again, it is extraordinary that the Commission is asking people to support TAFTA without revealing the costs that are likely to be involved. Here's one important category of them:
Adjustment costs are mostly neglected or downplayed in the TTIP studies. This refers in particular to macroeconomic adjustment costs, which can come in the form of (i) changes to the current account balance, (ii) losses to public revenues, and (iii) changes to the level of unemployment.
The first of these is unlikely to be major, but the other two could well be. After all, if tariff barriers are eliminated, there is bound to be some loss of government revenue:
We would thus estimate cumulated income losses to be in the order of €20 billion over a period of 10 years, also depending on tariff exemptions and phase-in periods for sensitive goods.
Three of the studies assume that there will be no permanent unemployment as a result of TTIP (quite a big assumption, given the current economic situation), while one predicts unemployment will be reduced. But even in that case, there is likely to be worker displacement, as the effects of TTIP are felt differently in different industries. This will lead to temporary unemployment, retraining, and probably downgrading of jobs. All of these impose costs on the economy:
A rough calculation yields annual expenses for unemployment benefits of between €0.5 – €1.4 billion during a TTIP implementation period of 10 years. Thus a cumulative €5 – €14 billion might be necessary to finance a part of the adjustment costs on the labor market, with additional costs for re-training and skills-acquisition not included in this amount. To this amount, a further loss of public revenue from foregone tax income and social security contributions between €4 - €10 billion has to be added.
The final category of costs is perhaps the most important, because it exposes another massive assumption in the European Commission's figures:
Another type of costs ignored refers to the regulatory change resulting from TTIP. All studies, but particularly the Ecorys study, assume that a reduction of NTMs [non-tariff measures] is welfare-enhancing. This ignores that NTM such as laws, regulations and standards pursue public policy goals. They correct for market failures or safeguard collective preferences of a society. As such they are themselves welfare-enhancing. The elimination or alignment of an NTM thus will imply a social cost for society. This applies equally to NTM elimination, harmonization and mutual recognition.
This is something else I had not appreciated. The removal of "non-tariff barriers/measures" is one of the most contentious areas of TTIP since those "barriers" are things like health and safety regulations. The fact that their removal is being treated as "welfare-enhancing" - improving the lot of society - is a truly outrageous redefinition of both society and welfare. It might well boost the bottom lines of companies that pollute the environment, say, but that can hardly been called "welfare enhancing". Thus what are currently being counted as *benefits* are probably actually costs, as the Austrian economists go on to point out:
the elimination of NTMs will result in a potential welfare loss to society, in so far as this elimination threatens public policy goals (e.g. consumer safety, public health, environmental safety), which are not taken care of by some other measure or policy. The analysis of NTMs in the Ecorys study completely ignores these problems. Instead, it is assumed that around 50 % or 25% of all existing NTMs between the EU und the US are actionable, i.e. can be eliminated or aligned to some international standard, while CEPR assumes a 25% actionability level. This includes sensitive sectors such as foods & beverages, chemicals, pharmaceuticals and cosmetics or automotives. In order to arrive at its optimistic welfare estimations, strong reductions/alignments of NTMs in precisely those sectors are necessary, where the safeguarding of public policy goals is perhaps most crucial. It is highly doubtful that such high levels of actionability could be implemented without any losses to the quality of regulation in the public interest. Though subject to considerable uncertainty, the incurred social costs of TTIP regulatory change might be substantial, and require careful case-by-case analysis.
That's putting it mildly.
As I hope you can see, this is a really important contribution to the TTIP debate, since it not only examines existing studies, and subjects them to an extremely detailed analysis running to dozens of pages, but it also raises crucial issues that have so far been almost completely ignored. Key among those are the costs of TTIP - which turn out to include aspects that somehow have been magically transformed into benefits, simply by ignoring their true impact on the public.
That's just one among many reasons to take a look at this work. Although the technical critique of the impact assessment studies are hard going unless you are an economist, the report's authors have very thoughtfully provided not just one, but two summaries: a condensed one, and an extended version. These do not require any technical econometric knowledge and should be read by anyone who wants to form a more balanced view on what the real benefits and costs of TTIP are likely to be.
Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+
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