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TTIP - the best thing since the invention of sliced pan bread?

Posted on March 29, 2015 by Tom Healy

Sliced Bread
TTIP: The Best Thing Since Sliced Bread?

There is widespread official support for the Transatlantic Trade, Investment Partnership (TTIP) across European member states – especially in the Republic of Ireland where the level of enthusiasm and zeal for promoting TTIP exceeds that of other member states. TTIP is seen as a saving grace to pull the European economy forward especially in the context of public spending constraints. (See a recent interview with, Cecilia Malmström, EU Trade Commissioner here).  The claim is that TTIP will release growth, trade and higher incomes and employment – especially in Ireland given its close investment and trade links to the US as well as the opportunities for particular sectors and firms to take advantage of greater access to US markets. Last Friday was the occasion of a launch of TTIP impact in Ireland – a study by Copenhagen Economics (CE) commissioned by the Irish Department of Jobs, Enterprise and Innovation. It was accompanied by a very upbeat assessment of prospects for Irish export trade and the spillovers in the local economy.  On the other side of the debate are a number of civil society, citizen and environmental groups across Europe including many trade union confederations that have come out against TTIP and demand that it be at least suspended if not entirely scrapped. The matter is of key importance to European and American citizens and workers and deserves careful consideration.

TTIP is not like previous free trade agreements for a number of reasons:

-        It addresses ‘non-tariff barriers’ concerning regulations and standards more than tariff barriers (which nowadays are generally small as a percentage of the value of goods).

-        Its scope and geographical coverage is enormous (25% of world GDP).

-        The inclusion of Investor-State-Dispute-Settlement (ISDS) mechanisms to protect investors against expropriation or other interventions that compromise investor interests.

Concerns have been expressed about many aspects of TTIP – not least ISDS. For an initial assessment of these concerns see my previous Monday blog last year here. The extent of public outcry in many European countries does seem to have had some impact – at least in terms of rhetoric and stated intention on the part of EU official authorities.  It is now claimed, categorically, that there will be no ‘chlorination of chickens’, no relaxation of genetically modified organism rules and standards in Europe and that, furthermore, ISDS will be ‘reformed’ to ensure that the more infamous cases involving nuclear power in Germany, packing of Australian cigarettes and the case of the minimum wage in Egypt will simply not be possible under an agreed ISDS.  It is a case, now, of ‘trust us, we know what we are doing, everything from now will be transparent and our bond is our word’. In the Irish case there is the added bonus of the special US-Ireland factor where, US foreign direct investment accounts for 25% of GDP and 5% of the workforce and a large proportion of exports of pharma, business services and insurance is from Ireland to the US.  TTIP is spoken of in reverential terms and in much the way Ireland’s low headline corporate tax is a matter of national pride and loyalty. How could anyone be possibly against TTIP – especially now that the impressive econometric results of CE are available since last week?

Many technical reports fall into this domain including last week’s Copenhagen Economics (CE) report together with ‘Annex Computable General Equilibrium (CGE) model technical overview’.  Readers or listeners to the presentation can sit back like surgery patients and conclude that ‘these guys know what they are doing’. However, as with all technical material of this nature the conclusions reached in relation to the likely output, trade, income and employment impacts very much depend on:

-        The particular assumptions made about the various industry and service sectors analysed and how different relevant economic variables behave; and

-        How the model or toolbox used to make economic projections is constructed.

The latter is important because in any economic projections exercise the ‘theoretical model’ shapes the findings. Underlying the CE analysis is a Computational General Equilibrium model (CGE). A simple way of summarising the significance of this model compared to alternative models is captured on page 72 of the report:

Because the simulations assumed full employment in equilibrium, the employment changes in Irish and non-Irish firms should add up to zero (before rounding). Put differently, this assumption means that there is not a change in the overall employment of, say, low-skill workers, just a change in the nationality of their employer.

The report goes on to say (page 73):

It is important to remember that these predictions are based on the assumptions of the exercise.

Clearly, predicting what would happen if trade or non-trade barriers between the US and the EU were removed or lowered is a daunting and complex challenge.  This is especially so in the case of non-trade barriers where a myriad of regulations and standards impact on trade patterns and supply in ways that are extremely hard to foresee or model. The very term ‘barrier’ reflects an underlying assumption (or prejudice) that regulations and protections that apply to trade constitute an interference in the workings of markets which, if left to their own, would bring about the best or optimal result for everyone).

At best economists can estimate the trade barrier equivalent of a ‘non-tariff barrier’. Say, a tariff make up 1.9% of the value of pharmaceutical and chemical goods imported into the USA from Ireland and the estimated non-tariff barriers may be in the region of 19% of the value of goods according to ECORYS (2009) used extensively by CE. These non-tariff barriers involve, for example in the case of pharma, authorisation of drugs and recognition of good manufacturing practice inspections. Removing these barriers (tariff and non-tariff), according to CE could lift output, exports and employment in this sector in Ireland.

CE claims that Ireland stands to gain much from TTIP compared to the rest of the EU. This is due, in large measure, to the very close trade links between the US and Ireland as well as the specific sectoral composition of US-Ireland trade with potential gains in areas such as pharma, insurance services and processed food (e.g. dairy produce which currently face high tariff and not just non-tariff barriers in the USA). They also claim significant gains for small and medium-sized enterprises with potential for goods and service exports into the US (for example in the area of ICT software exports by SMEs). Tariffs do not apply on service exports. However, a range of non-tariff barriers do apply. These have often proved very controversial in previous trade negotiations in the 1990s (e.g. the ‘exception culturelle’ clause covering audio-visual trade insisted on by the French authorities).

As with all estimates it ‘all depends’.  It would be misleading if anyone were to predict that output or employment or wages were to rise by a given percentage and claim that this is a precise and robust estimate. It is particularly so when examining the complex interaction between costs, regulations and trade flows among different countries (including trading partners outside the USA and the EU). At best it is possible to say that based on a range of technical assumptions and simulations it is possible or likely that output/employment/exports will rise or fall by so much. In a paper by Jeronim Capaldo of Tufts University in the USA (“The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability”) analysis using the General Policy Model favoured by United Nations it is estimated that TTIP would lead to:

-        losses in terms of net exports and GDP after a decade, compared to the baseline “no-TTIP” scenario with the largest losses in Northern Europe.

-        A fall in labour income as well as in its share of national income.

-        job losses in the order of approximately 600,000 jobs across the EU.

-        a loss of government revenue.

-        higher financial instability and accumulation of imbalances associated with higher asset prices.

Similar analysis had not been undertaken for Ireland. However, it would be reasonable to assume that the net impact is also negative using this alternative model.  Considering the CE analysis as a whole it is evident that the extent of claimed benefits to GDP, output and employment in Ireland are not as huge as might appear in the very positive press release and other statements emanating from Friday’s seminar. For example, Figure 2.5 (page 23 of the CE report) indicates a one-off increase in the level of GDP for the economy as a whole by 1.1% (or 1.5% in the very longrun). Exports are estimated to rise, one-off by 5% in the very longrun while real wages rise by 1.9%. While these estimates are very tentative and open to question and alternative analysis, they do not constitute earth-shattering news to transform the economic fortunes of Ireland Europe as a whole.  The projected net employment gain is indeed very modest. Reference is made, without supporting detail, on page 28, to ‘somewhere between 5,000 and 10,000 additional export-related jobs in Ireland’. While every additional job would be welcome (that is, if there were to be net additional employment as a result of TTIP) an overall increase of 10,000 or less represents about 0.5% of total employment in 2015.

The CE study is remarkably cautious and silent about possible job losses in vulnerable sectors such as primary agricultural produce, suckler cows used for meat and beef were TTIP to see a significant lowering of barriers and further opening up of markets. Suffice it say that nobody can be sure what the impact would be on the Irish beef industry of a significant lowering of EU tariff and non-tariff barriers in this particular sector.

There is a one-side emphasis, in the CE report, on the costs to businesses of regulation. However, many regulations can confer significant benefits on producers, consumers and citizens.

It would be helpful if the CE report were subject to critical academic peer review by a range of experts. Also, it would help public debate if the results of analysis were more widely debated and considered in the Oireachtas, the media and in civil society. If, as suggested by proponents of TTIP, objections to it constitute scaremongering and analysis not based on facts or on misinterpretation then why not open the process to a much wider debate rather than limited consultation or information meetings with selected invitees? It would also help if, in the domain of European public administration a more balanced and less protagonist approach were adopted.

Even if one were to accept the CE projections as reliable and realistic the scale of improved economic activity is very small and is a high price to pay in exchange for uncertainty around labour, environmental and democratic rights. The use of ISDS – in any shape or form – is highly dangerous and possibly at variance with Irish and German constitutional law.

A final word about public services – TTIP protagonists argue that education and health services are exempt from TTIP. Defining public services as an ‘exercise of governmental authority’ exempt from competition rules  does not cut mustard. The fact is that health and education services are already spread between public and private providers – often on a competitive basis. TTIP could lock in existing ‘neo-liberal’ arrangements and leave States and public service providers open to legal challenge via private tribunals.

In conclusion it may be asked ‘what is all the fuss about?’. Why is the export of burgers from Philadelphia to Westport such a high priority now? After 8 years of European crisis and stagnation TTIP will not save Europe. It should suspended or stopped and a fresh start made in opening up trade only where there is a demonstrable benefit to citizens not only in the countries directly involved but in other parts of the world, too.

Tom Healy

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(for previous Monday Blogs just click on 'Director's Blog' on the NERI homepage and then scroll down to read previous weeks' blogs)

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