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Reducing Transatlantic Barriers to Trade and Investment
An Economic Assessment
Final Project Report
March 2013
Prepared under implementing Framework Contract TRADE10/A2/A16
Joseph Francois (project leader)
Centre for Economic Policy Research, London
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Colophon
Reducing Trans-Atlantic Barriers to Trade and Investment
Primary authors: Joseph Francois, Miriam Manchin, Hanna Norberg, Olga Pindyuk, Patrick Tomberger
Client: European CommissionPrepared under implementing Framework Contract TRADE10/A2/A16
Date: March 2013
Contact:Centre for Economic Policy Research3rd Floor77 Bastwick StreetLondon, EC1V 3PZUKTel: +44 (0)20 7183 8801Email: [email protected]: www.cepr.org
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Contents
Colophon ii
Key Findings vii
Executive Summary 1
1. Introduction 5
2. Economic and Policy Background 72.1. Current trade flows and FDI 82.1.1. Trade 82.1.2. FDI 102.2. Current patterns of tariffs 142.3. Non-tariff barriers 152.3.1. Indexes and econometrics 16
3. Technical Discussion on CGE Modelling Set Up 213.1. The model 213.2. Sectors and regions in the model 24
4. The Policy Options Considered 274.1. Scenarios 274.2. Spill-overs 284.3. Sectoral effects: Preliminary ranking 30
5. Results 335.1. Limited Scenarios 335.2. Full FTA 455.2.1. Macro Results 455.2.2. Output and Trade 495.2.3. Sustainability Impacts 705.2.4. Global Effects 81
6. FDI Barriers 856.1 Indexes and comparison of levels of openness 856.2 Impact of NTBs on foreign affiliates 91
7. Conclusions 95
8. References 97
Annex 1: Mapping of model sectors 103
Annex 2: CGE model technical overview 105
Annex 3: High tariff sectors, ranked by HS2 applied tariff rates 113
Annex 4: Derivation of foreign investment income equation 115
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List of FiguresFigure 1 EU trade in goods with the US by sector (in million euros), 2011 9Figure 2 The bilateral composition of trade in projected benchmark (2027) 9Figure 3 EU27 outward stocks of FDI, 2010 10Figure 4 Top ten hosts of EU outward FDI stocks, 2010 (in 1000 million euros) 11Figure 5 Top ten sources of EU inward FDI stocks, 2010 (in 1000 million euros) 11Figure 6 US outward and inward FDI to the EU and the rest of the World, 2010 (in 1000 million euros) 12Figure 7 EUs direct investment flows to the US, 2004-2011 13Figure 8 EUs direct investment flows from the US, 2004-2011 13Figure 9 Trade Weighted Applied (MFN) average tariff rates 2007 14Figure 10 Value added and impact rankings 32Figure 11 Decomposition of EU output changes, ambitious scenario 63Figure 12 Average Value of NTM Indexes for FDI 87Figure 13 Average NTM index values for FDI located in the EU 88Figure 14 Breakdown of NTBs for FDI by sector 89Figure 15 Income from FDI, market size, and openness, 2007-2009 90Figure 3 Representative nested production technology 106Figure 4 Representative household demand 108
List of TablesSummary of Macroeconomic Effect 3Table 1 Perceived NTB index by business (index between 0-100) 18Table 2 Total trade cost estimates from NTB reduction in per cent, Ecorys (2009) 20Table 3 Sectors and regions used in the CGE model 25Table 4 Scenario Summaries 28Table 5 Impact ranking indexes 31Table 6 Changes in GDP (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 34Table 7 Changes in GDP (in million euros), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 35Table 8 Changes in trade (in per cent), extra-EU trade for the EU, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 36Table 9 Changes in trade (in million euros), extra-EU trade in case of the EU, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 36Table 10 Changes in EU bilateral exports to US by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 38Table 11 Changes in US bilateral exports to EU by sector, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 39Table 12 Changes in EU trade by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 40
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vTable 13 Changes in US trade by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 42Table 14 Changes in EU output by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 43Table 15 Changes in US output by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 44Table 16 Changes in GDP (in per cent), 2027 benchmark, 20 per cent direct spill-overs 46Table 17 Changes in GDP (in million euros), 2027 benchmark, 20 per cent direct spill-overs 47Table 18 Household disposable income, million euro, 2027 benchmark 48Table 19 Changes in bilateral exports to the partner country (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 50Table 20 Changes in value of total exports (in per cent and million euros), extra-EU exports in case of the EU, 2027 benchmark, 20 per cent direct spill-overs 51Table 21 Changes in value of total imports (in per cent and million euros), extra-EU imports in case of the EU, 2027 benchmark, 20 per cent direct spill-overs 52Table 22 Changes in terms of trade (in per cent), 2027 benchmark, 20 per cent direct spill-overs 53Table 23 Change in EU tariff revenue (in million euros), 2027 benchmark 54Table 24 Trade diverted from intra-EU trade (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 55Table 25 Change in EU exports to non-US, extra-EU destinations (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 57Table 26 Change in EU imports from non-US extra-EU sources (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 59Table 27 Changes in EU output by sector (in per cent). 2027 benchmark, 20 per cent direct spill-overs 60Table 28 Changes in US output by sector (in per cent), 2027 benchmark, 20 per cent direct spill-overs 61Table 29 Changes in extra-EU exports and imports by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 64Table 30 Changes in US exports and imports by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs. 66Table 31 Changes in bilateral exports from the EU to the US by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 68Table 32 Changes in bilateral exports from the US to the EU by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 69Table 33 Changes in wages for less and more skilled labour, total effects (in per cent), 2027 benchmark, 20 per cent direct spill-overs 71Table 34 Change in more skilled employment in the EU by sector (in per cent), 2027 benchmark, ambitious scenario, 20 per cent direct spill-overs 73Table 35 Change in more skilled employment in the US by sector (in per cent), 2027 benchmark, ambitious scenario 74Table 36 Change in less skilled employment in the EU by sector (in per cent), 2027 benchmark, ambitious scenario 75Table 37 Change in less skilled employment in the US by sector (in per cent), 2027 benchmark, ambitious scenario 76
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Reducing Transatlantic Barriers to Trade and Investment
Table 38 Displacement of less and more skilled labour in the EU and US, total effects (in per cent), 2027 benchmark, 20 per cent direct spill-overs 77Table 39 Changes in CO2-emissions (in thousand metric tons), 2027 benchmark, 20 per cent direct spill-overs 79Table 40 Changes in land use (in per cent), 2027 benchmark, 20 per cent direct spill-overs 80Table 41 Total effects on GDP for rest of the World (in million euros and per cent), 2027 benchmark, 20 per cent direct spill-overs 82Table 42 Change in exports by region (in per cent), 2027 benchmark, 20 per cent direct spill-overs 83Table 43 Regression estimates for NTMs and FDI 92Table A1 Mapping of Model Sectors to GTAP 103Table A2 Mapping of Model Sectors to ISIC rev 3.1 104Table A3 Annualized GDP growth rates 111Table A4 HS-2 Classification, top 2 per cent of tariff lines 113
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An ambitious and comprehensive transatlantic trade and investment agreement
couldbringsignificanteconomicgainsasawholefortheEU(119billionayear)
andUS(95billionayear).Thistranslatestoanextra545indisposableincome
eachyearforafamilyof4intheEU,onaverage,and655perfamilyintheUS.
ThebenefitsfortheEUandUSwouldnotbeattheexpenseoftherestoftheworld.
Onthecontrary,liberalisingtradebetweentheEUandtheUSwouldhaveaposi-
tiveimpactonworldwidetradeandincomes,increasingglobalincomebyalmost
100billion.
Incomegainsarearesultofincreasedtrade.EUexportstotheUSwouldgoupby
28%,equivalent toanadditional187billionworthofexportsofEUgoodsand
services.Overall,totalexportswouldincrease6%intheEUand8%intheUS.
Reducing non-tariff barrierswill be a key part of transatlantic liberalisation.As
muchas80%ofthetotalpotentialgainscomefromcuttingcostsimposedbybu-
reaucracyandregulations,aswellasfromliberalisingtradeinservicesandpublic
procurement.
Theincreasedlevelofeconomicactivityandproductivitygainscreatedbytheagree-
mentwillbenefittheEUandUSlabourmarkets,bothintermsofoverallwagesand
newjobopportunitiesforhighandlowskilledworkers.Labourdisplacementwill
bewellwithinnormallabourmarketmovementsandeconomictrends.Thismeans
arelativelysmallnumberofpeoplewouldhavetochangejobsandmovefromone
sectortoanother(0.2to0.5percentoftheEUlabourforce.)
TheagreementwouldhavenegligibleeffectsonCO2emissionsandonthesustain-
ableuseofnaturalresources.
Key Findings
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1TheeconomiesoftheEuropeanUnionandtheUnitedStatesareveryimportanttrading
partnersforeachother.Althoughaveragetarifflevelsarerelativelylowalready,various
non-tariffbarriersorNTBs(oftenintheformofdomesticregulations)onbothsides
oftheAtlanticconstituteimportantimpedimentstodeepeningtransatlantictradeand
investmentlinkages.Thisstudyexaminestheimpactofthereductionofsuchbarriers.
Evenwheretheymightnotbedirectlytargetingcross-borderactivities,domesticrules
andregulationsneverthelesscanplaceacostontradeandinvestment.However,unlike
tariffs,itshouldalsobestressedthatmanyregulationscannotsimplyberemovedwhen
theyservelegitimatedomesticpurposes.Yetinsuchcasesthecostsinvolvedmaystill
bemitigatedorreducedthroughpartialregulatoryconvergenceandcross-recognition
ofstandards.Whilethisislikelytobeadifficultprocess,thepotentialbenefitsinterms
ofproductivityandincomesaresubstantial.
Thisstudyreviewstheimportanceofthebilateraleconomicrelationshipandprovides
computablegeneralequilibrium(CGE)-basedestimatesfortheeconomy-wideimpact
of reducing both tariff and non-tariff barriers (NTBs). Estimates are providedwith
regardstoexpectedchangesinGDP,sectoroutput,aggregateandbilateraltradeflows,
wages, and labour displacement, amongother issues.The analysis uses theGTAP8
database(projectedto2027),inconjunctionwithNTBestimatesreportedintheEcorys
(2009)study.Thestudyinvestigatesdifferentpolicyoptionsforthedeepeningofthe
bilateraltradeandinvestmentrelationshipbetweentheEUandUS.Theserangefrom
partialagreementsthatarelimitedinthescopeofbarrierstheywouldaddress(tariffs
only, or services only, or procurement only) to a full-fledged free trade agreement
Executive Summary
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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(FTA) with a comprehensive liberalisation agenda covering simultaneously tariffs,
procurement, NTBs for goods, and NTBs for services. The comprehensive option
includestwoscenarios:alessambitiousagreementthatincludesa10percentreduction
intradecostsfromNTBsandnearlyfulltariffremoval(98percentoftariffs)andan
ambitiousscenariothatincludestheeliminationof25percentofNTBrelatedcosts
and100percentoftariffs.Inbothscenariosmoreambitionisimposedonthelowering
ofprocurement-relatedNTBsthanforotherNTBsaffectinggoodsandservices.Itis
assumedthatNTBslinkedtoprocurementarereducedby25percentor50percent,
inthelessambitiousandintheambitiousscenariosrespectively.Theimpactof
partialalignmentofglobalrulesandstandardswithanewsetofEU-USstandardsand
cross-recognitionagreementsisalsoincludedintheassessment.
The results indicate positive and significant gains for both economies. Under a
comprehensiveagreement,GDPisestimated to increasebybetween68.2and119.2
billioneuros for theEUandbetween49.5and94.9billioneuros for theUS(under
the less ambitious and more ambitious scenarios). However, if the FTA would be
limitedtotariffliberalisationonly,orservicesorprocurementliberalisationonly,the
estimatedgainswouldbe significantly lower.For example, anFTA limited to tariff
liberalisationwouldleadtoalower(23.7billioneuro)increaseinGDPfortheEUand
a9.4billioneurosincreasefortheUS.Thestudyalsoquantifiespotentialbenefitsfrom
NTBreductionaffectingFDI.Theoverallmessageisthatnegotiatinganagreementthat
wouldbeofacomprehensivenaturewouldbringsignificantlygreaterbenefitstoboth
economies.
Anothercoremessagethatfollowsfromourresultsisthatfocusingeffortsonreducing
NTBsiscriticaltothelogicoftransatlantictradeliberalization.Differentapproaches
tothesameregulatorychallengeshavetheunintendedconsequenceofincreasingcosts
for firms,which have to complywith two regulatory environments, dragging down
labourproductivity.NegotiationonNTBsprovidestheopportunitytopursueamixof
cross-recognitionandregulatoryconvergencetoreducethesebarriers.Comparedtoa
focusonNTBS,justlimitingtheexercisetotariffswouldleadtomuchmorelimited,
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Executive Summary
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thoughpositive effects. Furthermore, thegains to the transatlantic economies from
NTBreductionarenotprojectedtobeattheexpenseoftherestoftheworld,thoughthe
rest-of-worldimpacthingescriticallyonthepotentialforglobalconvergencetoward
EU-US standards, which could then become de facto global standards and have a
knock-oneffectloweringNTBsmultilaterally.Suchaprocessimpliesimprovementof
marketaccessforthirdcountries,helpingtooffsettradediversion.
Finally, this study also reports estimates on sustainability impacts -- changes in
emissionsandinnaturalresourceutilization.EliminationofNTBsimpliesimproved
productivity(i.e.lessprimaryinputsarerequiredforcurrentactivity).Theresultspoint
tonegligibleeffectsontherateofCO2emissionsandutilisationofnaturalresources.
Summary of Macroeconomic Effect
Limitedagreement:tariffsonly
Limitedagreement:servicesonly
Limitedagreement:procurement
only
Comprehensiveagreement:less
ambitious
Comprehensiveagreement:ambitious
ChangeinGDP EU,millioneuros 23,753 5,298 6,367 68,274 119,212US,millioneuros 9,447 7,356 1,875 49,543 94,904
Bilateralexportsf.o.b.EUtoUS,millioneuros 43,840 4,591 6,997 107,811 186,965
UStoEU,millioneuros 53,777 2,859 3,411 100,909 159,098
Totalexportsf.o.b.extra-EU,millioneuros 43,740 5,777 7,136 125,232 219,970
US,millioneuros 57,330 5,488 5,942 142,071 239,543
Note: estimatestobeinterpretedaschangesrelativetoaprojected2027globaleconomy.
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5Thetransatlantictraderelationshipisadeepone,rootedincenturiesofsharedeconomic
history. In thepost-warperiod, this facthasbeen reflectednotonly in early shared
steps leadingultimately to themodernmultilateral tradingsystem,butalsoperiodic
initiativestoformaregionaltradeagreement.1Withtherisingimportanceofglobaland
regionalproductionchainsandinternationalfirms,thelogicforaregional,transatlantic
agreement seemscompelling.Together, the twoeconomiesaccount for roughlyhalf
of world output and world trade. They are, mutually, each others most important
investmentpartnersaswell.
In 2012, a comprehensive dialoguewas initiated between the EuropeanUnion and
UnitedStates,regardingpossibilitiesfordeepeningoftransatlantictradeandinvestment
relations.Thediscussionsregardingthepossibledeepeningoftheselinksareon-going.
This report offers quantification of the effects of a trade and investment agreement
underarangeofpossiblepolicyoptions.BoththeEUandtheUShaverelativelylow
MFNtariffs.But,giventhemagnitudeofbothtradeandinvestmentflowsbetweenthe
EUandtheUS,removingevenrelativelyminorimpedimentstotheseflowswillhavea
significantimpact,withpotentialsubstantivebenefitsforbotheconomies.Inaddition,
sincetheexistingnon-tariffbarriersalsoactasimpedimentstotradeandinvestment,
therearegoodreasonstobelievethattherearesignificantuntappedgainsfromadeeper
tradeandinvestmentrelationship.
1 Past initiativeshave includedboth theNAFTA(NorthAtlanticFreeTradeArea)and theTAFTA(TransatlanticFreeTradeArea).SeeBaldwinandFrancois(1997a,1997,1999)forbackgroundonearlierinitiatives.SeeBaldwin(2012)andFrancois,Manchin,andTomberger(2012)ontheriseinvaluechainsandglobalproduction.
1. Introduction
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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This report builds on an important previous study benchmarking the current level
of transatlanticNTBs.That report found that thepotentialgains for theEUandUS
were substantial (Ecorys, 2009). Since the Ecorys study was published, economic
conditionshavechanged,whilethelikelyfocusofapossibleagreementisnowbetter
defined.Workingwith new data (including theGTAP8 database,more recent trade
and tariff information and new investment income data fromEurostat), the present
reportprovidesanupdatedandmoreaccuratesetofestimates.WeprovidenewCGE-
basedestimatesfortheeconomy-wideimpactofremovingnotonlyNTBs(quantified
onthebasisoftheestimatesinEcorys(2009),2butalsotariffsaffectingtransatlantic
tradeflows.Inaddition,wehaveexpandedtheanalysisbyprovidinganassessmentof
theimpactofremovingbarrierstoforeigndirectinvestment(FDI)ontheactivityof
multi-nationalenterprises(MNEs)acrossthetransatlanticmarketplace.BoththeCGE
andinvestmentassessmentsbuildonthesurveyandeconometricworkoftheoriginal
Ecorysstudy.Thereportisstructuredasfollows.Chapter2providesthebackground
fortheeconomicassessment.ThisincludescurrenttradeandFDIflows,aswellasa
technical discussion, providing an overviewof howNTBshavebeen identified and
measured,basedonthe2009Ecorysreport.InChapters3-5wesetoutandemploya
CGEmodeltoexaminebotheconomicandsocio-economic(sustainability)impactsof
trade-relatedmeasures.Chapter6focusesonforeigninvestment.InChapter7weoffer
someconcludingcomments.
2 InEcorys(2009)study,non-tariffbarriersaredefinedasallnon-priceandnon-quantityrestrictionsontradeingoods,servicesandinvestment,atfederalandstatelevel.Thisincludesbordermeasures(customsprocedures,etc.)aswellasbehind-thebordermeasuresflowingfromdomesticlaws,regulationsandpractices.
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7WestartthischapterwithanoverviewofcurrenttradeandFDIrelationshipsbetween
theEUandUS,aswellastariffsandNTBsthatarecurrentlyinplace.Indoingso,we
definethecontextinwhichweestimatetheeffectsofliberalisingtradeandinvestment
betweenthetwoeconomies.
TheEUandtheUSarerelativelyopentowardseachotherintermsofinvestmentand
trade,asreflectedinrelativelylowlevelsfortariffs.However,variousNTBs(oftenin
the formofdomestic regulations)onboth sidesof theAtlantic constitute important
impedimentstotransatlantictradeandinvestmentflows.Eventhoughtheymightnot
bedirectlytargetingcross-borderactivities theyneverthelessdobearacostontrade
andinvestment.ThereductionofsuchbarrierscouldpotentiallybenefitboththeEU
andtheUS.However,unliketariffs,manyregulationscannotsimplyberemoved,as
theyoftenserveimportantandlegitimatedomesticobjectiveslikeproductsafetyand
environmentalprotection. Yetsuchcostsmaybereduced throughpartial regulatory
convergence and cross-recognition of standards. Still, some amount of regulatory
divergenceisinevitableandwillremain,asregulationsreflectdifferencesingeography,
language,preferences,culture,andhistory.Thus,inarealisticanalyticalexercise,while
itcanbeassumedthatsomeNTBscanbeeliminatedbymutualagreementandeffort,
their100percenteliminationshouldnotbeconsideredasarealisticoutcome.3
3 Atthesametime,asbothregionsarehighincomewithhighstandardsfordomesticobjectives,neithershouldregulatoryconvergencebeseenasaprocessforbilateralloweringofstandards,butratherasamechanismforreinforcementofcomparableobjectivesotherwisereachedthroughdifferentregulatorymeans.
2. Economic and Policy Background
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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2.1. CurrenttradeflowsandFDI
2.1.1. Trade
TheUS is themost important trade partner for theEU asmeasured by exports. In
2011,around17percentoftotalEUexportsweredestinedtotheUSmarket.TheUS
isalsoanimportantsourceofEUimports.Itisthethirdmostimportant(11percent
of total imports)afterChinaandRussia4.For theUS, theEUisalsoakeybilateral
tradepartner.TheEUwasthesecondmostimportantdestinationforUSexports(after
Canada),representing19percentoftotalexports.Itisalsothesecondmostimportant
importpartner(afterChina),supplying17percentoftotalUSimports.5
ThemagnitudeofthetraderelationshipbetweentheEUandtheUS,andtheimportance
of the two economies as bilateral partners, suggests that anFTA thatwould reduce
obstaclesandcoststotradebetweenthetwocouldhavesignificantimpactsontradeand
ontheireconomicperformance.
Figure1showsEUmerchandisetradewiththeUSdividedbymainsectorsfortheyear
2011.Mostimportsandexportstakeplaceinthemachineryandtransportequipment
sector.Thisamountedto70,850millioneurosofEUimportsfromtheUS,and104,429
millioneurosworthofEUsalestotheUS.Thesecondmostimportantsectorforgoods
tradebetweentheEUandtheUSischemicals.AlsointhissectortheEUexportsmore
thanitimports(around50percentmore).
4 Source:Eurostat.5 Source:Eurostat.
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Economic and Policy Background
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Figure 1 EUtradeingoodswiththeUSbysector(inmillioneuros),2011
Source: Eurostat
Giventhatgoods tradeaccountsforroughly65percentof totalbilateral trade, (see
Figure2), liberalisationefforts (if thesameacross theboard)are likely to lead toa
morepronouncedimpactintermsofexchangesofgoodsratherthanservicesbetween
theUSandEU.
Figure 2 Thebilateralcompositionoftradeinprojectedbenchmark(2027)
Source: modelbenchmarkdatabase.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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2.1.2. FDI
NorthAmericaisthemostimportantdestinationforEUoutwardFDI,ascanbeseen
inFigure 3.The region hosts about one-third of totalEUoutwardFDI stocks.The
secondmost important region forEUs outwardFDI stock is the so-called non-EU
EuroperegionthatincludestheformerSovietUnioncountries,Switzerland,Norway
andTurkey.Theseeconomiesholdaboutone-fourthofEUFDIstocks.Thethirdmost
important region forEUsFDI isAsia,whichaccounts for14percentof totalFDI
outwardstocks.
Figure 3 EU27outwardstocksofFDI,2010
Source: Eurostat.
While inFigure 3we focused on regions, Figure 4 andFigure 5 (below) show the
breakdown of EU FDI partners by major country (instead of regions).Again, this
confirmstheimportanceoftheUS.Onacountrybasis,theUSstandsoutevenmoreas
themostimportantbilateralinvestmentpartnerfortheEU.EUoutwardFDIstocksin
theUSaremorethantwiceaslargeastothesecondmostimportanthostcountryfor
EUFDI,whichisSwitzerland.TherelativeimportanceoftheUSassourceofFDIin
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Economic and Policy Background
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theEUisevenmorepronouncedwhenviewedonacountrybasis,withtheUSowning
almostfourtimesmoreofEUinwardstocksofFDIthanthesecondmostimportant
partnercountry,Switzerland.GiventhemagnitudesoftheFDIbetweentheEUandthe
USanypolicyinfluencingthefurtherflowscouldhaveasignificantimpactonthese
economies.
Figure 4 ToptenhostsofEUoutwardFDIstocks,2010(in1000millioneuros)
Source: Eurostat
Figure 5 ToptensourcesofEUinwardFDIstocks,2010(in1000millioneuros)
Source: Eurostat
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Figure6depictstheevolutionofoutwardandinwardFDItoandfromtheUS.Forthe
US,theEUisalsothemostimportantFDIpartner.ThestockofinwardFDIfromthe
EUexceedsthatfromtherestoftheworld.However,thestockofUSoutwardFDIto
theEUrepresentsanevenhigheramountthaninwardstockfromtheEU.
Figure 6 USoutwardandinwardFDItotheEUandtherestoftheWorld,2010(in
1000millioneuros)
Source: OECDandowncalculations
FDIactivitybetweenEUandUSsufferedtheconsequencesofthefinancialcrisisbutis
nowrebounding.Justbeforethefinancialcrisis,EUinvestmentflowstotheUSpeaked,
withalmost178,510millioneurosofEUinvestmentflowsgoingto theUSin2007
(seeFigure7).Thisrepresentedabout14percentofthetotaloftheEUsinvestment
flowsgoingabroad.Duringthecrisis,EUinvestmentflowstotheUSdroppeddown
toalmost2004levels,withthelowestamountofbilateralflowstakingplacein2010.
Nevertheless,in2011,bilateralinvestmentflowspickedupagain,althoughnotreaching
yetpre-crisislevels.
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Economic and Policy Background
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Figure 7 EUsdirectinvestmentflowstotheUS,2004-2011
Source: Eurostatandowncalculations.
InvestmentflowsfromtheUS(andfromtherestoftheworld)totheEUalsodropped
dramaticallyduringthecrisis(seeFigure8).Thehighestamountofinvestmentfrom
theUStookplacein2007,amountingto195,660millioneuros.In2010,theincoming
FDIflowswereonly114,763millioneuros.However,whilethevolumeofFDIinflows
fromtheUSisstillbelowthepre-crisislevel,theshareofinvestmentcomingfromthe
UShasreacheditspre-crisislevelasof2010.
Figure 8 EUsdirectinvestmentflowsfromtheUS,2004-2011
Source: Eurostatandowncalculations.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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GiventheimportanceandattractivenessoftheNorthAmericanregionforEUinvestors
andoftheEuropeanmarketforUSinvestorsanypolicyaimingtoremoveregulatory
barriers to transatlantic investmentscanbeexpected tohaveapotentiallyvery large
impact.
2.2. Current patterns of tariffs
Inthissectionwefocusonexistingtariffbarriers.Figure9showsthatthereissome
heterogeneityintermsoftariffprotectionsbetweentheEUandtheUS.Whileinmost
sectors, EU tariffs are slightly higher than those imposed by theUS, they are still
relativelylow.However,therearetwomainexceptions:motorvehicles,andprocessed
foods.TheEUaveragetariffsontheseproductsaresubstantiallyhigherthantheUS
tariffs.Formotorvehicles6theEUappliesanaveragetariff(8.0percent)thatisalmost
eighttimeshigherthantheUS.Forprocessedfoodproducts,EUaveragetariffs(14.6
per cent) aremore than four times higher thanUS average tariffs. For agriculture,
forestryandfisheriesaveragetariffsarealsorelativelyhigh(about3.7percent)butfor
theseproductsthereisnodifferencebetweentheEUandtheUS.
Figure 9 TradeWeightedApplied(MFN)averagetariffrates2007
Source: WTO,CEPII,UNCTADmappedtoGTAP8
6 Motorvehiclessectorinthiscaseincludesalsopartsandcomponents.
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Economic and Policy Background
15
Giventhecurrenttariffstructure,thescopefortariffreductionstohaveasignificant
impactontradeflowsislimited.Indeed,formostsectors,afurtherreductionintariffs
impliesverysmallabsolutechangesinthelevelofprotection.Nevertheless,insome
sectors,suchasprocessedfoods,agriculture,forestryandfisheries,andmotorvehicles,
the impact is likely tobemoresubstantial.Forothersectors,NTBsare theprimary
driverofpotentialimpactaswillbeshowninthenextsection.
2.3. Non-tariff barriers
NTBs and regulatory divergence are complex issues to dealwith analytically.Even
the measurement of the importance of these barriers for trade and investment is a
difficultexercise.ThisstudyreliesontheearlierworkonthistopicintheEcorys(2009)
study.TheEcorys study remains themost comprehensive and detailed to date.The
methodologyincorporatedinthatstudyusedamulti-prongedapproachthatcombined
literaturereviews,businesssurveys,econometricanalyses(gravitymodellingtogether
with CGEmodelling), as well as consultations with regulators and businesses and
inputs by sector experts aiming to obtain a qualitative andquantitative estimates of
transatlanticNTBs.WhiletheEcoryssurveyfocusedonbothtradeandFDI,wefocus
hereontrade-relatedbarriers.WewillreturntoFDIbarriersinChapter6.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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2.3.1. Indexes and econometrics
Toestimatethead-valoremequivalentofNTBs(theimpactonpricesandcosts)and
toquantifytowhatextentthoseareremovablebetweenthetwoeconomies,theEcorys
(2009)studyundertookacomplexsetofassessments.Wesummarizethosestepsbriefly
here.Theassessmentinvolvedsurveyscombinedwithgravity-basedeconometrics.7
7 ForfurtherdiscussiononthemethodologiesusedforNTBquantification,whichtechnicallyareknownasgravitymodelsseebothEcorys(2009)Chapter3.4,andalsoAnderson,Bergstrand,Egger,andFrancois(2008).Forgoods,selectionbasedgravitymodellingwasused. Servicesbarrierswerebasedon theNTBelasticityestimates fromFrancoisandHoekman(2010).
Box 1 NTBSandtheconceptsofcostandrents
NTBs and regulatory differences can have two main effects. NTBs can either
increase thecostofdoingbusinessfor firms,or theycanrestrictmarketaccess.
TraditionalNTBs,likeimportquotas,areanexamplewhereNTBsmarketaccess.
In contrast, regulations that require expensive reconfiguration of products (like
changing voltage or reconfiguration of an exhaust system) for export are an
exampleofcostraisingNTBs.Bothcanhavedifferentimpactsbychangingmarket
concentration and economic power (and thus profits) of companies. In order to
beabletomakeadistinctionbetweenthosetwotypesofNTBs,theconceptsof
costandrentareincludedhereinmodellingofNTBs,followingthefindings
ofthefirmsurveys(andrelatedliterature)intheEcorys(2009)study.Thatstudy
foundthatabout60percentof theprice impactofNTBscouldbeclassifiedas
following from actual cost increases on average, while the creation of market
power(economicrent)wasresponsiblefortheother40percentofpriceincreases.
Thisisanaverage,andthereissomevariationacrossbothsectorsandcountries
inthisregard.InthecaseofNTB-relatedcostincreases,thisconstitutesawelfare
losstosociety.Incaseofanincreaseinmarketconcentration,consumerpricesmay
alsogoup.Howeverpartoftheincreaseisthenappropriatedbycompaniesasthey
reapincreasedrevenuesandprofits.Thusthereisaredistributionofwelfare,and
notsimplyareductionineconomicefficiency.
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Economic and Policy Background
17
TheNTBestimatesinvolvedatwo-partsurveyasafirststep.Thesurveywasconducted
on firms in theEUandUSengaged in trade, and firms in theEUandUSengaged
in FDI.Theywere asked both detailed questions aboutNTBs, and amore general
setofquestionsaboutoverallmarketaccessconditions.8 IncaseswhereNTBswere
identified,companieswereaskedabouttherelativeimportanceofsuchbarriers.Firms
also provided a comprehensive generalmeasure ofNTB-relatedmarket access (the
combinedimpactofallbarriers)intheformofarankingscaledfrom0to100.With
theoverall rankingquestion, 0 indicated that therewerenoNTBsof any type, and
100meant therewere prohibitively highNTBs.The business survey restrictiveness
indicators were then crosschecked against OECD (2007) restrictiveness indicators
and against the ProductMarket Regulation (PMR) indexes. For the service sectors
the combinationof theOECD restrictiveness indicators and the survey resultswere
used.TheresultingmeasuresaresummarisedinTable1below.Thefirmrankingsare
bilateral(forexampleanAmericanfirminFrancemightgiveadifferentrankingthan
aGermanfirminFrance).
ThereportedNTBrankings(theNTBindex)ongoodsonbothsidesoftheAtlanticare
generallyhigherthanonservices,rangingfrom20percentto56percent.Thehighest
perceived NTB levels were found on the aerospace and space industry. On goods
exported to theUS,machinery also exhibits high levels ofNTBs,while the lowest
levelsarereportedforpharmaceuticals.ForgoodsexportedfromtheUS,highlevels
ofNTBswerereportedforchemicals,cosmeticsandbiotechnology.Lowerlevelsof
NTBswerereportedforelectronics,iron,steelandmetalproducts.
Ofcourse,thefirmrankingsofgeneralopennessarerelative.Theydonottranslateinto
actualimpactsoncostsandprices.Forthis,thesurveydatawasthenintegratedwith
asetofeconometricmodels(knownasgravitymodels)toestimatethecorresponding
ad-valoremofpercentpriceimpactofthevariationsinNTBlevels.Onthatbasis,the
8 Thegeneralrankingquestionsarereproducedasanannextothisreport.SeetheannextotheEcorys(2009)reportformoreinformationonthemoredetailedquestions.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Ecorys (2009) report alsoprovidesprice/cost estimatesof existingNTBs for traded
goodsandservicesinapercentageformthatcanbeinterpretedsimilarlytoad-valorem
tariffs.TheseestimatesarereportedinTable2below.Theyreflectthehigherpricesthat
resultbecauseofNTBs.9
Table 1 PerceivedNTBindexbybusiness(indexbetween0-100)
Sector EUexportstotheUS USexportstotheEUServices Sectors:Travel 35.6 17.6Transport 39.9 26.3FinancialServices 29.7 21.3ICT 20.0 19.3Insurance 29.5 39.3Communication 44.6 27.0Construction 45.0 37.3OtherBusinessServices 42.2 20.0Personal,CulturalandRecreationalServices 35.8 35.4
Goods Sectors:Chemicals 45.8 53.2Pharmaceuticals 23.8 44.7Cosmetics 48.3 52.2Biotechnology 46.1 50.2Machinery 50.9 36.5Electronics 30.8 20.0Office,InformationandCommunicationEquipment 37.9 32.3
Medical,MeasuringandTestingAppliances 49.3 44.5
AutomotiveIndustry 34.8 31.6AerospaceandSpaceIndustry 56.0 55.1FoodandBeverages 45.5 33.6Iron,SteelandMetalProducts 35.5 24.0Textiles,ClothingandFootwear 35.6 48.9
WoodandPaper,PaperProducts 30.0 47.1
Source: Ecorys(2009)
9 Thereadermaynotesomedifferencebetweenthesectorsinthetablesinthissection.WehavestartedinTable1withthefullsetofsectorsfromtheoriginalECORYSsurvey.Thesehavebeenconsolidatedwhenwemovetosectorsforthemodelling,bothintheoriginalECORYSstudyandinthisreport.
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Economic and Policy Background
19
AccordingtotheestimatesinTable2,non-tariffbarriersarethehighestforfoodand
beverageproducts,withimportsfromtheUSfacinga56.8percenttariffequivalent,
whileEUexportstotheUSoftheseproductsfacea73.3percentextracost.Among
services,financialservicesareoneofthesectorswiththehighestestimatedNTBs.In
thissector,EUbarriersagainstUSexportsamountto11.3percent,whileUSbarriers
againstEUexports areestimated tobeabout31.7per cent.Barriers in the services
sectors arehigheron theEU side for thebusiness and ICT sector, communications
sector,construction,andpersonal,cultural,otherservices.OntheotherhandtheUS
barriersforEUexportersintheservicessectorsarehigherthanintheEUinthefinance
andinsurancesectors.
Itshouldbestressedthatincontrasttoreducingtariffs,theremovalofNTBsisnotas
straightforward.Infact,itisunlikelythatallareasofregulatorydivergenceidentified
actuallycanbeaddressed.Aspreviouslypointedout,therearemanydifferentsources
of NTBs and thus removing them may require constitutional changes, unrealistic
legislative changes, or unrealistic technical changes. Removing NTBsmay also be
difficultpolitically,e.g.becausethereisalackofsufficienteconomicbenefittosupport
theeffort;becausethesetofregulationsistoobroad;becauseofconsumerpreferences,
language and geography; or due to other political sensitivities. In recognition of
thesedifficulties,intheassumptionsofthescenarios,thedegreetowhichanNTBor
regulatorydivergencecan,potentiallyandrealistically,bereducedistakenintoaccount
whichisdiscussedinmoredetailsinthefollowingsubchapter.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Table 2 TotaltradecostestimatesfromNTBreductioninpercent,Ecorys(2009)
Sector Totaltradebarriers:EUbarriersagainstUSexports
Totaltradebarriers:USbarriersagainstEUexports
Foodandbeverages 56.8 73.3Chemicals 13.6 19.1Electricalmachinery 12.8 14.7Motorvehicles 25.5 26.8Othertransportequipment 18.8 19.1Metalsandmetalproducts 11.9 17.0Woodandpaperproducts 11.3 7.7Othermanufactures N/A N/A average goods 21.5 25.4TransportAir 2.0 2.0Water 8.0 8.0Finance 11.3 31.7Insurance 10.8 19.1BusinessandICT 14.9 3.9Communications 11.7 1.7Construction 4.6 2.5Personal,cultural,otherservices 4.4 2.5
average services 8.5 8.9
Source: Ecorys(2009),AnnexTableIII.1
At this stage, therearepatterns inTable2 thatwill carry forward in themodelling.
FollowingfromtheEcorys(2009)study,businessesperceivedtransatlanticNTBsas
substantiallylowerforservicesthanforgoods.Thismeansthat,forcomparablecuts
inbarriers inpercent terms, thedifferences inbarriers(combinedwith theabsolute
importanceingoodstraderelativetoservicestrade)implythatwecanexpectgreater
impactfromNTBreductionsingoodsthaninservices.
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21
Thepurposeofthischapteristopresentanddiscussthemodelusedasbasisforthe
policyexperiments,includingthesectorandregionalaggregationthatwereused.
Inthisreport,theeconomicassessmentofatradeagreementbetweentheEUandUS
isbasedonacomputablegeneralequilibrium(CGE)modelofglobalworldtrade.The
CGEmodellingexerciseismeanttoestimatetheeffectsontheEUandUSeconomies.
CGEmodelsliketheonesusedherehelpanswerwhat-ifquestionsbysimulatingthe
price,incomeandsubstitutioneffectsinmarketequilibriumunderdifferentassumptions
aboutchangesinpolicy.Theeconomicoutcomesofthebaselinescenario(withno
policy change) can be compared to the different scenario associated with changes
in tradepolicy.Thebaseline for themodel is thus the equilibriumwithoutpolicy
change,andthescenarioistheequilibriumafterthepolicychange.Theeffectofthe
policychangecanthenbebenchmarkedbythedifferencebetweenthetwo.
3.1. The model
TheCGEmodelemployedisbasedonthewidelyusedGTAPmodel(Hertel,1997),
with added features from theFrancois, vanMeijl, and vanTongeren (2005)model.
Moretechnicaldetailsofthemodelareprovidedintheannex.
Themostimportantaspectsofthemodelcanbesummarisedasfollows:
Itcoversglobalworldtradeandproduction
Itallowsforscaleeconomiesandimperfectcompetition
3. Technical Discussion on CGE Modelling Set Up
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Itincludesintermediatelinkagesbetweensectors
It allows for trade to impact on capital stocks through investment effectswhich
allowstoobtainlonger-runimpactontheeconomy
ImperfectcompetitionintheFrancois,vanMeijl,andvanTongeren(2005)model,as
implementedhere,isexplainedinFrancois,Manchin,andMartin(2012).Itinvolves
firm level competition and supply of varieties of goods and services to both final
consumersanddownstreamfirmsunderwhatisknownasmonopolisticcompetition.
ThemodellingofinvestmenteffectsisbasedonFrancoisandMcDonald(1996).This
doesnotinvolvegrossforeigndirectinvestmentflows,butratherchangesinregional
andglobalcapitalstocks(machineryandequipment)asaresultofchangesinlevelsof
savingsandinvestment.
Box 2 Keyfeaturesofthemodel
Modelsimulationsarebasedonamulti-region,multi-sectorglobalCGEmodel.
Sectorsarelinkedthroughintermediateinputcoefficients(basedonnationalsocial
accountsdata)aswellascompetitioninprimaryfactormarkets.Themodelincludes
imperfectcompetition,short-runandlong-runmacroeconomicclosureoptions,as
wellasthestandardstatic,perfectcompetition,Armington-typeset-upasasubset.
Onthepolicyside,itofferstheoptiontoimplementtariffreductions,exporttax
and subsidy reduction, trade quota expansion, input subsidies, output subsidies,
andreductionsintradecosts.Internationaltradecostsincludeshippingandlogistic
services(thesourceoffob-cifmargins),butcanalsobemodelledasSamuelson-
typedeadweightcosts.Thiscanbeusedtocapturehighercostswhenproducingfor
exportmarkets,duetoregulatorybarriersorNTBsthatdonotgeneraterents(or
wheretherentsaredissipatedthroughrent-seeking).
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Technical Discussion on CGE Modelling Set Up
23
In theCGEmodel, there is a single representative or composite household in each
region. Household income is allocated to government, personal consumption, and
savings. In each region the composite household owns endowments of the factors
of production and receives incomeby selling the services of these factors to firms.
It also receives income from tariff revenue and rents accruing from import/export
quotalicenses.Partoftheincomeisdistributedassubsidypaymentstosomesectors,
primarilyinagriculture.
Taxes are included at several levels in the model. Production taxes are placed on
intermediateorprimaryinputs,oronoutput.Tariffsareleviedattheborder.Additional
internal taxes are placed on domestic or imported intermediate inputs, andmay be
applied at differential rates that discriminate against imports.Where relevant, taxes
arealsoplacedonexports,andonprimaryfactorincome.Finally,whererelevant(as
indicatedbysocialaccountingdata)taxesareplacedonfinalconsumption,andcanbe
applieddifferentiallytoconsumptionofdomesticandimportedgoods.
Ontheproductionside,inallsectors,firmsemploydomesticproductionfactors(capital,
labourandland)andintermediateinputsfromdomesticandforeignsourcestoproduce
outputsinthemostcost-efficientwaythattechnologyallow.Inmostsectors,perfect
competition isassumed,withproducts fromdifferent regionsmodelledas imperfect
substitutes.
Heavymanufacturingsectorsaremodelledwithimperfectormonopolisticcompetition.
Monopolistic competition involves scale economies that are internal to each firm,
depending on its own production level.An important property of themonopolistic
competitionmodelisthatincreasedspecialisationatintermediatestagesofproduction
yields returns due to specialisation, where the sector as a whole becomes more
productivethebroadertherangeofspecialisedinputs.Inmodelsofthistype,partof
theimpactofpolicychangesinfinalconsumptionfollowsfromchangesinavailable
choices(thevarietyofgoodstheycanchoosefrom).Similarlyfirmsareaffectedby
changes in available choices (varieties)of intermediate inputs.Changes in available
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
24
varieties also involve changes in available foreign varieties, in addition to domestic
one.Asaresult,changesinconsumerandfirminputchoiceswillspill-overbetween
countriesastheytradewitheachother.
TariffsandtariffrevenuesareexplicitinthestandardGTAPdatabase,andthereforecan
bedirectlyincorporatedintothemodelusedheredirectlyfromthestandarddatabase.
However,NTBsaffectinggoodsandservicestrade,aswellascostsavingslinkedto
tradefacilitationarenotexplicitinthedatabaseandweneedtotakestepstocapture
these effects.Where NTBs leads to higher costs, we follow the standard approach
tomodelling icebergordead-weight tradecosts in theGTAP framework,originally
developedbyFrancois(1999,2001)withsupportfromtheECtostudytheMillennium
Round (nowknownas theDohaRound).10 Ithas featured in the jointEC-Canadian
governmentstudyonanEU-CanadaFTA,aswellasthe2009EcorysstudyonEU-US
non-tariffbarriers.Informalterms,wemodelchangesintheefficiencyofproduction
forsale inspecificmarkets. In thissense,wecancapture the impact thatNTBscan
haveinraisingcostswhenservingforeignmarkets.WhereNTBsinsteadinvolvehigher
pricesbecauseofrents,wemodelthisasadditionalmark-ups(higherprices)accruing
tofirms.AshighlightedalreadyinthediscussioninChapter2,thereisanapproximate
60:40splitbetweencostgeneratingNTBsandrentgeneratingNBTs,intermsofimpact.
3.2. Sectors and regions in the model
WhileintheGTAPdataabout60sectorsand130differentregionsareavailable,forthe
purposeofthisstudywehaveaggregatedsectorsandregionstoallowustoconcentrate
onthekeyresults.ThesectorandregionalaggregationsarepresentedinTable3.
10 TheoriginalFrancoisapproachhasgrownfromaspecializedextensioninearlyapplicationstoanowstandardfeatureoftheGTAPmodel,followingitsincorporationbyHertel,WalmsleyandItakura(2001).
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Technical Discussion on CGE Modelling Set Up
25
Table 3 SectorsandregionsusedintheCGEmodel
Sectors RegionsAgrforestryfisheries EuropeanUnionOtherprimarysectors UnitedStatesProcessedfoods OtherOECD,highincomeChemicals EastEuropeElectricalmachinery MediterraneanMotorvehicles ChinaOthertransportequipment IndiaOthermachinery ASEANMetalsandmetalproducts MERCOSURWoodandpaperproducts LowIncomeOthermanufactures RestofWorldWatertransportAirtransportFinanceInsuranceBusinessservicesCommunicationsConstructionPersonalservicesOtherservices
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27
In thischapterwesummarize thepolicyscenariosused in theCGEassessment that
followsinChapter5.Thisincludessomeexplanationofconcepts,suchaspolicyspill-
overs,thatareincludedinthescenarios.
4.1. Scenarios
Asdiscussed inChapter2,while it isconceivableforall tariffs toberemoved, it is
not realistic to assume that all NTBs and costs from regulatory divergence can be
removed.Thisisbecauseoftheunderlyingdifferencesinthenatureofthesemeasures.
AsaresultwhenmodellingtheliberalisationofNTBswemusttakeintoaccountthe
degree towhichNTB-related costs can realistically be reduced (via variousmeans
and techniques).On thebasis of theEcorys (2009) survey, a reasonableunderlying
ruleofthumbisthatapproximately50percentofthecost/priceimpactofNTBscan
beremovedi.e. theyareactionable.While there issomevariationbysector, the
mappingfromoverallprice/costdifferencestothosethatcanbenegotiatedonreflects
thisfinding,whichisbasedonexpertopinions,cross-checkswithregulators,legislators
andbusinessessupportedbythebusinesssurveyfromtheEcorys(2009)study.Against
thisbackground,thestudyissetuparoundscenariosdifferingwithrespecttolevelsof
ambitionandscopeofcoverage.ThescenariosaresummarizedinTable4below.
Thescenariossummarizedinthetablearerelativelymodest.Startingfromthelevelof
barriersreportedinTable2,onlyabouthalfofthebarriersareconsideredasnegotiable
oractionable.Ofthese,halfarereducedinthemostambitiousscenario(or25percent
4. The Policy Options Considered
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
28
oftotalNTBsinTable2).Thisisthemostambitiousscenario.Themodestscenarios
assumeevenlessreductioninNTBs.Underboththeambitiousandmodestscenarios,it
isassumedthatmoreaggressiveliberalizationisappliedtoprocurement.Thescenarios
reported here are therefore far less ambitious than under the original Ecorys study,
wherefulleliminationofactionableNTBswasassumed.
Table 4 ScenarioSummaries
Narrow(limited)FTAScenariosTariffsonly 98percentoftariffseliminatedServicesonly 10percentofservicesNTBseliminatedProcurementonly 25percentofprocurementNTBseliminatedComprehensiveScenarios
Lessambitious
98percentoftariffseliminated10percentofNTBseliminatedonbothgoodsandservices(20percentofactionable)25percentofprocurementNTBseliminated
Ambitious
100percentoftariffseliminated25percentofNTBseliminatedonbothgoodsandservices(50percentofactionable)50percentofprocurementNTBseliminated
4.2. Spill-overs
Thesimulationsthatarecarriedoutalsotakeintoaccountconceptsofbothregulatory
convergenceandregulatoryspill-overs.Morespecifically,insettinguptheexperiments,
wehaveincludedtwosetsofpossibleeffectsbeyondbilateralliberalization.Theseare
definedasfollows.First,wehaveincludeddirect spill-overs.Thesearebasedonthe
assumptionthatimprovedregulatoryconditionsnegotiatedbetweentheEUandtheUS
willalsoresultinalimitedfallinrelatedtradecostsforthirdcountriesexportingtothe
EUandUS.Inotherwords,thiscapturestheextenttowhichthebilateralstreamlining
of regulationsandstandards,and reduction in regulatoryburdens,alsobenefitother
exporterstotheEUandUS.Thispositivemarketaccesseffectforthirdcountriesis
modelledasbeingaround20percentofthebilateralfallintradecostrelatedtoNTBs
forthecorescenarios.(Wehavealsoexamined10percentspill-oversasarobustness
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The Policy Options Considered
29
check.)ThisconceptwasintroducedintheEU-JapanstudybyCopenhagenEconomics
(2009).Inpractice,itmeansthatifthereis5percentNTB-relatedtradecostreduction
betweentheEUandUS,therewillalsobea1percenttradecostreductionforthird
countriesexportingtotheEUandUS.Thelogicisthatfirmsinthirdcountriesmayfind
iteasiertomeeteitherEUorUSregulatoryrequirementsifbilateralnegotiationslead
to simplifications thatarenot inherentlydiscriminatory.KoxandLejour (2006), for
example,provideevidencethatdifferencesinregulationscanincreaseoperatingcosts
indifferentmarkets,reducingbilateraltrade.
Asecondindirecteffectinvolvingthirdcountriesisconsideredaswell:theindirect spill-
overs.Thesearemeanttogaugetheeconomicimplicationsifthirdcountriesadoptsome
ofthecommonstandardsagreedbetweentheEUandtheUS.Giventhat,collectively,
theEUandtheUSwouldstandastheworldsbiggesttradingblock,thereisavery
realpossibilitythatmutualagreementonregulationsandstandardswouldbeadopted,
partially,alsobythirdcountries.Thus,wheretheEUandtheUSactasaregulatory
hegemon,thereisscopeforsettingdefactocommon,globalstandards.Thisimplies
thatthebilateralagreementwillgiveEUandtheUSimprovedmarketaccessinthird
marketsfromreducedNTBs.Inaddition,therewillbescopeforreductionsinNTBs
amongst third countries, as they converge further on common standards.Therefore,
indirectspill-overswillleadtolowercostsandgreatertradebetweenthirdcountriesas
well.Wehavemodelledindirectspill-oversas50percentofthedirectspill-overrate.
Thismeansthatforexamplefora5percenttradecostreductionbetweentheEUand
US,andwith20percentcorrespondingdirectspill-overs,wewillhavea1percent
(directspill-over)reductionforthirdcountriesexportingtotheUSorEU,anda0.5per
cent(indirectspill-over)reductionforEUandUSexportcoststothirdcountries,and
fortradebetweenthirdcountries.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
30
4.3. Sectoral effects: Preliminary ranking
Atthisstage,wehavespelledout tradeflows, tariffbarriers,andnon-tariffbarriers.
InwhatfollowsinChapter5,wewillfocusoneffects.Beforedoingso,itisusefulto
benchmarkexpectations.Whatwemeanisthat,beforeweturntomodellingresults,
wewant toprovideanon-modelbased rankingof some important sourcesof likely
effects. This involves the data summarized inTable 5 below. In theTable, column
Asummarizes the totalvalueof tariffsandactionableNTBs(asdefinedbyEcorys)
appliedbytheUSagainstEUexports.Thenexttwocolumnssummarizetheimportance
ofeachsectortototalEUexportstotheUS.ColumnBisbasedongrossvalues,while
columnCisbasedinsteadonthevalueaddedcontainedinexports.11IncolumnC,we
seethatwhilechemicalsare12.38percentofexportsonagrossvaluebasis,theyare
somewhatlessimportantonavalueaddedbasis,accountingfor11.21percentofEU
valueaddedcontainedinexportstotheEU.Asacrudefirstpassatpossibleeffects,
columnEprovidesanimpact-rankingindex.Thisisbasedonthevalueaddedcontained
in exports by sector (C), the scope for liberalization (A), and theprice elasticityof
demandforimports(D).Together,theseprovidearoughestimateofincreasedexports,
onavalueaddedbasis,followingfromimprovedmarketaccesstotheUSforEUfirms.
Forexample,ofthetotalvalueaddedcontainedinEUexportstotheUS,columnEsays
thatfullliberalizationinchemicalscouldyieldan8.39percentincreaseintotalexports
totheUSonavalueaddedbasis.AsitisvalueaddedthattranslatesintoGDP,theindex
alsoprovidesacruderankingofoverallGDPimpactsofsector-specificliberalization.
11 SeeFrancois,Manchin,andTomberger(2012)forexplanationofthevalueaddedcalculations,whicharebasedonourCGEmodeldatabase
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The Policy Options Considered
31
Table 5 Impactrankingindexes
A B C D E=.01*A*C*D
actionableNTBs+tariffsgrossexport
shareexportvalueaddedshare priceelasticity index
Agrforestryfisheries 3.70 1.73 2.09 4.77 0.37
Otherprimarysectors 0.00 1.36 1.70 12.13 0.00
Processedfoods 48.93 4.42 4.71 2.46 5.67Chemicals 14.69 12.38 11.21 5.09 8.39Electricalmachinery 9.91 1.09 0.94 9.65 0.89
Motorvehicles 22.49 8.81 7.11 10.00 15.99Othertransportequipment 8.63 5.31 4.94 7.14 3.04
Othermachinery 0.80 16.92 16.25 9.71 1.26Metalsandmetalproducts 6.69 2.75 2.53 13.91 2.36
Woodandpaperproducts 5.76 2.42 2.61 7.99 1.20
Othermanufactures 3.20 7.32 4.90 6.56 1.03
Watertransport 0.65 0.05 0.04 3.80 0.00Airtransport 2.35 3.12 2.41 3.80 0.22Finance 6.46 6.20 7.45 2.04 0.98Insurance 3.84 6.02 7.10 3.18 0.87Businessservices 1.58 10.07 12.28 3.18 0.62Communications 0.65 0.85 1.01 3.18 0.02Construction 0.90 0.35 0.36 4.21 0.01Personalservices 0.66 1.49 1.76 8.71 0.10Other(public)services 0.00 7.36 8.59 3.92 0.00
Source: CGEcalculations.
TheestimatesincolumnEofTable5areofcoursepartialequilibrium.Theymisscross-
sectoreffects,includinglabourmarketinteractionandintermediatelinkages.Theyalso
missconsumerbenefitsfromaccesstomoregoodsandservices.Evenso,theyprovide
aclearrankingoflikelyeffects.Thisrankingcarriesthroughtheestimatesinthenext
chapter, and so it isworth discussing the pattern for the impact indexes briefly, as
showninFigure10.Fromthefigure,wecanseethatforsomesectors,especiallymotor
vehicles, though they are not dominant on a value added basis, the combination of
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
32
highelasticitiesandhightradebarriersmeansthat,overall,thesesectorsarelikelyto
dominateintermsofimpact.Bythesamelogic,despitethefactthatothermachinery
isamajorsectoronavalueaddedbasis, the lowlevelofbarriersmeansitdoesnot
rankhighlyintermsofexpectedbenefitsfromimprovedmarketaccess.FromFigure
10,themanufacturingsectorsarelikelytohavethegreatestimpactbyfaroverall.This
includesmotorvehicles,chemicals,processedfoods,andother transportequipment.
Incontrast,whilevalueaddedsharesarecomparablefortheservicessectors(business
services is more important on a value added basis than either chemicals or motor
vehicles), thecombinationof lowelasticitiesand relatively lowbarriersmeans that,
overall,weexpectthegreatestimpactofmarketaccessonexportsandGDPtobefrom
liberalizationongoodsectors,andespeciallychemicals,machinery(vehiclesandother
transportequipment),andprocessedfoods.ThepatterninFigure10revealsitselfagain
whenreportresultsinChapter5.Manufacturingliberalizationistheprimarydriverof
benefitsfromimprovedtrade-relatedmarketaccess.
Figure 10 Valueaddedandimpactrankings
Source: owncalculations.SeeTable5.
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33
In this chapter we focus on the results of the CGE modelling of bilateral trade
liberalization.Theresultsarereportedwithrespecttoaneconomicbenchmarkprojected
outtotheyear2027,whichimpliesthatthattheycapturetheimpactoftheagreement
afulltenyearsaftertheimplementationoftheagreement,providingthelonger-term
impactofpolicychanges.First,wepresentresultsforthelimitedscenarios.Wethen
examinethecomprehensivescenarios,assumingthatanagreementwouldcollectively
covertariffs,services,andprocurement.Wethenmoveontoreportingestimatedeffects
on output and trade, first on an aggregate and then on amore disaggregate, sector
specific level.Wealsoprovideadiscussionof the effectsof removalofbarrierson
sustainability,i.e.effectsonlabour,CO2emissionsandtheuseofnaturalresources.
Thelastpartofthischaptersummarisestheresultingeffectsontherestoftheworld.
5.1. Limited Scenarios
Inthissection,wepresentresultsassumingthatalessambitious,limitedFTAwouldbe
implemented.Weanalysetheimpactassumingthatonlyasinglepolicypillar,i.e.only
tariffliberalisation,oronlyservicesliberalization,oronlyprocurementliberalisation
wouldbe implemented.Note that the liberalisationefforts thatarebeingconsidered
for each pillar are similar to those envisaged in the less ambitious scenario of the
comprehensiveFTAoption(seeTable4),including20percentspill-overs.12Forthe
tariffonlyagreementthereareobviouslynospill-overs.
12 Resultswith10percentspill-oversarereportedinseparateannextables.
5. Results
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Thefirstconclusiontotakefromtheresultsofthepartialagreementsisthatliberalising
eachpolicypillarsseparatelyleadstorelativelysmall increasesinGDPforboththe
USandtheEU(seeTable6andTable7below).FortheEU,thetariffscutsleadtoa
GDP increaseof0.10percent (23,753millioneuros),while the reductionofNTBs
inservicesandinprocurementincreaseGDPbyonly0.02percent(5,298and6,367
millioneuros).FortheUS,thesechangesareevensmaller(rangingfrom0.01to0.04
percent).
Table 6 ChangesinGDP(inpercent),2027benchmark,limitedagreement,20per
centdirectspill-overs
TariffsOnly ServicesOnly ProcurementOnlyEuropeanUnion 0.10 0.02 0.02UnitedStates 0.04 0.03 0.01Other -0.01 0.00 0.00OtherOECD,highincome -0.03 0.00 0.00
EastEurope -0.04 0.00 0.00Mediterranean -0.04 0.00 0.00China 0.01 -0.01 -0.01India -0.01 0.00 0.00ASEAN -0.02 0.01 -0.01MERCOSUR -0.01 0.00 0.00LowIncome -0.02 0.00 0.00RestofWorld -0.02 0.00 0.00
Source: CGEcalculations.
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Results
35
Table 7 ChangesinGDP(inmillioneuros),2027benchmark,limitedagreement,
20percentdirectspill-overs
TariffsOnly ServicesOnly ProcurementOnlyEuropeanUnion 23,753 5,298 6,367UnitedStates 9,447 7,356 1,875Other -7,903 -117 -1,595OtherOECD,highincome -5,065 726 -668
EastEurope -292 26 4Mediterranean -580 60 -8China 2,289 -1,713 -856India -489 137 79ASEAN -832 337 -263MERCOSUR -363 182 -5LowIncome -228 39 47RestofWorld -2,344 90 75
Source: CGEcalculations.
Therelativesizeoftheservicesimpactislinkedbothtothemagnitudeofunderlying
bilateralbarriersthatarereduced(seeTable2)andalsototherelativetradevolumes
(seeFigure2).NTBsareperceivedbybusinessesasroughly2.5timeshigheringoods
thanservices,asappliedintheexperiments.ThiscapturesthefactthatboththeEUand
USarerelativelyopen,byglobalstandards,intheservicesectors.Atthesametime,
goodstradeistwicethevalueofservicestrade.Thustherelativemagnitudesforgoods
andservicesNTBsareconsistentwiththebenchmarklevelsofprotectionandtrade.
Next,welookattheexpectedchangesintradefortheEUandtheUS.Theresultsare
presentedforeachmeasureseparatelyinTable8andTable9below.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Table 8 Changesintrade(inpercent),extra-EUtradefortheEU,2027benchmark,
limitedagreement,20percentdirectspill-overs
TariffsOnly ServicesOnly ProcurementOnlyExportsEuropeanUnion 1.18 0.16 0.19UnitedStates 1.91 0.19 0.23
ImportsEuropeanUnion 1.00 0.13 0.18UnitedStates 1.13 0.57 0.14
Terms of tradeEuropeanUnion -0.01 0.00 0.00UnitedStates 0.04 -0.01 -0.02
Source:CGEcalculations.
Table 9 Changesintrade(inmillioneuros),extra-EUtradeincaseoftheEU,2027
benchmark,limitedagreement,20percentdirectspill-overs
TariffsOnly ServicesOnly ProcurementOnlyExportsEuropeanUnion 43,740 5,777 7,136UnitedStates 57,330 5,488 5,942
ImportsEuropeanUnion 44,338 5,742 7,881UnitedStates 47,775 4,655 5,869
Source:CGEcalculations.
Amongthepartialagreementoptions, the tariffcutsareshowntodeliver thelargest
increase in trade flows. Here, both exports and imports are shown to increase by
between 1 and 2 per cent. Extra-EU exports are estimated to increase by 1.18 per
cent(correspondingto44billioneuros)whileimportsfromoutsideEUareexpected
toriseby1.00percent(correspondingalso toabout44billioneuros increase).The
changesareestimatedtobeslightlyhigherfortheUS.Liberalisingprocurementand
serviceswill leadtorelativelysmall, less than0.5percent(about6-7billioneuros)
increases inexportsand imports.Theresultingchanges in termsof tradeareshown
tobe insignificant.While theprocurementandservicesoptions leadtosimilarGDP
effects, the trade effects are larger overall for procurement.This traces back to the
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Results
37
underlying trade elasticities.Goods are estimated to bemoreprice sensitive overall
(seethediscussioninChapter4)andthistranslatesintosomewhatlargertradevolume
effects.However,bothsetsoftradevolumeeffectsaremuchsmallerthantheestimates
discussedbelowlinkedtoamorecomprehensiveagreement.
ThetablesbelowshowtheimpactofthelimitedFTAonbilateralsectoraltradebetween
theEUandtheUS.Limitingtheliberalisationtoservicesorprocurementonlywould
haveaverymarginalimpactonsectoraltrade,withtheexceptionofsomeoftheservices
exportsand imports increasingasbarriers removedunder theservices liberalisation.
Nevertheless,onaverage,bothbilateralexportsandimportswouldincreasebyabout
1per centor less if only servicesorprocurement is liberalised.On theotherhand,
thecutsintariffswouldleadto6.6percentincreaseofEUexportstotheUSandto
a12.4percentincreaseinimports.Thedifferenceinthemagnitudeofchangeisdue
totheinitialtariffstructuresbetweenthetwoeconomies,withtheEUhavinghigher
barrierstowardstheUS.Thusthedifferenceintheseaveragechangesismainlydriven
bymotorvehicles.Inthissectortheimportswouldsignificantlyincreaseastariffsare
removedforUSexporters.Inabsoluteterms,thegreatestincreaseinbilateralservices
exportsunderservices-onlyliberalizationisinfinance,insurance,andbusinessservices
inthecaseoftheEU,andinfinanceandbusinessservicesinthecaseoftheUS.With
procurement only,we see bilateral trade growth primarily in goods (chemicals and
vehiclesexportsfortheEU,chemicalsandmetalsandfabricatedmetalproductsforthe
US).Thebilateraltradeeffectsoftariffsoutweighboththeprocurementandservices
only scenarios.There is substantial growth in bilateral trade in chemicals, vehicles,
machinery, and othermanufactures.Total trade (EU exports to theUS,US exports
totheEU)expandsbyalmost100billioneurosinthetariffonlyscenario.Thesector
patternreflectsthebasicpatternoftariffsinthetariffs-onlyscenario,asdiscussedin
Chapter2,alongwiththeunderlyingelasticitiesasdiscussedinChapter3.Forexample,
USmanufacturing tariffs are relatively low, and highest on othermanufactures and
processedfoods(Figure9).
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Table 10 Changes in EU bilateral exports to US by sector (in per cent), 2027
benchmark,limitedagreement,20percentdirectspill-overs
TariffsOnly ServicesOnly ProcurementOnly
Percent Millioneuros PercentMillioneuros Percent
Millioneuros
Agrforestryfisheries 17.53 2,024 0.00 0 -0.15 -17
Otherprimarysectors 0.37 33 0.05 4 0.00 0
Processedfoods 8.15 2,402 0.00 0 1.50 442Chemicals 5.46 4,509 -0.09 -77 2.59 2,140Electricalmachinery 3.08 225 -0.19 -14 -0.22 -16
Motorvehicles 13.70 8,048 -0.05 -29 5.69 3,345Othertransportequipment 1.84 653 -0.01 -4 1.50 531
Othermachinery 8.60 9,705 -0.11 -123 -0.11 -126Metalsandmetalproducts 20.40 3,744 0.01 2 4.13 757
Woodandpaperproducts 2.23 359 -0.02 -4 -0.19 -30
Othermanufactures 23.35 11,402 -0.02 -12 -0.05 -27
Watertransport 0.32 1 3.35 12 0.26 1Airtransport 0.24 50 0.79 164 0.03 7Finance 0.22 93 4.32 1,787 -0.03 -13Insurance 0.27 107 4.35 1,746 -0.06 -24Businessservices 0.43 288 1.23 825 0.13 87Communications 0.20 11 0.73 41 0.07 4Construction 0.45 10 1.73 40 0.48 11Personalservices 0.46 46 2.49 247 -0.26 -25Otherservices 0.27 130 -0.03 -13 -0.10 -50total 6.57 43,840 0.69 4,591 1.05 6,997
Source:CGEcalculations.
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Table 11 ChangesinUSbilateralexportstoEUbysector,2027benchmark,limited
agreement,20percentdirectspill-overs
TariffsOnly ServicesOnly ProcurementOnly
Percent Millioneuros PercentMillioneuros Percent
Millioneuros
Agrforestryfisheries 19.33 978 0.03 1 0.15 8
Otherprimarysectors 0.50 51 -0.04 -4 0.00 0
Processedfoods 39.82 2,173 0.03 2 0.11 6Chemicals 12.45 9,927 0.16 129 0.54 430Electricalmachinery 3.39 639 0.91 171 1.07 201
Motorvehicles 109.50 20,808 0.11 20 0.67 127Othertransportequipment 7.61 2,823 0.05 18 0.32 118
Othermachinery 12.10 5,659 0.16 75 0.28 129Metalsandmetalproducts 23.43 4,995 0.03 6 9.29 1,980
Woodandpaperproducts 3.74 257 0.07 5 0.73 50
Othermanufactures 15.80 5,836 0.04 16 0.06 22
Watertransport -0.25 -1 2.90 17 0.11 1Airtransport -0.17 -29 0.74 125 0.08 14Finance -0.14 -35 2.16 546 0.66 166Insurance -0.24 -9 3.25 116 0.09 3Businessservices -0.36 -130 2.41 862 0.09 32Communications -0.18 -12 4.60 300 0.11 7Construction -0.31 -7 2.76 65 1.14 27Personalservices -0.42 -29 5.07 355 0.30 21Otherservices -0.23 -116 0.07 35 0.14 69total 12.36 53,777 0.66 2,859 0.78 3,411Source:CGEcalculations.
Table12belowshowsthecorrespondingestimatedchangesintheEUstotalexternal
trade (extra-EU). Overall, the tariff cuts are expected to cause total imports and
exports to increaseby1.18and1.00percentrespectively.Theinducedeffectsfrom
liberalisingtradeinservicesandprocurementaresmaller,rangingfrom0.13to0.19
per cent respectively.Nevertheless, exports in the insurance and finance sectors are
estimatedtoincreasebyabout2percentifservicesareliberalised.Meanwhile,finance,
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
40
communications,andpersonalservicesimportsareestimatedtoincreaseby1-1.8per
cent due to services liberalisation. Under tariff liberalisation, the highest increase
in importswould takeplace inmotorvehicleswitha9.21percent,while regarding
exportsthemostpronouncedincreaseisestimatedtotakeplaceinothermanufactures
witha5.50percentincrease.
Table 12 Changes in EU trade by sector (in per cent), 2027 benchmark, limited
agreement,20percentdirectspill-overs
Totalexports Totalimports
Tariffsonly Servicesonly Procurementonly Tariffsonly ServicesonlyProcurement
onlyPercent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Agrforestryfisheries 0.58 1,303 0.00 3 -0.05 -102 2.64 1,342 0.10 52 0.17 85
Otherprimarysectors -0.27 -363 0.03 35 0.01 11 0.52 3,643 0.01 98 0.01 47
Processedfoods 1.33 2,360 0.03 45 0.27 481 2.66 2,282 0.07 64 0.12 100Chemicals 1.23 4,707 -0.01 -47 0.65 2,478 2.46 7,972 0.08 268 0.13 419Electricalmachinery -0.03 -26 -0.02 -15 -0.31 -292 0.39 1,357 0.01 23 0.01 24
Motorvehicles 3.70 8,399 -0.02 -43 1.47 3,340 9.21 16,799 0.11 193 0.22 404Othertransportequipment 0.56 914 -0.02 -38 0.27 442 2.54 2,345 0.06 55 0.16 151
Othermachinery 1.73 10,359 -0.08 -487 -0.10 -611 0.82 3,969 0.14 685 0.03 126Metalsandmetalproducts 2.70 3,720 -0.01 -18 1.15 1,589 1.18 4,156 0.06 214 1.45 5,111
Woodandpaperproducts 0.16 222 -0.01 -17 -0.05 -72 0.67 438 0.11 74 0.29 189
Othermanufactures 5.50 11,957 0.02 34 -0.02 -36 -0.03 -250 0.05 523 0.04 412
Watertransport 0.10 47 0.22 100 0.03 14 -0.02 -8 0.31 118 0.05 21Airtransport 0.14 110 0.21 162 0.01 9 -0.09 -84 0.21 203 0.05 51Finance 0.09 87 2.00 1,864 0.00 2 0.09 63 1.02 695 0.32 221Insurance 0.09 86 2.03 1,849 -0.03 -27 0.12 20 0.94 160 0.07 12Businessservices 0.04 183 0.36 1,500 0.02 77 -0.08 -144 0.62 1,127 0.06 103Communications 0.00 0 0.47 127 0.02 6 0.09 35 1.15 420 0.08 29Construction -0.02 -13 0.27 176 0.00 -1 0.09 20 0.47 110 0.22 52Personalservices -0.13 -138 0.50 552 -0.11 -117 0.15 41 1.84 487 0.21 55Otherservices -0.06 -173 0.00 -4 -0.02 -53 0.12 341 0.06 173 0.10 267Total 1.18 43,740 0.16 5,777 0.19 7,136 1.00 44,338 0.13 5,742 0.18 7,881
Source:CGEcalculations.
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Results
41
ThereductionoftariffswillleadUSimportsandexportstoincreaseby1.91and1.13
percentrespectively(Table13).Thebiggestincreasesareestimatedtotakeplacein
theexportofmotorvehicles (15.43percent),chemicals (4.05percent),metalsand
metalproducts(4.33percent).AscanbeseenfromtheTable,theestimatedeffectsof
theliberalisationofservicesandprocurementontradearemuchsmaller.Thebiggest
changes in imports are also attributable to the reduction of tariffs,with the highest
sectorspecificincreasesexpectedtotakeplaceinprocessedfoodsandmetalsandmetal
productions(2.37percentand2.43percentrespectively)andmotorvehicles(2.13per
cent).Theliberalisationoftheservicessectorsishoweverestimatedtoincreaseimports
offinanceandinsuranceservicesbyaround3percent.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Table 13 Changes inUS trade by sector (in per cent), 2027 benchmark, limited
agreement,20percentdirectspill-overs
Totalexports Totalimports
TariffsOnly ServicesOnly ProcurementOnly TariffsOnly ServicesOnlyProcurement
OnlyPercent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Percent
Mlneuros
Agrforestryfisheries 0.29 1,386 0.00 -16 0.03 140 1.74 1,814 0.03 35 -0.08 -82
Otherprimarysectors -0.09 -166 0.00 8 0.01 18 0.14 696 0.05 265 0.00 -2
Processedfoods 2.39 2,556 0.02 16 0.03 31 2.37 2,490 0.01 14 0.58 608Chemicals 4.05 13,363 0.11 375 0.11 362 1.06 2,857 -0.06 -167 1.00 2,678Electricalmachinery -1.10 -1,534 0.76 1,061 0.59 826 0.94 3,994 -0.26 -1,106 -0.35 -1,467
Motorvehicles 15.43 23,826 0.05 80 0.31 477 2.13 8,879 0.01 25 0.91 3,773Othertransportequipment 1.55 2,688 0.02 34 0.18 305 1.08 929 0.02 18 0.55 473
Othermachinery 1.77 4,854 0.08 220 0.17 466 1.46 10,363 0.01 72 -0.14 -1,012Metalsandmetalproducts 4.33 5,171 0.01 10 2.14 2,553 2.43 4,716 0.08 165 0.69 1,339
Woodandpaperproducts 0.00 0 0.02 14 0.13 96 0.82 1,088 0.03 40 -0.11 -143
Othermanufactures 3.40 6,989 0.03 69 0.04 84 1.06 8,190 0.03 213 -0.03 -237
Watertransport 0.07 3 0.09 4 0.03 1 0.22 6 0.63 18 0.04 1Airtransport 0.04 19 0.18 96 0.04 19 0.12 66 0.34 182 0.01 7Finance -0.10 -78 0.98 736 0.27 203 0.26 156 3.14 1,903 -0.02 -13Insurance -0.26 -85 0.68 222 0.03 9 0.31 191 2.81 1,716 -0.04 -26Businessservices -0.29 -398 0.90 1,240 0.04 55 0.39 609 0.55 861 0.05 79Communications -0.18 -36 2.07 411 0.05 11 0.24 36 0.32 48 0.02 3Construction -0.33 -42 0.82 105 0.27 35 0.45 26 0.80 47 0.23 13Personalservices -0.57 -429 0.95 712 0.13 98 0.60 124 1.43 298 -0.18 -38Otherservices -0.28 -758 0.03 90 0.06 152 0.35 544 0.01 9 -0.06 -88Total 1.91 57,330 0.19 5,488 0.23 5,943 1.13 47,775 0.57 4,655 0.14 5,868
Source:CGEcalculations.
Wenowturntoanalysingtheestimatedeffectsontheoutputofthedifferentsectors.
TheunderlyingchangesfortheEUandtheUSarepresentedinTable14andTable15
below.
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Results
43
Table 14 Changes inEUoutputbysector(inpercent),2027benchmark, limited
agreement,20percentdirectspill-overs
Baselinesharesinvalueadded TariffsOnly ServicesOnly ProcurementOnly
Agrforestryfisheries 0.040 0.03 0.00 0.00
Otherprimarysectors 0.019 0.00 0.00 0.00
Processedfoods 0.030 0.06 0.01 0.04Chemicals 0.028 -0.11 -0.01 0.12Electricalmachinery 0.004 -0.31 0.02 0.06
Motorvehicles 0.015 -0.65 -0.01 0.30Othertransportequipment 0.007 -0.26 -0.02 0.09
Othermachinery 0.037 0.35 -0.04 0.03Metalsandmetalproducts 0.021 0.03 -0.03 -0.39
Woodandpaperproducts 0.023 0.06 0.00 -0.01
Othermanufactures 0.029 0.60 -0.01 0.01
Watertransport 0.003 0.14 -0.04 0.03Airtransport 0.003 0.15 -0.01 0.01Finance 0.032 0.06 0.11 -0.02Insurance 0.010 0.06 0.32 0.01Businessservices 0.222 0.05 0.01 0.02Communications 0.023 0.05 -0.03 0.01Construction 0.083 0.12 0.03 0.02Personalservices 0.035 0.04 0.02 0.00Otherservices 0.338 0.05 0.01 0.01Source:CGEcalculations.
AscanbeseenintheTable14,thecorrespondingestimatedchangesinsectorspecific
outputareverysmall.Noneofthesectorswillexpandorcontractbymorethan1per
centinthecaseoftheEU,andinmostsectorsoutputwillbasicallyremainunchanged.
Similarly,onlyslightchangesareexpectedtotakeplaceinUSsector-leveloutputasa
consequenceofthenon-comprehensiveFTAsthatweresimulated.Inonlytwosectors
theoutputisestimatedtochangebymorethan1percent:intheelectricalmachinery
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
44
sectoritisestimatedtodecreaseby1.40percent,whileinmotorvehiclesitisexpected
toincreaseby1.76percent(oncetariffsarecut).
Table 15 Changes inUSoutputbysector (inpercent),2027benchmark, limited
agreement,20percentdirectspill-overs
Baselinesharesinvalueadded TariffsOnly ServicesOnlyProcurement
OnlyAgrforestryfisheries 0.031 -0.02 0.00 0.00Otherprimarysectors 0.023 -0.01 0.00 0.00Processedfoods 0.017 0.06 0.02 -0.06Chemicals 0.021 0.81 0.07 -0.27Electricalmachinery 0.003 -1.40 0.64 0.73Motorvehicles 0.010 1.76 0.05 -0.56Othertransportequipment 0.009 0.38 0.03 -0.07
Othermachinery 0.027 -0.38 0.07 0.13Metalsandmetalproducts 0.014 0.15 0.05 0.07
Woodandpaperproducts 0.023 -0.05 0.03 0.02
Othermanufactures 0.010 0.05 0.02 0.00Watertransport 0.002 0.04 0.03 0.02Airtransport 0.004 0.00 0.00 0.02Finance 0.074 0.00 -0.11 0.01Insurance 0.020 -0.04 -0.27 0.01Businessservices 0.099 -0.01 0.01 0.00Communications 0.019 0.00 0.06 0.01Construction 0.080 0.09 0.04 0.01Personalservices 0.036 -0.01 0.04 0.02Otherservices 0.480 -0.02 0.00 0.00Source:CGEcalculations.
Whilethenon-comprehensiveFTAoption,whichwouldbelimitedtoeithertariff,or
servicestrade,orprocurementliberalization,wouldresultinpositivechangesinsector-
leveloutputandtradepatterns,thesebenefitswouldberelativelysmall.Atanaggregate
level,thechangeswouldbeevensmaller.Whencomparingtheimpactofthesenon-
comprehensiveFTAswithacomprehensiveFTAthatwillbediscussedinthefollowing
section,itisclearthattheoverallbenefitswouldbeofmuchlargermagnitudeinthe
caseofatradeagreementthatcoversmorepolicypillarssimultaneously.
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Results
45
5.2. Full FTA
5.2.1. Macro Results
Here,weturntothediscussionofeffectsonmacroeconomicvariables,resultingfrom
a reductionofbarriers to tradeand investmentbetween theEUand theUSundera
comprehensiveFTA(seeTable4fordetails).Insodoing,wepresenttheresultswith
regards to GDP.13As indicated above two FTA scenarios are considered: one less
ambitiousandonemoreambitious(asdescribedinTable4).
Table16andTable17belowshowtheestimatedeffectonGDPbothfortheambitious
andlessambitiousscenariosfortheEUandtheUS.Theresultsarepresentedforthe
totalimpactandalsodecomposedintothedifferentsubcomponentsthatcorrespondto
theseveralpolicypillars,namelytariffs,totalNTBsongoods,totalNTBsonservices,
directandindirectspill-overs,andprocurement.Procurementrelatedbarriersareinfact
capturedbytheNTBsingoodsandinservices.Aprocurementcolumnisintroduced
inthetablebelowinordertohighlighttheimportanceofthistypeofbarriersinthe
negotiations.However,itisimportanttonotethattheimpactofreducingprocurement
barriersshouldnotbeaddedtotheeffectsfromotherpillarsasitwouldmeandouble-
counting.
AscanbeseenTable16,theestimatedimpactonGDPfortheEUandUSrangebetween
0.2 and 0.5 per cent, for the less ambitious and ambitious scenarios respectively.
BecausewearedealingwithNTBsratherthantariffs,changesintradevolumesalone
arenotnecessarilyindicativeofthenetimpactonGDP,andsothereaderiscautioned
whencomparingTable16toTable20(changesinexports)below.Thisisbecause,as
13 Theannextablesalsoreportchangesinrealnationalincome.GDPisreportedherebecauseitisaconceptthatwillbemorefamiliartothereader.GDPisthevalueofafixedbasketoffinalgoodsandservicesproducedbytheeconomy.Realnationalincome,ontheotherhand,isameasureoftheactualpurchasingpoweravailableforfinalconsumption,givenchangesinbothoutputandprices. Realnational incomebettercapturesshifts in theeconomytowardamoreefficientbasketofgoodsandservices,aswellaschanges in finalconsumptionprices. Usually these twomeasurestrackeachotherclosely.However,whenthecurrentpatternofGDPreflectsstrongunderlyingdistortions,realnationalincomeisabettermeasureofthebenefitstotheagentsintheeconomy.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
46
discussedearlierinthereport(seeChapters2and3),NTBsinvolvehighercostsand
solowerproductivity.TheimpactonGDPwillthereforehinge,inpart,oncostsavings
linkedtoremovingNTBs.Basically,withNTBsthatraisecoststheopportunitycosts
ofnewexportsresultingfromNTBreductionarelowerthanwithtariffs,sothatthecost
sideofthecost-benefitanalysisofincreasedtradeislower.TheimpactonGDPwill
alsohingeonthevalueaddedcompositionofexports.Assuch,eveniftradevolume
effects arenot relatively large in aparticular sector (recall ourdiscussionofFigure
10), theymaystillyield relatively largegainsoverall.The indirectspill-overeffects
aremorecomplexstill(thoughsmallinabsoluteterms).Therewillbebothincreased
incomeandtradeinthirdcountries(fromtheothersetsofresultsdiscussedhere),along
with improvedaccessconditions to thirdmarkets. However, there isalso scope for
somediversionoftradeawayfromtheUSandEUandtowardintra-thirdcountrytrade.
Thetotalimpactdependsonallthesethings,andthedirectionisunknownapriori.
Table 16 ChangesinGDP(inpercent),2027benchmark,20percentdirectspill-
overs
A=B+C+D+E+F B C D E F G
Total
Stemmingfromtheliberalisationof
tariffstotalNTBsgoods
totalNTBsservices
directspill-overs
indirectspill-overs procurement
Less ambitious experiment EuropeanUnion 0.27 0.10 0.12 0.01 0.03 0.01 0.02UnitedStates 0.21 0.04 0.11 0.03 0.03 0.00 0.01Ambitious experimentEuropeanUnion 0.48 0.11 0.26 0.03 0.07 0.02 0.05UnitedStates 0.39 0.04 0.23 0.06 0.06 0.00 0.03Source:CGEcalculations.
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Results
47
Analternativemeasure of aggregate results is provided inTable 18below,where a
comparisonisprovidedacrossscenariosofhouseholdincomeeffectsfortheEUand
US.14Startingwiththelimitedscenarios,atariffonlyscenarioyields12.9billionin
disposable incomegainsacrossEuropeanhouseholds,and5.1billionindisposable
income gains for US households. The services and procurement agreements yield
substantiallylessforEuropeanhouseholds,whiletheservicesonlyagreementyieldsthe
mostforUShouseholdsunderthelimitedscenarios.Theseeffectsarefaroutweighed
underboththelessambitiousandmoreambitiouscomprehensivescenarios.Herewe
have estimated gains to disposable income acrossEuropean households of between
39.8billionand70.82billion.IntheUS,householddisposableincomeincreaseby
between29.9and58.4billion.Forafamilyof4thecomprehensivescenariosyield
disposableincomegainsbetween306and545annuallyintheEUandbetween336
and655intheUS.
Table 17 ChangesinGDP(inmillioneuros),2027benchmark,20percentdirect
spill-overs
A=B+C+D+E+F B C D E F G
Total
Stemmingfromtheliberalisationof
tariffstotalNTBsgoods
totalNTBsservices
directspill-overs
indirectspill-overs procurement
Less ambitious experiment EuropeanUnion 68,274 25,394 29,250 3,482 7,984 2,164 6,069UnitedStates 49,543 9,784 25,505 6,899 7,404 -72 3,341Ambitious experiment EuropeanUnion 119,212 27,409 64,344 7,014 16,291 4,154 12,312UnitedStates 94,904 10,120 56,202 14,014 14,760 -216 6,707Source:CGEcalculations.
14 Householddisposableincomeisasubsetoftotalincome(itislessthantotalnationalincome).Itrepresentstheincomeavailabletospendonfinalconsumption(food,clothing,transport,housing),afterallocationstothegovernmentandforsavings.Changesinthisvariablethereforemeasurethechangesinprivateconsumptionvaluedatcurrentprices.
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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment
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Table 18 Householddisposableincome,millioneuro,2027benchmark
limited
agreement:tariffsonly
limitedagreement:servicesonly
limitedagreement:procurement
only
comprehensiveagreement:low
ambition
comprehensiveagreement:
highambition
totalEU,mill.euro 12,934 3,089 4,295 39,813 70,820US,mill.euro 5,081 4,122 2,246 29,982 58,434EU,percent 0.09 0.02 0.02 0.28 0.49US,percent 0.03 0.02 0.01 0.18 0.35EU,perhousehold 99 41 49 306 545
US,perhousehold 57 82 21 336 655
Source:CGEcalculations.Perhouseholdestimatesareforafamilyof4.
Theexactamountoverall,asreportedinTable16,dependsonthecombinationofvalue
added,barrier levels, andunderlyingelasticities. It alsohingeson linkagesbetween
sectors, and final demand responses to price changes. Indeed this is the reason for
workingwithaCGEframeworkwearethenbetterabletocapturethecombinationof
theseeffectsacrosssectors.InthecaseoftheEU,ifwereferbacktoTable2,combined
withtheunderlyingbilateraltradebalancebysector(Figure1),theEUhasastrong,
positivebalanceingoodssectorswithrelativelyhighNTBlevels.Thismeansthaton
averageEuropeanfirmsfaceahighercostburdenlinkedtotransatlanticNTBsthando
USfirms,sothatthereductioninthecostburdenlinkedtoNTBswillbesomewhat
disproportionateaswell,benefitingEuropeanfirmsmoreonaverage.Assuch,wecan
expectsomewhatgreaterbenefitsfromimprovedmarketaccessfortheEUthanforthe
US.ThisisreflectedintheresultinTable16andTable17.Indeed,wherewehavea
similarchangeintradevolumes,thispositivebalancemeanstheEUwillbenefitmore
intermsofGDP.ThisisreflectedintherelativemagnitudesoftradeandGDPeffects
inTable16(above)andTable20(below).
For the US, around three quarters of the estimated increase in GDP, across both
scenarios, stemfrom the loweringofNTBs.For theEU,NTBs ingoodsare shown
tobeaccountableforaroundhalfof the increase,while lowering tariffs isshownto
belessimportant.Again,thisisconsistentwiththepatternoftrade,NTBsandtariffs
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Results
49
asdiscussed inChapter2.Whenviewing these tables, it is alsouseful to recall the
observationmade in Chapter 4 about the relatively low level of perceived bilateral
barriers in services, combinedwith a 65 per cent share of goods in bilateral trade.
Together,thehigherbarriersandtradeshareforgoodsimplythatmostgainswillfollow
fromNTBsandtariffsongoods.Similarly,theoriginalEcorys(2009)studycovered
limitedaspectsofprocurement,andthebarriersidentifiedwererelativelyminorasa
shareoftotalprotection.Assuch,itisnotsurprisingthattheprocurementestimatesare
relativelysmallasashareofthetotal.
Insummary,theseresultshighlightthatthepotentialmainimpactfromliberalization
stemsmorefromNTBliberalization(especiallyincludingspill-overs)ratherthanjust
reducingtariffbarriers.
5.2.2. Output and Trade
Next,wetakeacloserlookatthecorrespondingchangestotradeandoutputforthe
EUandtheUS.First,welookattheoveralleffectsonimportsandexportsandthenwe
moveontostudyingtheeffectsonamoredisaggregate,sectorspecificlevel.
5.2.2.1. Aggregate Effects
AscanbeseenfromTable19below,liberalisingtradewouldimplysomesignificant
increasesinEU-UStrade.Inthelessambitiousscenario,EUexports to theUSwill
increaseby16percentwhileUSexports to theEU increaseby23percent. In the
ambitiousscenario,thecorrespondingfiguresare28and37percent.Abouttwothirds
oftheincreaseinbilateraltradeintheambitiousexperimentisattributabletoreducing
NTBsingoodssectors.Changesintariffsarealsoimportant,thoughasdiscussedabove
agivenchangeintradetranslatesintogreaterGDPeffectswithNTBs.
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Table 19 Changesinbilateralexportstothepartnercountry(inpercentandmillion
euros),2027benchmark,20percentdirectspill-overs
A=B+C+D+E+F B C D E F G
Total
Stemmingfromtheliberalisationof
tariffstotalNTBsgoods
totalNTBsservices
directspill-overs
indirectspill-overs procurement
InpercentLess ambitious experiment EuropeanUnion 16.16 7.06 9.34 0.69 -0.76 -0.15 1.04UnitedStates 23.20 13.67 8.80 0.67 0.01 0.02 0.78Ambitious experiment EuropeanUnion 28.03 7.67 21.00 1.40 -1.73 -0.34 2.13UnitedStates 36.57 15.34 19.93 1.37 -0.08 0.03 1.62
InmillioneurosLess ambitious experiment EuropeanUnion 107,811 47,083 62,289 4,598 -5,089 -989 6,957UnitedStates 100,909 59,476 38,284 2,934 57 77 3,410Ambitious experiment EuropeanUnion 186,965 51,185 140,106 9,332 -11,525 -2,243 14,211UnitedStates 159,098 66,720 86,698 5,966 -335 151 7,043Source:CGEcalculations.
Table20andTable21provideestimatesfortotal(asopposedtobilateral)trade.For
theEU,totalexportsareexpectedtoincreaseby3.37to5.91percentundertheless
ambitiousandambitiousscenariosrespectively.Similartotheresultspresentedinthe
previoussection, the loweringofNTBs ingoods isshowntobe themost important
factorinincreasingexports,followedbytheloweringoftariffsonexportstotheUS.
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Table 20 Changesinvalueoftotalexports(inpercentandmillioneuros),extra-EU
exportsincaseoftheEU,2027benchmark,20percentdirectspill-overs
A=B+C+D+E+F B C D E F G
Total
Stemmingfromtheliberalisationof
tariffstotalNTBsgoods
totalNTBsservices
directspill-overs
indirectspill-overs procurement
InpercentLess ambitious experiment EuropeanUnion 3.37 1.28 1.43 0.11 0.25 0.28 0.19UnitedStates 4.75 2.11 1.69 0.16 0.52 0.27 0.23Ambitious experiment EuropeanUnion 5.91 1.41 3.23 0.23 0.48 0.56 0.42UnitedStates 8.02 2.34 3.79 0.33 1.01 0.54 0.48
InmillioneurosLess ambitious experiment EuropeanUnion 125,232 47,577 53,341 4,211 9,442 10,564 7,163UnitedStates 142,071 63,219 50,600 4,717 15,505 8,031 5,943Ambitious experiment EuropeanUnion 219,970 52,327 120,313 8,523 18,010 20,959 15,620UnitedStates 239,543 70,265 113,630 9,624 30,042 15,982 14,202Source:CGEcalculations.
FortheUS,thecorrespondingeffectonexportsislarger.Theyareestimatedtoincrease
by4.75and8.02percent respectively for the two liberalizingscenarios. In the less
ambitiousscenario,theloweringoftariffsisaccountableforaroundhalfofthatincrease.
Inthecaseofthemoreambitiousscenariothemostimportantcontributioncomesfrom
theloweringofNTBsingoods.Meanwhile,theloweringoftariffsisstillshowntobe
animportantfactorinrealizingtheseincreasesintrade.It is important torecall that
theEUhashightariffsonmotorvehiclesandprocessedfoods.Thisdrivespartofthe
largerexportgainfortheUSinthetablesabove.Theestimatedeffectsalsotellusthat
spill-overeffectsaremoreimportantfortheUSthantheyarefortheEU.(Seecolumns
E inboth tables). Thisdifference isdue inpart todifferences in the importanceof
tradewiththirdcountriesfortheUSandtheEU.Whenwelookatunderlyingbaseline
tradeflows,fortheUSthefirstmostimportantimportpartnerisChina.TheEUcomes
secondasasourceofimports.Furthermore,NAFTAcountriesarealsoveryimportant
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tradingpartners for theUSoverall. IncolumnE inboth tables,givendifferences in