Consequences of the Transatlantic Trade and Investment Partnership. Arguments and Counterarguments

Transcription

1 Consequences of the Transatlantic Trade and Investment Partnership Arguments and Counterarguments March 2015

2 This report was requested by the office of Tamas Meszerics (Member of the European Parliament) via The Greens/EFA group of the European Parliament. Author: Whitby Kft, Hungary Responsible office: Tamas MESZERICS Member of the European Parliament ASP 5 F 252 rue Wiertz 60 B-1047 Brussels Publication: Editorial closing date: 10/03/2015 Photo on the cover: TRADES by Pryere on Flickr, CC Attribution/Non-commercial license 2.0 Printed in the European Parliament The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. Reproduction and translation, except for commercial purposes, are authorised, provided the source is acknowledged and provided the publisher is given prior notice and supplied with an electronic copy of the publication. 2

3 Executive Summary This study gives a brief overview of the projected effects of the proposed Transatlantic Trade and Investment Partnership between the European Union and the United States, and the debate which has evolved around it. First, we give an overview of what is supposed to be the hard facts in the core of the debate, that is, the current state of the EU-US trade and the prospects of negotiating a large scale regional free trade agreement. There are a few key points to be made: TTIP is unique in many ways. Transatlantic trade is already relatively free, which is partly proven by the fact that the EU and US are one of each other's most important partner (if not the most important partner) in terms of trade and FDI. Also, there are not much tariffs left to be abolished. That being said, everyone agrees that if TTIP is going to have significant effect, which will stem from abolishing what the trade jargon calls non-tariff barriers or non-tariff measures (NTMs) - regulations, basically. Most quantitative studies are predicting effects on national income and wages for participating countries well below 1% in real terms over a long run of 15 years. These are understood as one-time level increases, not changes to yearly growth rates. This is true even with the most ambitious scenarios, where most NTMs are assumed to be abolished. These studies are mostly very optimistic in their assumptions on the nature of NTMs, but are also very similar in their modelling techniques and the data they use. Studies based on different assumptions show a much worse picture namely, significant decrease in all relevant socioeconomic indicators. We provide an insight into the methodological debate over the quantitative impact assessments of TTIP. Second, we look at the arguments around which the public debate crystallizes. Without taking a stand in the questions, we replicate the main issues raised by TTIP: Arguments over its general effectiveness: why do we want to have TTIP? It is, of course, the economic growth. But will there be growth? What does that growth depend on? If there is growth, is it enough? Over the costs, benefits and possible means of regulatory convergence: regulatory convergence means that doing business is made easier. But at what cost? Do we have to abandon such important EU values such as the precautionary principle? Do we have to adopt American standards? Are those lower than ours? Are labour rights doomed under TTIP? Do we have to privatize public services and open up procurement markets? Issues that have a potential effect on the environment: does TTIP mean the enforcement of shale gas on Europe? Democracy and transparency: is a coup d état going on against European democracy by big corporations, or is it just that elected leaders try to come up with the best agreement they can? The geopolitical context of TTIP and its effect on the prospects of the world trade system: does TTIP re-invigorate world trade, or euthanize it? Does it divide, or does it promote convergence? What should countries hope for which are not participating, but will nevertheless experience its effects? The core issues in terms of agriculture and food security: do we have to eat chlorinated chicken, genetically modified corn, hormone treated beef from now 3

4 on, and endure that American companies abuse of Europe s oldest geographical brands? The controversial topic of investor protection under the new trade regime: are we privatizing justice under the guide of TTIP and Investment-State Dispute Settlement? Third, we look at how TTIP might affect each EU members by collecting countryspecific data from the existing impact studies (where available) and data on the their trade with the US (how important it is in terms of GDP and in which industries it manifests) this latter info then can be contrasted with the industry-specific predictions on EU-US trade. In the appendix we give the list of non-trade measures as presented in one of the studies, and highlight does which are particularly controversial in the light of the TTIP debate. 4

5 Table of Contents Executive Summary Assessment on the large quantitative studies on TTIP and the corresponding criticism What is to be expected from TTIP? Chapter introduction Overview of the US-EU trade Main results in comparison Detailed results from the quantitative studies Ecorys (2009) CEPII (2013) CEPR (2013) Bertelsmann/Ifo (2013) Capaldo (2014) Criticism of the quantitative studies Oversold results Conceptual errors, biased opinions Bad economics Argument Catalog Effectiveness of TTIP in general Regulatory convergence Regulatory convergence general remarks Labour rights Privatization of public services Access to procurement markets Regulatory convergence examples from particular industries Environment Democracy and transparency Geopolitics, multilateralism vs bilateralism Effects on third countries Agriculture and food security Investment protection Country by country assessment TTIP s possible effects on Austria TTIP s possible effects on Belgium TTIP s possible effects on Bulgaria TTIP s possible effects on Croatia TTIP s possible effects on Cyprus TTIP s possible effects on the Czech Republic

6 3.7. TTIP s possible effects on Denmark TTIP s possible effects on Estonia TTIP s possible effects on Finland TTIP s possible effects on France TTIP s possible effects on Germany TTIP s possible effects on Greece TTIP s possible effects on Hungary TTIP s possible effects on Ireland TTIP s possible effects on Italy TTIP s possible effects on Latvia TTIP s possible effects on Lithuania TTIP s possible effects on Luxembourg TTIP s possible effects on Malta TTIP s possible effects on the Netherlands TTIP s possible effects on Poland TTIP s possible effects on Portugal TTIP s possible effects on Romania TTIP s possible effects on Slovakia TTIP s possible effects on Slovenia TTIP s possible effects on Spain TTIP s possible effects on Sweden TTIP s possible effects on United Kingdom References Appendix

7 1. Assessment on the large quantitative studies on TTIP and the corresponding criticism What is to be expected from TTIP? 1.1. Chapter introduction This chapter provides a comparison of the main quantitative assessments of the hypothesized effects of the proposed Trans-Atlantic free trade area. There are five main studies we are aware of and several meta-studies which try to argue against both the theoretical and the empirical validity (and relevance) of the impact assessment studies - we also cover the arguments provided by these. The earliest impact assessment study we are aware of was undertaken by the Rotterdam based research and consultancy firm Ecorys. The document is entitled Non-Tariff Measure in EU-US Trade and Investment - An Economic Analysis (Ecorys, 2009). The study gives model estimations on the effects of a then hypothetical EU-US free trade agreement, which they base on trade data, expert opinion and firm surveys. The next study was made four years later at the Centre for Economic Policy Research at London, and was sponsored by the Directorate General for Trade of the European Commission (Francois et al, 2013). This study heavily builds on its precursor using the same modelling technique and assumptions, the main differences being its increased forecast horizon and more recent baseline data. The predicted economic consequences also fall in line with those from the Ecorys study. The France based research centre CEPII published their study in the same year; they started from similar assumptions and arrived at very similar conclusions. The most important commonality of these studies besides their similarities in modelling techniques is, unsurprisingly the lack of significant variation in the quantitative impact on trade and national income, which are both generally predicted to be modest at best. The only supportive study which substantially moved away from this methodological canon was the paper by Felberaymr et al. published as a CESifo working paper the next year (Fabelmayr et al., 2014), later turned into a policy paper of Bertelsman Stiftung. Using a similar modelling technique but different assumptions on how the economy would adapt to the policy changes under TTIP the authors provide scenarios of which some show an impact which exceeds the previous impact estimates multiple times. The series of supportive studies stop here. Raza et al. provide a thorough meta-analysis of the previous work pointing out serious issues in terms of theoretical credibility and data use (Reza et al. 2014) - we replicate the main arguments of their work in this chapter. Jeronim Capaldo also overviews the precursor studies and gives his very own impact analysis making use of a wholly different methodology, resulting in completely different results - results which show that TTIP would hurt the EU economies substantially (Capaldo, 2014). In a very recent paper Martin Myant and Ronan O Brien also provide arguments against the widely accepted and referenced model estimates while also point out that the main discourse of reducing non-trade barriers misses the whole point of the question (Myant and O Brien, 2015). The remaining part of the chapter is organized as follows. First, we sum up the main quantitative findings of the five impact studies. Then we compare them in terms of methodology and their use of data. The final part of the chapter summarizes the critical arguments made against these research practices. From now on in this chapter we will reference the aforementioned studies for the sake of simplicity as Ecorys (for Ecorys, 2009), CEPR (for Francois et al. 2013), CEPII (for Fontagné et al. 2013), Ifo (for Felbermayr et al. 2014a and Felbermayer et al. 2014b) and Capaldo (for Capaldo, 2014), respectively. 7

8 1.2. Overview of the US-EU trade Tariffs across the countries are already low EU and US are main trading partners, in particular in Chemicals and Machinery and transport equipment They are also the most important source and destination for FDI of each other as well. If there is one empirical fact all studies agree upon, that would be the fact that the proposed trade agreement is in many regards unprecedented. The reasons for this are 1) that the EU-US trade is already very extensive, the two areas being the main trade partners for each other, the same being true for foreign direct investment as well 2) that usual trade barriers (customs duties, quotas) in most sectors are already relative low, close to actual free trade 3) if TTIP is to have any significant effect, irrespectively of it being a positive or a negative one, that would stem from the alleviation of the so called non-trade barriers, or non-trade measures. As the CEPR study correctly points out, US is the most important export market for the EU (17% of total exports in 2011), and the third most important source of imports (with its 11% after China and Russia). The US only exports more to Canada than the EU, and only imports more from China (17% of exports, 11% of imports). As seen in Figure 1, most trade activity takes place in the chemicals industry and the machinery and transport equipment industry. The US is the single most important FDI source and destination for the EU ( 1201 billion and 1195 billion in 2010, respectively). Tariffs are already relatively low between the two countries, for most industries ranging between 1-3%. Notable exceptions are processed foods, motor vehicles and agricultural products on which the EU levies heavy tariffs (rates are 14.6, 8, 3.7, respectively), while the US tends to penalize imports of processed foods and agricultural products (3.3% and 3.7%). The Ecorys study lists the industries with the most serious non-tariff barriers and finds that they are the industries of chemicals, cosmetics, biotechnology and the aerospace industry for exporting to the EU, while in the chemicals, cosmetics, biotechnology and the aerospace industries is it the hardest to export to the US. The studies pose that alleviating these barriers are the key to TTIP s success as traditional trade barriers are already quite low. Figure 1 EU US trade in goods (taken from CEPR, source: Eurostat) 8

9 1.3. Main results in comparison Most models use similar methodology and data, and find very modest positive economic effects of TTIP The one study which is different in methodology finds considerable negative impact. Table 1-2 Comparison of findings Basic Assumptions Ecorys (2009) 1 CEPII (2013) CEPR (2013) CGE GTAP MIRAGE GTAP Bertelsmann/ifo (2013) Simulation of gravity model Capaldo (2014) UN Global Policy Model Data GTAP 7 GTAP GTAP 8 not specified Use predicted Non-tariff measures CEPII export growth Ecorys Ecorys ifo (NTM) & Ecorys from previous studies Forecast period years No. of Scenarios Tariffs reduction NTM reduction in reference scenario 100% of goods 75% of services 100% % 100% 25% 25% 25% Reduction corresponding to trade creation effect Main Findings (different scenarios, percentage changes compared to baseline scenario within forecasting period) No tariffs in the model, use predicted export growth from other studies Use predicted export growth from other studies EU GDP US GDP EU bilateral exports not specified Taken from other studies EU total exports (extra-eu only) not specified EU real wages N/A not specified Unemployment rate in unchanged unchanged unchanged (deep EU-OECD countries (assumption) (assumption) (assumption) liberalization) (avge. %-points) Taken from other studies jobs (EU total) 1 Findings for ambitious and limited scenarios only 2 Reference scenario only 3 Derived from BMWT/ifo (2013), aggregated to EU-27 level 4 Given country by country, these are the minimum and maximum values Sources: Raza, Werner et al. (2014), Capaldo (2014) Table 1 contains both the methodological comparison of the main studies and the differences in core. Out of the five studies in question four employ a computable general equilibrium (CGE) modelling framework. Out of the 4 CGE studies 3 involve using the same database (GTAP) and engage in the modelling strategy of quantifying the NTM-s as listed in Ecorys. In contrast, the Ifo studies make the assumption that the TTIP will have similar effects as previous big trade deals (such as NAFTA) and extrapolate the empirics of those to the TTIP case. The Capaldo study uses a different model, the UN Global Policy Model, a large-scale 9

10 econometric model which tries to take into account several policy constraints coming from previous behaviour of states. 1 Table 2 shows the results of the four studies at first glance. The results are unsurprising in one regard: the three studies which are the most closely related present very similar quantitative results. This shows that long run positive effects are modest. Two studies don t fall in line with the others: the Ifo studies are much more optimistic regarding the TTIP s effects on the Atlantic economy, while the Capaldo results are exactly the opposite. He finds quite significant negative effects Detailed results from the quantitative studies Ecorys (2009) The study finds one-time GDP and wage growth under 1% under all scenarios on long run (over 15 years) This is not affecting growth rates, this is affecting levels. Table 3 Summary of macroeconomic effects (Ecorys) Real income [billion ] Real income [% change] Real household income [% change] Real wages - unskilled workers [% change] Real wages - skilled workers [% change] Value of Exports [% change] Value of Imports [% change] Terms of trade [% change] Ambitious Scenario (full liberalisation) Short Run Ambitious Scenario (full liberalisation) Long Run Limited Scenario (partial liberalisation) Short Run Limited Scenario (partial liberalisation) Long Run US EU US EU US EU US EU US EU US EU US EU US EU Criticism of the CGE approach found in Grassini 2007, Lance and von Amin 2006, McKitrick

11 Most effects take place through the growing output of the Processed foods, the Chemicals and the Motor vehicles industries. Table 4 Estimated sectoral effects under different scenarios (Ecorys) Outcome 1A 1B 2A 2B 3A 3B 4A 4B 5A Processed foods (food & beverages) Chemicals, cosmetics, pharmaceuticals Electrical machinery (electronics, OICE) Motor vehicles (automotives) Other transport equipment (aerospace) Metals and metal products Wood & paper products Finance Insurance Business services & ICT Communications Personal, recreational & cultural services Construction Total : Summary of changes in national income following NTM alignment (billions, ambitious scenario Long Run) 2: Summary of sector level percentage changes in output following NTM alignment (ambitious scenario Long Run) 3: Summary of sector level percentage changes in exports following NTM alignment (ambitious scenario Long Run) 4: Percentage change in output at the sectoral level for the EU 5: Percentage change in exports at the sectoral level for the EU A: Economy-wide NTM reductions (i.e. reductions of NTMs in all sectors simultaneously) B: Sector-specific NTM reductions (i.e. reductions of NTMs only in the specific sector) Note: Air/Water transportation left out due to inconsistencies across calculation 11

12 CEPII (2013) Effects on EU again under 1%, slight decline for agriculture. Real income effects are again under one time 1% increase. German manufacturing industry benefits the most and UK agriculture is hit the hardest Table 5 Macroeconomic effects of TTIP (CEPII) Total (GDP) Value added Agriculture Industry Services USA EU Of which: Germany UK France Enlargement Note: volume, percentage deviation from baseline in Table 6 Real income and export changes under different scenarios (CEPII) Ref Alternative scenarios Tariffs only Export: Targeted NTM cuts Harmonization spillovers Alternative NTMs USA EU Of which: Germany UK France Enlargement Real income: USA EU Of which: Germany UK France Enlargement Note: volume, percentage deviation from baseline in

13 US-EU trade flows go up significantly, while there is considerable trade diversion from the rest of the world Table 7 Effects on bilateral trade flows (CEPII) Exporter Importer Total Agriculture Industry Services Transatlantic trade USA EU EU27 USA Other trade flows USA RoW EU27 RoW RoW USA RoW EU EU27 EU RoW RoW Note: trade in volume, percentage deviation from baseline in Total trade grows on average. Table 8 Effects on total trade flows (CEPII) Imports Total Agriculture Exports Industry Services USA EU27 (excluding intra EU) EU27 (including intra EU) Of which: Germany UK France Enlargement Note: trade in volume, percentage deviation from baseline in CEPR (2013) CEPR also finds one-time household income growth under 1% after 15 years. Table 9 Summary of macroeconomic effects (CEPR) Limited agreement: tariffs only Limited agreement: services only Limited agreement: procurement only Comprehensive agreement: less ambitious Comprehensive agreement: ambitious Change in GDP Bilateral exports FOB Total exports FOB EU 23,753 5,298 6,367 68, ,212 US 9,447 7,356 1,875 49,543 94,904 EU to US 43,84 4,591 6, , ,965 US to EU 53,777 2,859 3, , ,098 extra-eu 43,74 5,777 7, , ,97 US 57,33 5,488 5, , ,543 Notes: Estimates to be interpreted as changes relative to a projected 2027 global economy. All amounts are shown in million euros. 13

14 With the most comprehensive agreement accepted, EU households will earn 545 euros more each year. Table 10 Changes in household disposable income (CEPR) Limited agreement: tariffs only Comprehensive agreement: low ambition Comprehensive agreement: high ambition Total EU [mill. ] 12,934 39,813 70,82 US [mill. ] 5,081 29,982 58,434 EU [%] US [%] EU [ per household] US [ per household] Notes: Estimates to be interpreted as changes relative to a projected 2027 global economy. Figure 2 Market Access Impact Ranking (CEPR) Those industries benefit the most from TTIP which have higher share in value added. 14

15 Trade in processed food, chemicals, transport equipment, metal and wood products and business services will increase the most. Most trade diversion from EU internal trade to US trade will occur in the sectors of motor vehicles, chemicals, electrical machinery, metals and metal products. Table 11 Sectorial changes in output and trade diversion (CEPR) Scenario/Sector Baseline shares in value added Output change: Less ambitious Output change: Ambitious Export change (non US) Total [million ] Trade diverted from intra-eu trade Total [million ] Agr forestry fisheries Other primary sectors Processed foods Chemicals Electrical machinery Motor vehicles Other transport equipment Other machinery Metals and metal products Wood and paper products Other manufactures Water transport Air transport Finance Insurance Business services Communications Construction Personal services Other services Total Notes: Estimates to be interpreted as changes relative to a projected 2027 global economy. All amounts are shown in million euros. 15

16 Bertelsmann/Ifo (2013) Under the most likely scenario all effects again are under 1% and are understood as a one-time increase over the course of 15 years. Table 12 Estimated changes if only tariffs are lowered (Bertelsmann/ifo) Change in Percentage Percentage unemployment Country rise in change in real rate in employment wages percentage points Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Netherlands New Zealand Norway Poland Portugal Slovakia South Korea Spain Sweden Switzerland Turkey United Kingdom United States Average (GDP-weighted)

17 Trade partners of the US and EU are hurt significantly by TTIP under this model. Table 13 Effects under "deep liberalization scenario (Bertelsmann/ifo) Change in Percentage Percentage unemployment Country rise in change in real rate in percentage employment wages points Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Netherlands New Zealand Norway Poland Portugal Slovakia South Korea Spain Sweden Switzerland Turkey United Kingdom United States Average (GDP-weighted)

18 Figure 3 Changes in global per capita incomes if only tariffs are reduced (Bertelsmann/ifo) Figure 3 Changes in global per capita incomes under "deep liberalization" scenario (Bertelsmann/ifo) Assumptions of the second scenario are deemed unrealistic by the European Commission. It only appears in the Bertelsmann policy paper version of the original study. 18

19 Capaldo (2014) The only study not using CGE methodology and taking into account short-term effects in the economy shows considerable negative effects of TTIP. Over jobs will be lost, GDP decreases (however, the rate is under 1%), tax incomes and net exports decrease. Table 14 Long-term impact of TTIP (Capaldo) Net Exports [% GDP] GDP Growth [Diff between %] Employment [Units] Empl. Income [EUR/employee] Net Taxes [% GDP] Depend. Ratio [Diff between %] US United Kingdom Germany France Italy Other Northern Europe Other Southern Europe EU total Note: Net Taxes are indirect taxes minus subsidies. Dependency Ratio is defined as ratio of total population to employed population. 19

20 After a hypothetical TTIP introduction in 2015, projected share of labour in nation income declines steadily, exacerbating previous negative trends. Figure 5 labour incomes as % of GDP (Capaldo). Blue: baseline projection without TTIP. Red: projected labour share under TTIP 1.5. Criticism of the quantitative studies Oversold results Almost all studies deal studies show one-time level increases in GDP which are not affecting long term growth. Most of the economic benefits predicted are negligible. Myant and O Brien point out that by optimistic assumptions the income increase of average Europeans would amount for the price of a cup of coffee per person per week, which does not justify optimal optimism (Myant and O Brien, 2015). 20

21 The actionability of NTMs are overestimated. The studies call a 25% reduction in total NTMs the ambitious scenario. While this seems conservative, according to the Ecorys survey this reduction amounts to half the NTMs faced by firms engaged in within-eu trade. That is, the ambitious scenario would essentially mean assuming that the US will be half-way to becoming an embedded member of the EU (Myant and O Brien, 2015). The total social benefit of the trade agreement is crucially sensitive to the assumed actionability level of the barriers. The benefits are expected to be higher the more non-trade measures are eliminated, thus, the estimated net benefits of TTIP are potentially overestimated along this margin as well (Reza et al. 2014). The ifo paper s later version is considered unrealistically positive by even the European Commission. The second paper apparently uses gross output instead of GDP, yielding in 2-4 times higher than realistic effects. (Myand and O Brien, 2015) Conceptual errors, biased opinions Social costs of dismantling NTMs are neglected. When calling for dismantling non-trade barriers, all supportive studies assume that this can be done without significant social costs. The nature of NTMs are misunderstood, the calculations are based on opinions biased in one direction. Also, the catalog of non-trade measures in the EU-US trade is based on a survey which is seriously biased towards business interests (e.g. only firm managers and leaders of business associations were interviewed whose opinion, how justified they might be, are far from being the only valid points in the debate (Raza et al. 2014). Also, these barriers to business are typically measures that facilitate internalizing negative externalities, alleviating information asymmetries etc. From this it directly follows that by dismantling them the negative social costs they were trying to prevent from occurring will reappear instantly (Myant and O Brien 2015). Social costs of adjustment are ignored. The supportive studies assume away macroeconomic adjustment costs, that is, the costs incurred by societies through the transition to the new trade regime. These may involve costs of o labour market adjustments (e.g. unemployment benefits), effects on public budget balance (through the missing tax revenue from firms going out of business and people losing their job), o current account balance (large changes in trade flows might end up in currency devaluations, which, if become common, can result in a race to the bottom [Capaldo, 2014]). TTIP, as all trade agreements, is expected to result in a reallocation of labour and capital across sectors. Essentially this means that people who lose jobs in one sector are supposed to take up new ones in a totally different but more competitive sector, which is potentially an unrealistic assumption. o If it indeed is, then TTIP will increase not just temporary, but structural unemployment as well, a phenomenon also assumed away by these models (Reza et al. 2014). 21

22 A back-of-the-envelope calculation for the expected social costs of macroeconomic adjustment is found in Table 15. The authors estimate that the social costs will be somewhere between 32 and 60 billion for the next 15 years at 2012 prices. Table 15 Rough calculation of macroeconomic adjustment costs (from Reza et al. 2014) Lower Bound (p.a.) Lower Bound (cumulative, 10 year period) Upper Bound (p.a.) Upper Bound (cumulative, 10 year period) 1. Loss of Public Revenue Annual Loss of Tariff Revenues of 2.6 bn Annual Loss of Tariff Revenues of ( )* Adjustment Margin for Phase-Out Periods, and Carve-Outs for sensitive products (10%) Sub-Total Costs of Unemployment a. Unemployment Benefits 43,000 long-term unemployed post-ttip (Year 1) ,000 long-term unemployed post-ttip (Year 1) ,000 long-term unemployed post-ttip (Year 2-5) ,000 long-term unemployed post-ttip (Year 2-5) ,000 short term unemployed post TTIP (6 months) ,000 short term unemployed post TTIP (6 months) Sub-Total b. Foregone Public Income from Taxes and Social Contributions 43,000 long-term unemployed post-ttip (Years 1-5) ,000 long-term unemployed post-ttip (Years 1-5) ,000 short-term unemployed post TTIP (6 months) ,000 short-term unemployed post TTIP (6 months) Sub-Total Cumulative Adjustment Costs - TOTAL Assumptions: Average duration of long-term unemployment during TTIP implementation phase: 5 years; Average duration of short-term unemployment during TTIP implementation phase: 0.5 years; Number of displaced persons post-ttip: 430,000 (lower bound) 1,100,000 (upper bound), of which 90 % short-term and 10 % long-term unemployment Macroeconomic adjustment costs of TTIP range from 32 billion and 60 billion even by a simple calculation. Trade diversion effects are downplayed. The studies downplay some of the negative effects. Trade diversion is most likely to occur, disproportionally hurting low income partners of EU and the US, and also weakening internal trade relations within the EU. (Raza et al. 2014) Ex post evaluations are usually showing smaller benefits than ex ante impact studies. While the impact studies refer many times to the benefits of previous big trade 22

23 liberalization event (the Ifo paper go as far as assuming that the TTIP s effects will be identical to those of NAFTA, for example), they ignore that the ex ante impact studies of these particular trade agreements tended to prove overestimates of the actual ex post social benefits. In the case of TTIP the predicted benefits of which are already modest at best, any overestimation can mean that there will be no positive effect of the agreement at all Bad economics The modelling framework might be inappropriate theoretically. The model in use in 4 out of 5 impact assessment studies is the so called Computable General Equilibrium (CGE) modelling framework, which not a general equilibrium model in a microeconomic sense (does not describe an optimal welfare allocation), but only in the strict macroeconomic sense that the aggregate resource constraints of the economy apply. In this sense CGE is a misnomer, while the feasibility of any microeconomically valid general equilibrium model is questionable at best (Raza et al. 2014) The modelling framework is inappropriate practically. o These models apply long run assumptions of macroeconomics, e.g. they assume that on the long run all factors of production are allocated in some sector (e.g. if there is unemployment some sector, wages go down somewhere and firms suck up the idle workforce). Also, perhaps more importantly, the full factor employment assumptions make these models unable to model any employment effect (Raza et al. 2014, Myant and O Brien 2015). o The models only consider the average values of the variables, not distributions. That is, if a model predicts 0.3% growth in GDP, it does not tell whether that is a very small income growth for all individuals, or a single person gets very rich. Or many get very rich, and many people get substantially poorer on average resulting in a slight positive change (Capaldo 2014). o Two out of four CGE studies consider the EU as a whole, again, saying nothing about how the economic effects of TTIP are distributed across European subregions and countries. This holds for income gains, but, perhaps most importantly for possible displacement effects as well. (Capaldo 2014, Myant and O Brien 2015). o CGE models used by the Ecorys, CEPR and CEPII models disregard the government as an active entity. Government income and spending is incorporated in the workings of the representative household, while these models also assume the budget deficit to be constant (Raza et al. 2014) o The models disregard foreign direct investment completely. Though one of the main reasons for the TTIP is to improve conditions for FDI, these general equilibrium models completely disregard it. The studies present calculations for FDI effects, but they do not come from the same models, these are completely separate econometric estimations. (Raza et el. 2014) While these assumptions are useful for some purposes, they are unfit for saying anything on the short run consequences on the EU and US economies, which are potentially substantial, especially in the EU environment which already suffers from persistent unemployment and anaemic economic growth. Quantitative assessment of non-trade measures is unsubstantiated at best in the models. By their very nature, parts of the trade costs caused by the non-trade measures are unobservable, and the tariff equivalents of these are hard to measure. 23

24 2. Argument Catalog This chapter presents the main arguments for and against TTIP, broken down into categories by the content of the argument. For each category we summarized the main lines along which the arguments go and then categorize the arguments into either positive, negative or mixed categories. Each argument is followed by a reference to the document it was taken from. The categories we defined are: 1 Effectiveness of TTIP in general 2 Regulatory convergence 3 Environment 4 Democracy and transparency 5 Geopolitics, multilateralism vs bilateralism 6 Effects on 3rd countries 7 Agriculture and food security 8 Investment protection 2.1. Effectiveness of TTIP in general Summary The positive argument relies on the growth effects of TTIP and that market penetration will be easier for European companies. Those against TTIP instead point out the unreliability of the quantitative calculations and that the envisioned growth effects are minuscule. Another concern is that quantitative studies have close to no say about the distribution of costs and benefits created by TTIP. Positive Two key arguments behind promoting TTIP: 1) TTIP would create significant economic gains, 2) it would create new dynamic in the global trading system. The first is now needed by Europe in particular. (Erixon, 2012a and 2012b) The idea of TTIP was embraced as a last resort by the EU to invigorate the economy as monetary policy and fiscal austerity failed them. Also, it was a means for the EU and the US to reassert global economic leadership. (Ikenson, 2014) TTIP will benefit small and medium enterprises which are now unable to penetrate US markets. (Mildner, 2013) Myth says that TTIP will only benefit big business, while SMEs and consumers also will benefit the most. The reason is that streamlined regulations and standards would decrease the fixed costs of compliance which can be deterring smaller firms from penetrating the US market. A simpler competition and public procurement law would benefit small firms who do not have an own legal department. Consumers would benefit from lower prices and increased varieties. (FGI, 2014) The effects on SMEs are likely to be positive, since TTIP decreases the relative cost of entering the global market. (DG For international Policies, 2015) Brain drain type of effects is not expected, since the skill levels of the two signatory parties are similar. (DG For international Policies, 2015) Mixed The obstacles that need to be overcome for TTIP to function are yet unexplored. We cannot even estimate the hardship and the costs. (Dieter, 2013) 24

25 The TTIP will not bring equal benefits to all member states, but average increase is expected. (DG For international Policies, 2015) Negative The main goal of TTIP is to create economic growth. It is achieved through reducing tariffs and non-tariff barriers. However, while tariffs protect from competition and thus hinder growth, regulations are designed to protect from hidden risks in the use of a given product or service. They promote consumer welfare, essentially. The economic benefits thus depend on the level of regulatory convergence achieved. (Fabry et al. 2014) Most of the studies say that economic gains will stem from alleviating NTM-s, but the US and the EU are working on those since 1990, without any major success. If they fail to do again, the economic gains of TTIP are under question. (Karnakar, 2013) Reducing tariffs is also harder than expected since they represent vested interests in sugar, textiles etc. industries. (Karnakar, 2013) Since the anticipated tremendous impact of TTIP is entirely relying on legal harmonisation, historical experience suggests that it will not live up to its expectations. It will not achieve regulatory convergence and new global standards, but through mutual recognition it will only lead to deregulation and will have no indirect spillovers on the rest of the world. (De Ville, 2014) The previous free trade agreements such as NAFTA brought about job losses, yet TTIP is sold to the general public as an engine of job creation.(hartmann, 2014) It is possible that all social costs of the TTIP will be concentrated on some member states of the EU, while the scarce benefits will be enjoyed by others (Bizzarri, 2013) 2.2. Regulatory convergence Regulatory convergence general remarks Summary Supporters of TTIP emphasize that regulatory convergence means that doing business is made easier while retaining the level of previous standards. Those who oppose TTIP claim that the main thing at stake is the precautionary principle, the general EU principle that for something (that is, a technology, a procedure or a given chemical) to become legal, its non-harmfulness must be proven. This is not the case in the US. Positive Harmonizing regulations makes doing business easier. The reason why these are different is not due to divergent policy choices but purely that they were devised independently. The goal is not to lower the levels of consumer protection, but to encourage transparency and collaboration. (BusinessEurope,2014) TTIP promotes standards that are harmonised, but higher. It would lower costs and open markets, and the EU US standards would be promoted beyond the transatlantic market. (BusinessEurope,2014) Myth says that EU's high standards of consumer and environmental protection are at risk. The signing parties say that it is important to uphold the right to regulate in the public interest. The aim is not to reduce the global level of consumer safety but to achieve regulatory convergence, so that the same rules apply on both sides of the Atlantic. (FGI, 2014) 25

26 Negative The EU looks to the Precautionary Principle as the main regulatory principle ( better safe than sorry - for new technologies it must be proven that they are not harmful for human life and the environment) while US employs risk assessment approach linked to cost-benefit analyses, looking at cost for businesses versus harms to citizens. These are hard to reconcile. Some argue that for US business the TTIP is just a tool to get rid of the precautionary principle, particularly in the case of policies such as REACH, the EU directive on Registration, Evaluation, Authorisation and Restriction of Chemicals (Barker, 2014) EU has much stronger protections for consumers and environment in general, which can be harmed by TTIP (Baker, 2014) TTIP is about pushing through regulatory changes which could not have been pushed through the regular political process (Baker, 2014) Many of the factors embedded in TTIP are against the concept of free trade. Instead of promoting less regulations and bigger liberty, these will extend existing regulations (Baker, 2014) Removing regulatory barriers essentially means removing or downgrading of key social standards and environmental regulations, such as labour rights and food safety rules. (Hilary, 2014) The EU's use of the precautionary principle is a core issue the TTIP negotiations will essentially mean that the burden of proof shifts from those who want to introduce a new chemical or technology to those who claim that it is unhealthy. (Hilary 2014, Bizarri 2013) Labour rights Summary The main question in the debate is whether TTIP would deteriorate European labour standards. Supporters say that the trade deal has no provisions on labour, while opponents say that eliminating regulatory divergence can be interpreted this way, and opening up markets can end up in a race to the bottom where both EU and US engage in a series of cuts in labour rights to ensure competitiveness. Positive Myth says that TTIP will erode high labour standards. TTIP does not restrict the contracting parties' right to maintain domestic regulation on labour affairs. (FGI, 2014) Negative Currently trade creates winners and losers, not winners and winners. Declining labour share in income point out that workers in the US and in the EU have been losing. (AFL-CIO, 2014) TTIP will hit employment in a time when youth unemployment is already at over 50% in some EU member states (Hilary, 2014) As the US has not ratified ILO Conventions on labour standards such as collective bargaining and freedom of association, the removal of trade barriers in this regard might mean a race to the bottom in terms of labour rights. (AFL-CIO, 2014, Hilary 2014) TTIP might revoke European workers' rights to self-organise if a race to the bottom scenario emerges in labour relations. (Bizzarri, 2013) 26

27 Privatization of public services Summary Supporters of TTIP argue that privatization of public services is not on the table and it generally is not there in free trade talks. The debate is on the fact that opening up a market to private providers (which is indeed on the table) is essentially understood as a huge step towards privatization as the opponents understand it. Positive Myth says that TTIP will lead to privatization in the areas of water supply, healthcare and education. The European Commission has declared that the special status of public services will not be affected by TTIP. Restrictions on market access to public services are found even in WTO agreements. Opening of public procurement markets will not result in privatization but lower prices for consumers and equal treatment of companies in the US procurement market. (FGI, 2014) Negative TTIP is opening up public services for liberalization in an unprecedented way (Bizzarri, 2013) TTIP should not facilitate replacing state provision of public services with private provision but it currently defines public services too narrowly, making such an outcome possible. (AFL-CIO, 2014) The US government has confirmed that TTIP will be used to open up service markets in Europe in areas such as public utilities. The only exceptions the EC wants to see are those related to the judiciary, border policing and air traffic control. (Hilary, 2014) It will be effectively impossible to restore public services once they have been privatized. (Hilary, 2014) The liberalization is done according to a negative list, that is, everything not included in it is potentially subject to liberalization. The EU traditionally applied a positive list approach to liberalization of public services. (Hilary, 2014) Access to procurement markets Summary One of the main claimed benefits of TTIP is that EU companies would be able to enter the huge US public procurement market which should withdraw its buy American regulations. Opponents claim that the other side of this coin is that local governments would not have the option to buy from local, more sustainable producers. Positive EU companies would have access to the US procurement market. (BusinessEurope, 2014) Negative Opening up of public procurement markets will make local governments unable to pursue they local social and ecological agendas. (Hilary, 2014) If TTIP will liberalize public procurement, then no levels of government in Europe will be able to explore any alternative economic model to international free trade (Bizzarri, 2013) Opening up public services and government procurement markets essentially serves transnational corporate interests and will spark waves of privatizations in sectors such as health and education. (Hilary, 2014) 27

28 Regulatory convergence examples from particular industries Patents Positive Harmonizing intellectual property right would support innovation and R&D investment. EU and US could lead globally in IPR protection together. (BusinessEurope,2014) Negative The patent system in the US is frivolous and corrupt, and the patenting practices raise prices and impede competition. This kind of patenting might arrive to Europe through TTIP. (Baker, 2014) Americans pay on average twice as much on prescription drugs due to the patent monopolies of drug companies. The pharmaceutical industry wants similar regulations passed in the EU. (Baker, 2014) Adaptation of US patenting standards puts the access to information at risk. E.g. the pharmaceutical industry seeks to restrict public access to clinical trial data under the guise of the TTIP. (Hilary, 2014) TTIP will be undermining Europeans' access to affordable medicine through US patent rules (Bizzarri, 2013) Finance The financial sector seeks to undo the reforms which came after the crisis of 2008 (Bizzarri 2013, Hilary 2014) Culture The cultural sector has relatively low economic performance but has a greater relevance to society. (Kirchschlager, 2014) EU audiovisial markets are relatively open for US companies but not vice versa. (Kirchschlager, 2014) Hollywood movies enjoy huge successes in Europe even under the protection regime. (Kirchschlager, 2014) Privacy There is no comprehensive EU data protection law which would be needed before any negotiation takes place. TTIP promotes flow of data, but not data protection. Sensitive personal data will be more likely to be stored in the cloud storage of a US company exposing EU citizens. (Knoll, 2014) Some elements of the already rejected Anti-Counterfeiting Trade Agreement are planned to be reintroduced under TTIP. Elements of these included requirements of the internet service providers to monitor online activity to see whether the user commits copyright infringements. (Bizarra 2013, Hilary 2014) It will be easier to gain access to personal information for commercial purposes. (Hilary, 2014) 2.3. Environment Summary The main environmental concern of opponents is shale gas, through two channels: 1) enforcing fracking technology on the European continent, 2) exacerbating fracking activities in America through driving up demand. They argue that fracking is environmentally harmful. Supporters of TTIP argue that since shale gas can be sold at a higher price in Asia as in Europe, TTIP will not increase the demand for fossil fuel. 28