TTIP: Does the European Union need a free trade agreement with the United States?

by Jan Teresiński, CASE — Center for Social
and Economic Research | 13.05.2015

Since 2013, the Transatlantic Trade and Investment Partnership (TTIP) is being negotiated between the European Union (EU) and the United States (US). The TTIP is a trade agreement aiming at creating a free trade area between the EU and the US. Trade activities between the two economies are already highly liberalized — why is further liberalization needed?

The United States are the main trade partner of the EU. The total trade exchange between the two economic powers accounted for 484 billion euro in 2013, which constitutes 14% of the EU total external trade. The USA are the main receiver of EU exports, as 16.6% of total EU exports go to the US. The United States are also the third most important partner of the EU (after China and Russia) for imports, as 11.7% of total EU imports come from the US. This raises the question of trade liberalization level between the two economies, which may result in significant economic gains due to a large trade volume.

It appears that traditional trade barriers between the US and the EU are low, as the average tariff is under 3%. The problem lies in non-tariff barriers to trade, due to some incoherent regulations in force in both economies. They constitute a main obstacle in the development of transatlantic trade. That is why, besides further tariff reduction, cooperation in terms of regulatory harmonization is necessary.

An important part of TTIP will be devoted to the removal of non-tariff barriers. It will include sections related to regulatory coherence, technical barriers to trade, food safety, animal health and environment protection, and industry-specific regulations. Regulatory coherence is crucial, since the necessity to respect diverging norms and standards on both sides of the Atlantic results in redundant transaction costs. In the case that there was no such divergence, it would be easier for companies to sell their products on new markets. Lower costs for exporters allow domestic firms to buy cheaper intermediate inputs from abroad and thus become more competitive.

A study by the Center for Economic Policy Research prepared for the European Commission shows that TTIP will lead to significant economic gains: the EU GDP should rise by 119 billion euro a year, while the US GDP should increase by 95 billion euro. The rise of both GDPs will have the consequence in raising the disposable income per household in the EU and the US by 545 and 655 EUR respectively. EU exports to the US should increase by 28%, while US exports to the EU should rise by 37%. 80% of these gains will come directly from the reduction of regulatory barriers to trade.

It is important to note that free trade and higher exports mean not only higher national income and reduction of firms’ costs, but also a higher competition and eventually, lower prices for consumers. Moreover, we can expect that consumers will have access to even wider choice of products; once the barriers are gone the goods which weren’t imported because of regulatory divergence will henceforth appear on the market.
Trade liberalization is often controversial because of unavoidable changes on the labor market — labor shifts between sectors and income redistribution: in some sectors wages rise, in others they fall. In the context of TTIP, it seems that only 0.7% of the labor force will be affected by the Partnership. If it comes to wages, various studies show that they will rise for both skilled and unskilled workers in the long run because lower transaction costs lead to productivity gains, which results in wage increases. However, regulatory cooperation raises concerns about the lowering of the standards in force, especially in terms of food safety, animal welfare and environmental protection. Yet, it is worth mentioning that EU and US standards are among the best in the world, so it seems that concerns about those issues are exaggerated. The standards which are currently in force, although somewhat different have similar goals, and leave the door open for common agreements.

To summarize, it appears that a free trade agreement between the European Union and the United States is needed and it should bring positive outcomes to both sides. As tariffs are already low, the most important part of the agreement will be regulatory cooperation: it will result in lower transaction costs, lower prices for consumers, gains in productivity, wage increase, trade facilitation, increase in incomes and, as a consequence, economic prosperity.

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