Análisis del Tratado Transatlántico de Comercio e Inversiones entre la U.E. y EE.UU (Parte II)

– Anexo: Informes de Consultoría, sobre el Tratado de Comercio e Inversión Transatlántico (TTIP)

Informe: Reducing Transatlantic Barriers to Trade and Investment (March 2013) – Centre for Economic Policy Research, London

(Reproducción parcial)

Key findings

• An ambitious and comprehensive transatlantic trade and investment agreement could bring significant economic gains as a whole for the EU (€119 billion a year) and US (€95 billion a year). This translates to an extra €545 in disposable income each year for a family of 4 in the EU, on average, and €655 per family in the US.

• The benefits for the EU and US would not be at the expense of the rest of the world. On the contrary, liberalising trade between the EU and the US would have a positive impact on worldwide trade and incomes, increasing global income by almost €100 billion.

• Income gains are a result of increased trade. EU exports to the US would go up by 28%, equivalent to an additional €187 billion worth of exports of EU goods and services. Overall, total exports would increase 6% in the EU and 8% in the US.

• Reducing non-tariff barriers will be a key part of transatlantic liberalisation. As much as 80% of the total potential gains come from cutting costs imposed by bureaucracy and regulations, as well as from liberalising trade in services and public procurement.

• The increased level of economic activity and productivity gains created by the agreement will benefit the EU and US labour markets, both in terms of overall wages and new job opportunities for high and low skilled workers. Labour displacement will be well within normal labour market movements and economic trends. This means a relatively small number of people would have to change jobs and move from one sector to another (0.2 to 0.5 per cent of the EU labour force.)

• The agreement would have negligible effects on CO2 emissions and on the sustainable use of natural resources.

Executive Summary

The economies of the European Union and the United States are very important trading partners for each other. Although average tariff levels are relatively low already, various non-tariff barriers or NTBs (often in the form of domestic regulations) on both sides of the Atlantic constitute important impediments to deepening transatlantic trade and investment linkages. This study examines the impact of the reduction of such barriers.

Even where they might not be directly targeting cross-border activities, domestic rules and regulations nevertheless can place a cost on trade and investment. However, unlike tariffs, it should also be stressed that many regulations cannot simply be removed when they serve legitimate domestic purposes. Yet in such cases the costs involved may still be mitigated or reduced through partial regulatory convergence and cross-recognition of standards. While this is likely to be a difficult process, the potential benefits in terms of productivity and incomes are substantial.

This study reviews the importance of the bilateral economic relationship and provides computable general equilibrium (CGE)-based estimates for the economy-wide impact of reducing both tariff and non-tariff barriers (NTBs). Estimates are provided with regards to expected changes in GDP, sector output, aggregate and bilateral trade flows, wages, and labour displacement, among other issues. The analysis uses the GTAP8 database (projected to 2027), in conjunction with NTB estimates reported in the Ecorys (2009) study. The study investigates different policy options for the deepening of the bilateral trade and investment relationship between the EU and US. These range from partial agreements that are limited in the scope of barriers they would address (tariffs only, or services only, or procurement only) to a full-fledged free trade agreement (FTA) with a comprehensive liberalisation agenda covering simultaneously tariffs, procurement, NTBs for goods, and NTBs for services. The comprehensive option includes two scenarios: a less ambitious agreement that includes a 10 per cent reduction in trade costs from NTBs and nearly full tariff removal (98 per cent of tariffs) and an ambitious scenario that includes the elimination of 25 per cent of NTB related costs and 100 per cent of tariffs. In both scenarios more ambition is imposed on the lowering of procurement-related NTBs than for other NTBs affecting goods and services. It is assumed that NTBs linked to procurement are reduced by 25 per cent or 50 per cent, in the "less ambitious" and in the "ambitious" scenarios respectively. The impact of partial alignment of global rules and standards with a new set of EU-US standards and cross-recognition agreements is also included in the assessment.

The results indicate positive and significant gains for both economies. Under a comprehensive agreement, GDP is estimated to increase by between 68.2 and 119.2 billion euros for the EU and between 49.5 and 94.9 billion euros for the US (under the less ambitious and more ambitious scenarios). However, if the FTA would be limited to tariff liberalisation only, or services or procurement liberalisation only, the estimated gains would be significantly lower. For example, an FTA limited to tariff liberalisation would lead to a lower (23.7 billion euro) increase in GDP for the EU and a 9.4 billion euros increase for the US. The study also quantifies potential benefits from NTB reduction affecting FDI. The overall message is that negotiating an agreement that would be of a comprehensive nature would bring significantly greater benefits to both economies.

Another core message that follows from our results is that focusing efforts on reducing NTBs is critical to the logic of transatlantic trade liberalization. Different approaches to the same regulatory challenges have the unintended consequence of increasing costs for firms, which have to comply with two regulatory environments, dragging down labour productivity. Negotiation on NTBs provides the opportunity to pursue a mix of cross-recognition and regulatory convergence to reduce these barriers. Compared to a focus on NTBS, just limiting the exercise to tariffs would lead to much more limited, though positive effects. Furthermore, the gains to the transatlantic economies from NTB reduction are not projected to be at the expense of the rest of the world, though the rest-of-world impact hinges critically on the potential for global convergence toward EU-US standards, which could then become de facto global standards and have a knock-on effect lowering NTBs multilaterally. Such a process implies improvement of market access for third countries, helping to offset trade diversion.

Finally, this study also reports estimates on sustainability impacts – changes in emissions and in natural resource utilization. Elimination of NTBs implies improved productivity (i.e. less primary inputs are required for current activity). The results point to negligible effects on the rate of CO2 emissions and utilisation of natural resources.

NTB: Non-tariff barriers

Sectoral effects: Preliminary ranking

In the Table, column A summarizes the total value of tariffs and actionable NTBs (as defined by Ecorys) applied by the US against EU exports. The next two columns summarize the importance of each sector to total EU exports to the US. Column B is based on gross values, while column C is based instead on the value added contained in exports. In column C, we see that while chemicals are 12.38 percent of exports on a gross value basis, they are somewhat less important on a value added basis, accounting for 11.21 percent of EU value added contained in exports to the EU. As a crude first pass at possible effects, column E provides an impact-ranking index. This is based on the value added contained in exports by sector (C), the scope for liberalization (A), and the price elasticity of demand for imports (D). Together, these provide a rough estimate of increased exports, on a value added basis, following from improved market access to the US for EU firms.

For example, of the total value added contained in EU exports to the US, column E says that full liberalization in chemicals could yield an 8.39 percent increase in total exports to the US on a value added basis. As it is value added that translates into GDP, the index also provides a crude ranking of overall GDP impacts of sector-specific liberalization.

Limited Scenarios

In this section, we present results assuming that a less ambitious, limited FTA would be implemented. We analyse the impact assuming that only a single policy pillar, i.e. only tariff liberalisation, or only services liberalization, or only procurement liberalization would be implemented. Note that the liberalisation efforts that are being considered for each pillar are similar to those envisaged in the less ambitious scenario of the comprehensive FTA option (see Table 4), including 20 per cent spill-overs. For the tariff only agreement there are obviously no spill-overs.

The first conclusion to take from the results of the partial agreements is that liberalizing each policy pillars separately leads to relatively small increases in GDP for both the US and the EU (see Table 6 and Table 7 below). For the EU, the tariffs cuts lead to a GDP increase of 0.10 per cent (23,753 million euros), while the reduction of NTBs in services and in procurement increase GDP by only 0.02 per cent (5,298 and 6,367 million euros). For the US, these changes are even smaller (ranging from 0.01 to 0.04 per cent).

The relative size of the services impact is linked both to the magnitude of underlying bilateral barriers that are reduced (see Table 2) and also to the relative trade volumes (see Figure 2). NTBs are perceived by businesses as roughly 2.5 times higher in goods than services, as applied in the experiments. This captures the fact that both the EU and US are relatively open, by global standards, in the service sectors. At the same time, goods trade is twice the value of services trade. Thus the relative magnitudes for goods and services NTBs are consistent with the benchmark levels of protection and trade.

Next, we look at the expected changes in trade for the EU and the US. The results are presented for each measure separately in Table 8 and Table 9 below.

Among the partial agreement options, the tariff cuts are shown to deliver the largest 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 (corresponding to 44 billion euros) while imports from outside EU are expected to rise by 1.00 per cent (corresponding also to about 44 billion euros increase). The changes are estimated to be slightly higher for the US. Liberalising procurement and services will lead to relatively small, less than 0.5 per cent (about 6-7 billion euros) increases in exports and imports. The resulting changes in terms of trade are shown to be insignificant. While the procurement and services options lead to similar GDP effects, the trade effects are larger overall for procurement. This traces back to the underlying trade elasticities. Goods are estimated to be more price sensitive overall and this translates into somewhat larger trade volume effects. However, both sets of trade volume effects are much smaller than the estimates discussed below linked to a more comprehensive agreement.

The tables below show the impact of the limited FTA on bilateral sectoral trade between the EU and the US. Limiting the liberalisation to services or procurement only would have a very marginal impact on sectoral trade, with the exception of some of the services exports and imports increasing as barriers removed under the services liberalisation. Nevertheless, on average, both bilateral exports and imports would increase by about 1 per cent or less if only services or procurement is liberalised. On the other hand, the cuts in tariffs would lead to 6.6 per cent increase of EU exports to the US and to a 12.4 per cent increase in imports. The difference in the magnitude of change is due to the initial tariff structures between the two economies, with the EU having higher barriers towards the US. Thus the difference in these average changes is mainly driven by motor vehicles. In this sector the imports would significantly increase as tariffs are removed for US exporters. In absolute terms, the greatest increase in bilateral services exports under services-only liberalization is in finance, insurance, and business services in the case of the EU, and in finance and business services in the case of the US. With procurement only, we see bilateral trade growth primarily in goods (chemicals and vehicles exports for the EU, chemicals and metals and fabricated metal products for the US). The bilateral trade effects of tariffs outweigh both the procurement and services only scenarios. There is substantial growth in bilateral trade in chemicals, vehicles, machinery, and other manufactures. Total trade (EU exports to the US, US exports to the EU) expands by almost 100 billion euros in the tariff only scenario. For example, US manufacturing tariffs are relatively low, and highest on other manufactures and processed foods (Figure 9).

Table 12 below shows the corresponding estimated changes in the EU"s total external trade (extra-EU). Overall, the tariff cuts are expected to cause total imports and exports to increase by 1.18 and 1.00 per cent respectively. The induced effects from liberalising trade in services and procurement are smaller, ranging from 0.13 to 0.19 per cent respectively. Nevertheless, exports in the insurance and finance sectors are estimated to increase by about 2 per cent if services are liberalised. Meanwhile, finance, communications, and personal services imports are estimated to increase by 1-1.8 per cent due to services liberalisation. Under tariff liberalisation, the highest increase in imports would take place in motor vehicles with a 9.21 per cent, while regarding exports the most pronounced increase is estimated to take place in other manufactures with a 5.50 per cent increase.

The reduction of tariffs will lead US imports and exports to increase by 1.91 and 1.13 per cent respectively (Table 13). The biggest increases are estimated to take place in the export of motor vehicles (15.43 per cent), chemicals (4.05 per cent), metals and metal products (4.33 per cent). As can be seen from the Table, the estimated effects of the liberalisation of services and procurement on trade are much smaller. The biggest changes in imports are also attributable to the reduction of tariffs, with the highest sector specific increases expected to take place in processed foods and metals and metal productions (2.37 per cent and 2.43 per cent respectively) and motor vehicles (2.13 per cent). The liberalisation of the services sectors is however estimated to increase imports of finance and insurance services by around 3 per cent.

We now turn to analysing the estimated effects on the output of the different sectors.

The underlying changes for the EU and the US are presented in Table 14 and Table 15 below.

As can be seen in the Table 14, the corresponding estimated changes in sector specific output are very small. None of the sectors will expand or contract by more than 1 per cent in the case of the EU, and in most sectors output will basically remain unchanged.

Similarly, only slight changes are expected to take place in US sector-level output as a consequence of the non-comprehensive FTAs that were simulated. In only two sectors the output is estimated to change by more than 1 per cent: in the electrical machinery sector it is estimated to decrease by 1.40 per cent, while in motor vehicles it is expected to increase by 1.76 per cent (once tariffs are cut).

While the non-comprehensive FTA option, which would be limited to either tariff, or services trade, or procurement liberalization, would result in positive changes in sector level output and trade patterns, these benefits would be relatively small. At an aggregate level, the changes would be even smaller. When comparing the impact of these non-comprehensive FTAs with a comprehensive FTA that will be discussed in the following section, it is clear that the overall benefits would be of much larger magnitude in the case of a trade agreement that covers more policy pillars simultaneously.

Full FTA

Macro Results

Here, we turn to the discussion of effects on macroeconomic variables, resulting from a reduction of barriers to trade and investment between the EU and the US under a comprehensive FTA (see Table 4 for details). In so doing, we present the results with regards to GDP. As indicated above two FTA scenarios are considered: one less ambitious and one more ambitious (as described in Table 4).

Table 16 and Table 17 below show the estimated effect on GDP both for the ambitious and less ambitious scenarios for the EU and the US. The results are presented for the total impact and also decomposed into the different subcomponents that correspond to the several policy pillars, namely tariffs, total NTBs on goods, total NTBs on services, direct and indirect spill-overs, and procurement. Procurement related barriers are in fact captured by the NTBs in goods and in services. A procurement column is introduced in the table below in order to highlight the importance of this type of barriers in the negotiations. However, it is important to note that the impact of reducing procurement barriers should not be added to the effects from other pillars as it would mean doublecounting.

As can be seen Table 16, the estimated impact on GDP for the EU and US range between 0.2 and 0.5 per cent, for the less ambitious and ambitious scenarios respectively. Because we are dealing with NTBs rather than tariffs, changes in trade volumes alone are not necessarily indicative of the net impact on GDP, and so the reader is cautioned when comparing Table 16 to Table 20 (changes in exports) below. This is because, as discussed earlier in the report, NTBs involve higher costs and so lower productivity. The impact on GDP will therefore hinge, in part, on cost savings linked to removing NTBs. Basically, with NTBs that raise costs the opportunity costs of new exports resulting from NTB reduction are lower than with tariffs, so that the cost side of the cost-benefit analysis of increased trade is lower. The impact on GDP will also hinge on the value added composition of exports. As such, even if trade volume effects are not relatively large in a particular sector (recall our discussion of Figure 10), they may still yield relatively large gains overall. The indirect spill-over effects are more complex still (though small in absolute terms). There will be both increased income and trade in third countries (from the other sets of results discussed here), along with improved access conditions to third markets. However, there is also scope for some diversion of trade away from the US and EU and toward intra-third country trade.

The total impact depends on all these things, and the direction is unknown a priori.

An alternative measure of aggregate results is provided in Table 18 below, where a comparison is provided across scenarios of household income effects for the EU and US. Starting with the limited scenarios, a tariff only scenario yields €12.9 billion in disposable income gains across European households, and €5.1 billion in disposable income gains for US households. The services and procurement agreements yield substantially less for European households, while the services only agreement yields the most for US households under the limited scenarios. These effects are far outweighed under both the less ambitious and more ambitious comprehensive scenarios. Here we have estimated gains to disposable income across European households of between €39.8 billion and €70.82 billion. In the US, household disposable income increase by between €29.9 and €58.4 billion. For a family of 4 the comprehensive scenarios yield disposable income gains between €306 and €545 annually in the EU and between €336 and €655 in the US.

The exact amount overall, as reported in Table 16, depends on the combination of value added, barrier levels, and underlying elasticities. It also hinges on linkages between sectors, and final demand responses to price changes. Indeed this is the reason for working with a CGE framework – we are then better able to capture the combination of these effects across sectors. In the case of the EU, if we refer back to Table 2, combined with the underlying bilateral trade balance by sector (Figure 1), the EU has a strong, positive balance in goods sectors with relatively high NTB levels. This means that on average European firms face a higher cost burden linked to transatlantic NTBs than do US firms, so that the reduction in the cost burden linked to NTBs will be somewhat disproportionate as well, benefiting European firms more on average. As such, we can expect somewhat greater benefits from improved market access for the EU than for the US. This is reflected in the result in Table 16 and Table 17. Indeed, where we have a similar change in trade volumes, this positive balance means the EU will benefit more in terms of GDP. This is reflected in the relative magnitudes of trade and GDP effects in Table 16 (above) and Table 20 (below).

For the US, around three quarters of the estimated increase in GDP, across both scenarios, stem from the lowering of NTBs. For the EU, NTBs in goods are shown to be accountable for around half of the increase, while lowering tariffs is shown to be less important… When viewing these tables, it is also useful to recall the observation about the relatively low level of perceived bilateral barriers in services, combined with a 65 per cent share of goods in bilateral trade.

Together, the higher barriers and trade share for goods imply that most gains will follow from NTBs and tariffs on goods. Similarly, the original Ecorys (2009) study covered limited aspects of procurement, and the barriers identified were relatively minor as a share of total protection. As such, it is not surprising that the procurement estimates are relatively small as a share of the total.

In summary, these results highlight that the potential main impact from liberalization stems more from NTB liberalization (especially including spill-overs) rather than just reducing tariff barriers.

Output and Trade

Next, we take a closer look at the corresponding changes to trade and output for the EU and the US. First, we look at the overall effects on imports and exports and then we move on to studying the effects on a more disaggregate, sector specific level.

Aggregate Effects

As can be seen from Table 19 below, liberalising trade would imply some significant increases in EU-US trade. In the less ambitious scenario, EU exports to the US will increase by 16 per cent while US exports to the EU increase by 23 per cent. In the ambitious scenario, the corresponding figures are 28 and 37 per cent. About two thirds of the increase in bilateral trade in the ambitious experiment is attributable to reducing NTBs in goods sectors. Changes in tariffs are also important, though as discussed above a given change in trade translates into greater GDP effects with NTBs.

Table 20 and Table 21 provide estimates for total (as opposed to bilateral) trade. For the EU, total exports are expected to increase by 3.37 to 5.91 per cent under the less ambitious and ambitious scenarios respectively. Similar to the results presented in the previous section, the lowering of NTBs in goods is shown to be the most important factor in increasing exports, followed by the lowering of tariffs on exports to the US.

For the US, the corresponding effect on exports is larger. They are estimated to increase by 4.75 and 8.02 per cent respectively for the two liberalizing scenarios. In the less ambitious scenario, the lowering of tariffs is accountable for around half of that increase.

In the case of the more ambitious scenario the most important contribution comes from the lowering of NTBs in goods. Meanwhile, the lowering of tariffs is still shown to be an important factor in realizing these increases in trade. It is important to recall that the EU has high tariffs on motor vehicles and processed foods. This drives part of the larger export gain for the US in the tables above. The estimated effects also tell us that spill-over effects are more important for the US than they are for the EU. (See columns E in both tables). This difference is due in part to differences in the importance of trade with third countries for the US and the EU. When we look at underlying baseline trade flows, for the US the first most important import partner is China. The EU comes second as a source of imports. Furthermore, NAFTA countries are also very important trading partners for the US overall. In column E in both tables, given differences in trade composition the NTB-related direct spillovers yield falling costs from spill-overs for a larger share of imports in the case of the US compared to the EU. This is why we see a higher impact due to these spill-overs for the US. For the EU, the estimated changes in total imports are similar to the estimated changes in exports. The increase is expected to be in the range of 2.91 and 5.11 per cent, with NTBs in goods being the most important liberalizing measure. One last point on the pattern of results in Table 20 and Table 21 relates to export expansion linked to direct spillovers. It is a common (and even expected result) in such modelling exercises that increased imports (in column E, for example, for reduction in trade costs for third countries exporting to the US and EU) there will also be increased exports. With more direct competition from imports, domestic firms find foreign markets relatively more attractive, such that exports reflect a relative shift toward overseas markets.

For the US, imports will increase by 2.81 and 4.74 per cent respectively. In the less ambitious scenario, the tariff cuts are shown to be the most important driving factor. Meanwhile, in the more ambitious scenario, lowering of NTBs in goods provides the biggest contribution to the changes in imports.

Terms of trade for a country reflect how much its exports are worth in terms of imports.

Thus an improvement (or a positive change) in a country"s terms of trade will imply that it can afford to buy more imports for every unit of its exports sold. The corresponding changes in terms of trade are summarized in Table 22 below.

As can be seen from Table 22, the resulting changes in terms of trade are relatively small. For the EU, terms of trade are expected to remain essentially unchanged. For the US, terms of trade are shown to decrease somewhat. In the less ambitious scenarios they are expected to decrease by 0.08 per cent. Under the ambitious scenario, the American terms of trade are expected to decrease by 0.19 per cent. As discussed above with respect to Table 20, this decrease is largely attributable to direct spill-overs, and is linked to the underlying estimated trade volume effects. The US has a relatively larger import share with third countries (especially China and Canada) in goods sectors affected by NTB reductions than does the EU. This leads to a greater impact when we examine direct spill-overs. As NTBs are reduced also in trade with these third countries, increased US demand drives the slight deterioration in terms of trade.

Lowering of tariffs naturally implies that tariff revenues in the EU will decrease somewhat. As can be seen from the first row of Table 23, the 2027 benchmark value of tariffs collected is 78.7 billion euros. Reducing tariffs alone would cause these revenues to decrease by 7.3 billion euros, relative to baseline situation in 2027. On the other hand under the ambitious and less ambitious scenarios with full liberalisation, tariff revenues would decreases by less – 5.4 billion euros and 6.4 billion euros, respectively. This is due to increased trade with third countries from further liberalisation (with spill-over effects, or in other words the lowering of part of the NTBs on a MFN basis) relative to tariffs only, which would result in additional tariff revenues.

Another potential impact of the Transatlantic FTA is that the lower barriers to trade with the US will cause a shift in relative costs leading to diverting some trade away from intra-EU partners towards new trade partners (see Table 24). In the table, we have defined trade diversion as the change in intra-EU trade following implementation of an FTA. This change will amount to 72.1 billion euros under full liberalization, of which 26.0 and 23.6 billion euros are caused by spill-overs and NTBs in goods respectively.

Meanwhile, NTBs in services, indirect spill-overs and procurement have a minor role in redirecting trade. Half of the estimated trade diversion effect (the change in intra-EU trade flows) is attributable to the motor vehicles sector. For this sector, the lowering of tariffs is shown to be the most important contributing factor, together with NTBs in goods and direct spill-overs. Some trade diversion is also visible in chemicals, electrical machinery and metals and metal products.

Overall, EU exports to non-US, extra-EU destinations are expected to increase by 33.3 billion euros (see Table 25). From the model estimates reported in the table, this increase is attributable to spill-over effects (direct and indirect). (The positive overall trade effect from removing tariffs is 1.1 billion euros, which is essentially 0.0 per cent). The bilateral lowering of NTBs in goods causes exports to non-US, extra-EU partners to shrink as trade is diverted away from these partners toward the US with EU exports becoming relatively more competitive in the US market due the reduction in trade costs (that would still apply in third countries). Nevertheless, with direct and indirect spill-overs, the costs of exporting to third countries will also fall and will lead to increased trade beyond the transatlantic market. As a consequence, with the exception of agriculture, forestry and fisheries and electrical machinery, exports in all sectors are estimated to increase towards destinations outside the potential FTA.

EU imports from non-US, extra-EU sources are estimated to increase by twice as much as exports, i.e. 66.9 billion euros (see Table 26). Half of this increase originates from the lowering of NTBs in goods. Spill-overs are also shown to be important contributors.

As noted above with respect to Table 20 and Table 21, increased competition from imports can be expected to push domestic firms to focus more on overseas markets, at least in relative terms. On the other hand, lowering of tariffs between the EU and US decreases the imports from outside the FTA, switching imports towards intra-FTA partners. Imports in all sectors (with the exception of other machinery and other manufactures) increase. The biggest increases in total are estimated to take place in electrical machinery, motor vehicles and metals.

Sector Specific Effects

We now turn to take a closer look at the sector-specific effects underlying the aggregate economic impacts reported above. First, we look at the changes in output and then we move on to the estimated changes in trade.

The results reported in Table 27 show that the sector output changes in the EU are in general small. Production in the primary sectors is almost unaffected, while there is a small increase across all services sectors. In manufacturing there is also a small increase in output with some exceptions. The most notable can be found in electrical machinery, where output is expected to decline by 3.74 and 7.28 per cent in the less ambitious and the more ambitious scenarios respectively. In contrast, the EU production of motor vehicles is expected to increase by 0.24 and 1.54 per cent in the less ambitious and ambitious scenarios, respectively. If we compare Table 27 with Table 14, it is clear that the reductions of NTBs in goods and in services are important drivers of changes at sector level. For example, for motor vehicles, tariff reductions alone harm the EU motor vehicle sector, with falling output levels. In contrast, with NTB reductions, the sector expands. This is strongest under the ambitious scenario, with the deepest NTB reductions (half of actionable or 25% of total NTBs).

For the US, the changes in sector specific output are also found to be small, with all the services sectors changing less than one per cent (Table 28). Finance and insurance sectors will contract, however the reduction is less than half a per cent, which implies no significant change. Within manufacturing, processed foods, electrical machinery and motor vehicles are expected to see an output decline, while in the other sectors it will expand, albeit quite limitedly. Overall the resulting pattern of output changes is similar in the two scenarios with the same sectors expanding and contracting.

Figure 11 below presents a breakdown of the sources of change across selected sectors for the EU, under the ambitious scenario. We have focused on some of the largest changes, full detail is provided in the annex tables. The largest negative impact is in electrical machinery. From the figure, almost all of this change is driven by direct spill-overs. If we contrast electrical machinery and motor vehicles, we can also see that bilateral NTB reduction and spill-overs work in opposite directions in the two sectors…

For the EU, overall imports and exports are both estimated to increase by 3.37 and 5.11 per cent in the less ambitious and ambitious scenarios, respectively. With the exception of electrical machinery, both imports and exports are shown to increase across both scenarios in all sectors for the EU. Some of the largest changes are in chemicals, motor vehicles, and metals. As discussed earlier (Table 27), parallel to these changes in trade, output in almost all sectors expands, electrical machinery being one exception. The results indicate an increase in imports of electrical machinery, which is accompanied by a decline in the output in this sector (7.28 per cent in the ambitious scenario) as more competitive imported goods replace some of the domestic production.

The biggest relative increase in imports as well as exports takes place in the motor vehicles sector. Here trade is estimated to increase by 43.11 per cent in the ambitious scenario. This is accompanied with an increase in the output of this sector (by 1.54 per cent under the ambitious scenario). This reflects the important liberalisation effort that the agreement would imply due to the initial combination of high tariffs and high NTBs. In addition, it reflects trade in parts and components in the model. This is a sector characterized by two-way trade in both vehicles and parts. Total exports are also estimated to increase significantly for metals and metal products (12.07 per cent), processed foods (9.36 per cent), chemicals (9.26 per cent), and other manufactures (6.13 per cent).

As can be seen from Table 30, trade in all sectors are expected to increase in the US. Here, total exports are shown to increase by 4.75 and 8.02 per cent under the less ambitious and ambitious scenarios, respectively. For many of the manufacturing sectors, these changes are quite significant. As in the case for the EU, motor vehicles are exhibiting the biggest increase in trade. Here, total exports are estimated to increase by up to 59.47 per cent under the ambitious scenario, while total imports will go up by 20.81 per cent.

In part, this is due to the initial structure of trade barriers between the two economies, with the EU having quite high initial protection in the motor vehicle sector. At the same time, the reader is reminded to keep in mind the discussion following Table 27 and Table 28 about general equilibrium effects. It is problematic to assign outcomes to policy changes in individual sectors, as the changes in output and trade depend on what happens across all sectors.

Changes in bilateral trade for the two liberalisation scenarios are summarized in Table 31 and Table 32 below. The first one shows estimated changes in sector specific bilateral exports from the EU to the US, and the second the bilateral exports from the US to the EU.

The total exports from the EU to the US are estimated to increase significantly by 16.16 and 28.03 per cent, respectively. The increase is shown to be taking place across almost all sectors (with the exemption of "Other Services"), however with smaller increases in the exports of services and other primary sectors than in manufactured goods. The most significant relative increases in exports are shown to occur in metals and metal products (42.40 and 68.20 per cent, respectively) and motor vehicles (71.00 and 148.70 per cent).

Looking at the estimated increases in exports from the US to the EU, the increase in bilateral exports in percentage terms is even bigger (Table 32). This is driven mainly by the difference in increase in the motor vehicle sector. Imports from the US in this sector expand more than exports to the US. In the less ambitious scenario bilateral exports to the EU are shown to increase by 23.20 per cent and by 36.57 per cent in the ambitious scenario. The expansion of exports is higher in all sectors in the ambitious scenario than in the less ambitious. As was the case with EU"s exports to the US, the increase is most substantial in the manufacturing sectors. The increase is most notable for motor vehicles, where exports to the EU are expected to increase by 207.40 and 346.80 per cent respectively. Significant relative increases are also expected to occur in the exports for metals and metal products and processed foods. Despite the high percent increase of US exports, the FTA increases the positive EU trade balance of motor vehicles with the US. In addition, the increase in imports from the US only corresponds to roughly 4.8 percent of total sales in the EU in the baseline.

We next compare total trade effects with bilateral trade effects for selected sectors. In both cases the strongest changes are in motor vehicles. Here, we can see that there is a substantial expansion of trade between the transatlantic partners (the EU and US).

Indeed, this implies relatively deep changes in the integration of the transatlantic motor vehicle sector. This reflects a relatively large share of parts and components in total sector trade, as well as the high tariffs (and so large tariff cuts) for the sector. The high tariffs are on the EU side (see Figure 9) while NTBs are high on both sides (see Table 2).

Sustainability Impacts

In this subchapter, we concentrate on sustainability impacts resulting from the two FTA scenarios. First, we focus on the resulting effects on the labour market with respect to changes in wages and displacements. Then we discuss the estimated effects on CO2- emissions and the use of natural resources.

First, we look at the corresponding estimated changes in wages for less and more skilled labour as a result of liberalizing trade between the two economies. These effects are summarized in Table 33 below.

The resulting effects on wages for the both the EU and the US are positive. All estimated changes are equal to or less than 0.5 per cent of the wage rate. The changes in wages are shown to be similar for both skilled and unskilled labour with the impact being marginally lower for skilled workers. The ambitious experiment results in somewhat higher changes for the EU. The wage effects are in line with changes in GDP in Table 6 and Table 16, and so are consistent with an interpretation of general cost savings that lead to productivity gains as firms operate with lower tariff and NTB-related costs for transatlantic commerce. It should be stressed that the model is a long-run model, where sources of employment and unemployment are "structural" (rather than cyclical). In this sense, changes in labour demand are captured through wage changes (in this case rising wages). As wages increase in the experiments, this means a rising demand for labour, so that under a flexible labour supply specification, employment would increase instead.

Table 34, Table 35, Table 35, and Table 37 report detailed employment effects across sectors under the ambitious comprehensive scenario. As we are not modeling long run unemployment rates, these are reallocation effects across sectors. In the EU, the motor vehicle sector sees employment expand by 1.28 per cent for skilled labor, and 1.27 per cent or less skilled labor. In contrast, there is a significant contraction in the electrical machinery and metals sectors. Mirroring this pattern, in the US the motor vehicle sector sees falling employment, and the metals and metal products sector sees a rise. In the US, like the EU, the electrical machinery sector contracts in terms of employment.

Combined with rising wages, the pattern in the tables suggests that the expansion of other sectors (motor vehicles in the EU for example, and other machinery and transport equipment in the US) pulls workers out of the sectors that then contract, by offering higher wages.

Conclusions

This study provides new estimates of the economy wide impact of removing both tariff and non-tariff barriers to transatlantic trade between the EU and the US. Several scenarios are analysed in the report. On the one hand specific trade liberalisation with regards to tariffs only, services only or procurement only is discussed. On the other hand, the option of comprehensive trade and investment liberalisation is scrutinised. The first FTA scenario, a moderately ambitious FTA assumed a 10 per cent reduction in NTBs-related costs and an "almost full" elimination of tariffs. The second, ambitious FTA scenario assumes the elimination of 25 per cent of costs linked to NTBs together with full tariff elimination.

The results indicate positive and significant gains for both the EU and the US. GDP is estimated to increase by 68-119 billion euros for EU and 50-95 billion euros for the US (under the less ambitious and the ambitious FTA scenarios, respectively). However, if the trade initiative would be limited to tariff liberalisation only, or services or procurement liberalisation only, the estimated gains would be significantly lower. An FTA limited to tariff liberalisation would lead to 24 billion euros increase in GDP for the EU and 9 billion euros increase for the US. Thus implementing a comprehensive FTA would bring greater benefits to both economies.

A core message following from our results is that a focus on NTBs is critical to the logic of transatlantic liberalization. Different approaches to the same regulatory challenges can have the unintended consequence of increasing costs for firms, and so dragging down labour productivity. Negotiation on NTBs provides the opportunity to pursue a mix of cross-recognition and regulatory convergence to reduce these barriers. The estimates reported here point to substantial gains, if reductions in the costs of NTBs can be achieved. Limiting the exercise to tariffs alone would lead to positive effects, but these would be much more limited leaving a huge potential for economic and welfare gains untapped.