If the proposed Transatlantic Trade and Investment Partnership is finalized, the free trade agreement would be unprecedented.
It aims to reduce or eliminate trade barriers and harmonize standards and regulations in the United States and the European Union for the mutual economic gains of the partners.
TTIP would create a free trade area representing nearly half of all global economic output with only 11.8 percent of the world population.
Select sectors would benefit most. Exports of motor vehicles will likely increase by 40 percent. Exports of metal products could increase by 12 percent, processed foods by 9 percent, chemicals by 9 percent, other manufactured goods by 6 percent and other transport equipment by 6 percent.
The impact of TTIP on California would be significant. Annual exports from California to the EU averaged nearly $30 billion from 2012 to 2014, accounting for nearly 17 percent of all state exports. In The Los Angeles Customs District alone, two-way trade with Europe accounted for nearly $42 billion in 2014. Additionally, EU states such as Germany and Great Britain are vital trade partners, serving as the LACD’s sixth and 13th biggest trading partners, respectively.
But many well-structured studies predict the overall impact on personal income and the gross domestic product of the two regions will not be significant. A 2013 study by the Centre for Economic Policy Research concluded that, by 2027, an ambitious TTIP would produce gains of about $164 billion for the EU and $131 billion for the U.S., while a less ambitious agreement that eliminates most tariffs but leaves many non-tariff barriers in place would create EU gains of $94 billion and U.S. gains of $69 billion. The rest of the world would benefit from small but positive spillover effects.
The negative impacts should not be overlooked. Most economists do not consider free trade agreements suitable trade policies because they are a threat to the carefully constructed postwar multilateral trade system.
They prefer to see advancements coming through the World Trade Organization rather than bilateral and multilateral agreements. Currently, the U.S. maintains 14 bilateral agreements and the EU has 35. Korea, Mexico, Canada, Singapore, Israel and Chile all have bilateral agreements with both the EU and the U.S.
“Behind-the-border” issues may have the greatest impact on the workings of economies, the processes of decision-making and policy-setting and the quality of life.
In the case of TTIP, these issues include financial deregulation, adverse climate policies, lower food safety standards and reduced product safety rules. The regulations in question may be critical to creating sustainable economic interests and benefits for the people who live within the regions. In addition, the fact that negotiations have been taking place behind closed doors is undermining the role of citizens and civil societies in the decision-making process in favor of large corporations.
“New” New Trade Theory can be used to explain the uneven impact TTIP would have. NNTT stresses the importance of firms rather than sectors in understanding the challenges and opportunities countries face in a global setting.
Within a single industry, some firms are not able to cope with international competition while others thrive. The resulting intra-firm reallocations of market shares and productive resources are much more pronounced than inter-industry reallocations driven by comparative advantage.
Trade between affiliates of companies located in different countries is quantitatively very important and accounts for 80 percent of German exports in the automotive industry, 76 percent in the chemicals sector and 61 percent in machinery.
In other words, some companies have much greater share within the sectors than other firms and stand to be impacted more.
Putting the short-term gains of large companies ahead of food security, the protection of investors, environmental safety and the rights of civil societies to full information about any agreement that will impact the lives of hundreds of millions of people on the two sides of the Atlantic is a clear misunderstanding of a “thriving economy.”
• Jamshid Damooei is the chairman of the Department of Economics, Finance & Accounting and co-director of the Center for Leadership & Values in the California Lutheran University School of Management.