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Topical Terms in Economics

Transatlantic Free Trade Agreement

A free trade agreement guarantees that the parties involved enjoy freedom from customs and trade barriers and serves as legal safeguard for unhindered economic exchange. In the framework of a comprehensive free trade agreement, both customs and non-tariff trade constraints such as, for example, import and export bans, are lifted. The current debate focuses on the set up of a transatlantic trade agreement (Transatlantic Trade and Investment Partnership, TTIP) between the European Union and the USA. The idea of such an agreement is not new - Klaus Kinkel, Germany’s former Foreign Minister, proposed it way back in 1995.

Both the EU and the USA are already involved in a series of free trade agreements regulating trade in goods and services. According to data from the World Trade Organisation (WTO), the USA has 14 bilateral agreements, several of which involve groups of countries (e.g. NAFTA). The EU has a total of 35 bilateral agreements. Further agreements, with Japan, for example, are under negotiation. At the same time, interest on the part of EU countries and the USA in intensifying transatlantic trade relations is growing, especially since emerging countries like China and India are increasingly becoming more competitive. A TTIP agreement would be unsurpassed in terms of its dimensions. It would create a free trade area that would represent nearly 50% of global economic output, but would account for only 11.8% of the world’s population.

Free Trade Agreement – Impact on Trade, Prosperity and the Labour Market

Econometric estimates show that the trade, turnover and employment would increase through the creation of a transatlantic free trade area. Trade between EU member states and the USA would increase by 79% on average. This would be achieved through the abolition of customs, the reduction in non-tariff market entry barriers and both private and public investment in measures to reduce the cost of trade. Since the fixed costs of market entry would be considerably lower after sweeping liberalization, export-oriented, medium-sized companies would stand to benefit in particular, as this would give them entry to the US market for the first time. An agreement would also create significant prosperity effects. A full liberalisation of trade relations between the USA and the EU would considerably lower the prices of imported goods and would therefore strengthen the purchasing power of incomes. At the same time, more products for consumers would appear on the market. This would intensify competition, which usually serves to reduce prices, too.

A TTIP would also have positive effects on the labour market. A total of 400,000 new jobs could be expected in the EU as a whole, and up to 110,000 new jobs would be created in Germany. In addition, employment would increase in the USA, while Mexico and Canada would also both enjoy upturns. At the same time average productivity would rise, which would increasingly lead to better paying jobs. Expressed in numbers this would mean an increase of around 268 euros to a monthly gross wage of 3,311 euros. The overall potential of a comprehensive TTIP is tremendous. If trade barriers can be lowered to the same extent as in other far-reaching agreements, real income in EU member states could increase by 2.6% to 9.7% if sweeping liberalization were to occur, with the figure reaching 4.7 % in Germany and as high as 13.4 % in the USA.

Drawbacks of Sweeping Liberalisation

Not all countries, however, would stand to benefit from a sweeping free trade agreement. Third countries, that remain excluded from the TTIP agreement, would lose market share compared to their competitors from TTIP states in the USA and the EU, because their products would not benefit from the lower trade costs. If liberalization between the USA and the EU were to have a purely bilateral impact, i.e. were not to influence the trade costs of third countries, then the prosperity losses of these countries would be significant. In such a case the countries with which either the EU or the USA already had free trade agreements would sustain particularly high prosperity losses, including, for example, Mexico at -7.2% or Canada at -9.5% (measured as the change in real income). Moreover, trade between a few countries could even grind to a halt completely.

The main criticism of the TTIP agreement is that third countries could be adversely affected, that this would undermine the self-image and goals of the World Trade Organisation, and would thus prevent the successful conclusion of a multilateral agreement (Doha Round). Critics see the TTIP as a shift in economic relations away from multilateral trade regimes and towards their bilateral counterparts; and talk of “preferential trade agreements” Empirical research, however, shows that bilateral agreements may actually increase incentives to conclude agreements at a multilateral level if countries like India and Brazil are granted concessions by the USA and the EU at a multilateral level, as this reduces the negative effects of TTIP for them. According to the WTO principle, this would mean that these countries would also have to grant their Western partners better market access. This would bring the world closer to a multilateral liberalization of trade than it has been in recent years.

Literature

Basic texts

  1. Felbermayr, Gabriel and Mario Larch, "Das Transatlantische Freihandelsabkommen – Zehn Beobachtungen aus der Sicht der Außenhandelslehre", Wirtschaftspolitische Blätter 2, 2013, 353 – 366 | Details

  1. Felbermayr, Gabriel, Mario Larch, Lisandra Flach, Erdal Yalcin and Sebastian Benz, "Dimensionen und Auswirkungen eines Freihandelsabkommens zwischen der EU und den USA", ifo Institut, München, 2013, Studie im Auftrag des Bundesministeriums für Wirtschaft und Technologie, Januar 2013, Endbericht. | Details | PDF Download

  1. Felbermayr, Gabriel, Mario Larch, Lisandra Flach, Erdal Yalcin and Sebastian Benz, "Dimensions and Effects of a Transatlantic Free Trade Agreement Between the EU and US", 2013, Study commissioned by German Federal Ministry of Economics and Technology, January 2013, Executive Summary | Details | PDF Download

  1. Felbermayr, Gabriel, Mario Larch, Lisandra Flach, Erdal Yalcin, Sebastian Benz and Finn Krüger, "Dimensionen und Effekte eines transatlantischen Freihandelsabkommens", ifo Schnelldienst 66 (04), 2013, 22-31 | Details | PDF Download

Books and journal articles

  1. Felbermayr, Gabriel and Erdal Yalcin, "Export Credit Guarantees and Export Performance: An Empirical Analysis for Germany", The World Economy 36 (8), 2013, 967–999 | Details

  2. Felbermayr, Gabriel, Mario Larch, Berend Diekmann and Rolf J. Langhammer, "Transatlantische Handels- und Investitionspartnerschaft: Welche Effekte sind zu erwarten?", ifo Schnelldienst 66 (06), 2013, 03-12 | Details | PDF Download

  3. Felbermayr, Gabriel J., Benjamin Jung and Mario Larch, "Optimal Tariffs, Retaliation and the Welfare Loss from Tariff Wars in the Melitz Model", Journal of International Economics 89 (1), 2013, 13–25 | Details

  4. Gröschl, Jasmin, "Neuer Protektionismus – Gefahren für den Freihandel ", ifo Schnelldienst 65 (15), 2012, 35-39 | Details | PDF Download

  5. Felbermayr, Gabriel, Benjamin Jung and Mario Larch, "Tariffs and Welfare in New Trade Theory Models", Working Papers in Economics and Finance No. 41, University of Tübingen, Tübingen, 2012, Download | Details

  6. Felbermayr, Gabriel and Benjamin Jung, "Unilateral Trade Liberalization in the Melitz Model: A Note", Economics Bulletin 32 (2), 2012, 1724-1730 | Details

  7. Felbermayr, Gabriel and Benjamin Jung, "Unilateral Trade Liberalization in the Melitz Model: A Note", University of Tübingen Working Papers in Economics and Finance No. 30, 2012, Download | Details

  8. Felbermayr, Gabriel, Inga Heiland and Erdal Yalcin, "Beschäftigungseffekte der Exportkreditgarantien der Bundesrepublik Deutschland »Hermesdeckungen«", ifo Schnelldienst 65 (01), 2012, 20-30 | Details | PDF Download

  9. Yalcin, Erdal and Kilian Zacher, "Zur Lage der deutschen Exporte", ifo Schnelldienst 64 (21), 2011, 17-25 | Details | PDF Download

  10. Felbermayr, Gabriel J., Benjamin Jung and Mario Larch, "Optimal Tariffs, Retaliation and the Welfare Loss from Tariff Wars in the Melitz Model", CESifo Working Paper No. 3474, May 2011 | Details | PDF Download

  11. Felbermayr, Gabriel and Wilhelm Kohler, "Modeling the Extensive Margin of World Trade: New Evidence on GATT and WTO Membership", World Economy 33 (11), 2010, 1430–1469 | Details


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