Main Content

Ifo Project

Dimensions and Impact of a Free Trade Agreement Between the EU and the USA

Client: Federal Ministry of Economics and Technology •
Project period: July 2012 - January 2013 •
Department: International Trade

 

Project team:  
Prof. Gabriel Felbermayr Ph.D.
Prof. Dr. Mario Larch
Dr. Erdal Yalcin
Dr. Lisandra Flach
Sebastian Benz
Finn Krüger  
 
Client:  
Federal Ministry of Economics and Technology 
 
Project period:   July 2012 - January 2013

Tasks

In the framework of an evaluation study the International Trade Department of the Ifo Institute is examining the extent to which a transatlantic free trade agreement would influence prosperity, growth and employment in Germany and would change economic and corporate structures. The approach to its analysis is empirical and applies modern methods of econometric policy evaluation building to new international trade theories. Based on aggregated official statistics, trade creation and diversion effects, as well as productivity trends in various countries and sectors (different risks) will be analysed. The Ifo Institute will also conduct a survey of the leading corporate associations in Germany. This should provide a plausibility check and external validation for model-supported results. It should also capture the mood among companies and support the parameterization of newer trade models.

Methods

Panel data analysis
Analysis of gravity equations
Computable General Equilibrium Model (GTAP)

Data sources

Official trade statistics
Additional official statistics (Destatis, Eurostat) US Census Bureau
Bureau of Economic Analysis
UN COMTRADE
UNCTAD
WITS
Association survey

Results

Descriptive study results

The economic importance of the USA and the EU remains great. Together they account for almost 50% of global economic output, although they represent only 11.8% of the world’s population. In terms of bilateral trade the USA is the second biggest export market for German products (after the EU26) and the third biggest country of origin of German imports. The inter- and intra-industrial interconnection of both trade partners is reflected in the existence of foreign direct investments by companies. American firms invest over 50% of their foreign direct investment in Europe, while their European counterparts invest over 70% in the USA. Surveys of corporate associations show that non-tariff trade barriers (NTBs), and especially quality standards, represent key barriers to access to the US market for German exporters. NTBs are mainly understood as the fixed costs of market access. A reduction in NTBs would be especially helpful to small and medium-sized companies. It is the larger firms, on the other hand, that stand to gain from the elimination of customs and excise, according to corporate associations. Overall, large firms believe that a transatlantic free trade initiative would have a positive impact in terms of employment. They would expect to win market share not only in the USA, but also in third markets.

Econometric results

Econometric estimates show that, in addition to the real preferential trade agreements already in existence, trade creation gains of at least 67% can be expected. The trade creation would be far greater than reductions in custom and excise would lead us to expect. Trade would grow in all of the countries directly affected by the transatlantic free trade agreement.

A far-reaching liberalization of trade would increase prosperity (real income) by around 3.3% in the long-term. In Germany trade would increase by around 4.7% and in France by 2.6%. The USA and Great Britain would be the biggest winners with 13.4% and 9.7% respectively. Countries with which either the EU or the USA already has free trade agreements would be the biggest losers. These countries include Mexico, Canada and Chile, as well as some North African countries.

An analysis taking labour market effects into consideration shows that up to 110,000 jobs would be created in Germany, while a total of 400,000 jobs would be created in the EU. Increases in employment gains in the USA would be smaller. In Canada and Mexico the employment effects would only be very small and partly positive. The rest of the world would stand to lose around 240,000 jobs.

Project-related publications

Expert reports

Felbermayr, Gabriel, Mario Larch, Lisandra Flach, Erdal Yalcin and Sebastian Benz, "Dimensionen und Auswirkungen eines Freihandelsabkommens zwischen der EU und den USA", Ifo Institute, Munich, 2013, Study commissioned by the German Federal Ministry of Economics and Technology, January 2013, final report.  Details | Download

Executive Summary

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 the German Federal Ministry of Economics and Technology, January 2013, Executive Summary. Details | Download

Summary

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 | Download

External Publication

Presse und Informationsamt der Bundesregierung (2013): Neue Chancen für Verbraucher und Unternehmen. Zehn gute Gründe für ein Freihandelsabkommen der EU mit den USA. | Download (PDF, 4,0 MB)

Press release

Free Trade Agreement Between the EU and the USA Will Create Prosperity

Ifo policy issue

Free trade agreement

Contact

Prof. Gabriel Felbermayr, Ph.D.

Ifo Institute
Ifo Center for International Economics
Phone: +49(0)89/9224-1428
Fax: +49(0)89/985369
Email: felbermayr @ ifo.de
Website


Short URL: www.ifo.de/w/3kC6QR3vF