THE EU AND THE US: TTIP 1

The EU and the US: TTIP

Gabriel Felbermayr
Ludwig Maximilians Universität München and ifo Institut München.

1. INTRODUCTION

Since July 2013, the EU and the US have been in the process of negotiating a
Transatlantic Trade and Investment Partnership (TTIP). The objective of the process is
to create a common transatlantic market place with low barriers to trade and investment.
After the end of the Soviet Union, the world economy in general and the nature of
transatlantic trade in particular underwent a deep transformation towards an increasingly
prominent role of value chains and production networks. It has since become clear that
the transatlantic relationship needs to be redefined. Therefore, it is no surprise that the
TTIP is not the first effort to secure a substantial trade agreement between the world’s
two biggest trading blocks. The New Transatlantic Agenda in 1995, the Transatlantic
Economic Partnership in 1998 and a framework agreed at the Transatlantic Economic
Council in 2007 all attempted to make it easier to do business across the Atlantic,
however with limited success.
The current attempt is the most credible and the most ambitious so far. At an EU-US
Summit meeting in November 2011 both sides agreed to create a high-level working
group on jobs and growth led by US Trade Representative Ron Kirk and EU Trade
Commissioner Karel De Gucht. In February 2013, a final report from the group
recommended “to US and EU Leaders that the United States and the EU launch …
negotiations on a comprehensive, ambitious agreement that addresses a broad range of

Preliminary version of a chapter prepared for the Handbook of the Economics of European Integration, Harald Badinger and Volker
Nitsch (eds.), Routledge. I wish to thank Sebastian Benz, Fritz Breuss, Kerem Cosar, Anne-Célia Disdier, Heribert Dieter, Lionel
Fontagné, Joe Francois, Benedikt Heid, Len-Kuo Hu, Sébastien Jean, Mario Larch, Sybille Lehwald, Jacques Pelkmans, Laura
Márquez Ramos, Uli Schoof, Erdal Yalcin, and seminar participants at various places for many informative and inspiring
discussions on transatlantic trade and investment. All remaining errors are mine.
THE EU AND THE US: TTIP 2

bilateral trade and investment issues, including regulatory issues, and contributes to the
development of global rules”.1
Little later, in his State of the Union Address in February 2013, US President Obama
announced: “And tonight, I am announcing that we will launch talks on a comprehensive
Transatlantic Trade and Investment Partnership with the European Union – because
trade that is free and fair across the Atlantic supports millions of good-paying American
jobs”.2
Subsequently, the European Commission adopted the draft mandate for the TTIP talks
and a common position between the 27 Member States was negotiated. It was approved
unanimously under the Irish presidency of the EU in June 2013. Negotiations have
started in July 2013. Since then, six rounds have been held, alternating between Brussels
and Washington.
While little detail is known about the negotiating process, topics covered, or progress
made, officials from both sides of the Atlantic and numerous leaked documents have
made fully clear that the envisaged TTIP shall be ambitions, comprehensive, and go
beyond existing commitments at the level of the World Trade Organization (WTO). The
leaked Commission’s mandate states the objective of “realizing the untapped potential
of a truly transatlantic market place”.
One may wonder why talks on an ambitious TTIP have not started earlier. There are at
least three reasons. First, only in 2006 has the EU turned to a more active policy of
negotiating bilateral trade agreements based on economic rather than political
objectives.3 This move reflects the incapacity of the WTO to finalize the Doha Round of
trade negotiations that was launched in 2001, originally with the aim of achieving an
agreement by 2005. Second, while the US and the EU have long commanded substantial
influence in the world trading system each on their own, the rise of emerging economies,
most notably China, has challenged their pivotal roles. Figure 1 shows that, from 1974 to
2003, the joint share of the US and the EU in world GDP (measured in current prices)
was very stable, at around 60%, and both players had approximately similar weight.
From 2003 to 2013, the joint share fell to about 46%. Long-run predictions of the OECD
see the EU and the US both at about half their 1974-2003 weight by 2060. So, if the
traditional “West” wants to retain some influence in the world trade order, transatlantic
cooperation is a necessity. Third, the world financial crisis of 2008/09 and the following
period of sluggish growth have incentivized policy makers to look for new sources of
growth. With little room to loosen fiscal and monetary policies further, it was believed
that trade liberalization promises substantial benefits at relatively low political costs.4
>>>Figure 1 here<<<

1
The document is available at trade.ec.europa.eu/doclib/html/150519.htm.
2
The speech is available under www.whitehouse.gov/state-of-the-union-2013.
3
The “Global Europe” strategy report from 2006 by the EU Commission describes the role of bilateral free trade agreements
and ends a de facto moratorium on bilateral deals; see http://trade.ec.europa.eu/doclib/docs/2006/october/tradoc_130376.pdf.
4
Indeed, EU President Manuel Barroso has called the “TTIP the cheapest stimulus program one can imagine” (EC-
MEMO/13/569 from June 15, 2013).
THE EU AND THE US: TTIP 3

2. THE NATURE OF EU-US TRADE

Trade Volume. In 2012, the EU exported goods worth 388 bn. dollars to the US, and
it imported goods and services worth 264 bn. dollars from there. Services exports
amounted to about 162 bn. and imports to 191 bn. dollars. The EU has a bilateral surplus
in goods trade, a small deficit in services trade, and an overall bilateral trade surplus of
about 95 bn. dollars.
>>>Figure 2 here<<<
Figure 2 plots EU goods trade with the US over time. From 1995 to 2013, exports have
grown at an annual growth rate of about 6% while imports have grown at an annual rate
of about 4%. These numbers do not compare very favourably to the growth rate of world
trade of about 8% per annum in the same period.5

Table 1 Bilateral trade relative to total trade and GDP

Share in total trade Share in GDP
EU US EU US
Exports 8.06% 22.39% 3.55% 3.05%
Imports 7.07% 21.53% 2.98% 3.64%
Notes: Own calculations based on data from OECD and World Bank.

As shown in Table 1, EU exports to the US make up about 8% of total EU exports, and

they amount to about 3.55% of EU GDP. The ratios are slightly smaller for EU imports
from the US.
>>>Figure 3 here<<<
Within the EU, Germany and the United Kingdom are the largest trade partners of the
US. As shown in Figure 3, Germany accounts for 25% of exports, the United Kingdom
for 22%. This is higher than the shares of these countries in EU GDP (21 and 15%,
respectively). The third largest exporter, France, contributes a share of only 9%. On the
import side, Germany accounts for 21%, the UK for 19%, and France 12%. Ireland is
responsible for 7.2 and 5.7% of imports and exports, respectively; this is substantially
larger than the country’s share in EU GDP, which is a mere 1.2%, and almost double the
share of Spain. The importance of the US as a trade partner is, therefore, very different
for different EU countries.
>>>Figure 4 here<<<

Sectoral breakdown. Figure 4 shows that, in 2012, services accounted for 36% of EU
exports to the US and for 40% of EU imports. These shares have increased slightly over
time; in 2004 they stood at 34 and 39%, respectively. On the export side, in 2012, the
chemicals, machinery and transport equipment industries accounted for almost 50% of
total trade (20, 16 and 14%, respectively). The same industries also dominate the import

5
WTO, World Trade Report, 2013.
THE EU AND THE US: TTIP 4

side. In 2012, the accounted together for about 44% of imports (19, 14, and 11%,
respectively). These shares have remained remarkably stable over time.
The food and agricultural sectors, despite their prominent role in trade debates, are not
important: raw and processed food together amounted to about 15 billion Euros of
exports and 9 billion Euros of imports in 2012; this is about 5% of total US trade. In the
agri-food sector, the EU has a trade surplus of about 6 billion Euros with the US. It is
entirely driven by processed food. In raw agricultural goods, the EU has a trade deficit. 6
The figures shown suggest that transatlantic trade is strongly intra-industry in nature.
Indeed, the EU-US link features one of the highest Grubel-Lloyd indices amongst large
trading nations. This undisputed fact is very important for the economic analysis.
The role of multinational firms. Moreover, a large fraction of transatlantic trade
occurs within multinational enterprises. According to data from the US Census Bureau,
in 2013, 61% of European merchandise exports to the US have been to related parties
(up from 57% in 2002).7 In contrast, only 32% of EU imports from the US are from
related parties (up from 31%). The difference between imports and exports is striking. It
has to do with differences in the nature of foreign direct investment (FDI). European FDI
in the US is often vertical, so that trade in intermediate inputs between related firms is
important. In contrast, US FDI in the EU is more likely horizontal. The share of EU
exports to related parties is highest in the chemicals (83%), transport (69%), plastics
(65%) and computer (65%) industries.
The transatlantic economic relationship is often described as an investment-driven one.
Indeed, in 2011, the US outward stock of foreign direct investment (FDI) in the EU
amounts to about 50% of the US total, and the US inward stock of FDI in the US
amounts to about 62% of the total. American multinationals earned about 39% of their
foreign income in Europe and European multinationals accounted for about 63% of
foreign FDI income in the US. Moreover, about 41% of foreign affiliate sales of US
multinationals materialized in Europe, while EU multinationals accounted for 52% of
affiliate sales of foreign firms in the US. 8

3. HOW FREE IS TRANSATLANTIC TRADE TODAY?

On the importance of trade costs. The volume of trade between the EU and the US is
impressive, at least if one looks at the absolute transaction values. However, to judge the
depth of the relationship, one requires a benchmark scenario to compare the status quo
with. A rough calculation, inspired by Feenstra (2004, chapter 5) goes as follows: If
trade in the world were entirely free from trade frictions both on the demand and the
supply sides, and if trade occurs because of national product differentiation, the level of
trade between two countries relative to world GDP is simply the product of the two
countries’ shares in world GDP. The EU’s share in world GDP is a proxy for its supply
capacity, and the US’ share is a proxy for its demand capacity. So, if both regions

6
See Bureau et al. (2014) for a detailed account of EU-US agri-food trade and the potential effects of TTIP in this sector.
7
Data is available freely on: http://sasweb.ssd.census.gov/relatedparty/.
8
Hamilton and Quinlan (2013).
THE EU AND THE US: TTIP 5

account each for a 1/4 of world GDP,9 their trade should account for about 1/16 of world
GDP. Adding flows in both directions, total trade should be 1/8 of world GDP. This
number can be compared to observed trade, which amounts to about 1.4% of world
GDP.10
The difference between the benchmark value and the observed value may be due to
different preferences, but also due to different trade costs. The fact that the two values
differ so much has inspired the literature to talk about a “puzzle of missing trade”
(Trefler, 1995). It has spurred a large literature on the importance of trade costs. In their
survey article, Anderson and van Wincoop (2004) show evidence that trade costs within
the OECD member states are equivalent to tariffs ranging between 70 and 80%. The
largest fraction of these costs is not directly induced by trade policies, but is driven by
geographical distance, cultural or linguistic differences, or currency related costs.
However, the evidence also shows that directly policy-related trade costs are much
higher than what data on tariffs suggest. This finding motivates trade policy initiatives in
a world where conventional trade barriers (tariffs) are so low.
Tariffs. Import duties across the Atlantic are already relatively low. According to
Felbermayr et al. (2013), in the manufacturing sector, the weighted average customs
duties were 2.8% for both US imports from the EU and EU imports from the US. In the
area of agricultural goods, US imports from the EU were affected by an average tariff of
2.6% while EU imports from the US were affected by an average tariff of 3.9% (most
favoured nations tariffs, 2007).
However, this structure hides substantial variation. Figure 5 shows data from Berden et
al. (2009). EU import tariffs in the processed food and automotive sectors average
around 10%; US import tariffs are higher than average in processed foods, too, and in
other manufactures.
>>>Figure 5 here<<<

Despite low average tariffs, it would be wrong to conclude that tariffs have no trade-
inhibiting role in transatlantic trade. First, trade in intermediate inputs, a significant
portion of EU-US trade, can imply double taxation as inputs and final goods are taxed
when crossing the border. Second, since tariffs differ substantially across goods, they
induce welfare-reducing substitution effects towards low-tariff items. And, third, peak
tariffs can be as high as several hundred percentage points, so that they make trade in
some (few) goods prohibitively expensive.
Weighted average import tariffs with the US are low, but they are high compared with
the weighted average tariff of the EU relative to the world, where it is around 1.41% in
2007 (and 1.17% in 2012).11 This is more than half the weighted level for imports from
the US, reflecting the facts that EU imports from the US are biased towards products
with relatively high tariffs and that the EU already has free trade agreements with

9
See Figure 1 for exact data.
10
In 2012, total EU-US trade is about 1,000 billion dollars; world GDP is about 72,000 billion dollars.
11
According to Eurostat, total tariff income in the EU was 20.3 billion Euro in 2007. Total (extra-EU) imports amounted to
1,446.8 billion Euro.
THE EU AND THE US: TTIP 6

important trading partners such as Turkey, Mexico, or non-EU countries in Europe (such
as Switzerland, Norway, or Iceland).
Non-tariff measures. Given these facts, it is not surprising that the focus of trade
negotiations has shifted from tariffs to so called non-tariff measures (NTMs). These can
be understood as the sum of all policy-related costs that put foreign suppliers of goods
and services at a cost disadvantage relative to domestic suppliers. Such costs can arise
from traditional border measures (costs related to customs procedures, etc.) as well as
behind-the border measures flowing from domestic laws, regulations and practices.
Sometimes, the term NTM is used as synonymous to non-tariff barriers (NTBs), but it
makes sense to view NTBs as including natural barriers (such as distance, language
differences, …) that cannot be changed by trade negotiatons besides the policy-related
NTMs.
NTMs can reflect the course of history. Legitimate goals can be reached in different
ways. This can lead to regulatory divergence. Examples include different regulations
across the Atlantic on the design of side mirrors or on the color of blinker lights in cars.
Similar divergence exists in the chemicals industry. NTMs may also reflect different
policy preferences. For example, in the EU, market access of chemicals has been
governed by the so called precautionary principle, while the US bases regulation on strict
liability laws. Third, NTMs may be in place because of simple protectionist motives. In
practice, often all three determinants coexist, and NTMs fulfill a multiple purpose. For
example, the EU’s import ban on chicken washed in a chlorinated solution is in place to
protect consumers, but it also effectively protects the EU poultry industry from foreign
competition. NTMs are pervasive; they appear in almost every industry, and they take a
wide variety of different forms.
There are two main approaches to measure NTMs. The first, a bottom-up approach, is
to construct indicators of NTM existence and stringency with the help of firm-level
surveys, and to use this information in gravity models to estimate ad valorem tariff
equivalents (AVEs) of these barriers. Alternatively, one can use data on NTMs notified
to the WTO, e.g., in the areas of technical barriers to trade (TBT) or sanitary and
phytosanitary (SPS) measures. In a second step, expert opinion is brought in to decide on
the share of those AVEs which is actionable, i.e., which can in principle be reduced by
policy reform, and what portion of the actionable share can be realistically lowered
within a proposed free trade agreement, such as TTIP. The second approach, a top-down
approach, does not aim at measuring the level of NTMs but uses existing free trade
agreements to estimate their trade cost reducing effect.
>>>Figure 6 here<<<

In the context of transatlantic trade, Berden et al. (2009) have used a very careful and
comprehensive bottom-up analysis. They have shown that NTMs are very important in
EU-US trade, and that their incidence differs strongly from industry to industry. Figure 6
provides their data. In the manufacturing industries, AVEs associated to NTMs amount
to about 20%, with the highest values reached in the areas of food and beverages. While
THE EU AND THE US: TTIP 7

trade weighted tariff rates tend to be higher in the EU than in the US, NTMs are more
costly in the US than in the EU.
In the service industry, trade is generally tariff free, and the main restrictions to trade
are of NTM type. In some sectors, such as in construction, they look low; but they can be
very substantial, e.g., in the banking industry, where they reach more than 30% in the
US.
Bottom-up estimates of NTMs are very useful because they can tell negotiators in
great detail where the problems exactly lie. They are, however, prone to different
problems. For example, it is not clear whether firms actually have incentives to report
NTMs when they are asked in a survey. Also, the scope of the underlying NTM concept
is often not easily defined. For example, are government procurement or investment
restrictions covered?
Top-down estimates of NTM reductions in existing free trade agreements have their
own problems, too. First, it is not straightforward to obtain unbiased estimates of average
treatment effects. Second, earlier experience need not be informative about a specific
agreement in negotiation, such as the TTIP. And third, the ex post, top-down analysis
does not inform on the precise channels through which agreements have actually brought
down trade costs.
In the empirical trade literature, ex post evaluations of free trade agreements abound.
As the theoretical underpinning of the gravity equation has improved, estimation has
improved, too. Nonetheless, estimated treatment effects still differ widely. Cipollina and
Salvaticci (2010) as well as Head and Mayer (2014) provide meta analyses. Over time,
however, estimates have tended to converge as researchers have been able to more
successfully deal with the endogeneity of agreements. Overall, it is probably fair to say
that the literature agrees on the existence of a positive and substantial treatment effect of
agreements on bilateral trade. Depending on sample and period, the effect ranges
between 50 and 200%.

4. AREAS OF NEGOTIATIONS

The TTIP negotiations cover three broad areas: (a) market access, (b) regulatory issues
and non-tariff barriers (NTMs), and (c) rules. At the time of writing of this chapter (July
2014), some details on the level of ambition and on the state of the negotiations have
transpired, but substantial uncertainty still exists. Much of the following is, therefore, to
some extent speculative in nature.
Market access. In the area of trade in goods, the planned agreement strives to
eliminate all duties and other requirements (such as taxes, fees, quantitative restrictions,
or authorization requirements) on bilateral trade, but it will most likely include phase-in
provisions and safeguard “emergency” clauses. It will also contain provisions to
harmonize rules of origin, in particular with respect to third countries which already have
trade agreements with either the US or the EU. Regarding services, the parties attempt to
reduce long-standing market access barriers, while recognizing the sensitive nature of
certain sectors. They will also anchor a national treatment clause, by which foreign
THE EU AND THE US: TTIP 8

establishments (subsidiaries of foreign firms) must receive no less favorable treatment

than domestic firms. The agreement will contain the mutual recognition of professional
qualifications to facilitate services trade. The EU negotiating mandate explicitly
excludes audiovisual services.
Concerning investment, uncertainty is large, since the public opinion and even some
governments in the EU have expressed doubts about the usefulness of an investment
chapter in the TTIP. If the agreement is to be modeled on the publically available texts
on the EU-Canada agreement (CETA, comprehensive economic and trade agreement) or
on the existing US model text for bilateral investment treaties, it will go beyond the
usual bilateral investment treaties in that it not only covers investment protection but
also liberalization. It will include provisions that prohibit discriminatory treatment of
foreign firms through a national treatment and a most-favored nation clause; it will
protect investors against direct and indirect expropriation, including the right for
adequate and effective compensation; it will include provisions guaranteeing the free
transfer of funds of capital; and it will include an investor-to-state dispute settlement
mechanism to enforce the agreement.
The agreement should enhance mutual access to public procurement markets at all
levels of government; eliminate domestic production or local content requirements, and
achieving transparency in the tendering process.
To date, it is very likely that audiovisual services, and sensitive products in the agri-
food sector (cholorinated chicken, beef treated with growth hormones, genetically
modified organisms) will be not covered by the treatment.
Regulatory issues and non-tariff barriers. The agreement will attempt to reach an
ambitious level of regulatory compatibility for goods and services through mutual
recognition, harmonization, and through enhanced cooperation between regulators. The
agreement will cover sanitary and phytosanitary measures (SPS) and technical barriers to
trade (TBT). The former concerns regulation that sets standards protecting human,
animal, and plant health, while the latter deals with technical standards. So far, the
negotiators have stressed that the agreement will be without prejudice to the right to
regulate in accordance with the level of health, safety, consumer, labor and
environmental protection and cultural diversity
It is expected that the agreement will include cross-cutting disciplines on regulatory
coherence and transparency for the development and implementation of efficient, cost-
effective, and more compatible rules on goods and services. These may include early
consultations on regulatory action, impact assessments, or periodic review of existing
measures.
The agreement will probably also include sectoral provisions that contain additional
commitments or steps aimed at fostering regulatory compatability in specific areas such
as in motor vehicles, chemicals, pharmaceuticals, information and communication
technologies, or financial services.
Currently, it appears unrealistic that the agreement will define common standards in
any important industry. Mutual recognition of standards is more likely, but will be
limited to some industries (for example motor vehicles). At the very minimum, the
THE EU AND THE US: TTIP 9

agreement will contain provisions about the mutual recognition of tests. It will also
attempt to improve transparency and predictability of regulatory processes.
Rules. The agreement will probably cover intellectual property rights. In the EU,
geographical indicators are of major importance. Moreover, it will include provisions on
customs and trade facilitation. Specifically, these provisions will revise customs rules
and procedures or documentation requirements, and improve cooperation between
customs authorities. Importantly, the agreement is likely to include provisions on
competition policy covering issues such as antitrust, mergers, and state aid. Finally,
negotiating parties have announced that they will include a chapter on small and
medium-sized enterprises.
Clearly, an agreement between the EU and the US will need an institutional structure
to ensure an effective follow-up of commitments. Also, negotiators are talking about a
transatlantic regulatory cooperation council whose aim it is to promote the progressive
achievement of compatibility of regulatory regimes.

5. POTENTIAL ECONOMIC BENEFITS FROM A TTIP

At the date of writing this chapter, talks on the proposed TTIP are in full swing. In July
2013, they have started with high ambitions, but after six rounds of negotiations it has
become increasingly clear that the outcome, if at all positive, will most likely be more
modest than what was initially planned.
Against this backdrop, how can one provide a plausible quantification of the potential
economic effects from a TTIP? A number of studies have provided estimates; here, we
focus on two exemplary exercises which use different approaches and come, regarding
certain aspects, to different conclusions.12 First, a study ordered by the EU commission
and conducted by Francois et al. (2013) embeds top-down estimates on NTMs described
above into a rich multi-sector computable general equilibrium (CGE) model of the world
economy.13 Second, work carried out at the ifo Institute, a think tank in Germany, and
summarized in Felbermayr et al. (2014), makes use of a top-down strategy on NTMs in
the context of a macro-model with very large country coverage.
All exercises make use of standard general equilibrium models of the world economy.
They make use of the so called Armington assumption by which goods are differentiated
by country of origin. Francois et al. (2013) assume monopolistic competition in some
industries. These assumptions, while providing different micro structure, do not matter
much for quantitative analysis; see Arkolakis et al. (2013). With the exception of
Felbermayr et al. (2014), labor markets are assumed competitive. All frameworks
compare steady states and abstract from short-run adjustment dynamics. Francois et al.
(2013) compare two simulated equilibria, both pertaining to the year of 2027—one with
and one without a TTIP—while Felbermayr et al. (2014) compare the observed situation

12
Breuss (2014) provides a balanced discussion of different studies.
13
A study by Fontagné et al. (2013) also applies a bottom-up approach and uses a CGE model developed at the CEPII in Paris
called Mirage.
THE EU AND THE US: TTIP 10

of 2012 with a counterfactual world, also pertaining to 2012, in which a TTIP is in place
and fully working. Francois et al. (2013) provide estimates for 10 world regions (and a
residual aggregate), while Felbermayr et al. (2014) have results for 176 individual
countries, including the EU member states.
The mentioned studies agree that a TTIP could provide a substantial boost to per capita
income in both Europe and the US. They also yield very similar estimates on the effects
of a tariffs-only liberalization scenario. However, in scenarios going beyond tariffs, they
differ strongly from each other with regard to the size of these gains and with regard to
the effects on third countries. The main reason for these discrepancies lies in the
definition of the deep TTIP scenario.
Scenario definition. In scenarios of limited integration, all studies assume that tariffs
are almost fully eliminated (e.g., in Francois et al. (2013) tariffs are put to zero in 98% of
all tariff lines), and that some reduction in services NTMs is achieved. The scenarios of
comprehensive (or deep) liberalization, however, differ. Francois et al. (2013) assume
that, besides elimination of tariffs, costs from NTMs in goods and services trade are
reduced by 25%, a single market for 50% of all public procurement activities is created,
and NTMs between TTIP members and third countries as well as NTMs between third
countries themselves fall by 30% and 20% of the reduction achieved within the EU and
US.
In contrast, for their comprehensive scenario, Felbermayr et al. (2014) assume that
trade costs between the EU and the US fall by exactly the same percentage amount that
ex post evaluations have found for existing trade agreements. They follow the
econometric analysis of Egger et al. (2011), who have estimated the local average
treatment effect for a large number (about 120) of agreements, applying methods that
can convincingly deal with the non-random assignment of trade agreements to country
pairs. Together with their choice of trade elasticity of 7, the point estimates translates
into a reduction of trade costs by 17 percentage points. This approach implies that the
TTIP is assumed to be no more and no less ambitious than the average of existing
agreements. A bold assumption which is certainly violated in practice, it does have
several virtues. First, it is comprehensive because it accounts for changed private or
public incentives for reductions in bilateral trade costs (e.g., investment into bilateral
trading infrastructure, language, or law) and for the administrative costs that tariff
exemptions may put on firms (e.g., by requiring exporters to document the origin of their
merchandise). Second, it is feasible, since the reductions have been possible in other
agreements in the past. The approach, however, has drawbacks, too: it strongly relies on
the point estimates obtained in econometric analysis and it does not allow disentangling
the sources of trade cost reductions. In their main scenario, Felbermayr et al. (2014) do
not allow the TTIP to reduce trade costs between country pairs not fully covered by
TTIP. That is, they rule out spill-over effects. Based on a survey contained in the World
Trade Report (2012), they argue that there is little existing empirical evidence that would
support the existence of such spill-overs. The consequences of this assumption, however,
are dramatic: lower NTMs will benefit TTIP insiders in a discriminatory fashion as
outsiders see their relative competitiveness in the transatlantic market decline.
THE EU AND THE US: TTIP 11

Trade effects of a TTIP. In the tariffs-only agreement, transatlantic free trade would
have only very modest effects on trade flows; Francois et al. (2013) predict an increase
in bilateral trade of about 6%. Effects would be larger in more protected industries, e.g.,
agri-food and automotive, where Francois et al. (2013) predict an increase of about 18%
and 14%, respectively. However, in a comprehensive agreement, trade effects would be
sizeable. According to Francois et al. (2013), EU exports to the US could go up by 28%
while US exports to the EU could increase by 36%. Felbermayr et al. (2014) predict
gains in bilateral gains averaging about 80% between the EU and the US, and substantial
heterogeneity between EU member states and the US (ranging between 50 and 110%).
They also report that trade within the EU could go down by as much as 30% on average,
and that there would be substantial trade diversion with third countries. Francois et al.
(2013), due to existence of spill-over effects, do not find large trade diversion effects.
Welfare effects of a TTIP. In the tariffs-only scenarios, both studies come to very low
welfare gains (defined as equivalent variation measures). Francois et al. (2013) find a
gain of 0.10% for the EU and of 0.04% for the US, while Felbermayr et al. (2014) find
0.32 and 0.41%, respectively. Magnitudes differ due to differences in model setup
(multi-sector versus macro model), but the overall message is consistent: a tariffs-only
agreement would not yield any substantial welfare effects.

Table 2 Comparison of welfare effects across studies (comprehensive scenarios)

Felbermayr
Francois et et al.
al. (2013) (2014)
EU +0.48% +3.94%
US +0.39% +4.89%
China +0.03% -0.50%
ASEAN +0.89% -0.07%
India +0.04% -0.31%
Mercosur +0.01% -0.83%
World +0.14% +1.58%
Notes: equivalent variation measures; for Felbermayr et al. (2014), regional aggregates obtained
as GDP weighted averages over countries.

Regarding the welfare effects from a comprehensive trade agreement, the studies differ
substantially. As shown in Table 2 Francois et al. (2013) predict an increase in real per
capita income of about 0.5% for the EU and 0.4% for the US, while Felbermayr et al.
(2014) find a plus of about 3.9% and 4.9%, respectively. Moreover, Francois et al.
(2013) reports positive welfare effects in third countries, while Felbermayr et al. (2014)
finds negative effects. For the world in total, the welfare gain is between 0.1 and 1.6%,
respectively.
THE EU AND THE US: TTIP 12

Table 3. Welfare effects: Selected countries and scenarios

[1] [2] [3] [4]
Tariffs
Preferred H&M only Spillovers
1 Austria 2.83 0.23 0.22 4.73
2 Belgium 2.25 0.09 0.17 4.12
3 Bulgaria 3.94 0.55 0.33 5.90
4 Croatia 3.53 0.50 0.38 5.49
5 Cyprus 4.36 0.68 0.37 6.33
6 Czech Republic 3.04 0.31 0.24 4.96
7 Denmark 3.45 0.43 0.28 5.38
8 Estonia 4.31 0.73 0.36 6.29
9 Finland 4.60 0.77 0.39 6.58
10 France 3.46 0.33 0.28 5.32
11 Germany 3.48 0.33 0.28 5.28
12 Greece 4.21 0.63 0.35 6.17
13 Hungary 3.50 0.44 0.28 5.44
14 Ireland 4.70 0.64 0.39 6.70
15 Italy 3.86 0.50 0.32 5.74
16 Latvia 4.10 0.65 0.34 6.09
17 Lithuania 3.97 0.61 0.33 5.94
18 Luxembourg 2.57 0.19 0.20 4.48
19 Malta 4.84 0.96 0.41 6.86
20 Netherlands 2.85 0.22 0.22 4.73
21 Poland 3.51 0.45 0.28 5.44
22 Portugal 4.80 0.79 0.40 6.80
23 Romania 3.87 0.65 n.a. 5.82
24 Slovak Rep. 3.40 0.41 0.27 5.34
25 Slovenia 3.14 0.32 0.25 5.06
26 Spain 5.56 1.13 0.48 7.55
27 Sweden 4.25 0.71 0.35 6.20
28 United Kingdom 5.14 0.80 0.44 7.05
EU average 3.94 0.51 0.32 5.83
29 United States 4.89 0.59 0.41 5.95
30 Australia -2.01 -0.09 -0.17 -0.93
31 Brazil -0.77 -0.08 -0.05 0.06
32 Canada -3.09 -0.44 -0.27 -1.82
33 China -0.50 -0.03 -0.04 0.13
34 India -0.31 -0.05 -0.03 0.65
35 Japan -0.51 -0.05 -0.05 -0.04
36 Mexico -2.56 -0.41 -0.22 -1.37
37 Norway -1.91 -0.27 -0.17 -1.05
38 Russian Fed. -1.01 -0.12 -0.08 -0.16
39 South Africa -1.69 -0.12 -0.14 -0.82
40 Turkey -1.56 -0.17 -0.14 -0.72
Non-TTIP average -0.92 -0.10 -0.08 -0.07
World average 1.58 0.21 0.13 2.73
Source: Felbermayr, Heid, Larch, and Yalcin (2014). No tariff data available for Romania in 2012.
H&M refers to a simulation where the trade cost reducing effect of TTIP is taken to equal the
meta-study average for free trade agreements reported by Head and Mayer (2014).
THE EU AND THE US: TTIP 13

Table 3 reports more detailed welfare results for 40 selected countries (out of 173)
from the Felbermayr et al. (2014) study. It details four different scenarios: the preferred
(comprehensive) scenario based on the Egger et al. (2011) estimate; a scenario based on
the average effect of trade agreements found in the meta study of Head & Mayer (2014),
a tariffs-only scenario, and a scenario where the trade cost savings within TTIP spill over
to non-TTIP country pairs in similar fashion than in Francois et al. (2013).
Three lessons stand out: First, the gravity coefficient on trade agreements matters
importantly. This becomes clear by comparing columns [1] and [2]. Second, the
existence of spill-overs inflates the gains from a TTIP both for insiders and for outsiders,
but it does not fully undo negative third country effects. Third, as mentioned above, a
tariffs-only agreement yields very limited benefits for insiders and very limited losses for
outsiders.
Labor Market Effects. The quantitative literature on trade policy reform in models
with non-competitive labor markets is still at its beginning. However, when a recent
model with search frictions and wage bargaining is brought to the data (Heid and Larch,
2013), a TTIP looks as if—in the long-run—it could create jobs in the transatlantic
economy, and destroy jobs elsewhere. The logic for this result is that, with bargaining,
gains from trade are divided between workers and firms, and, assuming free entry, the
latter use the windfalls to create more jobs. Empirical literature supports this long-run
result; see Felbermayr et al. (2011). Nonetheless, there is a wide-spread consensus that
the short-run effect of a big trade agreement such as a TTIP is likely to lead to
substantial reallocation and displacement effects. Since transatlantic trade is so strongly
intra-industry, there is reason to hope that the costs of these reallocation effects will be
comparably small since most of the effects will happen within rather than between
industries.

6. POTENTIAL RISKS CAUSED BY A TTIP

The public debate has come up with at least three important points of critique. First,
the TTIP will lead to a lowering of standards, second, the TTIP will limit the sovereignty
of countries, and third, the TTIP harms third countries and the multilateral system. There
are more areas of concern, for example on how the negotiations are conducted (secret,
and non-democratically); but these issues are procedural and political and the economic
analysis in this chapter will not touch on them.
Standards. If a TTIP leads to the mutual recognition of standards, and one country has
less stringent regulation than the other, the agreement will put firms from the more
stringent countries at a competitive disadvantage. In turn, one can expect political
pressure to bring standards in line with the lowest existing ones. However, in many
areas, it is not straight-forward to say whether the EU or the US have the more
demanding standards, but it is clear that standards differ. It is in these areas that a TTIP
could make progress. In other areas, where differences in stringency are strong, such as
in the agri-food industry, mutual recognition will be very hard to achieve. Remarks by
the lead negotiator of the EU, Ignacio Garcia Bercero, point into this direction. In
THE EU AND THE US: TTIP 14

December 2013, he said that “TTIP is not and will not be a deregulation agenda. Neither
side intended to lower its high standards of consumer, environment, health, labour or
data protection”. US officials have made similar remarks. In difficult industries, rather
than agreeing on mutual recognition of standards, the negotiators could at least agree on
mutual recognition of test results on which different standards could be applied. Also, by
agreeing on a set of commitments on transparency and regulatory stability, transatlantic
trade could be facilitated.
Sovereignty. International agreements necessarily limit the policy space of
democratically elected governments. Politicians may want to voluntarily give away some
discretion, for example, on exchange rates (in currency unions), or tariffs (in trade
agreements), to reduce uncertainty and to avoid opportunistic behavior that could be
harmful in the long-run (e.g., devaluation or tariff wars). However, many observers are
increasingly skeptical as to the advantages of such commitment devices, in particular in
the context of globalization. They criticize the use of so called “negative lists”, which
specify exemptions from general rules rather than “positive lists” which provide an
exhaustive enumeration of configurations to which a rule applies. Indeed, the problem
with negative lists is that future regulatory needs are very hard to predict as they may
depend on products or techniques that do not yet exist.
Many observers are also very skeptical regarding the usefulness of so called investor-
state dispute settlement (ISDS) provisions in a TTIP. ISDS enables foreign investors to
sue governments when the latter expropriate them in a discriminatory fashion and
without providing compensation. ISDS clauses may include indirect expropriation,
which refers to changes in regulation that reduce the economic value of an investment by
a foreign firm.
Between 1990 and 1998, nine EU Member States, all of them formerly communist
countries, have signed bilateral investment treaties (BITs) with the US.14 The remaining
EU Member States do not have bilateral investment agreements with the US. However,
all together, the EU countries maintain about 1,400 agreements, most of them with
developing countries.15 Since the entry in force of the treaty of Lisbon in 2009, the EU
has acquired competence on foreign direct investment affairs, so that Member States no
longer negotiate their own BITs.
Critiques fear that ISDS provisions lead to regulatory chill, i.e., to a reluctance of
governments to enact laws protecting consumers, workers, or the environment due to
fear that foreign investors could demand large sums of compensation. Through this
mechanism, ISDS limits the sovereignty of countries regarding future regulation. This is
the more problematic the broader the scope of an investment chapter in a TTIP is.
Conventional investment treaties concern only foreign direct investment, but if portfolio
investment and public debt is also covered, sovereignty concerns become even more
important.16 Also, one may criticize the way that ISDS is organized: in private tribunals
14
These countries are (in order of the date of signing): Poland, Czech Republic, Slovakia, Romania, Bulgaria, Estonia, Latvia,
Croatia, Lithuania.
15
Germany has 137 active BITs, France has 102, Italy and United Kingdom have 94 each.
16
Such broad scope, however, would turn a TTIP into a mixed agreement which the EU Parliament and national parliaments
would have to vote on separately.
THE EU AND THE US: TTIP 15

rather than in public courts, behind closed doors, and without providing for the
possibility of appeal. Finally, while investment liberalization and protection is important
to facilitate trade in services, it is unclear whether bundling investment issues and more
conventional trade policy issues into a single agreement is sensible when investors from
both sides can actually trust the official legal systems in both countries to protect their
rights.
For these reasons, the German government, some economists, and the former US chief
negotiator Robert Zoellick, have demanded to exclude ISDS from a potential TTIP. The
European Commission has launched a three month moratorium on negotiations
regarding the investment chapter and has engaged in public consultations during this
period.
The calculations in the economic assessment studies covered in this chapter do not
assume that an ISDS is in place. Neither do they assume that common standards or
mutual recognition of standards will be achieved in all areas of economic activity. So,
even an agreement that is much closer to existing agreements of both the EU and the US
than to the negotiators’ initial ambitions can generate substantial welfare gains.
Third country effects and multilateralism. A comprehensive TTIP could harm
outsiders. This is an important message from economic modeling that goes back to Viner
(1950). Indeed, multilateral agreements, that lead to lower trade costs relative to all trade
partners, are strictly preferable to bilateral ones. While this remains true, there has been
virtually no progress at the multilateral level since the creation of the WTO in 1995. This
paralysis is one of the reasons why a TTIP is being negotiated. However, if a TTIP – by
its sheer size – causes negative effects for many poor countries, it counteracts other
policies by the EU or the US that aim to promote development.
Indeed, the negative effects calculated by Felbermayr et al. (2014) are impressive.
However, three comments are in order. First, the TTIP scenario is a ceteris paribus
scenario. It does not factor in that third countries will react, either by signing free trade
agreements amongst themselves or with TTIP partners, or by making stronger efforts to
bring down trade costs multilaterally. Such actions could reduce the negative effects of a
TTIP. If, however, a TTIP leads to even more free trade within the OECD, for example,
by bringing Mexico, Canada, or Japan into the agreement at some future date, negative
effects for outsiders would grow.
Second, the calculations assume that NTM reform within a TTIP will be fully
discriminatory. This need not be the case. For example, under mutual recognition, the
EU and US could admit products from third countries to their markets when they
conform either to EU or US standards. Also, the degree of discrimination depends on the
design of rule of origin: the more generous they are, the lower adverse third country
effects will be. And, finally, as discussed above, the picture looks more benign if there
are regulatory spill-overs. Negotiators can make a TTIP more or less conducive to such
spill-overs.
Regarding the multilateral system, it is true that neither the EU nor the US have much
negotiating capacity available for multilateral initiatives while a TTIP (and other so
called mega regionals) are being negotiated. Also, their interest in the WTO may fall as a
THE EU AND THE US: TTIP 16

smaller share of trade falls under WTO provisions. While these arguments imply that the
WTO may lose some of its appeal as a trade legislating forum, it remains important as
the world’s trade police. Moreover, many trade economists (most vocally, maybe,
Richard Baldwin) see bilateral agreements as stepping stones rather than stumbling blocs
for multilateralism, because they increase the incentives of third countries to make
concessions.
As a final remark, a comprehensive TTIP will quite obviously reshape the political
power game in the world trade system. It will give the EU and the US more power in the
necessary review of existing trade rules and in the design of new ones. This may not
necessarily harm third countries economically, but it does hurt them politically.

7. CONCLUSIONS

A TTIP would create the world’s largest free trade area. If comprehensive, it could
have strong effects on real per capita GDP around the world. The sheer size of TTIP
makes it a very special undertaking. This leads to a lot of uncertainties in the economic
ex ante analysis and to large discrepancies in the trade and welfare effects of a TTIP in
different studies. However, studies agree that economic effects for TTIP insiders from a
deep agreement would be unambiguously positive in the long-run, that a tariffs-only
agreement is not worth much, and that discriminatory elements in a TTIP should be
minimized. Studies suggest that insiders could harvest substantial gains, ranging between
0.5 and 5%, world GDP could go up by between 0.1 and 1.6%, but non-TTIP countries
could potentially register large losses.
Although still in negotiation, the prospect of a TTIP has triggered a lot of criticism.
Much of it is to be taken very seriously. A TTIP could lead to a lowering of standards in
both the EU and the US, it will most likely lead to some loss of policy space, and it will
probably not be helpful for third parties. However, there are remedies to these concerns.
Even if a TTIP does not come up with investor-state dispute settlement provisions, and
even it limits mutual recognition of standards to areas where standards are deemed of
equal stringency, will economic benefits be sizeable.
TTIP would shape the world trading system for the next few decades. It would give the
EU and the US a more pivotal role in revising old rules and institutions and in designing
new legislation. It could turn out to be the corner stone for a WTO 2.0 (Baldwin, 2012),
but it could also lead to a fragmentation of the world economy into large and opposed
blocs.
THE EU AND THE US: TTIP 17

REFERENCES

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42(3): 691-751.
Arkolakis, C., Costinot, A., and Rodríguez-Clare, A. (2012), “New Trade Models, Same Old
Gains?”, American Economic Review, 102(1): 94-130.
Baldwin, Richard (2012). “WTO 2.0: Global governance of supply-chain trade”, CEPR Policy
Insight No.64, December
Berden, Koen, Joseph Francois, Martin Thelle, Paul Wymenga, and Saara Tamminen (2009),
“Non-Tariff Measures in EU-US Trade and Investment- An Economic Analysis”, Report OJ
2007/S 180-219493 for the European Commission: Directorate-General for Trade.
Bureau, Jean-Christophe, Emlinger Anne-Celia Disdier, Gabriel Felbermayr, Lionel Fontagné,
Jean Fouré and Sebastien Jean (2014), "Risks and Opportunities for the EU agri-food sector in a
possible EU-US trade agreement”, Study IP/B/AGRI/IC/2013_129 for the European Parliament.
Breuss, Fritz (2014), “TTIP und ihre Auswirkungen auf Österreich: Ein kritischer
Literaturüberblick”, WIFO Working Papers 468/2014.
Cipollina, Maria and Luca Salvatici (2010), “Reciprocal Trade Agreements in Gravity Models: A
Meta Analysis”, Review of International Economic, 18(1): 63-80.
Egger, Peter, Mario Larch, Kevin Staub, and Rainer Winkelmann (2011), “The Trade Effects of
Endogenous Preferential Trade Agreements”, American Economic Journal: Economic Policy 3:
113-143.
Feenstra, Robert (2004), “Advanced International Trade: Theory and Evidence”, Princeton
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Felbermayr, Gabriel, Mario Larch, Lisandra Flach, Erdal Yalcin und Sebastian Benz (2013a),
"Dimensionen und Auswirkungen eines Freihandelsabkommens zwischen der EU und den
USA", ifo Forschungsbericht 62.
Felbermayr, Gabriel and Mario Larch (2013), "The Transatlantic Trade and Investment
Partnership (TTIP): Potentials, Problems and Perspectives ", CESifo Forum 14 (2): 49-60, 2013.
Felbermayr, Gabriel, Hans-Joerg Schmerer, and Julien Prat (2011), “ Trade and Unemployment:
What Do the Data Say”, European Economic Review 55: 741-758.
Fontagné, L., J. Gourdon, and S. Jean (2013), Transatlantic Trade: Whither Partnership, Which
Economic Consequences? CEPII Policy Brief 2013-01, Paris.
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“Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment”, Report
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Hamilton, Daniel and Joseph Quinlan (2013), “The Transatlantic Economy 2013: Annual Survey
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THE EU AND THE US: TTIP 18

Figures and Tables

Figure 1 Shares of EU and US in World GDP: The Past, the Present, and the
Future

70

USA EU USA+EU
60

50

40

30

20

10

0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
Notes: Own calculations based on data from the World Bank’s World Development Indicators
(2014) and the OECD Long-Term Baseline Projections from the Economic Outlook No. 95 (May
2014).
THE EU AND THE US: TTIP 19

Figure 2 EU goods trade with the US over time, volume in bn. current dollars

400

350

300
Exports
250
Imports
200

150

100
Balance
50

0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Notes: Data from UNCTAD.
 THE EU AND THE US: TTIP 20

Figure 3 Shares of EU Member States in EU Exports and Imports (Goods and Sercices) to and from US,
2012, %

Exports Imports

Danmark,
2.5
Sweden, Sweden,
2.7 Others, Others,
2.3
9.1 11.3
Spain, 3.8 Spain, 4.4 Germany,
21.2
Germany, Italy, 5.1
Ireland, 25.0
5.7
Belgium,
Belgium, 7.1
UK, 18.5
6.2
Ireland,
UK, 21.8 7.2 Nether-
Nether- lands, France,
Italy, 7.5 10.7 12.2
lands, 6.5
France, 9.1

Notes: Own calculations based on OECD STAN Bilateral Trade in Goods, and OECD Statistics on
International Trade in Services
THEFigure
EU AND4 Shares ofTTIP
THE US: Sectors in EU trade with US, 2012, % 21

Exports Imports

Agri- Textiles, Agri-

culture, 1.5 culture,
3.0 0.8 Food, 1.7
Metals, Other, Other,
4.2 6.5 Mining, 9.3
1.8
Metals,
Services, 2.5
Services,
Transport- 35.7 39.5
equipmen
t; 13,7

Maschiner
Machiner y, 14.3
y, 15.9
Chemicals Chemicals
, 19.5 Transport-
, 19.2
equipmen
t; 10,9

Notes: Own calculations based on OECD STAN Bilateral Trade in Goods, and OECD Statistics on
International Trade in Services
THE EU AND THE US: TTIP 22

Figure 5 Import tariffs, applied MFN, trade weighted, 2007

Agriculture, forestry and fisheries

EU US
Other primary sectors

Processed foods

Chemicals

Electrical machinery

Motor vehicles

Other transport equipment

Other machinery

Metals and metal products

Wood and paper products

Other manufactures

0 5 10 15
Notes: Data from Francois et al. (2013)
THE EU AND THE US: TTIP 23

Figure 6 Bottom-up estimates of non-tariff measures, tariff equivalents

Foods and beverages

Chemicals
Electrical machinery
Motor vehicles US
Other transport equipment EU
Metals and metal products
Wood and paper products
Personal, cultural, other…
Constructions
Communications
Business and ICT
Insurance
Banking
Transportation

0 20 40 60 80

Source: Berden et al., 2009.