Economic Benefits of TTIP Prof. Gabriel Felbermayr, PhD Ludwig Maximilians Universität München Warsaw School of Economics Nov 30, 2015 Ifo Center for International Economics

POLAND: HOW TRADE MATTERS FOR INCOME Ifo Institut 2 Income gains from moving from „autarky“ to status quo of 2008 Source: Costinot and Rodriguez-Clare (2014)..

POLAND: HOW TRADE MATTERS FOR INCOME Ifo Institut 3 Income gains from moving from „autarky“ to status quo of 2008 Source: Costinot and Rodriguez-Clare (2014)..

WTO rules negotiated to fit XXth century trade International production sharing: new issues, requiring new rules APPROPRIATE RULES FOR XXIst CENTURY TRADE Ifo Institut 4 Complementarities between trade in final goods, trade in inputs, trade in services, investment, mobility of workers and data Protection on intellectual property Coherent regulation, to enable gains from specialization Problems of multiple taxation through tariffs Just in time practics: trade facilitation Contract enforcement Moral hazard issues related to political risk Which forum/platform for trade policy reform?

TTIP AMBITIONS Ifo Institut 5  „comprehensive“ agreement  „contributing to global rules“ Market access: going „beyond what the U.S. and the EU have achieved in previous trade agreements“ Investment: „highest levels of liberalization and of protection“ Regulatory cooperation: „ambitious SPS-plus“ and „ambitious TBT-plus“ chapters; regulatory council Feb 2013: Recommendation of a High-Level Working Group After 11 rounds: high-flying ambitions not all achievable

EVALUATING AN AGREEMENT THAT DOES NOT YET EXIST Ifo Institut 6 Ex post performance of standard CGE models disappointing: „models drastically underestimated the impact of NAFTA on North American trade” (Kehoe, 2005) Right trade model? How define an appropriate scenario ex ante? ifo Approach  „Guess“ likely/realistic scenario?  Use measured effects of past agreements. Assumption: TTIP lowers trade costs by as much as other already existing deep agreements have (e.g., all US agreements, EU, EU-CHL, …)

GERMAN VICE CHANCELLOR SIGMAR GABRIEL Ifo Institut 7 Voodoo Economics

Ifo Institut LEADING STUDIES Source: ifo. 8 Bertelsmann/ifo:Felbermayr et al., 2013b BMWi/ifo:Felbermayr et al., 2013a EU COM/CEPR:Francois, Norberg, et al., EU Com Economic Policy:Felbermayr et al., 2015 ifo 1 CESifo WP/ifo:Aichele, Felbermayr, Heiland, 2014 ifo 2 CEPII:Fontagné, Gourdon, Jean, 2013 Economic Policy:Egger, Francois et al., 2015 KOF 1 KOF 2 … and a growing number of more studies

Ifo Institut DIFFERENT APPROACHES, DIFFERENT OUTCOMES Source: ifo. 9 Multi Sector Spillovers NTMs top-down World 1.32%+0.14%1.58% KOF 1ifo 2EU Comifo 1KOF 2EU +2.27% +2.12% +0.48% +3.94% +2.97% USA +0.97% +2.68% +0.39% +4.89% +1.13% China -0.27% -0.23% +0.03% -0.50% +0.26% ASEAN +0.38% -0.19%+0.89%-0.07% -0.47% Germany +1.43% +2.48%+3.48% +2.32% Poland +1.74%+3.51% approx. EUR 200 per person and year

Ifo Institut POLAND: DETAILED TRADE EFFECTS Source: ifo2 (Aichele et al., 2014.) 10 Ifo 2 (Aichele et al., 2014)

Ifo Institut ZOOMING IN: EFFECTS OF TTIP ON AGGREGATES IN POLAND Source: ifo % +2.9% +2.1% bn USD, 2014

Ifo Institut POLAND: REAL GDP PER CAPITA EFFECTS OF DIFFERENT SCENARIOS (%) Source: Aichele et al.,

Ifo Institut EFFECTS ON LONG-RUN REAL PER CAPITA INCOME, % Source: ifo 2, Aichele et al., Positive net global effects +2,7% +2,1% 13 Ø Non-TTIP: -0,03%

Ifo Institut MORE (?) AND BETTER JOBS Source: ifo. 14 Displacement effects (Felbermayr et al., 2013) About 1% of labor force 1/3 across sectors, 2/3 within sectors Labor market effects (Bertelsmann-ifo, 2013) Jobs for Poland (=0.5% more jobs) +0.69% real wage Better jobs (Felbermayr et al., 2015): Newly creaed jobs are paying higher salaries tend to be more secure

Ifo Institut SECTOR EFFECTS 15 Initial shares (%) and rates of change (%), value added, top industries Source: ifo 2, Aichele et al., 2014.

Ifo Institut SOME „THREATS“ AND WHAT THEY REQUIRE Source: ifo. 16 Adjustment costs: displacement effects short-run in nature social policy (European Globalization fund) Higher inequality -Higher competition threat to weak -Market access opportunity for strong Crucial for ‚right‘ incentives fiscal and social policy Constraints on regulatory autonomy Reciprocal constraints on uncoordinated, arbitrary, discriminatory policies are the reason for free trade agreements.

Ifo Institut THANK YOU FOR YOUR ATTENTION 17

Ifo Institut BACKUP 18

FREQUENT MISUNDERSTANDINGS Ifo Institut Ifo assumes an overoptimistic scenario. WRONG. The scenario is benchmarked to the average of other agreements and is therefore, by construction, feasible. Because current US-EU trade is low, welfare gains from TTIP cannot be large. WRONG. In all known models, initial trade volumes correlate negatively with the size of potential gains from trade. The size of ifo gains is implausibly high. WRONG. Modern data-based research attributes the gains from trade for Germany at 30-50%. Bilateral trade effects are inconsistent with the welfare effects. WRONG. What matters for welfare is not the value (price x quantity) of trade flows, but quantity and quality only. 19

ADVANTAGES OF THE ifo APPROACH Ifo Institut 20 1.Top-down strategy on trade costs  No need to estimate non-tariff measures (NTMs)  Comprehensive measure 2.Data-defined scenario for TTIP  Capturing „actual“ direct and indirect effects  Political feasibility 3.Easily applicable on very large country samples  173 countries, i.e., 29,756 country pairs 4.Perfect theory-econometrics-data match  Parameters estimated on baseline date, using structural relationships from the model  Confidence intervals easily computed

MACRO- vs. MICRO-PERSPECTIVE Ifo Institut 21 Single-sector approach Simple, transparent, low data requirements, established in scientific literature No stance on patterns of comparative advantage, sectoral trade patterns, and value added networks, … MACRO Multi-sector approach Closer to CGE tradition, high data requirements Patterns of comparative advantage, sectoral trade patterns, and value added networks are modelled but fixed MICRO