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Reducing Transatlantic Barriers to Trade and Investment

An Economic Assessment

Final Project Report

March 2013

Prepared under implementing Framework Contract TRADE10/A2/A16

Joseph Francois (project leader)

Centre for Economic Policy Research, London

Colophon

Reducing Trans-Atlantic Barriers to Trade and Investment

Primary authors: Joseph Francois, Miriam Manchin, Hanna Norberg, Olga Pindyuk, Patrick Tomberger

Client: European CommissionPrepared under implementing Framework Contract TRADE10/A2/A16

Date: March 2013

Contact:Centre for Economic Policy Research3rd Floor77 Bastwick StreetLondon, EC1V 3PZUKTel: +44 (0)20 7183 8801Email: [email protected]: www.cepr.org

Contents

Colophon ii

Key Findings vii

Executive Summary 1

1. Introduction 5

2. Economic and Policy Background 72.1. Current trade flows and FDI 82.1.1. Trade 82.1.2. FDI 102.2. Current patterns of tariffs 142.3. Non-tariff barriers 152.3.1. Indexes and econometrics 16

3. Technical Discussion on CGE Modelling Set Up 213.1. The model 213.2. Sectors and regions in the model 24

4. The Policy Options Considered 274.1. Scenarios 274.2. Spill-overs 284.3. Sectoral effects: Preliminary ranking 30

5. Results 335.1. Limited Scenarios 335.2. Full FTA 455.2.1. Macro Results 455.2.2. Output and Trade 495.2.3. Sustainability Impacts 705.2.4. Global Effects 81

6. FDI Barriers 856.1 Indexes and comparison of levels of openness 856.2 Impact of NTBs on foreign affiliates 91

7. Conclusions 95

8. References 97

Annex 1: Mapping of model sectors 103

Annex 2: CGE model technical overview 105

Annex 3: High tariff sectors, ranked by HS2 applied tariff rates 113

Annex 4: Derivation of foreign investment income equation 115

iv

List of FiguresFigure 1 EU trade in goods with the US by sector (in million euros), 2011 9Figure 2 The bilateral composition of trade in projected benchmark (2027) 9Figure 3 EU27 outward stocks of FDI, 2010 10Figure 4 Top ten hosts of EU outward FDI stocks, 2010 (in 1000 million euros) 11Figure 5 Top ten sources of EU inward FDI stocks, 2010 (in 1000 million euros) 11Figure 6 US outward and inward FDI to the EU and the rest of the World, 2010 (in 1000 million euros) 12Figure 7 EU’s direct investment flows to the US, 2004-2011 13Figure 8 EU’s direct investment flows from the US, 2004-2011 13Figure 9 Trade Weighted Applied (MFN) average tariff rates 2007 14Figure 10 Value added and impact rankings 32Figure 11 Decomposition of EU output changes, ambitious scenario 63Figure 12 Average Value of NTM Indexes for FDI 87Figure 13 Average NTM index values for FDI located in the EU 88Figure 14 Breakdown of NTBs for FDI by sector 89Figure 15 Income from FDI, market size, and openness, 2007-2009 90Figure 3 Representative nested production technology 106Figure 4 Representative household demand 108

List of TablesSummary of Macroeconomic Effect 3Table 1 Perceived NTB index by business (index between 0-100) 18Table 2 Total trade cost estimates from NTB reduction in per cent, Ecorys (2009) 20Table 3 Sectors and regions used in the CGE model 25Table 4 Scenario Summaries 28Table 5 Impact ranking indexes 31Table 6 Changes in GDP (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 34Table 7 Changes in GDP (in million euros), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 35Table 8 Changes in trade (in per cent), extra-EU trade for the EU, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 36Table 9 Changes in trade (in million euros), extra-EU trade in case of the EU, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 36Table 10 Changes in EU bilateral exports to US by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 38Table 11 Changes in US bilateral exports to EU by sector, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 39Table 12 Changes in EU trade by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 40

v

Table 13 Changes in US trade by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 42Table 14 Changes in EU output by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 43Table 15 Changes in US output by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 44Table 16 Changes in GDP (in per cent), 2027 benchmark, 20 per cent direct spill-overs 46Table 17 Changes in GDP (in million euros), 2027 benchmark, 20 per cent direct spill-overs 47Table 18 Household disposable income, million euro, 2027 benchmark 48Table 19 Changes in bilateral exports to the partner country (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 50Table 20 Changes in value of total exports (in per cent and million euros), extra-EU exports in case of the EU, 2027 benchmark, 20 per cent direct spill-overs 51Table 21 Changes in value of total imports (in per cent and million euros), extra-EU imports in case of the EU, 2027 benchmark, 20 per cent direct spill-overs 52Table 22 Changes in terms of trade (in per cent), 2027 benchmark, 20 per cent direct spill-overs 53Table 23 Change in EU tariff revenue (in million euros), 2027 benchmark 54Table 24 Trade diverted from intra-EU trade (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 55Table 25 Change in EU exports to non-US, extra-EU destinations (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 57Table 26 Change in EU imports from non-US extra-EU sources (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 59Table 27 Changes in EU output by sector (in per cent). 2027 benchmark, 20 per cent direct spill-overs 60Table 28 Changes in US output by sector (in per cent), 2027 benchmark, 20 per cent direct spill-overs 61Table 29 Changes in extra-EU exports and imports by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 64Table 30 Changes in US exports and imports by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs. 66Table 31 Changes in bilateral exports from the EU to the US by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 68Table 32 Changes in bilateral exports from the US to the EU by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 69Table 33 Changes in wages for less and more skilled labour, total effects (in per cent), 2027 benchmark, 20 per cent direct spill-overs 71Table 34 Change in more skilled employment in the EU by sector (in per cent), 2027 benchmark, ambitious scenario, 20 per cent direct spill-overs 73Table 35 Change in more skilled employment in the US by sector (in per cent), 2027 benchmark, ambitious scenario 74Table 36 Change in less skilled employment in the EU by sector (in per cent), 2027 benchmark, ambitious scenario 75Table 37 Change in less skilled employment in the US by sector (in per cent), 2027 benchmark, ambitious scenario 76

vi

Reducing Transatlantic Barriers to Trade and Investment

Table 38 Displacement of less and more skilled labour in the EU and US, total effects (in per cent), 2027 benchmark, 20 per cent direct spill-overs 77Table 39 Changes in CO2-emissions (in thousand metric tons), 2027 benchmark, 20 per cent direct spill-overs 79Table 40 Changes in land use (in per cent), 2027 benchmark, 20 per cent direct spill-overs 80Table 41 Total effects on GDP for rest of the World (in million euros and per cent), 2027 benchmark, 20 per cent direct spill-overs 82Table 42 Change in exports by region (in per cent), 2027 benchmark, 20 per cent direct spill-overs 83Table 43 Regression estimates for NTMs and FDI 92Table A1 Mapping of Model Sectors to GTAP 103Table A2 Mapping of Model Sectors to ISIC rev 3.1 104Table A3 Annualized GDP growth rates 111Table A4 HS-2 Classification, top 2 per cent of tariff lines 113

vii

• An ambitious and comprehensive transatlantic trade and investment agreement

couldbringsignificanteconomicgainsasawholefortheEU(€119billionayear)

andUS(€95billionayear).Thistranslatestoanextra€545indisposableincome

eachyearforafamilyof4intheEU,onaverage,and€655perfamilyintheUS.

• ThebenefitsfortheEUandUSwouldnotbeattheexpenseoftherestoftheworld.

Onthecontrary,liberalisingtradebetweentheEUandtheUSwouldhaveaposi-

tiveimpactonworldwidetradeandincomes,increasingglobalincomebyalmost

€100billion.

• Incomegainsarearesultofincreasedtrade.EUexportstotheUSwouldgoupby

28%,equivalent toanadditional€187billionworthofexportsofEUgoodsand

services.Overall,totalexportswouldincrease6%intheEUand8%intheUS.

• Reducing non-tariff barrierswill be a key part of transatlantic liberalisation.As

muchas80%ofthetotalpotentialgainscomefromcuttingcostsimposedbybu-

reaucracyandregulations,aswellasfromliberalisingtradeinservicesandpublic

procurement.

• Theincreasedlevelofeconomicactivityandproductivitygainscreatedbytheagree-

mentwillbenefittheEUandUSlabourmarkets,bothintermsofoverallwagesand

newjobopportunitiesforhighandlowskilledworkers.Labourdisplacementwill

bewellwithinnormallabourmarketmovementsandeconomictrends.Thismeans

arelativelysmallnumberofpeoplewouldhavetochangejobsandmovefromone

sectortoanother(0.2to0.5percentoftheEUlabourforce.)

• TheagreementwouldhavenegligibleeffectsonCO2emissionsandonthesustain-

ableuseofnaturalresources.

Key Findings

1

TheeconomiesoftheEuropeanUnionandtheUnitedStatesareveryimportanttrading

partnersforeachother.Althoughaveragetarifflevelsarerelativelylowalready,various

non-tariffbarriersorNTBs(oftenintheformofdomesticregulations)onbothsides

oftheAtlanticconstituteimportantimpedimentstodeepeningtransatlantictradeand

investmentlinkages.Thisstudyexaminestheimpactofthereductionofsuchbarriers.

Evenwheretheymightnotbedirectlytargetingcross-borderactivities,domesticrules

andregulationsneverthelesscanplaceacostontradeandinvestment.However,unlike

tariffs,itshouldalsobestressedthatmanyregulationscannotsimplyberemovedwhen

theyservelegitimatedomesticpurposes.Yetinsuchcasesthecostsinvolvedmaystill

bemitigatedorreducedthroughpartialregulatoryconvergenceandcross-recognition

ofstandards.Whilethisislikelytobeadifficultprocess,thepotentialbenefitsinterms

ofproductivityandincomesaresubstantial.

Thisstudyreviewstheimportanceofthebilateraleconomicrelationshipandprovides

computablegeneralequilibrium(CGE)-basedestimatesfortheeconomy-wideimpact

of reducing both tariff and non-tariff barriers (NTBs). Estimates are providedwith

regardstoexpectedchangesinGDP,sectoroutput,aggregateandbilateraltradeflows,

wages, and labour displacement, amongother issues.The analysis uses theGTAP8

database(projectedto2027),inconjunctionwithNTBestimatesreportedintheEcorys

(2009)study.Thestudyinvestigatesdifferentpolicyoptionsforthedeepeningofthe

bilateraltradeandinvestmentrelationshipbetweentheEUandUS.Theserangefrom

partialagreementsthatarelimitedinthescopeofbarrierstheywouldaddress(tariffs

only, or services only, or procurement only) to a full-fledged free trade agreement

Executive Summary

Reducing Transatlantic Barriers to Trade and Investment – An Economic Assessment

2

(FTA) with a comprehensive liberalisation agenda covering simultaneously tariffs,

procurement, NTBs for goods, and NTBs for services. The comprehensive option

includestwoscenarios:alessambitiousagreementthatincludesa10percentreduction

intradecostsfromNTBsandnearlyfulltariffremoval(98percentoftariffs)andan

ambitiousscenariothatincludestheeliminationof25percentofNTBrelatedcosts

and100percentoftariffs.Inbothscenariosmoreambitionisimposedonthelowering

ofprocurement-relatedNTBsthanforotherNTBsaffectinggoodsandservices.Itis

assumedthatNTBslinkedtoprocurementarereducedby25percentor50percent,

inthe“lessambitious”andinthe“ambitious”scenariosrespectively.Theimpactof

partialalignmentofglobalrulesandstandardswithanewsetofEU-USstandardsand

cross-recognitionagreementsisalsoincludedintheassessment.

The results indicate positive and significant gains for both economies. Under a

comprehensiveagreement,GDPisestimated to increasebybetween68.2and119.2

billioneuros for theEUandbetween49.5and94.9billioneuros for theUS(under

the less ambitious and more ambitious scenarios). However, if the FTA would be

limitedtotariffliberalisationonly,orservicesorprocurementliberalisationonly,the

estimatedgainswouldbe significantly lower.For example, anFTA limited to tariff

liberalisationwouldleadtoalower(23.7billioneuro)increaseinGDPfortheEUand

a9.4billioneurosincreasefortheUS.Thestudyalsoquantifiespotentialbenefitsfrom

NTBreductionaffectingFDI.Theoverallmessageisthatnegotiatinganagreementthat

wouldbeofacomprehensivenaturewouldbringsignificantlygreaterbenefitstoboth

economies.

Anothercoremessagethatfollowsfromourresultsisthatfocusingeffortsonreducing

NTBsiscriticaltothelogicoftransatlantictradeliberalization.Differentapproaches

tothesameregulatorychallengeshavetheunintendedconsequenceofincreasingcosts

for firms,which have to complywith two regulatory environments, dragging down

labourproductivity.NegotiationonNTBsprovidestheopportunitytopursueamixof

cross-recognitionandregulatoryconvergencetoreducethesebarriers.Comparedtoa

focusonNTBS,justlimitingtheexercisetotariffswouldleadtomuchmorelimited,

Executive Summary

3

thoughpositive effects. Furthermore, thegains to the transatlantic economies from

NTBreductionarenotprojectedtobeattheexpenseoftherestoftheworld,thoughthe

rest-of-worldimpacthingescriticallyonthepotentialforglobalconvergencetoward

EU-US standards, which could then become de facto global standards and have a

knock-oneffectloweringNTBsmultilaterally.Suchaprocessimpliesimprovementof

marketaccessforthirdcountries,helpingtooffsettradediversion.

Finally, this study also reports estimates on sustainability impacts -- changes in

emissionsandinnaturalresourceutilization.EliminationofNTBsimpliesimproved

productivity(i.e.lessprimaryinputsarerequiredforcurrentactivity).Theresultspoint

tonegligibleeffectsontherateofCO2emissionsandutilisationofnaturalresources.

Summary of Macroeconomic Effect

Limitedagreement:tariffsonly

Limitedagreement:servicesonly

Limitedagreement:procurement

only

Comprehensiveagreement:lessambitious

Comprehensiveagreement:ambitious

ChangeinGDP

EU,millioneuros 23,753 5,298 6,367 68,274 119,212

US,millioneuros 9,447 7,356 1,875 49,543 94,904

Bilateralexportsf.o.b.

EUtoUS,millioneuros

43,840 4,591 6,997 107,811 186,965

UStoEU,millioneuros

53,777 2,859 3,411 100,909 159,098

Totalexportsf.o.b.

extra-EU,millioneuros

43,740 5,777 7,136 125,232 219,970

US,millioneuros 57,330 5,488 5,942 142,071 239,543

Note: estimatestobeinterpretedaschangesrelativetoaprojected2027globaleconomy.

5

Thetransatlantictraderelationshipisadeepone,rootedincenturiesofsharedeconomic

history. In thepost-warperiod, this facthasbeen reflectednotonly in early shared

steps leadingultimately to themodernmultilateral tradingsystem,butalsoperiodic

initiativestoformaregionaltradeagreement.1Withtherisingimportanceofglobaland

regionalproductionchainsandinternationalfirms,thelogicforaregional,transatlantic

agreement seemscompelling.Together, the twoeconomiesaccount for roughlyhalf

of world output and world trade. They are, mutually, each other’s most important

investmentpartnersaswell.

In 2012, a comprehensive dialoguewas initiated between the EuropeanUnion and

UnitedStates,regardingpossibilitiesfordeepeningoftransatlantictradeandinvestment

relations.Thediscussionsregardingthepossibledeepeningoftheselinksareon-going.

This report offers quantification of the effects of a trade and investment agreement

underarangeofpossiblepolicyoptions.BoththeEUandtheUShaverelativelylow

MFNtariffs.But,giventhemagnitudeofbothtradeandinvestmentflowsbetweenthe

EUandtheUS,removingevenrelativelyminorimpedimentstotheseflowswillhavea

significantimpact,withpotentialsubstantivebenefitsforbotheconomies.Inaddition,

sincetheexistingnon-tariffbarriersalsoactasimpedimentstotradeandinvestment,

therearegoodreasonstobelievethattherearesignificantuntappedgainsfromadeeper

tradeandinvestmentrelationship.

1 Past initiativeshave includedboth theNAFTA(NorthAtlanticFreeTradeArea)and theTAFTA(TransatlanticFreeTradeArea).SeeBaldwinandFrancois(1997a,1997,1999)forbackgroundonearlierinitiatives.SeeBaldwin(2012)andFrancois,Manchin,andTomberger(2012)ontheriseinvaluechainsandglobalproduction.

1. Introduction


6

This report builds on an important previous study benchmarking the current level

of transatlanticNTBs.That report found that thepotentialgains for theEUandUS

were substantial (Ecorys, 2009). Since the Ecorys study was published, economic

conditionshavechanged,whilethelikelyfocusofapossibleagreementisnowbetter

defined.Workingwith new data (including theGTAP8 database,more recent trade

and tariff information and new investment income data fromEurostat), the present

reportprovidesanupdatedandmoreaccuratesetofestimates.WeprovidenewCGE-

basedestimatesfortheeconomy-wideimpactofremovingnotonlyNTBs(quantified

onthebasisoftheestimatesinEcorys(2009),2butalsotariffsaffectingtransatlantic

tradeflows.Inaddition,wehaveexpandedtheanalysisbyprovidinganassessmentof

theimpactofremovingbarrierstoforeigndirectinvestment(FDI)ontheactivityof

multi-nationalenterprises(MNEs)acrossthetransatlanticmarketplace.BoththeCGE

andinvestmentassessmentsbuildonthesurveyandeconometricworkoftheoriginal

Ecorysstudy.Thereportisstructuredasfollows.Chapter2providesthebackground

fortheeconomicassessment.ThisincludescurrenttradeandFDIflows,aswellasa

technical discussion, providing an overviewof howNTBshavebeen identified and

measured,basedonthe2009Ecorysreport.InChapters3-5wesetoutandemploya

CGEmodeltoexaminebotheconomicandsocio-economic(sustainability)impactsof

trade-relatedmeasures.Chapter6focusesonforeigninvestment.InChapter7weoffer

someconcludingcomments.

2 InEcorys(2009)study,non-tariffbarriersaredefinedas“allnon-priceandnon-quantityrestrictionsontradeingoods,servicesandinvestment,atfederalandstatelevel.Thisincludesbordermeasures(customsprocedures,etc.)aswellasbehind-thebordermeasuresflowingfromdomesticlaws,regulationsandpractices”.

7

WestartthischapterwithanoverviewofcurrenttradeandFDIrelationshipsbetween

theEUandUS,aswellastariffsandNTBsthatarecurrentlyinplace.Indoingso,we

definethecontextinwhichweestimatetheeffectsofliberalisingtradeandinvestment

betweenthetwoeconomies.

TheEUandtheUSarerelativelyopentowardseachotherintermsofinvestmentand

trade,asreflectedinrelativelylowlevelsfortariffs.However,variousNTBs(oftenin

the formofdomestic regulations)onboth sidesof theAtlantic constitute important

impedimentstotransatlantictradeandinvestmentflows.Eventhoughtheymightnot

bedirectlytargetingcross-borderactivities theyneverthelessdobearacostontrade

andinvestment.ThereductionofsuchbarrierscouldpotentiallybenefitboththeEU

andtheUS.However,unliketariffs,manyregulationscannotsimplyberemoved,as

theyoftenserveimportantandlegitimatedomesticobjectiveslikeproductsafetyand

environmentalprotection. Yetsuchcostsmaybereduced throughpartial regulatory

convergence and cross-recognition of standards. Still, some amount of regulatory

divergenceisinevitableandwillremain,asregulationsreflectdifferencesingeography,

language,preferences,culture,andhistory.Thus,inarealisticanalyticalexercise,while

itcanbeassumedthatsomeNTBscanbeeliminatedbymutualagreementandeffort,

their100percenteliminationshouldnotbeconsideredasarealisticoutcome.3

3 Atthesametime,asbothregionsarehighincomewithhighstandardsfordomesticobjectives,neithershouldregulatoryconvergencebeseenasaprocessforbilateralloweringofstandards,butratherasamechanismforreinforcementofcomparableobjectivesotherwisereachedthroughdifferentregulatorymeans.

2. Economic and Policy Background


8

2.1. CurrenttradeflowsandFDI

2.1.1. Trade

TheUS is themost important trade partner for theEU asmeasured by exports. In

2011,around17percentoftotalEUexportsweredestinedtotheUSmarket.TheUS

isalsoanimportantsourceofEUimports.Itisthethirdmostimportant(11percent

of total imports)afterChinaandRussia4.For theUS, theEUisalsoakeybilateral

tradepartner.TheEUwasthesecondmostimportantdestinationforUSexports(after

Canada),representing19percentoftotalexports.Itisalsothesecondmostimportant

importpartner(afterChina),supplying17percentoftotalUSimports.5

ThemagnitudeofthetraderelationshipbetweentheEUandtheUS,andtheimportance

of the two economies as bilateral partners, suggests that anFTA thatwould reduce

obstaclesandcoststotradebetweenthetwocouldhavesignificantimpactsontradeand

ontheireconomicperformance.

Figure1showsEUmerchandisetradewiththeUSdividedbymainsectorsfortheyear

2011.Mostimportsandexportstakeplaceinthemachineryandtransportequipment

sector.Thisamountedto70,850millioneurosofEUimportsfromtheUS,and104,429

millioneurosworthofEUsalestotheUS.Thesecondmostimportantsectorforgoods

tradebetweentheEUandtheUSischemicals.AlsointhissectortheEUexportsmore

thanitimports(around50percentmore).

4 Source:Eurostat.5 Source:Eurostat.

Economic and Policy Background

9

Figure 1 EUtradeingoodswiththeUSbysector(inmillioneuros),2011

Source: Eurostat

Giventhatgoods tradeaccountsforroughly65percentof totalbilateral trade, (see

Figure2), liberalisationefforts (if thesameacross theboard)are likely to lead toa

morepronouncedimpactintermsofexchangesofgoodsratherthanservicesbetween

theUSandEU.

Figure 2 Thebilateralcompositionoftradeinprojectedbenchmark(2027)

Source: modelbenchmarkdatabase.


10

2.1.2. FDI

NorthAmericaisthemostimportantdestinationforEUoutwardFDI,ascanbeseen

inFigure 3.The region hosts about one-third of totalEUoutwardFDI stocks.The

secondmost important region forEU’s outwardFDI stock is the so-called non-EU

EuroperegionthatincludestheformerSovietUnioncountries,Switzerland,Norway

andTurkey.Theseeconomiesholdaboutone-fourthofEUFDIstocks.Thethirdmost

important region forEU’sFDI isAsia,whichaccounts for14percentof totalFDI

outwardstocks.

Figure 3 EU27outwardstocksofFDI,2010

Source: Eurostat.

While inFigure 3we focused on regions, Figure 4 andFigure 5 (below) show the

breakdown of EU FDI partners by major country (instead of regions).Again, this

confirmstheimportanceoftheUS.Onacountrybasis,theUSstandsoutevenmoreas

themostimportantbilateralinvestmentpartnerfortheEU.EUoutwardFDIstocksin

theUSaremorethantwiceaslargeastothesecondmostimportanthostcountryfor

EUFDI,whichisSwitzerland.TherelativeimportanceoftheUSassourceofFDIin


11

theEUisevenmorepronouncedwhenviewedonacountrybasis,withtheUSowning

almostfourtimesmoreofEUinwardstocksofFDIthanthesecondmostimportant

partnercountry,Switzerland.GiventhemagnitudesoftheFDIbetweentheEUandthe

USanypolicyinfluencingthefurtherflowscouldhaveasignificantimpactonthese

economies.

Figure 4 ToptenhostsofEUoutwardFDIstocks,2010(in1000millioneuros)

Source: Eurostat

Figure 5 ToptensourcesofEUinwardFDIstocks,2010(in1000millioneuros)

Source: Eurostat


12

Figure6depictstheevolutionofoutwardandinwardFDItoandfromtheUS.Forthe

US,theEUisalsothemostimportantFDIpartner.ThestockofinwardFDIfromthe

EUexceedsthatfromtherestoftheworld.However,thestockofUSoutwardFDIto

theEUrepresentsanevenhigheramountthaninwardstockfromtheEU.

Figure 6 USoutwardandinwardFDItotheEUandtherestoftheWorld,2010(in

1000millioneuros)

Source: OECDandowncalculations

FDIactivitybetweenEUandUSsufferedtheconsequencesofthefinancialcrisisbutis

nowrebounding.Justbeforethefinancialcrisis,EUinvestmentflowstotheUSpeaked,

withalmost178,510millioneurosofEUinvestmentflowsgoingto theUSin2007

(seeFigure7).Thisrepresentedabout14percentofthetotaloftheEU’sinvestment

flowsgoingabroad.Duringthecrisis,EUinvestmentflowstotheUSdroppeddown

toalmost2004levels,withthelowestamountofbilateralflowstakingplacein2010.

Nevertheless,in2011,bilateralinvestmentflowspickedupagain,althoughnotreaching

yetpre-crisislevels.


13

Figure 7 EU’sdirectinvestmentflowstotheUS,2004-2011

Source: Eurostatandowncalculations.

InvestmentflowsfromtheUS(andfromtherestoftheworld)totheEUalsodropped

dramaticallyduringthecrisis(seeFigure8).Thehighestamountofinvestmentfrom

theUStookplacein2007,amountingto195,660millioneuros.In2010,theincoming

FDIflowswereonly114,763millioneuros.However,whilethevolumeofFDIinflows

fromtheUSisstillbelowthepre-crisislevel,theshareofinvestmentcomingfromthe

UShasreacheditspre-crisislevelasof2010.

Figure 8 EU’sdirectinvestmentflowsfromtheUS,2004-2011

Source: Eurostatandowncalculations.


14

GiventheimportanceandattractivenessoftheNorthAmericanregionforEUinvestors

andoftheEuropeanmarketforUSinvestorsanypolicyaimingtoremoveregulatory

barriers to transatlantic investmentscanbeexpected tohaveapotentiallyvery large

impact.

2.2. Current patterns of tariffs

Inthissectionwefocusonexistingtariffbarriers.Figure9showsthatthereissome

heterogeneityintermsoftariffprotectionsbetweentheEUandtheUS.Whileinmost

sectors, EU tariffs are slightly higher than those imposed by theUS, they are still

relativelylow.However,therearetwomainexceptions:motorvehicles,andprocessed

foods.TheEUaveragetariffsontheseproductsaresubstantiallyhigherthantheUS

tariffs.Formotorvehicles6theEUappliesanaveragetariff(8.0percent)thatisalmost

eighttimeshigherthantheUS.Forprocessedfoodproducts,EUaveragetariffs(14.6

per cent) aremore than four times higher thanUS average tariffs. For agriculture,

forestryandfisheriesaveragetariffsarealsorelativelyhigh(about3.7percent)butfor

theseproductsthereisnodifferencebetweentheEUandtheUS.

Figure 9 TradeWeightedApplied(MFN)averagetariffrates2007

Source: WTO,CEPII,UNCTADmappedtoGTAP8

6 Motorvehiclessectorinthiscaseincludesalsopartsandcomponents.


15

Giventhecurrenttariffstructure,thescopefortariffreductionstohaveasignificant

impactontradeflowsislimited.Indeed,formostsectors,afurtherreductionintariffs

impliesverysmallabsolutechangesinthelevelofprotection.Nevertheless,insome

sectors,suchasprocessedfoods,agriculture,forestryandfisheries,andmotorvehicles,

the impact is likely tobemoresubstantial.Forothersectors,NTBsare theprimary

driverofpotentialimpactaswillbeshowninthenextsection.

2.3. Non-tariff barriers

NTBs and regulatory divergence are complex issues to dealwith analytically.Even

the measurement of the importance of these barriers for trade and investment is a

difficultexercise.ThisstudyreliesontheearlierworkonthistopicintheEcorys(2009)

study.TheEcorys study remains themost comprehensive and detailed to date.The

methodologyincorporatedinthatstudyusedamulti-prongedapproachthatcombined

literaturereviews,businesssurveys,econometricanalyses(gravitymodellingtogether

with CGEmodelling), as well as consultations with regulators and businesses and

inputs by sector experts aiming to obtain a qualitative andquantitative estimates of

transatlanticNTBs.WhiletheEcoryssurveyfocusedonbothtradeandFDI,wefocus

hereontrade-relatedbarriers.WewillreturntoFDIbarriersinChapter6.


16

2.3.1. Indexes and econometrics

Toestimatethead-valoremequivalentofNTBs(theimpactonpricesandcosts)and

toquantifytowhatextentthoseareremovablebetweenthetwoeconomies,theEcorys

(2009)studyundertookacomplexsetofassessments.Wesummarizethosestepsbriefly

here.Theassessmentinvolvedsurveyscombinedwithgravity-basedeconometrics.7

7 ForfurtherdiscussiononthemethodologiesusedforNTBquantification,whichtechnicallyareknownasgravitymodelsseebothEcorys(2009)Chapter3.4,andalsoAnderson,Bergstrand,Egger,andFrancois(2008).Forgoods,selectionbasedgravitymodellingwasused. Servicesbarrierswerebasedon theNTBelasticityestimates fromFrancoisandHoekman(2010).

Box 1 NTBSandtheconceptsofcostandrents

NTBs and regulatory differences can have two main effects. NTBs can either

increase thecostofdoingbusinessfor firms,or theycanrestrictmarketaccess.

TraditionalNTBs,likeimportquotas,areanexamplewhereNTBsmarketaccess.

In contrast, regulations that require expensive reconfiguration of products (like

changing voltage or reconfiguration of an exhaust system) for export are an

exampleofcostraisingNTBs.Bothcanhavedifferentimpactsbychangingmarket

concentration and economic power (and thus profits) of companies. In order to

beabletomakeadistinctionbetweenthosetwotypesofNTBs,theconceptsof

‘cost’and‘rent’areincludedhereinmodellingofNTBs,followingthefindings

ofthefirmsurveys(andrelatedliterature)intheEcorys(2009)study.Thatstudy

foundthatabout60percentof theprice impactofNTBscouldbeclassifiedas

following from actual cost increases on average, while the creation of market

power(economicrent)wasresponsiblefortheother40percentofpriceincreases.

Thisisanaverage,andthereissomevariationacrossbothsectorsandcountries

inthisregard.InthecaseofNTB-relatedcostincreases,thisconstitutesawelfare

losstosociety.Incaseofanincreaseinmarketconcentration,consumerpricesmay

alsogoup.Howeverpartoftheincreaseisthenappropriatedbycompaniesasthey

reapincreasedrevenuesandprofits.Thusthereisaredistributionofwelfare,and

notsimplyareductionineconomicefficiency.


17

TheNTBestimatesinvolvedatwo-partsurveyasafirststep.Thesurveywasconducted

on firms in theEUandUSengaged in trade, and firms in theEUandUSengaged

in FDI.Theywere asked both detailed questions aboutNTBs, and amore general

setofquestionsaboutoverallmarketaccessconditions.8 IncaseswhereNTBswere

identified,companieswereaskedabouttherelativeimportanceofsuchbarriers.Firms

also provided a comprehensive generalmeasure ofNTB-relatedmarket access (the

combinedimpactofallbarriers)intheformofarankingscaledfrom0to100.With

theoverall rankingquestion, 0 indicated that therewerenoNTBsof any type, and

100meant therewere prohibitively highNTBs.The business survey restrictiveness

indicators were then crosschecked against OECD (2007) restrictiveness indicators

and against the ProductMarket Regulation (PMR) indexes. For the service sectors

the combinationof theOECD restrictiveness indicators and the survey resultswere

used.TheresultingmeasuresaresummarisedinTable1below.Thefirmrankingsare

bilateral(forexampleanAmericanfirminFrancemightgiveadifferentrankingthan

aGermanfirminFrance).

ThereportedNTBrankings(theNTBindex)ongoodsonbothsidesoftheAtlanticare

generallyhigherthanonservices,rangingfrom20percentto56percent.Thehighest

perceived NTB levels were found on the aerospace and space industry. On goods

exported to theUS,machinery also exhibits high levels ofNTBs,while the lowest

levelsarereportedforpharmaceuticals.ForgoodsexportedfromtheUS,highlevels

ofNTBswerereportedforchemicals,cosmeticsandbiotechnology.Lowerlevelsof

NTBswerereportedforelectronics,iron,steelandmetalproducts.

Ofcourse,thefirmrankingsofgeneralopennessarerelative.Theydonottranslateinto

actualimpactsoncostsandprices.Forthis,thesurveydatawasthenintegratedwith

asetofeconometricmodels(knownasgravitymodels)toestimatethecorresponding

ad-valoremofpercentpriceimpactofthevariationsinNTBlevels.Onthatbasis,the

8 Thegeneralrankingquestionsarereproducedasanannextothisreport.SeetheannextotheEcorys(2009)reportformoreinformationonthemoredetailedquestions.


18

Ecorys (2009) report alsoprovidesprice/cost estimatesof existingNTBs for traded

goodsandservicesinapercentageformthatcanbeinterpretedsimilarlytoad-valorem

tariffs.TheseestimatesarereportedinTable2below.Theyreflectthehigherpricesthat

resultbecauseofNTBs.9

Table 1 PerceivedNTBindexbybusiness(indexbetween0-100)

Sector EUexportstotheUS USexportstotheEUServices Sectors:Travel 35.6 17.6Transport 39.9 26.3FinancialServices 29.7 21.3ICT 20.0 19.3Insurance 29.5 39.3Communication 44.6 27.0Construction 45.0 37.3OtherBusinessServices 42.2 20.0Personal,CulturalandRecreationalServices

35.8 35.4

Goods Sectors:Chemicals 45.8 53.2Pharmaceuticals 23.8 44.7Cosmetics 48.3 52.2Biotechnology 46.1 50.2Machinery 50.9 36.5Electronics 30.8 20.0Office,InformationandCommunicationEquipment

37.9 32.3

Medical,MeasuringandTestingAppliances

49.3 44.5

AutomotiveIndustry 34.8 31.6AerospaceandSpaceIndustry 56.0 55.1FoodandBeverages 45.5 33.6Iron,SteelandMetalProducts 35.5 24.0Textiles,ClothingandFootwear

35.6 48.9

WoodandPaper,PaperProducts

30.0 47.1

Source: Ecorys(2009)

9 Thereadermaynotesomedifferencebetweenthesectorsinthetablesinthissection.WehavestartedinTable1withthefullsetofsectorsfromtheoriginalECORYSsurvey.Thesehavebeenconsolidatedwhenwemovetosectorsforthemodelling,bothintheoriginalECORYSstudyandinthisreport.


19

AccordingtotheestimatesinTable2,non-tariffbarriersarethehighestforfoodand

beverageproducts,withimportsfromtheUSfacinga56.8percenttariffequivalent,

whileEUexportstotheUSoftheseproductsfacea73.3percentextracost.Among

services,financialservicesareoneofthesectorswiththehighestestimatedNTBs.In

thissector,EUbarriersagainstUSexportsamountto11.3percent,whileUSbarriers

againstEUexports areestimated tobeabout31.7per cent.Barriers in the services

sectors arehigheron theEU side for thebusiness and ICT sector, communications

sector,construction,andpersonal,cultural,otherservices.OntheotherhandtheUS

barriersforEUexportersintheservicessectorsarehigherthanintheEUinthefinance

andinsurancesectors.

Itshouldbestressedthatincontrasttoreducingtariffs,theremovalofNTBsisnotas

straightforward.Infact,itisunlikelythatallareasofregulatorydivergenceidentified

actuallycanbeaddressed.Aspreviouslypointedout,therearemanydifferentsources

of NTBs and thus removing them may require constitutional changes, unrealistic

legislative changes, or unrealistic technical changes. Removing NTBsmay also be

difficultpolitically,e.g.becausethereisalackofsufficienteconomicbenefittosupport

theeffort;becausethesetofregulationsistoobroad;becauseofconsumerpreferences,

language and geography; or due to other political sensitivities. In recognition of

thesedifficulties,intheassumptionsofthescenarios,thedegreetowhichanNTBor

regulatorydivergencecan,potentiallyandrealistically,bereducedistakenintoaccount

whichisdiscussedinmoredetailsinthefollowingsubchapter.


20

Table 2 TotaltradecostestimatesfromNTBreductioninpercent,Ecorys(2009)

Sector Totaltradebarriers:EUbarriersagainstUSexports

Totaltradebarriers:USbarriersagainstEUexports

Foodandbeverages 56.8 73.3Chemicals 13.6 19.1Electricalmachinery 12.8 14.7Motorvehicles 25.5 26.8Othertransportequipment 18.8 19.1Metalsandmetalproducts 11.9 17.0Woodandpaperproducts 11.3 7.7Othermanufactures N/A N/A average goods 21.5 25.4TransportAir 2.0 2.0Water 8.0 8.0Finance 11.3 31.7Insurance 10.8 19.1BusinessandICT 14.9 3.9Communications 11.7 1.7Construction 4.6 2.5Personal,cultural,otherservices

4.4 2.5

average services 8.5 8.9

Source: Ecorys(2009),AnnexTableIII.1

At this stage, therearepatterns inTable2 thatwill carry forward in themodelling.

FollowingfromtheEcorys(2009)study,businessesperceivedtransatlanticNTBsas

substantiallylowerforservicesthanforgoods.Thismeansthat,forcomparablecuts

inbarriers inpercent terms, thedifferences inbarriers(combinedwith theabsolute

importanceingoodstraderelativetoservicestrade)implythatwecanexpectgreater

impactfromNTBreductionsingoodsthaninservices.

21

Thepurposeofthischapteristopresentanddiscussthemodelusedasbasisforthe

policyexperiments,includingthesectorandregionalaggregationthatwereused.

Inthisreport,theeconomicassessmentofatradeagreementbetweentheEUandUS

isbasedonacomputablegeneralequilibrium(CGE)modelofglobalworldtrade.The

CGEmodellingexerciseismeanttoestimatetheeffectsontheEUandUSeconomies.

CGEmodelsliketheonesusedherehelpanswerwhat-ifquestionsbysimulatingthe

price,incomeandsubstitutioneffectsinmarketequilibriumunderdifferentassumptions

aboutchangesinpolicy.Theeconomicoutcomesofthe“baseline”scenario(withno

policy change) can be compared to the different scenario associated with changes

in tradepolicy.The“baseline” for themodel is thus the equilibriumwithoutpolicy

change,andthe‘scenario’istheequilibriumafterthepolicychange.Theeffectofthe

policychangecanthenbebenchmarkedbythedifferencebetweenthetwo.

3.1. The model

TheCGEmodelemployedisbasedonthewidelyusedGTAPmodel(Hertel,1997),

with added features from theFrancois, vanMeijl, and vanTongeren (2005)model.

Moretechnicaldetailsofthemodelareprovidedintheannex.

Themostimportantaspectsofthemodelcanbesummarisedasfollows:

• Itcoversglobalworldtradeandproduction

• Itallowsforscaleeconomiesandimperfectcompetition

3. Technical Discussion on CGE Modelling Set Up


22

• Itincludesintermediatelinkagesbetweensectors

• It allows for trade to impact on capital stocks through investment effectswhich

allowstoobtainlonger-runimpactontheeconomy

ImperfectcompetitionintheFrancois,vanMeijl,andvanTongeren(2005)model,as

implementedhere,isexplainedinFrancois,Manchin,andMartin(2012).Itinvolves

firm level competition and supply of varieties of goods and services to both final

consumersanddownstreamfirmsunderwhatisknownasmonopolisticcompetition.

ThemodellingofinvestmenteffectsisbasedonFrancoisandMcDonald(1996).This

doesnotinvolvegrossforeigndirectinvestmentflows,butratherchangesinregional

andglobalcapitalstocks(machineryandequipment)asaresultofchangesinlevelsof

savingsandinvestment.

Box 2 Keyfeaturesofthemodel

Modelsimulationsarebasedonamulti-region,multi-sectorglobalCGEmodel.

Sectorsarelinkedthroughintermediateinputcoefficients(basedonnationalsocial

accountsdata)aswellascompetitioninprimaryfactormarkets.Themodelincludes

imperfectcompetition,short-runandlong-runmacroeconomicclosureoptions,as

wellasthestandardstatic,perfectcompetition,Armington-typeset-upasasubset.

Onthepolicyside,itofferstheoptiontoimplementtariffreductions,exporttax

and subsidy reduction, trade quota expansion, input subsidies, output subsidies,

andreductionsintradecosts.Internationaltradecostsincludeshippingandlogistic

services(thesourceoffob-cifmargins),butcanalsobemodelledasSamuelson-

typedeadweightcosts.Thiscanbeusedtocapturehighercostswhenproducingfor

exportmarkets,duetoregulatorybarriersorNTBsthatdonotgeneraterents(or

wheretherentsaredissipatedthroughrent-seeking).

Technical Discussion on CGE Modelling Set Up

23

In theCGEmodel, there is a single representative or composite household in each

region. Household income is allocated to government, personal consumption, and

savings. In each region the composite household owns endowments of the factors

of production and receives incomeby selling the services of these factors to firms.

It also receives income from tariff revenue and rents accruing from import/export

quotalicenses.Partoftheincomeisdistributedassubsidypaymentstosomesectors,

primarilyinagriculture.

Taxes are included at several levels in the model. Production taxes are placed on

intermediateorprimaryinputs,oronoutput.Tariffsareleviedattheborder.Additional

internal taxes are placed on domestic or imported intermediate inputs, andmay be

applied at differential rates that discriminate against imports.Where relevant, taxes

arealsoplacedonexports,andonprimaryfactorincome.Finally,whererelevant(as

indicatedbysocialaccountingdata)taxesareplacedonfinalconsumption,andcanbe

applieddifferentiallytoconsumptionofdomesticandimportedgoods.

Ontheproductionside,inallsectors,firmsemploydomesticproductionfactors(capital,

labourandland)andintermediateinputsfromdomesticandforeignsourcestoproduce

outputsinthemostcost-efficientwaythattechnologyallow.Inmostsectors,perfect

competition isassumed,withproducts fromdifferent regionsmodelledas imperfect

substitutes.

Heavymanufacturingsectorsaremodelledwithimperfectormonopolisticcompetition.

Monopolistic competition involves scale economies that are internal to each firm,

depending on its own production level.An important property of themonopolistic

competitionmodelisthatincreasedspecialisationatintermediatestagesofproduction

yields returns due to specialisation, where the sector as a whole becomes more

productivethebroadertherangeofspecialisedinputs.Inmodelsofthistype,partof

theimpactofpolicychangesinfinalconsumptionfollowsfromchangesinavailable

choices(thevarietyofgoodstheycanchoosefrom).Similarlyfirmsareaffectedby

changes in available choices (varieties)of intermediate inputs.Changes in available


24

varieties also involve changes in available foreign varieties, in addition to domestic

one.Asaresult,changesinconsumerandfirminputchoiceswill“spill-over”between

countriesastheytradewitheachother.

TariffsandtariffrevenuesareexplicitinthestandardGTAPdatabase,andthereforecan

bedirectlyincorporatedintothemodelusedheredirectlyfromthestandarddatabase.

However,NTBsaffectinggoodsandservicestrade,aswellascostsavingslinkedto

tradefacilitationarenotexplicitinthedatabaseandweneedtotakestepstocapture

these effects.Where NTBs leads to higher costs, we follow the standard approach

tomodelling icebergordead-weight tradecosts in theGTAP framework,originally

developedbyFrancois(1999,2001)withsupportfromtheECtostudytheMillennium

Round (nowknownas theDohaRound).10 Ithas featured in the jointEC-Canadian

governmentstudyonanEU-CanadaFTA,aswellasthe2009EcorysstudyonEU-US

non-tariffbarriers.Informalterms,wemodelchangesintheefficiencyofproduction

forsale inspecificmarkets. In thissense,wecancapture the impact thatNTBscan

haveinraisingcostswhenservingforeignmarkets.WhereNTBsinsteadinvolvehigher

pricesbecauseofrents,wemodelthisasadditionalmark-ups(higherprices)accruing

tofirms.AshighlightedalreadyinthediscussioninChapter2,thereisanapproximate

60:40splitbetweencostgeneratingNTBsandrentgeneratingNBTs,intermsofimpact.

3.2. Sectors and regions in the model

WhileintheGTAPdataabout60sectorsand130differentregionsareavailable,forthe

purposeofthisstudywehaveaggregatedsectorsandregionstoallowustoconcentrate

onthekeyresults.ThesectorandregionalaggregationsarepresentedinTable3.

10 TheoriginalFrancoisapproachhasgrownfromaspecializedextensioninearlyapplicationstoanowstandardfeatureoftheGTAPmodel,followingitsincorporationbyHertel,WalmsleyandItakura(2001).

Technical Discussion on CGE Modelling Set Up

25

Table 3 SectorsandregionsusedintheCGEmodel

Sectors RegionsAgrforestryfisheries EuropeanUnionOtherprimarysectors UnitedStatesProcessedfoods OtherOECD,highincomeChemicals EastEuropeElectricalmachinery MediterraneanMotorvehicles ChinaOthertransportequipment IndiaOthermachinery ASEANMetalsandmetalproducts MERCOSURWoodandpaperproducts LowIncomeOthermanufactures RestofWorldWatertransportAirtransportFinanceInsuranceBusinessservicesCommunicationsConstructionPersonalservicesOtherservices

27

In thischapterwesummarize thepolicyscenariosused in theCGEassessment that

followsinChapter5.Thisincludessomeexplanationofconcepts,suchas“policyspill-

overs,”thatareincludedinthescenarios.

4.1. Scenarios

Asdiscussed inChapter2,while it isconceivableforall tariffs toberemoved, it is

not realistic to assume that all NTBs and costs from regulatory divergence can be

removed.Thisisbecauseoftheunderlyingdifferencesinthenatureofthesemeasures.

AsaresultwhenmodellingtheliberalisationofNTBswemusttakeintoaccountthe

degree towhichNTB-related costs can realistically be reduced (via variousmeans

and techniques).On thebasis of theEcorys (2009) survey, a reasonableunderlying

ruleofthumbisthatapproximately50percentofthecost/priceimpactofNTBscan

beremoved–i.e. theyare“actionable.”While there issomevariationbysector, the

mappingfromoverallprice/costdifferencestothosethatcanbenegotiatedonreflects

thisfinding,whichisbasedonexpertopinions,cross-checkswithregulators,legislators

andbusinessessupportedbythebusinesssurveyfromtheEcorys(2009)study.Against

thisbackground,thestudyissetuparoundscenariosdifferingwithrespecttolevelsof

ambitionandscopeofcoverage.ThescenariosaresummarizedinTable4below.

Thescenariossummarizedinthetablearerelativelymodest.Startingfromthelevelof

barriersreportedinTable2,onlyabouthalfofthebarriersareconsideredasnegotiable

oractionable.Ofthese,halfarereducedinthemostambitiousscenario(or25percent

4. The Policy Options Considered


28

oftotalNTBsinTable2).Thisisthemostambitiousscenario.Themodestscenarios

assumeevenlessreductioninNTBs.Underboththeambitiousandmodestscenarios,it

isassumedthatmoreaggressiveliberalizationisappliedtoprocurement.Thescenarios

reported here are therefore far less ambitious than under the original Ecorys study,

wherefulleliminationofactionableNTBswasassumed.

Table 4 ScenarioSummaries

Narrow(limited)FTAScenariosTariffsonly 98percentoftariffseliminatedServicesonly 10percentofservicesNTBseliminatedProcurementonly 25percentofprocurementNTBseliminatedComprehensiveScenarios

Lessambitious

98percentoftariffseliminated

10percentofNTBseliminatedonbothgoodsandservices(20percentofactionable)

25percentofprocurementNTBseliminated

Ambitious

100percentoftariffseliminated

25percentofNTBseliminatedonbothgoodsandservices(50percentofactionable)

50percentofprocurementNTBseliminated

4.2. Spill-overs

Thesimulationsthatarecarriedoutalsotakeintoaccountconceptsofbothregulatory

convergenceandregulatoryspill-overs.Morespecifically,insettinguptheexperiments,

wehaveincludedtwosetsofpossibleeffectsbeyondbilateralliberalization.Theseare

definedasfollows.First,wehaveincludeddirect spill-overs.Thesearebasedonthe

assumptionthatimprovedregulatoryconditionsnegotiatedbetweentheEUandtheUS

willalsoresultinalimitedfallinrelatedtradecostsforthirdcountriesexportingtothe

EUandUS.Inotherwords,thiscapturestheextenttowhichthebilateralstreamlining

of regulationsandstandards,and reduction in regulatoryburdens,alsobenefitother

exporterstotheEUandUS.Thispositivemarketaccesseffectforthirdcountriesis

modelledasbeingaround20percentofthebilateralfallintradecostrelatedtoNTBs

forthecorescenarios.(Wehavealsoexamined10percentspill-oversasarobustness

The Policy Options Considered

29

check.)ThisconceptwasintroducedintheEU-JapanstudybyCopenhagenEconomics

(2009).Inpractice,itmeansthatifthereis5percentNTB-relatedtradecostreduction

betweentheEUandUS,therewillalsobea1percenttradecostreductionforthird

countriesexportingtotheEUandUS.Thelogicisthatfirmsinthirdcountriesmayfind

iteasiertomeeteitherEUorUSregulatoryrequirementsifbilateralnegotiationslead

to simplifications thatarenot inherentlydiscriminatory.KoxandLejour (2006), for

example,provideevidencethatdifferencesinregulationscanincreaseoperatingcosts

indifferentmarkets,reducingbilateraltrade.

Asecondindirecteffectinvolvingthirdcountriesisconsideredaswell:theindirect spill-

overs.Thesearemeanttogaugetheeconomicimplicationsifthirdcountriesadoptsome

ofthecommonstandardsagreedbetweentheEUandtheUS.Giventhat,collectively,

theEUandtheUSwouldstandastheworld’sbiggesttradingblock,thereisavery

realpossibilitythatmutualagreementonregulationsandstandardswouldbeadopted,

partially,alsobythirdcountries.Thus,wheretheEUandtheUSactasaregulatory

hegemon,thereisscopeforsettingdefactocommon,globalstandards.Thisimplies

thatthebilateralagreementwillgiveEUandtheUSimprovedmarketaccessinthird

marketsfromreducedNTBs.Inaddition,therewillbescopeforreductionsinNTBs

amongst third countries, as they converge further on common standards.Therefore,

indirectspill-overswillleadtolowercostsandgreatertradebetweenthirdcountriesas

well.Wehavemodelledindirectspill-oversas50percentofthedirectspill-overrate.

Thismeansthatforexamplefora5percenttradecostreductionbetweentheEUand

US,andwith20percentcorrespondingdirectspill-overs,wewillhavea1percent

(directspill-over)reductionforthirdcountriesexportingtotheUSorEU,anda0.5per

cent(indirectspill-over)reductionforEUandUSexportcoststothirdcountries,and

fortradebetweenthirdcountries.


30

4.3. Sectoral effects: Preliminary ranking

Atthisstage,wehavespelledout tradeflows, tariffbarriers,andnon-tariffbarriers.

InwhatfollowsinChapter5,wewillfocusoneffects.Beforedoingso,itisusefulto

benchmarkexpectations.Whatwemeanisthat,beforeweturntomodellingresults,

wewant toprovideanon-modelbased rankingof some important sourcesof likely

effects. This involves the data summarized inTable 5 below. In theTable, column

Asummarizes the totalvalueof tariffsandactionableNTBs(asdefinedbyEcorys)

appliedbytheUSagainstEUexports.Thenexttwocolumnssummarizetheimportance

ofeachsectortototalEUexportstotheUS.ColumnBisbasedongrossvalues,while

columnCisbasedinsteadonthevalueaddedcontainedinexports.11IncolumnC,we

seethatwhilechemicalsare12.38percentofexportsonagrossvaluebasis,theyare

somewhatlessimportantonavalueaddedbasis,accountingfor11.21percentofEU

valueaddedcontainedinexportstotheEU.Asacrudefirstpassatpossibleeffects,

columnEprovidesanimpact-rankingindex.Thisisbasedonthevalueaddedcontained

in exports by sector (C), the scope for liberalization (A), and theprice elasticityof

demandforimports(D).Together,theseprovidearoughestimateofincreasedexports,

onavalueaddedbasis,followingfromimprovedmarketaccesstotheUSforEUfirms.

Forexample,ofthetotalvalueaddedcontainedinEUexportstotheUS,columnEsays

thatfullliberalizationinchemicalscouldyieldan8.39percentincreaseintotalexports

totheUSonavalueaddedbasis.AsitisvalueaddedthattranslatesintoGDP,theindex

alsoprovidesacruderankingofoverallGDPimpactsofsector-specificliberalization.

11 SeeFrancois,Manchin,andTomberger(2012)forexplanationofthevalueaddedcalculations,whicharebasedonourCGEmodeldatabase

The Policy Options Considered

31

Table 5 Impactrankingindexes

A B C D E=.01*A*C*D

actionable

NTBs+tariffsgrossexport

shareexportvalueaddedshare

priceelasticity index

Agrforestryfisheries

3.70 1.73 2.09 4.77 0.37

Otherprimarysectors

0.00 1.36 1.70 12.13 0.00

Processedfoods 48.93 4.42 4.71 2.46 5.67Chemicals 14.69 12.38 11.21 5.09 8.39Electricalmachinery

9.91 1.09 0.94 9.65 0.89

Motorvehicles 22.49 8.81 7.11 10.00 15.99Othertransportequipment

8.63 5.31 4.94 7.14 3.04

Othermachinery 0.80 16.92 16.25 9.71 1.26Metalsandmetalproducts

6.69 2.75 2.53 13.91 2.36

Woodandpaperproducts

5.76 2.42 2.61 7.99 1.20

Othermanufactures

3.20 7.32 4.90 6.56 1.03

Watertransport 0.65 0.05 0.04 3.80 0.00Airtransport 2.35 3.12 2.41 3.80 0.22Finance 6.46 6.20 7.45 2.04 0.98Insurance 3.84 6.02 7.10 3.18 0.87Businessservices 1.58 10.07 12.28 3.18 0.62Communications 0.65 0.85 1.01 3.18 0.02Construction 0.90 0.35 0.36 4.21 0.01Personalservices 0.66 1.49 1.76 8.71 0.10Other(public)services

0.00 7.36 8.59 3.92 0.00

Source: CGEcalculations.

TheestimatesincolumnEofTable5areofcoursepartialequilibrium.Theymisscross-

sectoreffects,includinglabourmarketinteractionandintermediatelinkages.Theyalso

missconsumerbenefitsfromaccesstomoregoodsandservices.Evenso,theyprovide

aclearrankingoflikelyeffects.Thisrankingcarriesthroughtheestimatesinthenext

chapter, and so it isworth discussing the pattern for the impact indexes briefly, as

showninFigure10.Fromthefigure,wecanseethatforsomesectors,especiallymotor

vehicles, though they are not dominant on a value added basis, the combination of


32

highelasticitiesandhightradebarriersmeansthat,overall,thesesectorsarelikelyto

dominateintermsofimpact.Bythesamelogic,despitethefactthat“othermachinery”

isamajorsectoronavalueaddedbasis, the lowlevelofbarriersmeansitdoesnot

rankhighlyintermsofexpectedbenefitsfromimprovedmarketaccess.FromFigure

10,themanufacturingsectorsarelikelytohavethegreatestimpactbyfaroverall.This

includesmotorvehicles,chemicals,processedfoods,andother transportequipment.

Incontrast,whilevalueaddedsharesarecomparablefortheservicessectors(business

services is more important on a value added basis than either chemicals or motor

vehicles), thecombinationof lowelasticitiesand relatively lowbarriersmeans that,

overall,weexpectthegreatestimpactofmarketaccessonexportsandGDPtobefrom

liberalizationongoodsectors,andespeciallychemicals,machinery(vehiclesandother

transportequipment),andprocessedfoods.ThepatterninFigure10revealsitselfagain

whenreportresultsinChapter5.Manufacturingliberalizationistheprimarydriverof

benefitsfromimprovedtrade-relatedmarketaccess.

Figure 10 Valueaddedandimpactrankings

Source: owncalculations.SeeTable5.

33

In this chapter we focus on the results of the CGE modelling of bilateral trade

liberalization.Theresultsarereportedwithrespecttoaneconomicbenchmarkprojected

outtotheyear2027,whichimpliesthatthattheycapturetheimpactoftheagreement

afulltenyearsaftertheimplementationoftheagreement,providingthelonger-term

impactofpolicychanges.First,wepresentresultsforthelimitedscenarios.Wethen

examinethecomprehensivescenarios,assumingthatanagreementwouldcollectively

covertariffs,services,andprocurement.Wethenmoveontoreportingestimatedeffects

on output and trade, first on an aggregate and then on amore disaggregate, sector

specific level.Wealsoprovideadiscussionof the effectsof removalofbarrierson

sustainability,i.e.effectsonlabour,CO2emissionsandtheuseofnaturalresources.

Thelastpartofthischaptersummarisestheresultingeffectsontherestoftheworld.

5.1. Limited Scenarios

Inthissection,wepresentresultsassumingthatalessambitious,limitedFTAwouldbe

implemented.Weanalysetheimpactassumingthatonlyasinglepolicypillar,i.e.only

tariffliberalisation,oronlyservicesliberalization,oronlyprocurementliberalisation

wouldbe implemented.Note that the liberalisationefforts thatarebeingconsidered

for each pillar are similar to those envisaged in the less ambitious scenario of the

comprehensiveFTAoption(seeTable4),including20percentspill-overs.12Forthe

tariffonlyagreementthereareobviouslynospill-overs.

12 Resultswith10percentspill-oversarereportedinseparateannextables.

5. Results


34

Thefirstconclusiontotakefromtheresultsofthepartialagreementsisthatliberalising

eachpolicypillarsseparatelyleadstorelativelysmall increasesinGDPforboththe

USandtheEU(seeTable6andTable7below).FortheEU,thetariffscutsleadtoa

GDP increaseof0.10percent (23,753millioneuros),while the reductionofNTBs

inservicesandinprocurementincreaseGDPbyonly0.02percent(5,298and6,367

millioneuros).FortheUS,thesechangesareevensmaller(rangingfrom0.01to0.04

percent).

Table 6 ChangesinGDP(inpercent),2027benchmark,limitedagreement,20per

centdirectspill-overs

TariffsOnly ServicesOnly ProcurementOnlyEuropeanUnion 0.10 0.02 0.02UnitedStates 0.04 0.03 0.01Other -0.01 0.00 0.00OtherOECD,highincome

-0.03 0.00 0.00

EastEurope -0.04 0.00 0.00Mediterranean -0.04 0.00 0.00China 0.01 -0.01 -0.01India -0.01 0.00 0.00ASEAN -0.02 0.01 -0.01MERCOSUR -0.01 0.00 0.00LowIncome -0.02 0.00 0.00RestofWorld -0.02 0.00 0.00


Results

35

Table 7 ChangesinGDP(inmillioneuros),2027benchmark,limitedagreement,

20percentdirectspill-overs

TariffsOnly ServicesOnly ProcurementOnlyEuropeanUnion 23,753 5,298 6,367UnitedStates 9,447 7,356 1,875Other -7,903 -117 -1,595OtherOECD,highincome

-5,065 726 -668

EastEurope -292 26 4Mediterranean -580 60 -8China 2,289 -1,713 -856India -489 137 79ASEAN -832 337 -263MERCOSUR -363 182 -5LowIncome -228 39 47RestofWorld -2,344 90 75


Therelativesizeoftheservicesimpactislinkedbothtothemagnitudeofunderlying

bilateralbarriersthatarereduced(seeTable2)andalsototherelativetradevolumes

(seeFigure2).NTBsareperceivedbybusinessesasroughly2.5timeshigheringoods

thanservices,asappliedintheexperiments.ThiscapturesthefactthatboththeEUand

USarerelativelyopen,byglobalstandards,intheservicesectors.Atthesametime,

goodstradeistwicethevalueofservicestrade.Thustherelativemagnitudesforgoods

andservicesNTBsareconsistentwiththebenchmarklevelsofprotectionandtrade.

Next,welookattheexpectedchangesintradefortheEUandtheUS.Theresultsare

presentedforeachmeasureseparatelyinTable8andTable9below.


36

Table 8 Changesintrade(inpercent),extra-EUtradefortheEU,2027benchmark,

limitedagreement,20percentdirectspill-overs

TariffsOnly ServicesOnly ProcurementOnlyExportsEuropeanUnion 1.18 0.16 0.19UnitedStates 1.91 0.19 0.23

ImportsEuropeanUnion 1.00 0.13 0.18UnitedStates 1.13 0.57 0.14

Terms of tradeEuropeanUnion -0.01 0.00 0.00UnitedStates 0.04 -0.01 -0.02

Source:CGEcalculations.

Table 9 Changesintrade(inmillioneuros),extra-EUtradeincaseoftheEU,2027

benchmark,limitedagreement,20percentdirectspill-overs

TariffsOnly ServicesOnly ProcurementOnlyExportsEuropeanUnion 43,740 5,777 7,136UnitedStates 57,330 5,488 5,942

ImportsEuropeanUnion 44,338 5,742 7,881UnitedStates 47,775 4,655 5,869


Amongthepartialagreementoptions, the tariffcutsareshowntodeliver thelargest

increase in trade flows. Here, both exports and imports are shown to increase by

between 1 and 2 per cent. Extra-EU exports are estimated to increase by 1.18 per

cent(correspondingto44billioneuros)whileimportsfromoutsideEUareexpected

toriseby1.00percent(correspondingalso toabout44billioneuros increase).The

changesareestimatedtobeslightlyhigherfortheUS.Liberalisingprocurementand

serviceswill leadtorelativelysmall, less than0.5percent(about6-7billioneuros)

increases inexportsand imports.Theresultingchanges in termsof tradeareshown

tobe insignificant.While theprocurementandservicesoptions leadtosimilarGDP

effects, the trade effects are larger overall for procurement.This traces back to the

Results

37

underlying trade elasticities.Goods are estimated to bemoreprice sensitive overall

(seethediscussioninChapter4)andthistranslatesintosomewhatlargertradevolume

effects.However,bothsetsoftradevolumeeffectsaremuchsmallerthantheestimates

discussedbelowlinkedtoamorecomprehensiveagreement.

ThetablesbelowshowtheimpactofthelimitedFTAonbilateralsectoraltradebetween

theEUandtheUS.Limitingtheliberalisationtoservicesorprocurementonlywould

haveaverymarginalimpactonsectoraltrade,withtheexceptionofsomeoftheservices

exportsand imports increasingasbarriers removedunder theservices liberalisation.

Nevertheless,onaverage,bothbilateralexportsandimportswouldincreasebyabout

1per centor less if only servicesorprocurement is liberalised.On theotherhand,

thecutsintariffswouldleadto6.6percentincreaseofEUexportstotheUSandto

a12.4percentincreaseinimports.Thedifferenceinthemagnitudeofchangeisdue

totheinitialtariffstructuresbetweenthetwoeconomies,withtheEUhavinghigher

barrierstowardstheUS.Thusthedifferenceintheseaveragechangesismainlydriven

bymotorvehicles.Inthissectortheimportswouldsignificantlyincreaseastariffsare

removedforUSexporters.Inabsoluteterms,thegreatestincreaseinbilateralservices

exportsunderservices-onlyliberalizationisinfinance,insurance,andbusinessservices

inthecaseoftheEU,andinfinanceandbusinessservicesinthecaseoftheUS.With

procurement only,we see bilateral trade growth primarily in goods (chemicals and

vehiclesexportsfortheEU,chemicalsandmetalsandfabricatedmetalproductsforthe

US).Thebilateraltradeeffectsoftariffsoutweighboththeprocurementandservices

only scenarios.There is substantial growth in bilateral trade in chemicals, vehicles,

machinery, and othermanufactures.Total trade (EU exports to theUS,US exports

totheEU)expandsbyalmost100billioneurosinthetariffonlyscenario.Thesector

patternreflectsthebasicpatternoftariffsinthetariffs-onlyscenario,asdiscussedin

Chapter2,alongwiththeunderlyingelasticitiesasdiscussedinChapter3.Forexample,

USmanufacturing tariffs are relatively low, and highest on othermanufactures and

processedfoods(Figure9).


38

Table 10 Changes in EU bilateral exports to US by sector (in per cent), 2027

benchmark,limitedagreement,20percentdirectspill-overs

TariffsOnly ServicesOnly ProcurementOnly

PercentMillioneuros

PercentMillioneuros

PercentMillioneuros


17.53 2,024 0.00 0 -0.15 -17

Otherprimarysectors

0.37 33 0.05 4 0.00 0

Processedfoods 8.15 2,402 0.00 0 1.50 442Chemicals 5.46 4,509 -0.09 -77 2.59 2,140Electricalmachinery

3.08 225 -0.19 -14 -0.22 -16

Motorvehicles 13.70 8,048 -0.05 -29 5.69 3,345Othertransportequipment

1.84 653 -0.01 -4 1.50 531

Othermachinery 8.60 9,705 -0.11 -123 -0.11 -126Metalsandmetalproducts

20.40 3,744 0.01 2 4.13 757


2.23 359 -0.02 -4 -0.19 -30

Othermanufactures

23.35 11,402 -0.02 -12 -0.05 -27

Watertransport 0.32 1 3.35 12 0.26 1Airtransport 0.24 50 0.79 164 0.03 7Finance 0.22 93 4.32 1,787 -0.03 -13Insurance 0.27 107 4.35 1,746 -0.06 -24Businessservices 0.43 288 1.23 825 0.13 87Communications 0.20 11 0.73 41 0.07 4Construction 0.45 10 1.73 40 0.48 11Personalservices 0.46 46 2.49 247 -0.26 -25Otherservices 0.27 130 -0.03 -13 -0.10 -50total 6.57 43,840 0.69 4,591 1.05 6,997


Results

39

Table 11 ChangesinUSbilateralexportstoEUbysector,2027benchmark,limited

agreement,20percentdirectspill-overs


PercentMillioneuros

PercentMillioneuros

PercentMillioneuros


19.33 978 0.03 1 0.15 8

Otherprimarysectors

0.50 51 -0.04 -4 0.00 0

Processedfoods 39.82 2,173 0.03 2 0.11 6Chemicals 12.45 9,927 0.16 129 0.54 430Electricalmachinery

3.39 639 0.91 171 1.07 201

Motorvehicles 109.50 20,808 0.11 20 0.67 127Othertransportequipment

7.61 2,823 0.05 18 0.32 118

Othermachinery 12.10 5,659 0.16 75 0.28 129Metalsandmetalproducts

23.43 4,995 0.03 6 9.29 1,980


3.74 257 0.07 5 0.73 50

Othermanufactures

15.80 5,836 0.04 16 0.06 22

Watertransport -0.25 -1 2.90 17 0.11 1Airtransport -0.17 -29 0.74 125 0.08 14Finance -0.14 -35 2.16 546 0.66 166Insurance -0.24 -9 3.25 116 0.09 3Businessservices -0.36 -130 2.41 862 0.09 32Communications -0.18 -12 4.60 300 0.11 7Construction -0.31 -7 2.76 65 1.14 27Personalservices -0.42 -29 5.07 355 0.30 21Otherservices -0.23 -116 0.07 35 0.14 69total 12.36 53,777 0.66 2,859 0.78 3,411


Table12belowshowsthecorrespondingestimatedchangesintheEU’stotalexternal

trade (extra-EU). Overall, the tariff cuts are expected to cause total imports and

exports to increaseby1.18and1.00percentrespectively.Theinducedeffectsfrom

liberalisingtradeinservicesandprocurementaresmaller,rangingfrom0.13to0.19

per cent respectively.Nevertheless, exports in the insurance and finance sectors are

estimatedtoincreasebyabout2percentifservicesareliberalised.Meanwhile,finance,


40

communications,andpersonalservicesimportsareestimatedtoincreaseby1-1.8per

cent due to services liberalisation. Under tariff liberalisation, the highest increase

in importswould takeplace inmotorvehicleswitha9.21percent,while regarding

exportsthemostpronouncedincreaseisestimatedtotakeplaceinothermanufactures

witha5.50percentincrease.

Table 12 Changes in EU trade by sector (in per cent), 2027 benchmark, limited


Totalexports Totalimports

Tariffsonly ServicesonlyProcurement

onlyTariffsonly Servicesonly

Procurementonly

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros


0.58 1,303 0.00 3 -0.05 -102 2.64 1,342 0.10 52 0.17 85

Otherprimarysectors

-0.27 -363 0.03 35 0.01 11 0.52 3,643 0.01 98 0.01 47

Processedfoods 1.33 2,360 0.03 45 0.27 481 2.66 2,282 0.07 64 0.12 100

Chemicals 1.23 4,707 -0.01 -47 0.65 2,478 2.46 7,972 0.08 268 0.13 419

Electricalmachinery

-0.03 -26 -0.02 -15 -0.31 -292 0.39 1,357 0.01 23 0.01 24

Motorvehicles 3.70 8,399 -0.02 -43 1.47 3,340 9.21 16,799 0.11 193 0.22 404

Othertransportequipment

0.56 914 -0.02 -38 0.27 442 2.54 2,345 0.06 55 0.16 151

Othermachinery 1.73 10,359 -0.08 -487 -0.10 -611 0.82 3,969 0.14 685 0.03 126

Metalsandmetalproducts

2.70 3,720 -0.01 -18 1.15 1,589 1.18 4,156 0.06 214 1.45 5,111


0.16 222 -0.01 -17 -0.05 -72 0.67 438 0.11 74 0.29 189

Othermanufactures

5.50 11,957 0.02 34 -0.02 -36 -0.03 -250 0.05 523 0.04 412

Watertransport 0.10 47 0.22 100 0.03 14 -0.02 -8 0.31 118 0.05 21

Airtransport 0.14 110 0.21 162 0.01 9 -0.09 -84 0.21 203 0.05 51

Finance 0.09 87 2.00 1,864 0.00 2 0.09 63 1.02 695 0.32 221

Insurance 0.09 86 2.03 1,849 -0.03 -27 0.12 20 0.94 160 0.07 12

Businessservices 0.04 183 0.36 1,500 0.02 77 -0.08 -144 0.62 1,127 0.06 103

Communications 0.00 0 0.47 127 0.02 6 0.09 35 1.15 420 0.08 29

Construction -0.02 -13 0.27 176 0.00 -1 0.09 20 0.47 110 0.22 52

Personalservices -0.13 -138 0.50 552 -0.11 -117 0.15 41 1.84 487 0.21 55

Otherservices -0.06 -173 0.00 -4 -0.02 -53 0.12 341 0.06 173 0.10 267

Total 1.18 43,740 0.16 5,777 0.19 7,136 1.00 44,338 0.13 5,742 0.18 7,881


Results

41

ThereductionoftariffswillleadUSimportsandexportstoincreaseby1.91and1.13

percentrespectively(Table13).Thebiggestincreasesareestimatedtotakeplacein

theexportofmotorvehicles (15.43percent),chemicals (4.05percent),metalsand

metalproducts(4.33percent).AscanbeseenfromtheTable,theestimatedeffectsof

theliberalisationofservicesandprocurementontradearemuchsmaller.Thebiggest

changes in imports are also attributable to the reduction of tariffs,with the highest

sectorspecificincreasesexpectedtotakeplaceinprocessedfoodsandmetalsandmetal

productions(2.37percentand2.43percentrespectively)andmotorvehicles(2.13per

cent).Theliberalisationoftheservicessectorsishoweverestimatedtoincreaseimports

offinanceandinsuranceservicesbyaround3percent.


42

Table 13 Changes inUS trade by sector (in per cent), 2027 benchmark, limited


Totalexports Totalimports

TariffsOnly ServicesOnlyProcurement

OnlyTariffsOnly ServicesOnly

ProcurementOnly

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros

Percent

Mlneuros


0.29 1,386 0.00 -16 0.03 140 1.74 1,814 0.03 35 -0.08 -82

Otherprimarysectors

-0.09 -166 0.00 8 0.01 18 0.14 696 0.05 265 0.00 -2

Processedfoods 2.39 2,556 0.02 16 0.03 31 2.37 2,490 0.01 14 0.58 608

Chemicals 4.05 13,363 0.11 375 0.11 362 1.06 2,857 -0.06 -167 1.00 2,678

Electricalmachinery

-1.10 -1,534 0.76 1,061 0.59 826 0.94 3,994 -0.26 -1,106 -0.35 -1,467

Motorvehicles 15.43 23,826 0.05 80 0.31 477 2.13 8,879 0.01 25 0.91 3,773


1.55 2,688 0.02 34 0.18 305 1.08 929 0.02 18 0.55 473

Othermachinery 1.77 4,854 0.08 220 0.17 466 1.46 10,363 0.01 72 -0.14 -1,012


4.33 5,171 0.01 10 2.14 2,553 2.43 4,716 0.08 165 0.69 1,339


0.00 0 0.02 14 0.13 96 0.82 1,088 0.03 40 -0.11 -143

Othermanufactures

3.40 6,989 0.03 69 0.04 84 1.06 8,190 0.03 213 -0.03 -237

Watertransport 0.07 3 0.09 4 0.03 1 0.22 6 0.63 18 0.04 1

Airtransport 0.04 19 0.18 96 0.04 19 0.12 66 0.34 182 0.01 7

Finance -0.10 -78 0.98 736 0.27 203 0.26 156 3.14 1,903 -0.02 -13

Insurance -0.26 -85 0.68 222 0.03 9 0.31 191 2.81 1,716 -0.04 -26

Businessservices -0.29 -398 0.90 1,240 0.04 55 0.39 609 0.55 861 0.05 79

Communications -0.18 -36 2.07 411 0.05 11 0.24 36 0.32 48 0.02 3

Construction -0.33 -42 0.82 105 0.27 35 0.45 26 0.80 47 0.23 13

Personalservices -0.57 -429 0.95 712 0.13 98 0.60 124 1.43 298 -0.18 -38

Otherservices -0.28 -758 0.03 90 0.06 152 0.35 544 0.01 9 -0.06 -88

Total 1.91 57,330 0.19 5,488 0.23 5,943 1.13 47,775 0.57 4,655 0.14 5,868


Wenowturntoanalysingtheestimatedeffectsontheoutputofthedifferentsectors.

TheunderlyingchangesfortheEUandtheUSarepresentedinTable14andTable15

below.

Results

43

Table 14 Changes inEUoutputbysector(inpercent),2027benchmark, limited


Baselinesharesinvalueadded



0.040 0.03 0.00 0.00

Otherprimarysectors

0.019 0.00 0.00 0.00

Processedfoods 0.030 0.06 0.01 0.04Chemicals 0.028 -0.11 -0.01 0.12Electricalmachinery

0.004 -0.31 0.02 0.06

Motorvehicles 0.015 -0.65 -0.01 0.30Othertransportequipment

0.007 -0.26 -0.02 0.09

Othermachinery 0.037 0.35 -0.04 0.03Metalsandmetalproducts

0.021 0.03 -0.03 -0.39


0.023 0.06 0.00 -0.01

Othermanufactures

0.029 0.60 -0.01 0.01

Watertransport 0.003 0.14 -0.04 0.03Airtransport 0.003 0.15 -0.01 0.01Finance 0.032 0.06 0.11 -0.02Insurance 0.010 0.06 0.32 0.01Businessservices 0.222 0.05 0.01 0.02Communications 0.023 0.05 -0.03 0.01Construction 0.083 0.12 0.03 0.02Personalservices 0.035 0.04 0.02 0.00Otherservices 0.338 0.05 0.01 0.01


AscanbeseenintheTable14,thecorrespondingestimatedchangesinsectorspecific

outputareverysmall.Noneofthesectorswillexpandorcontractbymorethan1per

centinthecaseoftheEU,andinmostsectorsoutputwillbasicallyremainunchanged.

Similarly,onlyslightchangesareexpectedtotakeplaceinUSsector-leveloutputasa

consequenceofthenon-comprehensiveFTAsthatweresimulated.Inonlytwosectors

theoutputisestimatedtochangebymorethan1percent:intheelectricalmachinery


44

sectoritisestimatedtodecreaseby1.40percent,whileinmotorvehiclesitisexpected

toincreaseby1.76percent(oncetariffsarecut).

Table 15 Changes inUSoutputbysector (inpercent),2027benchmark, limited


Baselinesharesin

valueaddedTariffsOnly ServicesOnly

ProcurementOnly

Agrforestryfisheries 0.031 -0.02 0.00 0.00Otherprimarysectors 0.023 -0.01 0.00 0.00Processedfoods 0.017 0.06 0.02 -0.06Chemicals 0.021 0.81 0.07 -0.27Electricalmachinery 0.003 -1.40 0.64 0.73Motorvehicles 0.010 1.76 0.05 -0.56Othertransportequipment

0.009 0.38 0.03 -0.07

Othermachinery 0.027 -0.38 0.07 0.13Metalsandmetalproducts

0.014 0.15 0.05 0.07


0.023 -0.05 0.03 0.02

Othermanufactures 0.010 0.05 0.02 0.00Watertransport 0.002 0.04 0.03 0.02Airtransport 0.004 0.00 0.00 0.02Finance 0.074 0.00 -0.11 0.01Insurance 0.020 -0.04 -0.27 0.01Businessservices 0.099 -0.01 0.01 0.00Communications 0.019 0.00 0.06 0.01Construction 0.080 0.09 0.04 0.01Personalservices 0.036 -0.01 0.04 0.02Otherservices 0.480 -0.02 0.00 0.00


Whilethenon-comprehensiveFTAoption,whichwouldbelimitedtoeithertariff,or

servicestrade,orprocurementliberalization,wouldresultinpositivechangesinsector-

leveloutputandtradepatterns,thesebenefitswouldberelativelysmall.Atanaggregate

level,thechangeswouldbeevensmaller.Whencomparingtheimpactofthesenon-

comprehensiveFTAswithacomprehensiveFTAthatwillbediscussedinthefollowing

section,itisclearthattheoverallbenefitswouldbeofmuchlargermagnitudeinthe

caseofatradeagreementthatcoversmorepolicypillarssimultaneously.

Results

45

5.2. Full FTA

5.2.1. Macro Results

Here,weturntothediscussionofeffectsonmacroeconomicvariables,resultingfrom

a reductionofbarriers to tradeand investmentbetween theEUand theUSundera

comprehensiveFTA(seeTable4fordetails).Insodoing,wepresenttheresultswith

regards to GDP.13As indicated above two FTA scenarios are considered: one less

ambitiousandonemoreambitious(asdescribedinTable4).

Table16andTable17belowshowtheestimatedeffectonGDPbothfortheambitious

andlessambitiousscenariosfortheEUandtheUS.Theresultsarepresentedforthe

totalimpactandalsodecomposedintothedifferentsubcomponentsthatcorrespondto

theseveralpolicypillars,namelytariffs,totalNTBsongoods,totalNTBsonservices,

directandindirectspill-overs,andprocurement.Procurementrelatedbarriersareinfact

capturedbytheNTBsingoodsandinservices.Aprocurementcolumnisintroduced

inthetablebelowinordertohighlighttheimportanceofthistypeofbarriersinthe

negotiations.However,itisimportanttonotethattheimpactofreducingprocurement

barriersshouldnotbeaddedtotheeffectsfromotherpillarsasitwouldmeandouble-

counting.

AscanbeseenTable16,theestimatedimpactonGDPfortheEUandUSrangebetween

0.2 and 0.5 per cent, for the less ambitious and ambitious scenarios respectively.

BecausewearedealingwithNTBsratherthantariffs,changesintradevolumesalone

arenotnecessarilyindicativeofthenetimpactonGDP,andsothereaderiscautioned

whencomparingTable16toTable20(changesinexports)below.Thisisbecause,as

13 Theannextablesalsoreportchangesinrealnationalincome.GDPisreportedherebecauseitisaconceptthatwillbemorefamiliartothereader.GDPisthevalueofafixedbasketoffinalgoodsandservicesproducedbytheeconomy.Realnationalincome,ontheotherhand,isameasureoftheactualpurchasingpoweravailableforfinalconsumption,givenchangesinbothoutputandprices. Realnational incomebettercapturesshifts in theeconomytowardamoreefficientbasketofgoodsandservices,aswellaschanges in finalconsumptionprices. Usually these twomeasurestrackeachotherclosely.However,whenthecurrentpatternofGDPreflectsstrongunderlyingdistortions,realnationalincomeisabettermeasureofthebenefitstotheagentsintheeconomy.


46

discussedearlierinthereport(seeChapters2and3),NTBsinvolvehighercostsand

solowerproductivity.TheimpactonGDPwillthereforehinge,inpart,oncostsavings

linkedtoremovingNTBs.Basically,withNTBsthatraisecoststheopportunitycosts

ofnewexportsresultingfromNTBreductionarelowerthanwithtariffs,sothatthecost

sideofthecost-benefitanalysisofincreasedtradeislower.TheimpactonGDPwill

alsohingeonthevalueaddedcompositionofexports.Assuch,eveniftradevolume

effects arenot relatively large in aparticular sector (recall ourdiscussionofFigure

10), theymaystillyield relatively largegainsoverall.The indirectspill-overeffects

aremorecomplexstill(thoughsmallinabsoluteterms).Therewillbebothincreased

incomeandtradeinthirdcountries(fromtheothersetsofresultsdiscussedhere),along

with improvedaccessconditions to thirdmarkets. However, there isalso scope for

somediversionoftradeawayfromtheUSandEUandtowardintra-thirdcountrytrade.

Thetotalimpactdependsonallthesethings,andthedirectionisunknownapriori.

Table 16 ChangesinGDP(inpercent),2027benchmark,20percentdirectspill-

overs

A=B+C+D+E+F

B C D E F G

Total

Stemmingfromtheliberalisationof

tariffstotalNTBsgoods

totalNTBsservices

directspill-overs

indirectspill-overs

procurement

Less ambitious experiment EuropeanUnion 0.27 0.10 0.12 0.01 0.03 0.01 0.02UnitedStates 0.21 0.04 0.11 0.03 0.03 0.00 0.01Ambitious experimentEuropeanUnion 0.48 0.11 0.26 0.03 0.07 0.02 0.05UnitedStates 0.39 0.04 0.23 0.06 0.06 0.00 0.03


Results

47

Analternativemeasure of aggregate results is provided inTable 18below,where a

comparisonisprovidedacrossscenariosofhouseholdincomeeffectsfortheEUand

US.14Startingwiththelimitedscenarios,atariffonlyscenarioyields€12.9billionin

disposable incomegainsacrossEuropeanhouseholds,and€5.1billionindisposable

income gains for US households. The services and procurement agreements yield

substantiallylessforEuropeanhouseholds,whiletheservicesonlyagreementyieldsthe

mostforUShouseholdsunderthelimitedscenarios.Theseeffectsarefaroutweighed

underboththelessambitiousandmoreambitiouscomprehensivescenarios.Herewe

have estimated gains to disposable income acrossEuropean households of between

€39.8billionand€70.82billion.IntheUS,householddisposableincomeincreaseby

between€29.9and€58.4billion.Forafamilyof4thecomprehensivescenariosyield

disposableincomegainsbetween€306and€545annuallyintheEUandbetween€336

and€655intheUS.

Table 17 ChangesinGDP(inmillioneuros),2027benchmark,20percentdirect

spill-overs

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspill-overs

indirectspill-overs

procurement

Less ambitious experiment EuropeanUnion 68,274 25,394 29,250 3,482 7,984 2,164 6,069UnitedStates 49,543 9,784 25,505 6,899 7,404 -72 3,341Ambitious experiment EuropeanUnion 119,212 27,409 64,344 7,014 16,291 4,154 12,312UnitedStates 94,904 10,120 56,202 14,014 14,760 -216 6,707


14 Householddisposableincomeisasubsetoftotalincome(itislessthantotalnationalincome).Itrepresentstheincomeavailabletospendonfinalconsumption(food,clothing,transport,housing),afterallocationstothegovernmentandforsavings.Changesinthisvariablethereforemeasurethechangesinprivateconsumptionvaluedatcurrentprices.”


48

Table 18 Householddisposableincome,millioneuro,2027benchmark

limited

agreement:tariffsonly

limitedagreement:servicesonly

limitedagreement:procurement

only

comprehensiveagreement:low

ambition

comprehensiveagreement:

highambition

totalEU,mill.euro 12,934 3,089 4,295 39,813 70,820US,mill.euro 5,081 4,122 2,246 29,982 58,434EU,percent 0.09 0.02 0.02 0.28 0.49US,percent 0.03 0.02 0.01 0.18 0.35EU,€perhousehold

99 41 49 306 545

US,€perhousehold

57 82 21 336 655

Source:CGEcalculations.Perhouseholdestimatesareforafamilyof4.

Theexactamountoverall,asreportedinTable16,dependsonthecombinationofvalue

added,barrier levels, andunderlyingelasticities. It alsohingeson linkagesbetween

sectors, and final demand responses to price changes. Indeed this is the reason for

workingwithaCGEframework–wearethenbetterabletocapturethecombinationof

theseeffectsacrosssectors.InthecaseoftheEU,ifwereferbacktoTable2,combined

withtheunderlyingbilateraltradebalancebysector(Figure1),theEUhasastrong,

positivebalanceingoodssectorswithrelativelyhighNTBlevels.Thismeansthaton

averageEuropeanfirmsfaceahighercostburdenlinkedtotransatlanticNTBsthando

USfirms,sothatthereductioninthecostburdenlinkedtoNTBswillbesomewhat

disproportionateaswell,benefitingEuropeanfirmsmoreonaverage.Assuch,wecan

expectsomewhatgreaterbenefitsfromimprovedmarketaccessfortheEUthanforthe

US.ThisisreflectedintheresultinTable16andTable17.Indeed,wherewehavea

similarchangeintradevolumes,thispositivebalancemeanstheEUwillbenefitmore

intermsofGDP.ThisisreflectedintherelativemagnitudesoftradeandGDPeffects

inTable16(above)andTable20(below).

For the US, around three quarters of the estimated increase in GDP, across both

scenarios, stemfrom the loweringofNTBs.For theEU,NTBs ingoodsare shown

tobeaccountableforaroundhalfof the increase,while lowering tariffs isshownto

belessimportant.Again,thisisconsistentwiththepatternoftrade,NTBsandtariffs

Results

49

asdiscussed inChapter2.Whenviewing these tables, it is alsouseful to recall the

observationmade in Chapter 4 about the relatively low level of perceived bilateral

barriers in services, combinedwith a 65 per cent share of goods in bilateral trade.

Together,thehigherbarriersandtradeshareforgoodsimplythatmostgainswillfollow

fromNTBsandtariffsongoods.Similarly,theoriginalEcorys(2009)studycovered

limitedaspectsofprocurement,andthebarriersidentifiedwererelativelyminorasa

shareoftotalprotection.Assuch,itisnotsurprisingthattheprocurementestimatesare

relativelysmallasashareofthetotal.

Insummary,theseresultshighlightthatthepotentialmainimpactfromliberalization

stemsmorefromNTBliberalization(especiallyincludingspill-overs)ratherthanjust

reducingtariffbarriers.

5.2.2. Output and Trade

Next,wetakeacloserlookatthecorrespondingchangestotradeandoutputforthe

EUandtheUS.First,welookattheoveralleffectsonimportsandexportsandthenwe

moveontostudyingtheeffectsonamoredisaggregate,sectorspecificlevel.

5.2.2.1. Aggregate Effects

AscanbeseenfromTable19below,liberalisingtradewouldimplysomesignificant

increasesinEU-UStrade.Inthelessambitiousscenario,EUexports to theUSwill

increaseby16percentwhileUSexports to theEU increaseby23percent. In the

ambitiousscenario,thecorrespondingfiguresare28and37percent.Abouttwothirds

oftheincreaseinbilateraltradeintheambitiousexperimentisattributabletoreducing

NTBsingoodssectors.Changesintariffsarealsoimportant,thoughasdiscussedabove

agivenchangeintradetranslatesintogreaterGDPeffectswithNTBs.


50

Table 19 Changesinbilateralexportstothepartnercountry(inpercentandmillion

euros),2027benchmark,20percentdirectspill-overs

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspill-overs

indirectspill-overs

procurement

InpercentLess ambitious experiment EuropeanUnion 16.16 7.06 9.34 0.69 -0.76 -0.15 1.04UnitedStates 23.20 13.67 8.80 0.67 0.01 0.02 0.78Ambitious experiment EuropeanUnion 28.03 7.67 21.00 1.40 -1.73 -0.34 2.13UnitedStates 36.57 15.34 19.93 1.37 -0.08 0.03 1.62

InmillioneurosLess ambitious experiment EuropeanUnion 107,811 47,083 62,289 4,598 -5,089 -989 6,957UnitedStates 100,909 59,476 38,284 2,934 57 77 3,410Ambitious experiment EuropeanUnion 186,965 51,185 140,106 9,332 -11,525 -2,243 14,211UnitedStates 159,098 66,720 86,698 5,966 -335 151 7,043


Table20andTable21provideestimatesfortotal(asopposedtobilateral)trade.For

theEU,totalexportsareexpectedtoincreaseby3.37to5.91percentundertheless

ambitiousandambitiousscenariosrespectively.Similartotheresultspresentedinthe

previoussection, the loweringofNTBs ingoods isshowntobe themost important

factorinincreasingexports,followedbytheloweringoftariffsonexportstotheUS.

Results

51

Table 20 Changesinvalueoftotalexports(inpercentandmillioneuros),extra-EU

exportsincaseoftheEU,2027benchmark,20percentdirectspill-overs

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspill-overs

indirectspill-overs

procurement

InpercentLess ambitious experiment EuropeanUnion 3.37 1.28 1.43 0.11 0.25 0.28 0.19UnitedStates 4.75 2.11 1.69 0.16 0.52 0.27 0.23Ambitious experiment EuropeanUnion 5.91 1.41 3.23 0.23 0.48 0.56 0.42UnitedStates 8.02 2.34 3.79 0.33 1.01 0.54 0.48

InmillioneurosLess ambitious experiment EuropeanUnion 125,232 47,577 53,341 4,211 9,442 10,564 7,163UnitedStates 142,071 63,219 50,600 4,717 15,505 8,031 5,943Ambitious experiment EuropeanUnion 219,970 52,327 120,313 8,523 18,010 20,959 15,620UnitedStates 239,543 70,265 113,630 9,624 30,042 15,982 14,202


FortheUS,thecorrespondingeffectonexportsislarger.Theyareestimatedtoincrease

by4.75and8.02percent respectively for the two liberalizingscenarios. In the less

ambitiousscenario,theloweringoftariffsisaccountableforaroundhalfofthatincrease.

Inthecaseofthemoreambitiousscenariothemostimportantcontributioncomesfrom

theloweringofNTBsingoods.Meanwhile,theloweringoftariffsisstillshowntobe

animportantfactorinrealizingtheseincreasesintrade.It is important torecall that

theEUhashightariffsonmotorvehiclesandprocessedfoods.Thisdrivespartofthe

largerexportgainfortheUSinthetablesabove.Theestimatedeffectsalsotellusthat

spill-overeffectsaremoreimportantfortheUSthantheyarefortheEU.(Seecolumns

E inboth tables). Thisdifference isdue inpart todifferences in the importanceof

tradewiththirdcountriesfortheUSandtheEU.Whenwelookatunderlyingbaseline

tradeflows,fortheUSthefirstmostimportantimportpartnerisChina.TheEUcomes

secondasasourceofimports.Furthermore,NAFTAcountriesarealsoveryimportant


52

tradingpartners for theUSoverall. IncolumnE inboth tables,givendifferences in

tradecompositiontheNTB-relateddirectspilloversyieldfallingcostsfromspill-overs

foralargershareofimportsinthecaseoftheUScomparedtotheEU.Thisiswhy

weseeahigherimpactduetothesespill-oversfortheUS.FortheEU,theestimated

changesintotalimportsaresimilartotheestimatedchangesinexports.Theincrease

isexpectedtobeintherangeof2.91and5.11percent,withNTBsingoodsbeingthe

mostimportantliberalizingmeasure.OnelastpointonthepatternofresultsinTable20

andTable21relatestoexportexpansionlinkedtodirectspillovers.Itisacommon(and

evenexpectedresult)insuchmodellingexercisesthatincreasedimports(incolumnE,

forexample,forreductionin tradecostsfor thirdcountriesexportingto theUSand

EU)therewillalsobeincreasedexports.Withmoredirectcompetitionfromimports,

domesticfirmsfindforeignmarketsrelativelymoreattractive,suchthatexportsreflect

arelativeshifttowardoverseasmarkets.

Table 21 Changesinvalueoftotalimports(inpercentandmillioneuros),extra-EU

importsincaseoftheEU,2027benchmark,20percentdirectspill-overs

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspill-overs

indirectspill-overs

procurement

InpercentLess ambitious experiment EuropeanUnion 2.91 1.09 1.22 0.10 0.23 0.27 0.18UnitedStates 2.81 1.25 1.00 0.09 0.31 0.16 0.14Ambitious experiment EuropeanUnion 5.11 1.20 2.75 0.20 0.44 0.52 0.36UnitedStates 4.74 1.39 2.24 0.19 0.60 0.32 0.28

InmillioneurosLess ambitious experiment EuropeanUnion 128,424 48,239 53,892 4,259 10,207 11,827 7,907UnitedStates 118,840 52,678 42,231 4,011 13,081 6,839 5,868Ambitious experiment EuropeanUnion 225,899 53,071 121,548 8,624 19,544 23,113 15,953UnitedStates 200,519 58,543 94,830 8,183 25,351 13,611 11,896


Results

53

For theUS, importswill increaseby2.81and4.74percentrespectively.In the less

ambitiousscenario,thetariffcutsareshowntobethemostimportantdrivingfactor.

Meanwhile,inthemoreambitiousscenario,loweringofNTBsingoodsprovidesthe

biggestcontributiontothechangesinimports.

Termsoftradeforacountryreflecthowmuchitsexportsareworthintermsofimports.

Thusanimprovement(orapositivechange)inacountry’stermsoftradewillimplythat

itcanaffordtobuymoreimportsforeveryunitofitsexportssold.Thecorresponding

changesintermsoftradearesummarizedinTable22below.

Table 22 Changesintermsoftrade(inpercent),2027benchmark,20percentdirect

spill-overs

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement

Less ambitious experiment EuropeanUnion 0.00 -0.01 0.04 0.00 -0.05 0.02 0.00UnitedStates -0.08 0.05 -0.04 -0.01 -0.11 0.03 -0.02Ambitious experiment EuropeanUnion 0.01 -0.02 0.09 0.00 -0.10 0.03 0.00UnitedStates -0.19 0.07 -0.08 -0.02 -0.21 0.05 -0.04


AscanbeseenfromTable22, the resultingchanges in termsof tradeare relatively

small.For theEU,termsof tradeareexpectedtoremainessentiallyunchanged.For

theUS,termsoftradeareshowntodecreasesomewhat.Inthelessambitiousscenarios

they are expected to decrease by 0.08 per cent. Under the ambitious scenario, the

Americantermsoftradeareexpectedtodecreaseby0.19percent.Asdiscussedabove

withrespecttoTable20,thisdecreaseislargelyattributabletodirectspill-overs,and

is linked to the underlying estimated trade volume effects.TheUS has a relatively

largerimportsharewiththirdcountries(especiallyChinaandCanada)ingoodssectors

affectedbyNTBreductionsthandoestheEU.Thisleadstoagreaterimpactwhenwe


54

examinedirectspill-overs.AsNTBsarereducedalsointradewiththesethirdcountries,

increasedUSdemanddrivestheslightdeteriorationintermsoftrade.

Lowering of tariffs naturally implies that tariff revenues in the EU will decrease

somewhat.AscanbeseenfromthefirstrowofTable23,the2027benchmarkvalueof

tariffscollectedis78.7billioneuros.Reducingtariffsalonewouldcausetheserevenues

todecreaseby7.3billioneuros,relativetobaselinesituationin2027.Ontheotherhand

undertheambitiousandlessambitiousscenarioswithfullliberalisation,tariffrevenues

woulddecreasesbyless–5.4billioneurosand6.4billioneuros,respectively.Thisis

duetoincreasedtradewiththirdcountriesfromfurtherliberalisation(withspill-over

effects,orinotherwordstheloweringofpartoftheNTBsonaMFNbasis)relativeto

tariffsonly,whichwouldresultinadditionaltariffrevenues.

Table 23 ChangeinEUtariffrevenue(inmillioneuros),2027benchmark

changeBenchmark 78,733 ambitious,20percentspill-overs

73,340 -5,393

lessambitious,20percentspill-overs

72,372 -6,361

tariffsonly 71,386 -7,347


Anotherpotential impactof theTransatlanticFTAis that the lowerbarriers to trade

withtheUSwillcauseashift inrelativecosts leadingtodivertingsometradeaway

fromintra-EUpartnerstowardsnewtradepartners(seeTable24).Inthetable,wehave

definedtradediversionasthechangeinintra-EUtradefollowingimplementationofan

FTA.Thischangewillamountto72.1billioneurosunderfullliberalization,ofwhich

26.0and23.6billioneurosarecausedbyspill-oversandNTBsingoodsrespectively.

Meanwhile,NTBsinservices,indirectspill-oversandprocurementhaveaminorrole

inredirectingtrade.Halfoftheestimatedtradediversioneffect(thechangeinintra-EU

tradeflows) isattributable to themotorvehiclessector.For thissector, the lowering

oftariffsisshowntobethemostimportantcontributingfactor,togetherwithNTBsin

Results

55

goodsanddirectspill-overs.Sometradediversionisalsovisibleinchemicals,electrical

machineryandmetalsandmetalproducts.

Table 24 Tradedivertedfromintra-EUtrade(inmillioneuros),2027benchmark,20

percentdirectspill-overs,ambitiousexperiment

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement


269 -101 319 17 -50 84 50

Otherprimarysectors

345 234 -89 0 278 -78 11

Processedfoods -425 -164 425 65 -851 98 131Chemicals -13,208 -3,641 -2,356 -214 -7,282 286 214Electricalmachinery

-12,829 -376 -2,847 61 -9,073 -594 206

Motorvehicles -36,517 -13,423 -10,551 -59 -12,016 -469 996Othertransportequipment

-2,468 -583 -1,572 -8 -262 -42 25

Othermachinery 492 -431 -3,692 -308 6,583 -1,661 431Metalsandmetalproducts

-11,464 -1,196 -4,185 -176 -4,642 -1,266 -4,114


-799 183 -365 23 -685 46 0

Othermanufactures

2,087 1,131 -261 -43 2,174 -913 174

Watertransport -35 41 26 -19 -118 35 10Airtransport 76 97 35 -62 14 -7 14Finance 129 60 103 0 -51 17 -51Insurance 84 18 36 20 5 5 8Businessservices 1,068 276 827 0 -138 103 172Communications 53 25 53 -25 -8 8 8Construction 131 36 77 8 0 11 11Personalservices 124 39 79 -28 17 17 17Otherservices 795 179 308 26 154 128 51Total -72,092 -17,596 -23,631 -722 -25,952 -4,192 -1,636



56

Overall,EUexportstonon-US,extra-EUdestinationsareexpectedtoincreaseby33.3

billioneuros(seeTable25).Fromthemodelestimatesreportedinthetable,thisincrease

isattributabletospill-overeffects(directandindirect).(Thepositiveoveralltradeeffect

fromremovingtariffsis1.1billioneuros,whichisessentially0.0percent).Thebilateral

loweringofNTBsingoodscausesexportstonon-US,extra-EUpartnerstoshrinkas

tradeisdivertedawayfromthesepartnerstowardtheUSwithEUexportsbecoming

relativelymore competitive in theUSmarket due the reduction in trade costs (that

wouldstillapplyinthirdcountries).Nevertheless,withdirectandindirectspill-overs,

thecostsofexportingtothirdcountrieswillalsofallandwillleadtoincreasedtrade

beyondthetransatlanticmarket.Asaconsequence,withtheexceptionofagriculture,

forestryandfisheriesandelectricalmachinery,exportsinallsectorsareestimatedto

increasetowardsdestinationsoutsidethepotentialFTA.

Results

57

Table 25 ChangeinEUexportstonon-US,extra-EUdestinations(inmillioneuros),

2027benchmark,20percentdirectspill-overs,ambitiousexperiment

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement


-1,270 -736 -1,562 -51 1,180 -100 -154

Otherprimarysectors

250 -416 -5 30 211 430 95

Processedfoods 3,247 -51 404 27 79 2,789 98Chemicals 5,591 346 1,753 -15 -503 4,009 331Electricalmachinery

-2,551 -82 -1,352 3 -2,018 898 73

Motorvehicles 7,559 552 -2,333 -20 3,475 5,886 -58Othertransportequipment

1,074 359 -1,050 -64 1,210 619 -146

Othermachinery 1,422 1,075 -9,718 -547 13,680 -3,068 382Metalsandmetalproducts

4,139 85 -1,575 -53 3,391 2,292 620


2,454 -119 -995 -49 1,312 2,305 -58

Othermanufactures

2,243 620 -518 68 1,915 158 108

Watertransport 951 58 230 0 279 384 52Airtransport 810 67 56 -53 278 462 21Finance 552 -12 222 11 -94 424 44Insurance 406 10 -143 5 199 334 -9Businessservices 2,808 -75 -529 16 1,311 2,086 34Communications 295 -6 7 2 42 250 14Construction 336 -17 -357 -21 480 251 -1Personalservices 898 -143 -1,540 -64 1,313 1,332 -139Otherservices 2,065 -374 -789 -31 1,797 1,461 106Total 33,277 1,142 -19,794 -809 29,535 23,202 1,409



58

EUimportsfromnon-US,extra-EUsourcesareestimatedtoincreasebytwiceasmuch

asexports,i.e.66.9billioneuros(seeTable26).Halfofthisincreaseoriginatesfrom

theloweringofNTBsingoods.Spill-oversarealsoshowntobeimportantcontributors.

As noted abovewith respect toTable 20 andTable 21, increased competition from

importscanbeexpectedtopushdomesticfirmstofocusmoreonoverseasmarkets,

at least inrelativeterms.Ontheotherhand, loweringoftariffsbetweentheEUand

US decreases the imports from outside the FTA, switching imports towards intra-

FTApartners.Importsinallsectors(withtheexceptionofothermachineryandother

manufactures) increase.Thebiggest increases in totalareestimated to takeplace in

electricalmachinery,motorvehiclesandmetals.15

15 Onapercentbasis,rankingoftotalchangesissomewhatdifferent.Thegreatestincreasesareinmotorvehicles(7.83percent),woodandpaper(7.53percent)andprocessedfoods(5.72percent).

Results

59

Table 26 ChangeinEUimportsfromnon-USextra-EUsources(inmillioneuros),

2027benchmark,20percentdirectspill-overs,ambitiousexperiment

A=B+C+D+E+F

B C D E F G

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement


1,538 390 1,081 53 -344 358 153

Otherprimarysectors

7,282 3,830 345 86 3,151 -131 98

Processedfoods 4,579 102 1,388 70 2,448 570 189Chemicals 1,831 -2,481 -5,227 197 8,688 654 -35Electricalmachinery

12,006 646 -4,452 -363 14,433 1,742 -338

Motorvehicles 12,781 -6,391 2,514 288 13,816 2,553 550Othertransportequipment

6 -529 -275 53 341 416 84

Othermachinery -330 -2,097 15,419 961 -19,126 4,513 13Metalsandmetalproducts

15,705 -1,343 3,710 285 9,846 3,207 6,197


4,366 153 1,544 105 1,906 659 271

Othermanufactures

-36 -6,456 10,162 736 -10,628 6,151 783

Watertransport 527 -10 315 -10 62 169 42Airtransport 492 -52 670 -39 -326 239 71Finance 735 100 603 -28 -118 178 113Insurance 237 28 216 12 -72 53 18Businessservices 1,094 -73 1,816 -5 -1,286 641 129Communications 482 46 396 -10 -61 112 48Construction 257 24 341 21 -203 74 51Personalservices 581 52 657 23 -271 121 68Otherservices 2,732 411 3,628 222 -2,376 847 404Total 66,864 -13,649 34,850 2,658 19,879 23,127 8,910



60

5.2.2.2.SectorSpecificEffects

Wenowturntotakeacloserlookatthesector-specificeffectsunderlyingtheaggregate

economicimpactsreportedabove.First,welookatthechangesinoutputandthenwe

moveontotheestimatedchangesintrade.

Table 27 ChangesinEUoutputbysector(inpercent).2027benchmark,20percent

directspill-overs

Scenario/SectorBaselinesharesin

valueaddedLessambitious Ambitious

Agrforestryfisheries 0.040 0.05 0.06Otherprimarysectors 0.019 0.01 0.02Processedfoods 0.030 0.30 0.57Chemicals 0.028 0.09 0.37Electricalmachinery 0.004 -3.74 -7.28Motorvehicles 0.015 0.24 1.54Othertransportequipment 0.007 -0.17 -0.08Othermachinery 0.037 0.40 0.37Metalsandmetalproducts 0.021 -0.71 -1.50Woodandpaperproducts 0.023 0.08 0.08Othermanufactures 0.029 0.69 0.79Watertransport 0.003 0.55 0.99Airtransport 0.003 0.30 0.44Finance 0.032 0.23 0.42Insurance 0.010 0.44 0.83Businessservices 0.222 0.15 0.25Communications 0.023 0.10 0.17Construction 0.083 0.31 0.53Personalservices 0.035 0.15 0.26Otherservices 0.338 0.16 0.28


The results reported inTable27 show that the sector output changes in theEUare

ingeneralsmall.Productionin theprimarysectors isalmostunaffected,while there

isasmall increaseacrossallservicessectors.Inmanufacturingthereisalsoasmall

increaseinoutputwithsomeexceptions.Themostnotablecanbefoundinelectrical

machinery,whereoutputisexpectedtodeclineby3.74and7.28percentintheless

ambitiousandthemoreambitiousscenariosrespectively.(Wereturntotheelectrical

Results

61

machineryestimateswhenwediscussFigure11.)Incontrast,theEUproductionof

motorvehiclesisexpectedtoincreaseby0.24and1.54percentinthelessambitious

andambitiousscenarios,respectively.IfwecompareTable27withTable14,itisclear

thatthereductionsofNTBsingoodsandinservicesareimportantdriversofchanges

atsectorlevel.Forexample,formotorvehicles,tariffreductionsaloneharmtheEU

motorvehiclesector,withfallingoutputlevels.Incontrast,withNTBreductions,the

sectorexpands.Thisisstrongestundertheambitiousscenario,withthedeepestNTB

reductions(halfofactionableor25%oftotalNTBs).

Table 28 ChangesinUSoutputbysector(inpercent),2027benchmark,20percent

directspill-overs

Scenario/SectorBaselinesharesinvalue

addedLessambitious Ambitious

Agr,forestryfisheries 0.031 -0.01 0.00Otherprimarysectors 0.023 0.02 0.05Processedfoods 0.017 -0.52 -1.13Chemicals 0.021 0.25 -0.40Electricalmachinery 0.003 -2.03 -2.04Motorvehicles 0.010 -0.57 -2.78Othertransportequipment

0.009 0.62 0.83

Othermachinery 0.027 0.71 1.66Metalsandmetalproducts

0.014 0.27 0.45


0.023 -0.04 -0.02

Othermanufactures 0.010 0.17 0.26Watertransport 0.002 0.22 0.42Airtransport 0.004 0.19 0.39Finance 0.074 -0.06 -0.11Insurance 0.020 -0.24 -0.44Businessservices 0.099 0.03 0.07Communications 0.019 0.15 0.32Construction 0.080 0.23 0.39Personalservices 0.036 0.18 0.38Otherservices 0.480 0.09 0.18



62

FortheUS,thechangesinsectorspecificoutputarealsofoundtobesmall,withall

theservicessectorschanginglessthanonepercent(Table28).Financeandinsurance

sectorswillcontract,howeverthereductionislessthanhalfapercent,whichimplies

no significant change.Withinmanufacturing, processed foods, electricalmachinery

andmotorvehiclesareexpectedtoseeanoutputdecline,whileintheothersectorsit

willexpand,albeitquite limitedly.Overall theresultingpatternofoutputchanges is

similarinthetwoscenarioswiththesamesectorsexpandingandcontracting.

Figure11belowpresentsabreakdownofthesourcesofchangeacrossselectedsectors

for the EU, under the ambitious scenario.We have focused on some of the largest

changes,fulldetailisprovidedintheannextables.Thelargestnegativeimpactisin

electricalmachinery.16From the figure, almostallof thischange isdrivenbydirect

spill-overs.Ifwecontrastelectricalmachineryandmotorvehicles,wecanalsoseethat

bilateralNTBreductionandspill-oversworkinoppositedirectionsinthetwosectors.

In the electrical machinery sector, bilateral NTB reduction and direct spill-overs

reinforceeachother.Incontrast,inmotorvehicles,bilateralNTBreductionsleadtoan

expansionoftheEUmotorvehiclesector.Thisexpansionisverystrong,andoutweighs

negative effects linked to spill-overs. In other machinery, direct spill-overs support

expansionofthesector,inthiscaseoffsettingtheeffectsofbilateralNTBreductions.

Chemicalsaresimilar,intermsofthepatternofresults,tomotorvehicles.Inservices,

weseethatforfinancialservicesbilateralNTBreductionmatters.Fortransport,itis

indirectspill-oversthatmatterthemostduetoanexpansionofglobaltradevolumes

(withindirectspill-overs)thatbenefitstheEUshippingindustry.Itmustbestressed

thatthesearegeneralequilibriumeffects.Intheothermachinerysector,forexample,

changesinNTBsinothersectorsaredrivingthechangeinoutput.(SeetheNTBlevels

inTable2).Thisismissedcompletelyifwelookatthesectorinisolation(i.e.partial

ratherthangeneralequilibrium.)Withthecomplexmixofchangesinbarriersacross

sectors, combinedwith intermediate linkages, the finalmix of outcomeswill hinge

16 FromtheoriginalEcorysstudy,thissectormapsto“Electronics&OfficeInformation&CommunicationEquipment.”Therewillbeothermachinerymadebyaffectedfirmsthatiscoveredbythe“OtherMachinery”sectorinthemodel.

Results

63

oninteractionsacrosssectors.Hence,whilewecansaythatbilateralNTBsaremost

important in agiven case, thismay follow fromgeneral equilibriumchanges rather

than changes limited to a particular sector.Another exampleof this point relates to

electricalmachinery.TheestimatedimpactontheEUindustrywereporthereissimilar

inmagnitudetotheoriginalEcorysestimates.TheEcorysstudyprovidesadifferent

andvaluabledecomposition(sector-specificvs.overallliberalization),andreportsthat

thedrop inoutput in this sector is actuallydrivenby liberalization inother sectors,

whichthendrawsresourcesintoexpandingsectors.

Figure 11 DecompositionofEUoutputchanges,ambitiousscenario


Wenowmovetolookingatthecorrespondingchangesinsector-leveltrade.Insodoing,

wefirstpresentthechangesforsectorspecifictradefortheEU,whicharesummarized

inTable29below.Thefirstfourcolumnsdepictchangesinexportsandthelastfourfor

importsforthelessambitiousandambitiousscenariosrespectively.


64

Table 29 Changesinextra-EUexportsandimportsbysector(inpercentandmillion

euros),2027benchmark,20percentdirectspill-overs

Totalexports TotalimportsScenario/Sector Lessambitious Ambitious Lessambitious Ambitious

PercentMillioneuros

PercentMillioneuros

PercentMillioneuros

PercentMillioneuros


0.41 936 0.22 490 3.84 1,953 5.22 2,657

Otherprimarysectors

-0.02 -29 0.24 313 0.78 5,424 1.05 7,322

Processedfoods 5.21 9,252 9.36 16,620 6.26 5,364 10.07 8,628Chemicals 5.07 19,368 9.26 35,405 5.67 18,376 9.01 29,183Electricalmachinery

0.04 35 -0.01 -10 3.10 10,706 5.87 20,298

Motorvehicles 20.11 45,699 41.75 94,857 24.14 44,039 43.11 78,626Othertransportequipment

3.26 5,357 6.10 10,032 6.72 6,208 11.21 10,353

Othermachinery 1.68 10,072 1.47 8,810 1.05 5,055 1.54 7,418Metalsandmetalproducts

7.15 9,875 12.07 16,656 5.25 18,552 9.76 34,483


2.16 2,936 4.19 5,694 5.65 3,673 11.20 7,277

Othermanufactures

5.82 12,663 6.13 13,327 0.26 2,586 0.63 6,132

Watertransport 1.08 498 2.11 970 0.70 265 1.49 565Airtransport 0.79 621 1.45 1,142 0.35 339 0.86 832Finance 2.20 2,046 4.37 4,068 1.45 996 2.92 2,000Insurance 2.08 1,895 4.11 3,741 1.46 249 2.92 499Businessservices 0.55 2,290 1.04 4,354 0.76 1,366 1.68 3,024Communications 0.64 172 1.27 342 1.58 576 3.20 1,164Construction 0.33 211 0.64 410 0.87 203 1.79 416Personalservices 0.52 568 1.02 1,126 2.83 749 5.84 1,545Otherservices 0.26 767 0.55 1,623 0.64 1,745 1.27 3,476Total 3.37 125,232 5.91 219,970 2.91 128,424 5.11 225,899


FortheEU,overallimportsandexportsarebothestimatedtoincreaseby3.37and5.11

percentinthelessambitiousandambitiousscenarios,respectively.Withtheexception

ofelectricalmachinery,both importsandexportsare shown to increaseacrossboth

scenariosinallsectorsfortheEU.Someofthelargestchangesareinchemicals,motor

vehicles,andmetals.Asdiscussedearlier(Table27),paralleltothesechangesintrade,

Results

65

output in almost all sectors expands, electricalmachinerybeingone exception.The

resultsindicateanincreaseinimportsofelectricalmachinery,whichisaccompanied

byadeclineintheoutputinthissector(7.28percentintheambitiousscenario)asmore

competitiveimportedgoodsreplacesomeofthedomesticproduction.

Thebiggest relative increase in imports aswell as exports takesplace in themotor

vehiclessector.Heretradeisestimatedtoincreaseby43.11percentintheambitious

scenario.This isaccompaniedwithan increase in theoutputof this sector (by1.54

percentundertheambitiousscenario).Thisreflectstheimportantliberalisationeffort

thattheagreementwouldimplyduetotheinitialcombinationofhightariffsandhigh

NTBs. Inaddition, it reflects trade inparts andcomponents in themodel.This is a

sector characterized by two-way trade in both vehicles and parts.Total exports are

alsoestimatedtoincreasesignificantlyformetalsandmetalproducts(12.07percent),

processed foods (9.36 per cent), chemicals (9.26 per cent), and othermanufactures

(6.13percent).


66

Table 30 Changes inUS exports and imports by sector (in per cent andmillion

euros),2027benchmark,20percentdirectspill-overs.

Totalexports TotalimportsScenario/Sector Lessambitious Ambitious Lessambitious Ambitious

PercentMillioneuros

PercentMillioneuros

PercentMillioneuros

PercentMillioneuros


0.67 3,261 1.07 5,204 1.18 1,228 0.59 614

Otherprimarysectors

0.09 166 0.30 526 0.43 2,095 0.70 3,412

Processedfoods 4.58 4,895 6.85 7,320 9.15 9,607 16.37 17,189Chemicals 7.71 25,448 11.49 37,938 6.10 16,395 11.56 31,081Electricalmachinery

3.35 4,650 8.86 12,307 2.39 10,136 3.65 15,458

Motorvehicles 34.36 53,071 59.47 91,856 10.73 44,709 20.81 86,693Othertransportequipment

4.98 8,631 8.57 14,853 5.55 4,758 10.33 8,855

Othermachinery 3.66 10,057 5.35 14,698 0.45 3,187 -0.37 -2,595Metalsandmetalproducts

12.79 15,254 22.45 26,783 5.49 10,655 9.04 17,530


3.76 2,834 7.75 5,846 2.48 3,291 4.35 5,766

Othermanufactures

3.88 7,972 4.31 8,861 0.97 7,463 0.93 7,194

Watertransport 0.78 30 1.52 58 0.77 22 1.39 40Airtransport 0.78 413 1.52 808 0.41 221 0.75 403Finance 1.14 861 2.40 1,809 3.27 1,986 6.40 3,884Insurance 0.83 268 1.88 612 3.02 1,840 5.84 3,562Businessservices 0.98 1,363 2.24 3,102 0.74 1,147 1.16 1,799Communications 2.39 473 5.03 998 0.31 46 0.43 64Construction 0.95 122 2.20 282 0.99 57 1.62 94Personalservices 1.80 1,348 4.15 3,109 0.66 137 0.83 173Otherservices 0.35 954 0.94 2,571 -0.09 -142 -0.45 -697total 4.75 142,071 8.02 239,543 2.81 118,840 4.74 200,519


AscanbeseenfromTable30,tradeinallsectorsareexpectedtoincreaseintheUS.Here,

totalexportsareshowntoincreaseby4.75and8.02percentunderthelessambitious

andambitious scenarios, respectively.Formanyof themanufacturing sectors, these

changesarequitesignificant.AsinthecasefortheEU,motorvehiclesareexhibiting

thebiggestincreaseintrade.Here,totalexportsareestimatedtoincreasebyupto59.47

Results

67

percentundertheambitiousscenario,whiletotalimportswillgoupby20.81percent.

Inpart,thisisduetotheinitialstructureoftradebarriersbetweenthetwoeconomies,

with theEUhaving quite high initial protection in themotor vehicle sector.At the

sametime,thereaderisremindedtokeepinmindthediscussionfollowingTable27

andTable28aboutgeneralequilibriumeffects.Itisproblematictoassignoutcomesto

policychangesinindividualsectors,asthechangesinoutputandtradedependonwhat

happensacrossallsectors.

ChangesinbilateraltradeforthetwoliberalisationscenariosaresummarizedinTable

31andTable32below.Thefirstoneshowsestimatedchangesinsectorspecificbilateral

exportsfromtheEUtotheUS,andthesecondthebilateralexportsfromtheUStothe

EU.


68

Table 31 ChangesinbilateralexportsfromtheEUtotheUSbysector(inpercent

andmillioneuros),2027benchmark,20percentdirectspill-overs

Scenario/Sector Lessambitious AmbitiousPercent Millioneuros Percent Millioneuros


16.30 1,882 15.10 1,743

Otherprimarysectors

0.50 45 0.60 55

Processedfoods 26.10 7,690 45.50 13,405Chemicals 20.00 16,517 36.20 29,895Electricalmachinery

18.30 1,336 35.00 2,555

Motorvehicles 71.00 41,711 148.70 87,358Othertransportequipment

13.20 4,678 25.50 9,037

Othermachinery 7.60 8,577 6.60 7,448Metalsandmetalproducts

42.40 7,781 68.20 12,516


10.80 1,741 19.90 3,209

Othermanufactures

23.00 11,230 22.80 11,132

Watertransport 3.50 12 6.80 23Airtransport 0.90 187 1.60 333Finance 4.30 1,779 8.50 3,517Insurance 4.20 1,687 8.30 3,333Businessservices 1.40 940 2.30 1,545Communications 0.60 34 0.90 51Construction 1.80 41 3.10 71Personalservices 1.40 139 2.30 228Otherservices -0.40 -196 -1.00 -491Total 16.16 107,811 28.03 186,965


ThetotalexportsfromtheEUtotheUSareestimatedtoincreasesignificantlyby16.16

and28.03percent,respectively.Theincreaseisshowntobetakingplaceacrossalmost

allsectors(with theexemptionof‘OtherServices’),howeverwithsmaller increases

intheexportsofservicesandotherprimarysectorsthaninmanufacturedgoods.The

mostsignificantrelativeincreasesinexportsareshowntooccurinmetalsandmetal

Results

69

products(42.40and68.20percent,respectively)andmotorvehicles(71.00and148.70

percent).

Table 32 ChangesinbilateralexportsfromtheUStotheEUbysector(inpercent

andmillioneuros),2027benchmark,20percentdirectspill-overs

Scenario/Sector Lessambitious AmbitiousPercent Millioneuros Percent Millioneuros


20.50 1,037 21.80 1,102

Otherprimarysectors

0.50 51 0.40 41

Processedfoods 56.50 3,084 74.80 4,083Chemicals 23.00 18,341 34.20 27,273Electricalmachinery

21.90 4,124 44.10 8,304

Motorvehicles 207.40 39,412 346.80 65,903Othertransportequipment

17.30 6,421 27.80 10,318

Othermachinery 14.40 6,734 16.70 7,810Metalsandmetalproducts

52.70 11,233 88.10 18,778


21.70 1,490 42.50 2,918

Othermanufactures

16.30 6,022 16.70 6,170

Watertransport 3.40 20 7.10 42Airtransport 1.00 170 2.20 374Finance 2.40 607 4.90 1,240Insurance 3.50 125 7.40 264Businessservices 2.50 894 5.40 1,931Communications 5.00 326 10.50 685Construction 3.10 73 6.60 155Personalservices 6.40 447 13.80 964Otherservices 0.60 298 1.50 744Total 23.20 100,909 36.57 159,098


LookingattheestimatedincreasesinexportsfromtheUStotheEU,theincreasein

bilateralexportsinpercentagetermsisevenbigger(Table32).Thisisdrivenmainlyby

thedifferenceinincreaseinthemotorvehiclesector.ImportsfromtheUSinthissector

expandmorethanexportstotheUS.Inthelessambitiousscenariobilateralexportsto


70

theEUareshowntoincreaseby23.20percentandby36.57percentintheambitious

scenario.Theexpansionofexports ishigher inall sectors in theambitiousscenario

thaninthelessambitious.AswasthecasewithEU’sexportstotheUS,theincreaseis

mostsubstantialinthemanufacturingsectors.Theincreaseismostnotableformotor

vehicles,whereexportstotheEUareexpectedtoincreaseby207.40and346.80per

centrespectively.Significantrelativeincreasesarealsoexpectedtooccurintheexports

formetalsandmetalproductsandprocessedfoods.Despitethehighpercentincrease

ofUSexports,theFTAincreasesthepositiveEUtradebalanceofmotorvehicleswith

theUS.Inaddition,theincreaseinimportsfromtheUSonlycorrespondstoroughly

4.8percentoftotalsalesintheEUinthebaseline.

Wenextcomparetotaltradeeffectswithbilateraltradeeffectsforselectedsectors.In

bothcasesthestrongestchangesareinmotorvehicles.Here,wecanseethatthereis

asubstantialexpansionof tradebetweenthe transatlanticpartners(theEUandUS).

Indeed,thisimpliesrelativelydeepchangesintheintegrationofthetransatlanticmotor

vehiclesector.This reflectsa relatively largeshareofpartsandcomponents in total

sectortrade,aswellasthehightariffs(andsolargetariffcuts)forthesector.Thehigh

tariffsareontheEUside(seeFigure9)whileNTBsarehighonbothsides(seeTable

2).

5.2.3. Sustainability Impacts

Inthissubchapter,weconcentrateonsustainabilityimpactsresultingfromthetwoFTA

scenarios.First,wefocusontheresultingeffectsonthelabourmarketwithrespectto

changesinwagesanddisplacements.ThenwediscusstheestimatedeffectsonCO2-

emissionsandtheuseofnaturalresources.

Results

71

5.2.3.1. Labour

First, we look at the corresponding estimated changes in wages for less andmore

skilledlabourasaresultofliberalizingtradebetweenthetwoeconomies.Theseeffects

aresummarizedinTable33below.

Table 33 Changes inwages for lessandmore skilled labour, total effects (inper

cent),2027benchmark,20percentdirectspill-overs

Lessskilled MoreskilledLess ambitious experiment EuropeanUnion 0.30 0.29UnitedStates 0.22 0.21Ambitious experimentEuropeanUnion 0.51 0.50UnitedStates 0.38 0.36


TheresultingeffectsonwagesfortheboththeEUandtheUSarepositive.Allestimated

changesareequaltoorlessthan0.5percentofthewagerate.Thechangesinwages

are shown tobe similar forboth skilledandunskilled labourwith the impactbeing

marginallylowerforskilledworkers.Theambitiousexperimentresultsinsomewhat

higherchangesfortheEU.ThewageeffectsareinlinewithchangesinGDPinTable

6andTable16,andsoareconsistentwithaninterpretationofgeneralcostsavingsthat

leadtoproductivitygainsasfirmsoperatewithlowertariffandNTB-relatedcostsfor

transatlanticcommerce.Itshouldbestressedthatthemodelisalong-runmodel,where

sourcesofemploymentandunemploymentare“structural” (rather thancyclical). In

thissense,changesinlabourdemandarecapturedthroughwagechanges(inthiscase

risingwages).Aswagesincreaseintheexperiments,thismeansarisingdemandfor

labour,sothatunderaflexiblelaboursupplyspecification,employmentwouldincrease

instead.

Table34,Table35,Table35,andTable37reportdetailedemploymenteffectsacross

sectorsundertheambitiouscomprehensivescenario.Aswearenotmodelinglongrun


72

unemploymentrates,thesearereallocationeffectsacrosssectors.IntheEU,themotor

vehiclesectorseesemploymentexpandby1.28percentforskilledlabor,and1.27per

centorlessskilledlabor.Incontrast,thereisasignificantcontractionintheelectrical

machineryandmetalssectors.Mirroringthispattern,intheUSthemotorvehiclesector

seesfallingemployment,andthemetalsandmetalproductssectorseesarise.Inthe

US, like theEU, the electricalmachinery sector contracts in terms of employment.

Combinedwithrisingwages,thepatterninthetablessuggeststhattheexpansionof

othersectors(motorvehiclesintheEUforexample,andothermachineryandtransport

equipmentintheUS)pullsworkersoutofthesectorsthatthencontract,byoffering

higherwages.

Results

73

Table 34 Change inmore skilled employment in theEUby sector (in per cent),

2027benchmark,ambitiousscenario,20percentdirectspill-overs

A=B+C+D+E+F

B C D E F G

Baselinesharesin

moreskilledemployment

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement

Agrforestryfisheries 0.005 0.07 0.04 -0.06 -0.01 0.09 0.01 0.00

Otherprimarysectors 0.004 -0.01 0.00 -0.12 -0.01 0.11 0.00 -0.01

Processedfoods 0.016 0.28 0.01 0.39 -0.01 -0.21 0.10 0.04

Chemicals 0.024 0.08 -0.13 0.87 -0.06 -0.73 0.14 0.20

Electricalmachinery 0.004 -7.00 -0.18 -1.29 0.00 -5.36 -0.17 0.08

Motorvehicles 0.013 1.28 -0.92 3.74 -0.04 -1.73 0.23 0.56


0.007 -0.23 -0.25 0.03 -0.04 0.02 0.01 0.16

Othermachinery 0.043 0.18 0.34 -1.06 -0.09 1.36 -0.38 0.03


0.015 -1.61 0.00 -0.61 -0.06 -0.76 -0.18 -0.76


0.016 -0.16 0.02 -0.17 -0.02 -0.12 0.13 -0.04

Othermanufactures 0.018 0.52 0.54 -0.21 -0.03 0.42 -0.20 0.00

Watertransport 0.002 0.43 0.03 -0.10 -0.04 0.20 0.34 0.00

Airtransport 0.002 0.11 0.09 -0.20 0.00 0.13 0.08 -0.02

Finance 0.041 0.12 0.00 -0.04 0.21 -0.05 0.02 -0.07

Insurance 0.015 0.57 0.02 -0.07 0.56 0.03 0.03 -0.01

Businessservices 0.166 -0.16 -0.04 -0.09 -0.02 -0.02 0.00 -0.01

Communications 0.026 -0.14 -0.02 -0.06 -0.07 -0.02 0.02 -0.01

Construction 0.045 0.18 0.06 0.12 0.00 -0.01 0.02 0.01

Personalservices 0.043 -0.04 -0.02 -0.18 -0.03 0.11 0.08 -0.02

Otherservices 0.496 0.06 0.00 0.03 -0.01 0.02 0.01 0.00

Displacement Index 0.55 0.15 0.53 0.09 0.53 0.10 0.12

Note:Displacementindexistheweightedmeandeviation(squarerootoftheweightedmeansquaredvariation).


74

Table 35 ChangeinmoreskilledemploymentintheUSbysector(inpercent),2027

benchmark,ambitiousscenario

A=B+C+D+E+F

B C D E F G

Baselinesharesin

moreskilledemployment

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement

Agrforestryfisheries 0.002 -0.04 -0.08 -0.13 0.00 0.16 0.01 0.00

Otherprimarysectors 0.004 0.11 -0.04 -0.05 0.01 0.17 0.01 0.01

Processedfoods 0.008 -1.21 0.02 -0.97 0.03 -0.41 0.11 -0.13

Chemicals 0.018 -0.54 0.76 -0.87 0.13 -0.79 0.21 -0.52

Electricalmachinery 0.004 -2.06 -1.92 9.01 1.23 -8.76 -1.61 1.37

Motorvehicles 0.010 -2.76 2.58 -2.59 0.10 -3.16 0.30 -1.10


0.010 0.74 0.33 -0.16 0.06 0.40 0.11 -0.14

Othermachinery 0.034 1.50 -0.50 -0.46 0.13 2.50 -0.16 0.24


0.010 0.35 0.20 0.29 0.11 -0.24 -0.01 0.14


0.017 -0.13 -0.09 -0.18 0.05 -0.01 0.10 0.04

Othermanufactures 0.006 0.15 0.02 -0.15 0.06 0.42 -0.20 -0.01

Watertransport 0.001 0.18 0.00 0.04 0.09 -0.05 0.10 0.01

Airtransport 0.002 0.17 -0.05 0.07 0.03 0.05 0.07 0.03

Finance 0.132 -0.17 -0.01 0.07 -0.19 -0.05 0.00 0.02

Insurance 0.036 -0.49 -0.06 0.01 -0.51 0.05 0.02 0.02

Businessservices 0.177 0.00 -0.03 0.05 0.01 -0.03 0.00 0.00

Communications 0.017 0.05 -0.06 -0.02 0.09 0.03 0.01 0.01

Construction 0.059 0.31 0.09 0.19 0.09 -0.06 0.01 0.01

Personalservices 0.056 0.25 -0.04 0.09 0.05 0.12 0.03 0.03

Otherservices 0.399 0.00 -0.03 0.00 0.04 -0.01 0.00 0.00



Results

75

Table 36 ChangeinlessskilledemploymentintheEUbysector(inpercent),2027


A=B+C+D+E+F

B C D E F G

Baselinesharesinlessskilledemployment

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement

Agrforestryfisheries 0.054 0.07 0.04 -0.07 -0.01 0.09 0.01 0.00

Otherprimarysectors 0.006 -0.02 0.00 -0.12 0.00 0.12 0.00 -0.01

Processedfoods 0.037 0.28 0.00 0.36 0.00 -0.18 0.11 0.04

Chemicals 0.031 0.08 -0.14 0.83 -0.05 -0.71 0.15 0.20

Electricalmachinery 0.005 -7.01 -0.19 -1.33 0.01 -5.33 -0.16 0.08

Motorvehicles 0.024 1.27 -0.93 3.70 -0.03 -1.71 0.24 0.56


0.012 -0.23 -0.26 0.00 -0.03 0.05 0.02 0.16

Othermachinery 0.052 0.17 0.33 -1.09 -0.08 1.39 -0.38 0.04


0.033 -1.62 -0.01 -0.64 -0.05 -0.73 -0.18 -0.76


0.032 -0.17 0.01 -0.21 -0.01 -0.10 0.14 -0.04

Othermanufactures 0.044 0.51 0.52 -0.25 -0.02 0.45 -0.19 0.00

Watertransport 0.003 0.42 0.02 -0.15 -0.03 0.24 0.34 0.01

Airtransport 0.004 0.10 0.08 -0.24 0.01 0.16 0.09 -0.01

Finance 0.026 0.12 -0.01 -0.08 0.22 -0.03 0.02 -0.07

Insurance 0.009 0.56 0.00 -0.10 0.56 0.06 0.03 0.00

Businessservices 0.103 -0.17 -0.05 -0.12 -0.01 0.01 0.01 -0.01

Communications 0.017 -0.15 -0.03 -0.09 -0.06 0.01 0.02 -0.01

Construction 0.106 0.17 0.04 0.08 0.01 0.02 0.03 0.02

Personalservices 0.027 -0.05 -0.03 -0.21 -0.03 0.13 0.09 -0.02

Otherservices 0.375 0.05 -0.01 -0.01 0.00 0.05 0.02 0.01




76

Table 37 ChangeinlessskilledemploymentintheUSbysector(inpercent),2027


A=B+C+D+E+F

B C D E F G

Baselinesharesinlessskilledemployment

Total



totalNTBsservices

directspillovers

indirectspillovers

procurement

Agrforestryfisheries 0.015 -0.04 -0.08 -0.13 0.00 0.16 0.01 0.01

Otherprimarysectors 0.007 0.10 -0.04 -0.04 0.00 0.17 0.01 0.02

Processedfoods 0.020 -1.23 0.01 -0.95 0.00 -0.39 0.11 -0.13

Chemicals 0.018 -0.56 0.74 -0.85 0.10 -0.77 0.21 -0.51

Electricalmachinery 0.003 -2.07 -1.94 9.03 1.20 -8.74 -1.61 1.38

Motorvehicles 0.012 -2.77 2.56 -2.57 0.07 -3.14 0.30 -1.09


0.012 0.72 0.31 -0.15 0.03 0.41 0.11 -0.14

Othermachinery 0.029 1.49 -0.52 -0.44 0.09 2.52 -0.16 0.25


0.021 0.33 0.18 0.31 0.08 -0.22 -0.01 0.15


0.031 -0.15 -0.11 -0.16 0.02 0.01 0.09 0.04

Othermanufactures 0.015 0.13 0.00 -0.13 0.03 0.44 -0.20 0.00

Watertransport 0.002 0.16 -0.03 0.07 0.05 -0.02 0.09 0.02

Airtransport 0.006 0.15 -0.08 0.10 -0.01 0.08 0.06 0.03

Finance 0.061 -0.19 -0.03 0.09 -0.22 -0.03 0.00 0.03

Insurance 0.017 -0.50 -0.08 0.03 -0.54 0.07 0.02 0.02

Businessservices 0.081 -0.01 -0.05 0.07 -0.02 -0.01 0.00 0.01

Communications 0.008 0.03 -0.08 0.00 0.06 0.05 0.01 0.01

Construction 0.135 0.30 0.07 0.21 0.06 -0.04 0.00 0.01

Personalservices 0.026 0.24 -0.06 0.11 0.02 0.14 0.02 0.03

Otherservices 0.483 -0.02 -0.05 0.02 0.01 0.01 -0.01 0.01



InadditiontotheeffectsonwagesTable34,Table35,Table35,andTable37alsoreport

asummarystatisticontheeffectonmovementofthelabourforcebetweensectors–a

labourdisplacementindex.Wehavereportedasummaryoftheindexchangesunder

allthescenariosinTable38below.Thisisthe“acrossdisplacement”index,basedon

Francois(2004)andFrancois,Jansen,andPeters(2012).Informalterms,theindexis

definedasfollows:

Results

77

^ ^SL, across = Σ λj (lj – mL)2

j=1

n

FollowingthenotationofFrancois,Jansen,andPeters(2012),λjisthesectorjshare

oftotalemployment,îjisthepercentchangeinsectorjemployment,andm

∧

Listotal

per cent change in employment across all sectors. Sincewe do notmodel changes

intotalemploymentlevelshere,andemployalong-runclosurewhereoveralllabour

participation and employment levels are determined by factors outside the model,

m∧=0.Thismeansoutindexreducestothefollowing:

^SL, across = Σ λj (lj)

2

j=1

n

TheindexSL, across

givesusameasureofvariationofemploymentacrosssectorsandthus

ameasureoftheactualnumberofworkersthatchangejobsbymovingacrosssectors.

In essence, an index value of 0.5means, that roughly 5workers out of 1,000 have

movedacrosssectors.Theindexprovidesausefulindicatorfortheadjustmentstaking

placeinlabourmarketsfollowingtradeliberalisation.17

Table 38 Displacement of less andmore skilled labour in the EU andUS, total

effects(inpercent),2027benchmark,20percentdirectspill-overs

Lessskilled MoreskilledLessambitious Ambitious Lessambitious Ambitious

EU 0.33 0.65 0.28 0.55US 0.21 0.48 0.21 0.46


17 Theindexisalowerboundonlabourdisplacement,asitislikelytounderestimatetheactualamountofjobchurningthatoccurs.Workerswhochangejobsbutdonotchangesectorsarenotcapturedbytheabovemeasure.Inordertocapturethoseworkers,itwouldbenecessarytohaveinformationonemploymentchangesatthefirmlevel.Inthemodel,wetreatlabourasmobilebutnotperfectlymobile,eveninthelong-run.Thismeansthatthereisatransformationelasticityforlabourbetweensectorsthatislessthaninfinite.


78

Aswasshowntobethecaseforwages,theestimatedeffectonmovementoflabouris

relativelysmall.Here,nomorethan0.7percentofthelabourforceisexpectedtomove

acrosssectorsasaresultofmeasurestakentoliberalisetradebetweentheEUandUS.

Theimpactisestimatedtobesomewhatbiggerforlessskilledworkersthanformore

skilledworkers.TheresultingchangesaresomewhatbiggerfortheEUthanfortheUS,

buttheeffectsarestillquitesmall.Toputthisinperspective,thisisachangefollowing

fullimplementation.AccordingtoEurostat,theaverageannualchangeinemployment

intheEUinmanufacturingbeforethecrisis(2001-2007)was2.1percent,andinthe

yearsafterthecrisisthisincreasedto3.7percent.Takingthisasabenchmark,ifwe

assume just 2 per cent labour turnover per year through natural entry and attrition,

thenoverfiveyearswewouldhaveroughly10percentlabourturnover,suchthatthe

labourdisplacementfromFTAimplementationoverafiveyearphaseinperiodwillbe

minimalbycomparison.In thissenseitought tobeeasilyabsorbedthroughnormal

entry and attrition rates.Additionally, the FTA-related labour movement is largely

drivenby“pullfactors”(higherwages).Bythiswemeanthatwagesaregoingup,and

sothemechanicsoflabourreallocationwillinvolveattractionofworkersfromlowerto

higherpayingsectorsonnet.

5.2.3.2. CO2 Emissions

Next, we move on to discuss the estimated impact on CO2-emissions. These are

summarizedinTable39below.

Results

79

Table 39 ChangesinCO2-emissions(inthousandmetrictons),2027benchmark,20

percentdirectspill-overs

Lessambitious AmbitiousEuropeanUnion 2.7 3.6UnitedStates 2.9 3.9Other -1.5 3.8OtherOECD,highincome 0.1 0.9EastEurope -0.9 0.3Mediterranean -1.4 -1.6China 1.4 4.3India -0.1 0.1ASEAN -0.5 -0.4MERCOSUR -0.1 -0.2LowIncome 0.2 0.8RestofWorld -0.2 -0.3Total, thousand metric tons 4.0 11.3Total, percentage share of annual rate 0.02 0.07


The lessambitiousFTAscenario isestimated to lead toa totalglobal increaseof4

and11 thousandmetric tonsunder the twodifferentexperiments respectively.CO2-

emissionsareexpectedtoincreaseintheEUandUSbyaround3and4thousandmetric

tons, respectively.On theotherhand, emissions are expected todecrease somewhat

acrosssomeothercountries.Lookingatthepercentageincrease,theestimatedchanges

areshowntobeverysmall,being0.02percentinthelessambitiouscaseand0.07per

centintheambitiouscase.Dependingonfuturechangesinthecoverageofemissions

tradingintheEU(increasedandmorebindingcoverage),andpossibilitiesforfuture

introductionofsuchaschemeintheUS,theneteffectwouldthenbeevensmallerthan

reportedhere.ItshouldbepointedoutthattheestimatesinTable39canbeconsidered

ascomprehensiveasthemodelconsidersalleconomicactivities,includinginternational

shippingandtransportthatareassociatedwithchangesintradeflows.Thelatterare

endogenouswithinthemodelasincreasesintradeflowsleadtochangesindemandfor

transportservices.Astransportactivitiesaremodelledexplicitly,thiswillleadinturn

tochangesinemissionslinkedtotheseactivities.


80

5.2.3.3. Natural Resource Usage (Land intensity)

Wenowtakea lookat the resultingeffecton the landuse. In themodel, land isan

explicit factor, likecapitaland labour. Increase invalueadded insectorsusing land

translatesintoitsmoreintensiveuse(moreoutputperunitofland).Alternatively,in

sectorswhereactivitiesfall,therewillbeadropinlanduseintensity.Bythiswemean

thereislesscapital,labour,andinputssuchasfertilizersinuseonagivenpieceofland

whenintensityfalls.Ourestimatesofchangesinlanduseintensity(basedontotalvalue

addedactivityforafixedstockofland)aresummarizedinTable40below.

Table 40 Changes in land use (in per cent), 2027 benchmark, 20 per cent direct

spill-overs

Lessambitious AmbitiousEuropeanUnion 0.05 0.06UnitedStates -0.01 0.00Other 0.00 0.01OtherOECD,highincome -0.01 -0.01EastEurope 0.02 0.03Mediterranean 0.03 0.04China 0.01 0.03India 0.00 0.01ASEAN -0.04 -0.07MERCOSUR 0.01 0.02LowIncome 0.00 0.00RestofWorld 0.01 0.01Total 0.00 0.01


TheresultingimpactfromremovingbarrierstotradebetweentheEUandtheUSon

theuseofnatural resources isnegligible.Theexpectedchangesarepracticallyzero

inallregions,includingtheEUandtheUS.Thesenegligibleresultsindicatethatthe

liberalisationmeasureswillnotimpactsignificantlyonlanduseinanyoftheeconomies

Results

81

5.2.4. Global Effects

Changing the conditions for trade between twomajor global trading partners, such

astheEUandtheUS,changesthetradingconditionsforothercountriesaswell.In

a traditional set-up,when tariffs are lowered, this implies trade diversion and trade

creationduetorelativeaswellasabsolutechangesintradingcosts.Inthisset-up,the

additionalmeasureof loweringofNTBsandassumptionofspill-oversaddsanother

channel throughwhichbilateral liberalisationpotentially affects third countries (see

Section4.2).

Overall, the rest-of-world impact hinges critically on the assumed potential for

streamliningofEUandUSregulationsintheprocessofnegotiationsandconvergence

ofEU-USstandards,linkedtoscopeforsomeresultingconvergenceonglobalstandards

andcross-recognitionaswell.Theseeffectsimplysomeimprovementofmarketaccess

forthirdcountries,helpingtooffsettradediversion.

Thepurposeofthissubsectionistotakeacloserlookhowliberalizingtradebetween

theEUandUSisexpectedtoaffecttherestoftheworld.TheestimatedimpactonGDP

issummarizedinTable41below.Ingeneral,theincreasedtradebetweentheEUand

theUSisestimatedtohaveapositiveimpactonotherpartsoftheworld.

Ascanbeseenfromthetable,underthelessambitiousscenario,theoverallgainfor

thirdcountries isestimated tobe46.6billioneuros,whichamounts toapercentage

increaseofGDPof0.07percent.Inthemoreambitiouscase,theincreasewouldbe

99.2billioneurosor0.14percentofworldGDP.18

18 ExcludingtheEUandtheUS.


82

Table 41 TotaleffectsonGDPforrestoftheWorld(inmillioneurosandpercent),

2027benchmark,20percentdirectspill-overs

Lessambitious AmbitiousMillioneuros Percent Millioneuros Percent

EuropeanUnion 68,274 0.27 119,212 0.48UnitedStates 49,543 0.21 94,904 0.39TotalOtherCountries 46,636 0.07 99,171 0.14Whereof:OtherOECD,highincome 15,942 0.08 36,322 0.19EasternEurope 1,019 0.14 2,328 0.33Mediterranean 237 0.02 1,063 0.08China 3,810 0.02 5,487 0.03India 946 0.02 2,338 0.04ASEAN 15,081 0.45 29,834 0.89MERCOSUR 624 0.01 1,545 0.03LowIncome 1,064 0.09 2,366 0.20RestofWorld 7,913 0.05 17,887 0.12

Source:CGEmodelling.

Lookingattheselectedregionsalittlemorecloselyrevealsthatallothereconomies

areexpectedtoexperiencewelfareincreases.Mostnotably,thisisthecaseforASEAN,

whereGDPisexpectedtoincreaseby15.1billioneurosand29.8billioneuros,or0.45

per cent and 0.89 per cent respectively.The driver forASEAN is the third-country

spill-overscombinedwithveryhigh trade toGDPratios in theASEANeconomies.

Basically, if there is a drop in global trade costs linked to indirect spill-overs, the

ASEANeconomiesbenefitgreatlyfromthis.

Table42showsaregionalbreakdownofthechangeinexports.Theseresultsprovide

insightregardingthepatternofresultsinTable41.Notsurprisingly,theprimaryeffects

arerealizedintheFTApartnerregions–theUSandEU.However,thespill-overeffects

alsocontributetoexportsgrowthinthirdcountries.ThisisespeciallytrueforASEAN,

whichisaregionwithahightradetoGDPratioandwithastructuralfocusinexportsin

thosesectorsthatseethegreatestNTBreductions.WithASEAN,strongerGDPeffects

alsosupportstrongtradeeffects.

Results

83

Table 42 Changeinexportsbyregion(inpercent),2027benchmark,20percent

directspill-overs

Lessambitious AmbitiousEuropeanUnion 3.37 5.91UnitedStates 4.75 8.02TotalOtherCountries 0.51 1.04Whereof:OtherOECD,highincome 0.50 1.00EasternEurope 0.42 0.95Mediterranean 0.28 0.59China 0.47 0.96India 0.43 0.94ASEAN 1.17 2.31MERCOSUR 0.47 0.97LowIncome 0.42 0.95RestofWorld 0.37 0.76

85

In this chapter,we focus onpossible benefits of reducingNTBs facing affiliates of

EuropeanfirmsoperatingintheUS,andaffiliatesofUSfirmsoperatinginEurope.This

involvesareviewofrecentbenchmarkNTBsurveyresultsforFDI,andaneconometric

mapping ofNTB levels to the activities of European firms (as captured by foreign

investment income, number of employees, and number of firms).19 To do this we

buildonanextendeddatabaseofmarketaccessrankingsforFDI,whichconsolidates

informationfromseveralrecentNTBsurveys,allbasedonthesamecorequestions.20

TheseNTBsurveydataarediscussedinmoredetailinChapter2.Theanalysisinthis

chapterisindependentoftheCGEanalysisinthepreviouschapters,whichisfocused

ontradeNTBsratherthaninvestmentNTBs.Thedifferenceintermsoftheunderlying

methodologiesdonotallowdirectcomparisonsbetweentheseresultsandtheresults

fromtheCGEanalysispresentedinthepreviouschapters.

6.1 Indexes and comparison of levels of openness

The original ECORYS (2009) study reported overall rankings ofmarket access for

operationsofMNEs,inadditiontorankingsofmarketaccessfordirecttradeingoods

and services. Like the trade-related questions in the firm survey, the FDI-related

19 ThesedatacomefrombothEurostatFATS(foreignaffiliatetradestatistics)andforeigninvestmentstatistics.EurostatdefinesFDIincomeastheincomeaccruingtodirectinvestors-i.e.EUfirms-includingreinvestedearnings,dividendsandnetbranchprofits,andinterestearned.‘Employees’isthenumberofemployeesworkinginalocalaffiliateofanforeignfirm,whilenumberofaffiliatesisreportedbilaterally.

20 SeeECORYS(2009),EuropeanCommissionandtheGovernmentofCanada(2009),andFrancois,Sunesen,andThelle(2009,2012).Theconsolidatedsurveycovers2,608individualfirmresponses.Theperiodcoveredis2007-2009,thoughessentiallyasacross-section.

6. FDI Barriers


86

questionsincludedbothdetailedquestionsaboutspecificbarriers,andamoregeneral

questiononlevelsofopennessforFDI.Thegeneralquestion,whichisavailableinthe

annex,requestedrespondentstoprovidebilateralrankingsofmarketaccess.TheFDI

responsesfromtheEcoryssurvey,scaledfrom0(=fullopenness)to100(=totallyclosed),

have sincebeen supplementedwith follow-up surveydata supportingECstudiesof

NTBsaffectingtradewithCanada,Japan,andChina.Thesedataareincorporatedin

thisanalysis.

Foranoverviewofthepatternofopennessindicatedbythesurveyresponses,Figure

12belowsummarizestheaveragelevelsoftheNTBindexesinoursurveydata.Inthe

figure, theaverage index levelsare reported forNTBs facing firmsoperating in the

EU,theUS,andinthirdcountries(labeledas“restofworld”index).Wehavefurther

splittheaverageindexvaluesintoindexesforNTBsfacingEUfirmsoperatinginthe

EU(the“intra-EU”index),andnon-EuropeanfirmsoperatingintheEU(extra-EU).

The figure illustrates a number of useful points. First, intra-EUNTBs (the ranking

ofmarket access restrictions facingEuropean firms operating affiliates in otherEU

MemberStates)areshowntobesubstantiallylowerthanNTBsreportedbynon-EU

firmswhenoperatinginthosesameEUmarkets.Thisfactreflectsthesuccessofthe

EuropeanUnion in reducing internalbarriers tocross-borderoperationofEuropean

firmswithinEurope.Hence,whiletheEUNTBindexforFDIaveragesapproximately

28forfirmsfromoutsidetheEU,itaveragesroughly18forfirmsinsidetheEU.The

differenceisaneffectivepreferencemargin(lowerNTBs)forintra-EUFDI.TheUS

levelissomewherebetweentheEUintra-andextra-levels,averagingapproximately24.

FDI Barriers

87

Figure 12 AverageValueofNTMIndexesforFDI

Source: Seetext.

Notes: Extra-EU(Intra-EU)referstoNTMsfacedbynon-EU(EU)firmsoperatinginEU.

Figure13andFigure14providefurtherbreakdownbysector.InFigure13,weagain

seetheintra-andextra-EUNTBindexvariationsfornon-EuropeanandEuropeanfirms

operatingaffiliateswithintheEU.IntermsofNTBrankings,thegreatestdifferences

forgoodsareapparentinaerospace,chemicals(includingdrugsandcosmetics),and

motorvehicles.Forservices,thegreatestdifferencesareintransport,travel,andICT

services.Ascanbeseenfromthefigure,however, thefinancialservicesindexesare

showntobemoreorlessthesameforintra-EUandextra-EUinvestment.Thisimplies

that there are similar levels of openness forEuropean and extra-EUbanks engaged

inFDIinEurope.Thesamemessageholdsforinsurance,construction,andbusiness

services.


88

Figure 13 AverageNTMindexvaluesforFDIlocatedintheEU

Source: Seetext.

Notes: Extra-EU(Intra-EU)referstoNTMsfacedbynon-EU(EU)firmsoperatingintheEU.

WhileFigure13abovefocusedontheEUasanFDIdestination,inFigure14wehave

adifferentdis-aggregation.Here,wehaveasector-by-sectorcomparisonbetweenthe

EU,US,andrestofworldallasFDIdestinations.Thissetupenablesacomparisonof

apparentlevelsofopennessinthetransatlanticeconomiestoFDI,withtheaveragelevel

fortherestoftheworld.Ascanbeseenfromthefigure,withafewexceptions,both

theUSandEUareshowntoberelativelyopenbythestandardofthirdcountries(i.e.

comparedtotherest-of-worldaverage).Thesectorspecificexceptionsareaerospace

(theUS andEU),motor vehicles (theEU), cosmetics (theEU), ICT (theEU), and

transport (theUS).The figure further shows that for processed foods, there is little

differencebetweentheUS,EU,andrestofworld.

FDI Barriers

89

Figure 14 BreakdownofNTBsforFDIbysector

Source: Seetext.

Notes: TheEUNTMindexisbasedonresponsesofnon-EUfirmsoperatingintheEU(extra-EU).

The impactofchanges inmarketaccess forMNEswillnaturallybeaffectedby the

sensitivityofMNEactivitiestomarketaccessrestrictions.Theimpactwillalsodepend

ontherelativemarketpotentialoftheEUforUSfirms,andtheUSforEUfirms.To

provideanoverviewof thispotential,Figure15presentsamappingofmarket size,

investment income (recall this is defined by Eurostat as the FDI-based earnings of

European-ownedaffiliates)andNTBrankings.

InFigure15,NTB index levels (whereahighnumbermeansmore restrictions) are

mappedonthehorizontalaxis,whileaverage2007-2009GDPisshownonthevertical

axis.Thesizeof thebubble in thefigure isscaledby thevalueofdirect investment

incomeineachmarket,againaveragedfortheyears2007-2009.


90

Figure 15 IncomefromFDI,marketsize,andopenness,2007-2009

Source: NTMsurveysandEurostatFATSstatisticsasexplainedintext,exculdingintra-EUFDI.

AscanbeseenfromtheleftpanelofFigure15,theUSmarketisshowntoberelatively

opentoFDIinvestments.Atthesametime,theUSmarketisalsorevealedtobethe

singlemostimportantsourceofincomeforEUforeigndirectinvestment.Therefore,

asinthediscussionofunderlyingactivityandNTBsintheearliertradeanalysis,the

simplesizeoftheUSmarketimpliespotentialgainsevenifrelativelysmallbarriersare

removed.Indeed,intermsofvalue,theUSmarketsdominates,byfar,bothJapanand

China.Assuch,andgiventhesizeofthebase,improvementsinmarketaccessarelikely

to implysubstantialchanges inFDI levelsand thuscorrespondingdirect investment

earningsofEuropeanfirms.Whileonemightbetemptingtoconcludefromthefigure

thatthereislittlescopeforfurtherliberalization,Figure12andFigure13belaythis.

The substantially bettermarket access conditions for intra-EU FDI shown in these

figures,point topotential roomformaneuver in loweringbarriers further.The right

handpanelofFigure15showsthatEuropeisthedominantsourceofinvestmentincome

forUS-owned affiliates.Asmadevisible in the figure, the transatlantic relationship

dominatestheinvestmentearningsreportedforaffiliatesinChinaandJapan.Whilethe

EUisrelativelyopen(comparedtoChina,forexample),thelevelofUSMNEactivity

FDI Barriers

91

asmeasuredbytheincomeofUS-ownedaffiliatesinEurope,viewedinconjunction

withtheNTBpreferencemarginsinFigure13,againsuggestsubstantialpotentialfor

absolute gains to direct investment earnings from reductions in regulatory barriers

facingUSfirmsintheEU.

6.2 ImpactofNTBsonforeignaffiliates

Next, in order to take a closer look and estimate the potential impacts from NTB

reductions for FDI we employ gravity regressions. Our gravity model has been

estimatedusingaset-upthatallowsforpairwiseobservations,andalsoforobservations

wherethereisnoforeigninvestmentincomeorMNEs’activity(i.e.asocalledPoisson-

basedmaximumlikelihoodestimator).Whilewefocusontheresultsofthemodeling

hereinthetext,thederivationoftheexactspecificationoftheestimatingequationis

providedintheannex.TheresultingNTBcoefficientprovidesanestimateoftheimpact

ofchangesintheleveloftheNTBindexonthreeindictors:(1)thelevelofinvestment

income(theelasticityofFDIincomewithrespecttotheNTBindex);(2)thenumber

ofaffiliatesfromahomecountryinagivenhostcountry(theelasticityofnumberof

affiliateswithrespecttotheNTBindex);and(3)thenumberofaffiliateemployees(the

elasticityofnumberofaffiliateswithrespecttotheNTBindex).Table43belowreports

regressionresultsforourgravitymodelfor2007-2009foreachoftheseindicators.


92

Table 43 RegressionestimatesforNTMsandFDI

PoissonMLestimatesFDIincome Numberofenterprises Numberofemployees

logdistance -0.5381*** -0.9525*** -0.9773***-(0.0011) -(.0049) -(0.0006)

logNTBindexforFDI -0.5057*** -0.3463*** -0.3136***(basedonEUmargin) -(0.0034) -(0.0095) -(0.0039)logNetworkindex 0.2188*** 1.1177*** 0.6728*** (0.0154) (0.6058) (0.0065)Obs 11,140 8,304 7,253chi2,Pr>chi2 2.41e+06,0.00 1.81e+04,0.00 2.14e+07,0.00Pseudo-R2 .8915 .8969 .8945 conditionalfixedeffects

Standarderrorsinparentheses.***denotessignificantat1percentlevel.logNTBmarginisthedifferencebetweenintra-andextra-EUNTBindexesforfirmsoperatingintheEUwithEUMembersashostcountries,asdiscussedintheannex.LogNetworkindexisanindexofoverlappingtradenetworks.

Source data:EurostatandNTBsurveydata,UNCOMTRADEdata(fornetworkindex).Datacover2007-2009.

TheNTBcoefficientsinthetablecanbeinterpretedasfollows.TakingtheFDIincome

coefficientthefirstcolumnofresults,forevery10percentincreaseintheNTBindex

(forexampleanincreaseinrestrictivenessfrom20to22),weestimate,onaverage,a

reductioninobservedincomefromforeigninvestment(meaningthenetincomeearned

byaffiliatesand reportedasa returnon foreign investment in that samemarket),of

5.057percent.

What does this mean in practical terms? Consider the level of market access in

Figure12,andthelevelofEUinvestmentincomeinFigure15.Togetsomesenseof

magnitudes, letusassume,hypothetically, thatnegotiations lead toagain inmarket

accessfortheaffiliatesofEuropeanfirmsintheUS,suchthatEUfirmsfacealevel

ofaccessintheUSsimilartotheaccesstheyenjoywithintheEUitself.Intermsof

Figure12,thiswouldimplyadropintheNTBindexfrom24to18,whichcorresponds

toarelativedropinNTBlevelsasmeasuredbytheindexof25percent(areductionof

6outof24).TakingthischangeinNTBlevels,andapplyingtheelasticityinthefirst

columnofTable43toEUFDIincomefromUSoperationsin2007(€65,980billion),

thisimpliesagaininincomeforaffiliatesofEuropeanfirmsofroughly10.3billion

FDI Barriers

93

euros.21Of course, actual effectswill vary dependingon level of ambition, but this

providesaroughorderofmagnitudefora25percentreductioninUSFDIbarriers

againstEUfirms.Fromthesecondandthirdcolumnofresults,thisincreasedincome

wouldbeaccompaniedbymoreEuropeanaffiliatesintheUS,andanapproximate9.44

percentincreaseinemploymentofUSworkersbyEuropeanfirms.Onasimilarbasis,

therewouldbea10.85percentincreaseinemploymentofEUworkersbyUSfirms.22

21 Thisfollowsfromtakinglogdifferencesintheaverageindex(from24to18),andapplyingtheFDIincomeelasticityfromTable43withrespecttotheNTBindex:

exp[(ln(18)-ln(24))*-0.5381+ln(65,980)]-65,980=investmentincomechange.

22 This followsfromtaking logdifferences in theaverage index(from24 to18for theUS,25 to18 for theEU),andapplyingtheFDIemploymentelasticitywithrespecttotheNTBindex.

95

This study provides new estimates of the economy wide impact of removing both

tariffandnon-tariffbarrierstotransatlantictradebetweentheEUandtheUS.Several

scenariosareanalysedinthereport.Ontheonehandspecifictradeliberalisationwith

regards to tariffsonly, servicesonlyorprocurementonly isdiscussed.On theother

hand, theoptionofcomprehensive tradeand investment liberalisation isscrutinised.

ThefirstFTAscenario,amoderatelyambitiousFTAassumeda10percentreductionin

NTBs-relatedcostsandan“almostfull”eliminationoftariffs.Thesecond,ambitious

FTAscenarioassumestheeliminationof25percentofcostslinkedtoNTBstogether

withfulltariffelimination.

TheresultsindicatepositiveandsignificantgainsforboththeEUandtheUS.GDP

is estimated to increaseby68-119billion euros forEUand50-95billion euros for

the US (under the less ambitious and the ambitious FTA scenarios, respectively).

However,ifthetradeinitiativewouldbelimitedtotariffliberalisationonly,orservices

orprocurementliberalisationonly,theestimatedgainswouldbesignificantlylower.An

FTAlimitedtotariffliberalisationwouldleadto24billioneurosincreaseinGDPfor

theEUand9billioneurosincreasefortheUS.Thusimplementingacomprehensive

FTAwouldbringgreaterbenefitstobotheconomies.

AcoremessagefollowingfromourresultsisthatafocusonNTBsiscriticaltothelogic

oftransatlanticliberalization.Differentapproachestothesameregulatorychallenges

canhave theunintendedconsequenceof increasingcosts for firms,andsodragging

down labour productivity.Negotiation onNTBs provides the opportunity to pursue

amixofcross-recognitionand regulatoryconvergence to reduce thesebarriers.The

7. Conclusions


96

estimatesreportedherepointtosubstantialgains,ifreductionsinthecostsofNTBs

canbeachieved.Limitingtheexercisetotariffsalonewouldleadtopositiveeffects,but

thesewouldbemuchmorelimitedleavingahugepotentialforeconomicandwelfare

gainsuntapped.

Intermsoflabourmarketimpacts,wageeffectsareinlinewithchangesinoutputand

soareconsistentwithaninterpretationofgeneralcostsavingsthatleadtoproductivity

gains as firms operatewith lowerNTB-related costs for transatlantic commerce. It

shouldbestressedthatthemodelisalong-runmodel,wheresourcesofemploymentand

unemploymentare“structural.”Inthissense,changesinlabourdemandarecaptured

throughwagechanges (in thiscase risingwages) rather thanaggregateemployment

levels.Aswagesincreaseintheexperiments,thismeansarisingdemandforlabour.At

sectorlevel,roughly0.2to0.5percentoftheEUlabourforce(intermsofallocation

acrosssectors)isde-located.However,thisisdueto“pullfactors”asexpandingsectors

(likemotorvehiclesinthecaseoftheEU)hireworkersawayfromothersectors(like

metals).

Theimpactontherestoftheworldisestimatedtobepositiveandamountstoatotal

ofapproximately99billioneurosasanupperboundintheambitiousFTAscenario.

TheEUandUS,collectively,areahugeeconomicforce.Totheextentthattheycan

work together to better promote establishment and recognition in standards, reduce

regulatory divergence, andotherwise reduce the impact on rules and regulations on

thecostofbusiness,itislikelythatpartsofsuchaframework(forexamplerecognized

productorsafetystandards)willbeadoptedelsewhere,reducingtradecostsforthird

markets,whichiscapturedinthemodelbyintroducingspill-overstothesimulations.

To the extent the EU andUS together drive global standards, this has potential to

promoteeconomicgainsacrosstheglobe.

Dependingontheapproachfollowed,EU-UStradeliberalisationhasthepotentialto

makeapositivecontributionnotonlytothetransatlanticeconomybutalsototheglobal

economy.

97

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Annexes

103

Table A1 MappingofModelSectorstoGTAP

No.GTAPSector

ModelSector No.GTAPSector

ModelSector

1 pdr 1Agrforestryfisheries 30 lum 10Woodandpaperproducts2 wht 1Agrforestryfisheries 31 ppp 10Woodandpaperproducts3 gro 1Agrforestryfisheries 32 p_c 4Chemicals4 v_f 1Agrforestryfisheries 33 crp 4Chemicals5 osd 1Agrforestryfisheries 34 nmm 11Othermanufactures6 c_b 1Agrforestryfisheries 35 i_s 9Metalsandmetalproducts7 pfb 1Agrforestryfisheries 36 nfm 9Metalsandmetalproducts8 ocr 1Agrforestryfisheries 37 fmp 9Metalsandmetalproducts9 ctl 1Agrforestryfisheries 38 mvh 6Motorvehicles10 oap 1Agrforestryfisheries 39 otn 7Othertransportequipment11 rmk 1Agrforestryfisheries 40 ele 5Electricalmachinery12 wol 1Agrforestryfisheries 41 ome 8Othermachinery13 frs 1Agrforestryfisheries 42 omf 11Othermanufactures14 fsh 1Agrforestryfisheries 43 ely 20Otherservices15 coa 2Otherprimarysectors 44 gdt 20Otherservices16 oil 2Otherprimarysectors 45 wtr 20Otherservices17 gas 2Otherprimarysectors 46 cns 18Construction18 omn 2Otherprimarysectors 47 trd 20Otherservices19 cmt 3Processedfoods 48 otp 20Otherservices20 omt 3Processedfoods 49 wtp 12WaterTransport21 vol 3Processedfoods 50 atp 13AirTransport22 mil 3Processedfoods 51 cmn 17Communications23 pcr 3Processedfoods 52 ofi 14Finance24 sgr 3Processedfoods 53 isr 15Insurance25 ofd 3Processedfoods 54 obs 16Businessservices26 b_t 3Processedfoods 55 ros 19Personalservices27 tex 11Othermanufactures 56 osg 20Otherservices28 wap 11Othermanufactures 57 dwe 20Otherservices29 lea 11Othermanufactures

Annex 1: Mapping of model sectors


104

Table A2 MappingofModelSectorstoISICrev3.1

ModelSector ISICSectors1Agrforestryfisheries ISIC01-052Otherprimarysectors ISIC10-143Processedfoods ISIC15-164Chemicals ISIC24-255Electricalmachinery ISIC30-326Motorvehicles ISIC347Othertransportequipment ISIC358Othermachinery ISIC29,31,339Metalsandmetalproducts ISIC27-2810Woodandpaperproducts ISIC20-2211Othermanufacturing ISIC15-37,allremaining12Watertransport ISIC6113Airtransport ISIC6214Finance ISIC65,6715Insurance ISIC6616Businessservices ISIC70-7417Communications ISIC6418Construction ISIC4519Personalservices ISIC91-9320Otherservices ISIC40,41,50,51,52,63,75,80,85,90

105

In the computational model, the ”whole” economy, for the relevant aggregation of

economicagents,ismodelledsimultaneously.Thismeansthattheentireeconomyis

classified intoproductionandconsumptionsectors.Thesesectorsare thenmodelled

collectively. Production sectors are explicitly linked together in value-added chains

from primary goods, through higher stages of processing, to the final assembly of

consumptiongoodsforhouseholdsandgovernments.Theselinksspanbordersaswell

asindustries.Thelinkbetweensectorsisbothdirect,suchastheinputofsteelintothe

productionoftransportequipment,andalsoindirect,aswiththelinkbetweenchemicals

andagriculture through theproductionof fertilizers andpesticides.Sectors are also

linkedthroughtheircompetitionforresourcesinprimaryfactormarkets(capital,labour,

andland).ThedatastructureofthemodelfollowstheGTAPdatabasestructure,and

basicmodelsofthisclassareimplementedineitherGEMPACKorGAMS(Herteletal

1997,RutherfordandPaltsev2000).WeworkherewithaGEMPACKimplementation.

Production

Westartherewitharepresentativeproductiontechnologyusingabasic,constantreturns

toscalespecification.Wherewehavescaleeconomies,thisservesasthecoststructure

forcompositeinputbundles.Assumethatoutputq jinsectorjcanbeproducedwitha

combinationofintermediateinputsz jandvalueaddedservices(capital,labour,land,

etc.)va j.This is formalized inequation1.Assuminghomotheticcost functionsand

separability,wecandefinethecostofarepresentativebundleofintermediateinputsz j

forthefirmproducingq jandsimilarlythecostofarepresentativebundleva jofvalue

Annex 2: CGE model technical overview


106

addedservices.Theseareshowninequations2and3.Theydependonthevectorof

compositegoodspricesP~andprimaryfactorpricesw.Unitcostsforq thendepend

onthemixoftechnologyandpricesembodiedinequations1,2,3.Werepresentthisin

equation4,whichdefinesunitcostz j.Intheabsenceoftaxes,incompetitivesectorsz j

representsbothmarginalcostandprice.Ontheotherhand,withimperfectcompetition

on the output side (discussed explicitly later) z j can be viewed as measuring the

marginal cost side of the optimalmarkup equation,withmarkups driving awedge

betweenz jandPj.

To combine production technologies with data, we need to move from general to

specificfunctionalforms.WeemployanestedCESfunction,withaCESrepresentation

ofvalueaddedactivitiesva j,aCESrepresentationofacompositeintermediatez jmade

upofintermediateinputs,andanupperCESnestthatthencombinesthesetoyieldthe

finalgoodqj.Ourset-upisillustratedinFigure2below,ontheassumptionwehavei

primaryfactorsv,aswellasnproductionsectorsthatcanberepresentedintermsof

compositegoodsq~asdefinedbelow.

Figure 3 Representativenestedproductiontechnology

qj : ψj

va j : σ j

. . . v i,jv1,j

z j : φ j

. . . q̃n,jq̃2,jq̃1,j

These composites may (or may not, depending on the goods involved) be used as

intermediateinputs.InFigure2,wehavealsoshowntheCESsubstitutionelasticityfor

intermediateinputsf,thesubstitutionelasticityforvalueaddeds,andthesubstitution

elasticityforour”uppernest”aggregationofvalueaddedandintermediates,y.Inthe

absenceoftaxes,totalvalueaddedYwillbethesumofprimaryfactorincome,asin

equation5.


107

GivenourassumptionofCEStechnologies,wecanrepresentvalueaddedinsectorjas

afunctionofprimaryinputsandtheelasticityofsubstitutioninvalueaddeds j.This

yieldsequation6,anditsassociatedCESpriceindexshowninequation7.Similarly,

wecanspecifytheCESpriceindexforcompositeintermediates,asinequation7.This

givesusequation8,wherethecoefficientf j istheelasticityofsubstitutionbetween

intermediate inputs.This is assumed to beLeontief (i.e.f j = 0). Finally, following

Figure2,wewillalsospecifyanaggregationfunctionforvalueaddedandintermediate

inputs,intermsofitsCESpriceindex.Thisisshownasequation9.Fromthefirstorder

conditionsforminimizingthecostofproduction,wecanmaptheallocationofprimary

factors to the levelofvalueaddedacrosssectors.This is formalized inequation10.

Wecanalsospecifythetotaldemandforcompositeintermediategoodsacrosssectors

q~int,i

asafunctionoftheproducerpricePz jofcompositeinputpriceineachsector,

thescaleofintermediatedemandacrosssectorsz j,andpricesofcompositegoodsP~

i.

Thisisshowninequation11.WiththeuppernestCESforgoodswecanalsomapvalue

addedva jandintermediatedemandz jintermsofequations7and8,outputq jandthe

elasticityofsubstitutiony jbetweeninputsandvalueadded.Thisyieldsequations12

and13,wherethetermsgaretheCESweights(similartothoseinequation6)whiley j

istheuppernestelasticityofsubstitutionintheproductionfunction.

We also model some sectors as being characterized by large group monopolistic

competition.Inreducedform,thiscanberepresentedbyanindustrylevelscaleeconomy

thatreflectsvarietyeffects.Wedefinethepriceofoutputatindustrylevelasinequation

14. In thiscase,z j isdefinedbyequation9and represents thepriceofabundleof

inputs, and equation14 followsdirectly fromaverage cost pricing, homothetic cost

functions,andDixit-Stiglitztypemonopolisticcompetition.(SeeFrancoisandRoland-

Holst1997,Francois1998,andFrancois,vanMeijl,andvanTongeren2005,Francois,

ManchinandMartin2012,forexplicitderivations.)


108

Together,equations1through14mapouttheproductionsideoftheeconomy.Foran

openeconomy,given resources, technology(representedby technicalcoefficients in

theCESfunctional forms),andprices for foreignanddomesticgoodsandservices,

we candetermine factor incomes, national income, and the structure of production.

Weclosethissystembydiscussionofthedemandsideoftheeconomy,andbasicopen

economyaspects,inthenextsections.

Final Demand

Inthesystemwehavespelledoutsofar,wehavemappedthebasic,nationalstructure

ofproduction.Weclose thesystemwithademandspecificationfora representative

household.Thisinvolvesallocationofregionalincomebythehouseholdtocomposite

consumptionH,whichisseparatedoverprivateconsumptionC,publicconsumptionG,

andinvestmentI.EachofthesecomponentsofHinvolvesconsumptionofcomposite

goodsandservicesq~indexedbysectorj.ThisisillustratedinFigure3below.Where

we assume fixed expenditure shares (i.e. with taking a Cobb-Douglas functional

form), then we also have a fixed savings rate. Otherwise, given the equilibrium

allocationofhouseholdincometoconsumptionandinvestment,wewilldenotethese

expenditure shares by q.We maintain a fixed-share allocation between public and

privateconsumption.

Figure 4 Representativehouseholddemand

H

G

. . . q̃g,nq̃g,1

I

. . . q̃I,nq̃I,1

C

. . . q̃c,nq̃c,1

Weassumeawell-definedCESutilityfunctionforpersonalconsumptiondefinedover

goodsq~.Fromthefirstorderconditionsforutilitymaximization,wecanthenderive

thepriceofutilityfromprivateconsumptionPUasafunctionofpricesP~,asinequation

15.ThecorrespondingexpenditurefunctionisthenU = UcPUwhereUcisthelevelof


109

utilityfromprivateconsumption.Takingnationalincomeasourbudgetconstraint,then

combiningequation5withtheexpenditurefunctionyieldsequation16.From16,wecan

defineUcfromtheexpenditurefunctionandincome,asinequation17.Consumption

quantities,intermsofcompositegoods,canberecoveredfromequation17,asshown

inequation18.Likeprivateconsumption,thepublicsectorisalsomodelledwithaCES

demandfunctionoverpublicsectorconsumption.This impliesequations19-22.For

investmentdemand,intheshortrun,weassumeafixedsavingsrate.Inthelong-run,

themodelcanalternativelyincorporateafixedsavingsrate,oraratethatadjuststomeet

steadystateconditionsinabasicRamseystructurewithconstantrelativeriskaversion

(CRRA)preferences.Weemploy theCRRAversionhere. (Francois,McDonaldand

Nordstrom1996).Withfixedsavings,andassumingaLeontiefcompositeofinvestment

goods thatmakeup the regional investmentgood, investmentdemand isdefinedby

equation23.WithCRRApreferences,steady-stateconditionsimpliesequation24as

well,relatedtothepriceofcapitalwk.Where24holds,theadditionalequationallowsus

tomakethesavingsratecoefficientq Iendogenous.Inequation24ρistherateoftime

discountandδistherateofdepreciation.Withashort-runorstaticclosure,investment

demandmeansweapplyequation23.Withalong-runclosure,wealsoapplyequation

25.Whenwe imposeCRRApreferences in the long-run,we then employ all three

equationsonthemodel23-25,andsavingsratesareendogenous.Withafixedsavings

rate,wedropequation24andmakeq Iexogenous.

Cross-border linkages and taxes

Finally,individualcountries,asdescribedbyequations1-25above,arelinkedthrough

cross border trade and investment flows.With either monopolistic competition or

Armingtonpreferences,wecandefineaCEScompositegoodq~ in termsof foreign

anddomesticgoods.Thepriceindexforthiscompositegoodisdefinedbyequation

26.Givenequation26andtheenvelopetheorem,wecandefinedomesticabsorptionD

asinequation27,wherehindexeshomepricesandquantities.Thedifferencebetween

production qj and domestic absorptionDj in equilibrium will be imports (where a


110

negativevaluedenotesexports),asinequation28.Acrossallcountriesindexedbyr,

wealsohaveaglobalbalanced trade requirement, shown in equation29.Similarly,

balancingtheglobalcapitalaccountalsorequiresequations30and31(wherewenow

indexsourcerandhomedestinationh).

TradingcostsaremodelledasinEcorys(2009),andbenchmarkvaluesforNTBscome

fromthissource.Informationontheextenttowhichpoliciesaffectpricesandcostsis

importantforaccuratemodellingofpolicyreforms,includingwhetherpoliciescreate

”rents” as opposed to being resource-using (generating ”waste”), and the identity

(ownership)oftheentitiesandgroupstowhomanyrentsaccrue.Thisisawell-known

issuethatcanhaveamajorbearingonthemagnitudeofthewelfareimpactsofpolicies

andpolicyreforms.Forexample,ifapolicygeneratesrentsfordomesticgroupsand

liberalizationresults inashareof these rentsaccruing to foreignentrants, the result

may be lower national welfare. Recent work supported by the EC (Ecorys 2009,

CopenhagenEconomics2009)hasbeenfocusedexplicitlyonthisdistinction,andthe

resultsofthisanalysisfeedintotheestimatedreportedinthisstudy.Intheestimates

below,wedistinguishbetweencostandrentgenerationunderNTBson thebasisof

Ecorys(2009),assuming2/3ofrentsaccruetoimporterinterests,and1/3toexporter

interests.Rentsaremodelled,ineffect,likeexportandimporttaxes.Forcost-raising

barriers,we follow thenowstandardapproach tomodelling icebergordead-weight

trade costs in theGTAP framework, originally developedbyFrancois (1999, 2001)

withsupport fromtheECtostudy theMillenniumRound(nowknownas theDoha

Round).This approachhasgrown fromanextension in early applications to anow

standardfeatureoftheGTAPmodel,followingHertel,WalmsleyandItakura’s(2001)

integrationoftheFrancoisapproachintothestandardGTSPmodel.Ithasfeaturedin

the jointEC-CanadiangovernmentstudyonaEU-CanadaFTA,aswellas the2009

EcorysstudyonEU-USnon-tariffbarriers.Informalterms,changesinthevalueofthis

technicalcoefficientcapturetheimpactofnon-tariffmeasuresonthepriceofimports

fromaparticularexporterduetodestination-specificreducedcostsforproductionand


111

delivery.ThishasbeenfurthermodifiedtosplitNTBwedgesintothoselinkedtocosts

andthosethatgeneratefromrents.

Thebasicsystemoutlinedaboveprovidesthecoreproductionanddemandstructureof

eachregion,aswellasthebasicrequirementsforbilateralimportdemand,globalmarket

clearingfor tradedgoodsandservices,andglobalcapitalaccountbalancing.Within

thisbasicstructure,wealsointroducetaxes,transportservices,iceberg(deadweight)

non-tariffbarriers,andrent-generatingnon-tariffbarriers.Thesedriveawedgebetween

theex-factorypriceoriginatingincountryrandthelandedpricesincountryhinclusive

ofdutiesandtransportcosts.Taxesandrent-generatingtradecostsmeanthatYisalso

inclusiveoftaxrevenuesandrents.Intheshort-runwefixB,whileinthelong-runthis

isendogenous(suchthatthedistributionofrelativeglobalreturnsismaintained).All

ofthisaddsadditionalcomplexitytothesystemoutlinedabove,butthecorestructure

remainsthesame.

Macroeconomic Projections

Themacroeconomicprojectionsdiscussedinthecoretextandusedtobenchmarkthe

modelto2027aresummarizedinthetablebelow.

Table A3 AnnualizedGDPgrowthrates

2001-2007 2007-2016 2007-2027EuropeanUnion 2.28 0.70 1.17USA 3.30 1.74 1.90OtherOECD 2.54 1.84 2.02EasternEurope 6.55 2.03 3.20Mediterranean 4.98 3.55 3.93China 11.21 9.06 8.24India 7.91 7.53 6.19ASEAN 5.70 5.01 5.19MERCOSUR 4.28 3.86 3.97LowIncome 5.94 5.43 5.56RestofWorld 6.12 3.81 4.41

Note:2007-2027areusedforprojections


112

Assessment of a Reduction of Barriers to Trade and Investment between the EU and the US

101

qj = f j�zj , vaj

�(1)

Pz = g⇣P̃

⌘(2)

Pva = h (⌦)(3)⇧j = c (Pz, Pva)(4)

Y =X

i

⌦ivi(5)

vaj =

"X

i

αijv⇥j1

⇥j

ij

# 1

⇥j1

(6)

Pvj =

"X

i

α⇥j

ij ⌦1−⇥j

i

# 1

1⇥j

(7)

Pzj =

"X

i

⇥⇤j

ij P̃ 1−⇤j

i

# 1

1⇤j

(8)

Pj =⇣⇤⌅j

vj P 1−⌅j

vaj + ⇤⌅j

zj P 1−⌅j

zj

⌘ 1

1⌅j(9)

vi ≥X

j

vaj

✓αvj

⌦i

◆⇥j

Pvaj(10)

q̃int,i =X

j

zj

✓⇥ij

P̃i

◆⇤j

Pzj(11)

vaj = qj

✓⇤vi

Pvj

◆⌅j

Pj(12)

z̄j = qj

✓⇤zi

Pzj

◆⌅j

Pj(13)

Pj = q⌅j

⇣⇤⌅j

vj P 1−⌅j

vaj + ⇤⌅j

zj P 1−⌅j

zj

⌘ 1

1⌅j(14)

where 1 > > 0

PUc =

nX

i=1

αηc

c,iP̃1−ηc

i

! 11ηc

(15)

where 0 <⌃c − 1

⌃c< 1

U c

nX

i=1

αηc

c,iP̃1−ηc

i

! 11ηc

= Y ⌥c(16)

U c =

nX

i=1

αηc

c,iP̃1−ηc

i

! 1ηc1

Y ⌥c(17)

q̃c,i = U cP ηc

Ucαηc

c,iP̃−ηc

i(18)

PUg =

nX

i=1

αηg

g,iP̃1−ηg

i

! 11ηg

(19)

where 0 <⌃g − 1

⌃g< 1

Ug

nX

i=1

αηg

g,iP̃1−ηg

i

! 11ηg

= Y ⌥g(20)

Ug =

nX

i=1

αηg

g,iP̃1−ηg

i

! 1ηg1

Y ⌥g(21)

q̃g,i = U cP ηg

Ucαηg

g,iP̃−ηg

i(22)0

@nX

j=1

αI,jP̃j

1

A = Y ⌥I(23)

⌦k = P c (ρ + ⌅)(24)dK/K = dI/I(25)

P̃j =

RX

r=1

bsj

r,jP1−sj

r,j

! 1

1sj

(26)

where 0 <sj − 1

sj< 1

Dj =�q̃c,j + q̃I,j + q̃g,j + q̃int,i

�P̃ s

j bsh,jP

−sh,j(27)

Mj = Dj − qj(28)

rrX

r=1

Mr,j

!= 0(29)

0

@X

j

X

r 6=h

Pr,jMr,h,j

1

A = Bh(30)

X

r

Br

!= 0(31)

5

113

Table A4 HS-2Classification,top2percentoftarifflines

HS-2 descriptionshareoflines

totalshare tariffrate

U.S.top2percentoftarifflines 24 Tobaccoandmanufacturedtobaccosubstitutes 0.383 0.383 43.223 Residues&wastefromthefoodindust;preprani 0.172 0.554 23.24 Dairyprod;birds’eggs;naturalhoney;ediblepr 2.160 2.714 17.9

EUtop2percentoftarifflines23 Residues&wastefromthefoodindust;preprani 0.531 0.531 71.02 Meatandediblemeatoffal 1.033 1.563 46.64 Dairyprod;birds’eggs;naturalhoney;ediblepr 1.353 2.916 46.3

Annex 3: High tariff sectors, ranked by HS2 applied tariff rates

115

Inthisannex,weprovidetheanalyticalderivationsbehindtheestimatingequationfor

foreign investment income inChapter 6. We startwith the basic gravitymodel in

equation (1), focusingon the first specificationwhere thevalueof sales/turnoverof

MNEs from source country i in host country j, represented asvi,j , is specified as a

functionofsourcecountryvariablesS,hostcountryvariablesX,andbilateralvariables

Z.

vi , j ,t = sSs,i ,ts

+ hXh, j ,th

+ kZi , j ,tk

(1)

Notethatwecangroupthesource-specificandhost-specificvariablesandrepresent

themwithexporterandimporterfixedeffects. Thisleavesuswithfixedeffectsand

pairwisevariablesZasinequation(2).

vi , j = sSs,is

FDI source fixed effect

+ hXh, jh

FDI host fixed effect

+ kZi , jk

pairwise variables

(2)

Togofurther,weassumethatthesetofpairwisevariablesincludestheeffectofnon-

tariffmeasures.NTMsarerepresentedbytheindexINTMwithcorrespondingcoefficient

gNTM. WhileNTMsmayvarybetween source andhost, as in the left hand sideof

equation(3),wecanre-writethisasafunctionofaverageNTMsandthedifference

betweenaverageandpair-wiseNTMs.Thisistherighthandsideofequation(3).

NTM ln INTM( )i , j= NTM ln INTM( )

j+ ln INTM( )

i , jln INTM( )

j( )(3)

Next,wesubstituteequation(3)intoequation(2),whichyieldsequation(4)below.

Annex 4: Derivation of foreign investment income equation


116

vi , j = sSs,is

FDI source fixed effect

+ h Xh, j + NTM ln INTM( )j

h

FDI hostfixed effect

+ kZi , jk

+ NTM ln INTM( )i , j

ln INTM( )j( )

pairwise variables

(4)

Finally,weassumeaverageNTMlevelsapply inmostcases,exceptwherewehave

estimatestothecontraryforintra-EUFDI.Inparticular,fromtheNTMsurveydata

forFDI,wehaveestimatesoftheterm NTM ln INTM( )i , j

ln INTM( )j( ) forFDINTMsapplied

betweenEUMemberstates,intermsofthedifferencefromaveragelevelsappliedto

thirdcountries.Thismeansourfinalregressionequationtakestheform:

vi , j = Si

FDI source fised effect

+ X j

FDI hostfixed effect

+ kZi , jk

+ NTM ln INTM( )i , j

ln INTM( )j( )

pairwise variables

(5)

Under this specification, and with the assumption that third-country j NTMs can

be represented by the average level in equations (3) and (4) (so that in general

NTM ln INTM( )i , j

ln INTM( )j( ) = 0 when j≠ EUMember) we use intra-EU variation from

NTMsappliedbyEUMemberStatesagainstthirdcountries,inequation(5),toestimate

theNTMcoefficientgNTM.

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