Trading Your Way Out of the Economic Crisis

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by Matthew Rae

September’s trade negotiations between the United States and the European Union have reignited a heated debate about genetically modified foods. Widely disdained in Europe by a public wary of the health effects and damages to the ecosystem, most of the debate has centered on the U.S. genetically modified (GMs) grains infiltrating European agriculture. However, a greater dilemma that is harder to see is whether the proposed Transatlantic Trade and Investment Partnership (TTIP) will actually lead to the economic growth that its proponents claim.

Publications ranging from the British magazine The Economist to the New York-based Wall Street Journal claim that a trade deal between the EU and the U.S. would bring untold wealth to both. A report released by the European Commission (EC) following the close of the talks, ‘TTIP the Economic Analysis Explained,’ asserts that a European family of four would see their annual disposable income increase by an average of €545 annually. This is potentially a huge windfall for an average European household, especially in today’s harsh economic environment. The same analysis claims that a U.S. family of four could see a gain of €336 to €655 in disposable income.

On closer examination, however, such assertions seem less promising than originally imagined. The gains from a transatlantic trade deal are measured in lower prices. According to the report commissioned by the EU, economic benefits are determined through potential wage increases and price reductions. Households will not see a direct increase in their incomes, but an indirect one. A growth in wages is unlikely because basic macroeconomic theory stipulates that wage increases occur when there is a shortage of labor or an increase in productive capacity.

Both conditions presently do not exist in Europe.  The unemployment rate for the EU was 11.5 percent in September. According to the Organization for Economic Co-operation and Development (OECD), labor productivity in the EU area is at 82.5 percent, 18 percent below the U.S. Therefore a rise in disposable income could only occur through price reductions.

The forecasted gains in household income are also misleading because it is assumed that the economy as a whole would benefit. In her Deutsche Welle article, ‘With a TTIP, EU and U.S. Promise a Transatlantic Trade Miracle,’ Colombia sociologist Saskia Sassen wrote that savings for households might not translate into larger gains for the economy. These days, households and businesses alike are refusing to spend the disposable income they currently hold. Juliet Chung and Vipal Monga, of the Wall Street Journal, discussed in their article, ‘Big Banks Start Charging Clients for Euro Deposits,’ how banks responded to this trend by imposing negative interest rates. By charging customers for merely holding money, bankers are hoping to encourage reluctant European households and businesses to spend.

Despite some banks charging negative interest rates since June 2014, household spending has remained flat. According to the BBC’s ‘ECB Imposes Negative Interest Rate,’ consumer spending, investment and exports are all growing at a slower rate than last year. An indirect increase in disposable income through a proposed transatlantic trade deal is unlikely to induce more spending by consumers or companies.

The economy as a whole may benefit through such policies as tariff reductions. However, the tariff barriers between the U.S. and the EU are already at an extremely low level, even without a trade deal. If the agreement only reached a conclusion on tariffs that are currently still in existence, the disposable income gains across European and U.S. households would be €12.9 billion and €5.9 billion respectively, according to the seminal report ‘Reducing Transatlantic Barriers to Trade and Investment’ by the Center for Economic Policy Research (CEPR). Compared to the projected gains from a more ambitious transatlantic trade deal that includes non-tariff barriers (NTBs), the difference is substantial. The same report claims that disposable incomes in EU households will grow by €39.8 billion if the EC is able to conclude an agreement on NTBs.

It is significantly more difficult to negotiate a transatlantic trade deal that includes comprehensive NTBs. The Economist describes the NTBs as including such things as import quotas and “Buy American” government-purchasing rules. NTBs are more difficult to eliminate than traditional trade barriers because politicians endorse them.

According to the CEPR, the primary goal is to pursue a convergence of regulatory measures between the EU and the U.S. It is here that the political viability of such an agreement begins to be questioned. In The Guardian’s article ‘EU Under Pressure to Allow GM Food Imports From US and Canada,’ Fiona Harvey discusses how EU countries will be forced to liberalize their food safety standards and allow greater privatization of the healthcare sector. A reduction of NTBs through a convergence of regulatory measures implies that the EU may have to relax some of its regulations, while the U.S. may have to strengthen some. Both options are unpopular in each of the respective areas.

The EC and its subsidiaries constantly refer to how large both partners are economically. The EU and the U.S. together make up 46 percent of the world economy. A trade deal would further integrate these two regions. However, due to their sheer economic size, potential benefits may be negligible. According to the EC, the Gross Domestic Product (GDP) of the Union was €12.9 trillion in 2012. In relative terms, an increase of €39.8 billion from a trade deal does not seem so large.

Some of the biggest companies in the world reside within the territory of the proposed trade deal. The annual sales of Cargill and Royal Dutch Shell Company, the largest companies in the U.S. and Europe, drastically outpace the potential economic gains of a trade deal. TTIP would lead to limited benefits on both sides of the ocean and the per capita income gains of these highly developed regions are likely overestimated.

European politicians, both in Brussels and various other national capitals, have constantly espoused the large economic growth potential of the deal. However, one has to question whether such gains are actually possible. The indirect rise in disposable incomes through lower prices will not induce stringent European households to spend. The gains to the European economy as a whole are opaque. The potential for an agreement that includes the NTBs is unknown at best. Even if such an agreement achieved some semblances of regulatory convergence, the potential gains in GDP would still be well below €100 billion. The EU and the U.S. together represent almost half the global economy and any potential increases in economic activity would barely register compared to the large transactions that already occur between their multi-national corporations.

We are reaching a point in global trade where a bilateral agreement between highly developed regions does not drastically increase economic growth or GDP. If the EC’s plan is to trade its way out of the economic crisis, it will be in for a rude awakening.

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