Finding the Right Balance Across EU FTAs: Benefits and Risks for EU Economic Sectors

10/15/2018

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Institute for Economic Research and Policy Consulting | Directorate-General for External Policies of the Union (European Parliament)

ABSTRACT

Globally, anti-trade sentiment is on the rise, meaning it is incumbent upon policymakers to explore and explain the benefits of free and open trade. This study examines the costs and benefits of various free trade agreements (FTAs) that the EU has completed, will complete, or is contemplating. With regard to completed FTAs, the EU has seen benefits in terms of consumer choice but has a much larger and positive impact on its partners (although not as much as ex-ante modelling would suggest). For forthcoming or contemplated FTAs, the issue of non-tariff barriers must be considered for FTAs with developed economies to be a success, while comprehensive liberalisation with emerging markets improves trade and other outcomes for both the EU and its partner. Across all FTAs, trade and economic metrics are improved by an agreement while indirect effects (human rights, environment) are less likely to change. We conclude that the EU must continue its focus on comprehensive liberalisation, incorporating NTBs effectively into new agreements, while tempering expectations of influence on human rights

Executive Summary

Although economists are generally in (rare) agreement about the benefits of free trade for consumer choice, improved national welfare, and the potential for growth, a surge of populism globally has taken aim at continued progress towards free trade around the world. Against this backdrop, and with an eye on keeping trade opportunities for European firms moving forward, the European Union (EU) has been a notable exception to these protectionist impulses. Despite the Transatlantic Trade and Investment Partnership (TTIP) project remaining on life support, the EU has been leading the way in negotiating preferential trade agreements (PTAs) across the globe and attempting to enable the benefits of free trade to keep flowing to EU citizens and firms. The objective of this study is to provide the European Parliament, its Members, and in particular the Committee on International Trade (INTA) with an estimate of the economic costs and benefits of various free trade agreements (FTAs) that the EU has completed, will complete, or is contemplating. This analysis was undertaken in the context of the EU’s agenda for growth, jobs, and harnessing globalisation, with an eye on understanding the effects on the EU and the partner countries of these agreements. Several consistent themes emerged from this broad-ranging analysis:
  • With regard to already-completed agreements, the effects on the EU have been mainly as predicted in ex-ante assessments and are for the most part relatively tiny, as befitting the staggering relative size of the EU economy versus either Peru and Colombia, Korea, or the six nations of Central America. And in nearly every case we examine, the actual effects in the partner countries have been smaller than predicted in computable general equilibrium (CGE) modelling due to both a short time-series worth of data and generally less-than-full liberalisation than envisaged in the models. We anticipated that trade, price, and poverty effects are likely to become magnified as economies continue to restructure themselves, but the accrual of these benefits will take more time than a few years.
  • Although aggregate effects are small, sectoral effects have been quite impressive for both the EU and its partners, especially in areas where disaster was predicted: the example of the European automotive sector under the EU-South Korea FTA is instructive, as EU firms have increased their exports to South Korea at the same time that imports have increased rapidly. Importantly, the differentiation of EU brands and their quality levels, as well as evolving consumer tastes in South Korea, have allowed the European automotive industry to thrive even under increased competition.
  • Perhaps most importantly for already-completed agreements, in no example could we show that the FTA had a demonstrably negative effect on the welfare of the EU or the signatory country. The key takeaway from the EU’s existing agreements is that trade agreements are very effective at influencing sectoral trade flows in the short run, while other economic and social metrics may take a longer time to influence (if they are influenced at all).
  • Turning to recently-concluded agreements (with Canada, Japan, and Vietnam), the EU is expected to see small but positive impacts on GDP and welfarewith a small boost in trade and larger gains in specific sectors. Ex-ante estimates predict that the agro-food sector will be among the top beneficiaries in the case of the agreements with Canada and Vietnam, while studies of the Japan Agreement predict that manufacturing will gain the most. The most outstanding negative change in production is expected to be generated by the FTA with Vietnam, where exports of leather products could negatively affect EU producers at the lower-end of the quality scale. Additionally, tougher competition will also be felt by the EU producers of various transport equipment due to the expansion of Japanese and Canadian exports.
  • The impact of these recently-concluded agreements is, however, dependent on non-tariff barriers (NTBs) in both trade in goods and services being substantially reduced, as tariff liberalisation alone is not capable of generating substantial economic gains. This is a difference which may be attributed to the fact that more developed economies are the intended trade partners of these agreements, rather than the emerging market economies explored earlier (i.e. much of the tariff gains have already been captured). Finally, although all three agreements contain provisions related to trade and sustainable development, quantitative assessments of these provisions are difficult to forecast.
  • The final area of analysis is on agreements currently being negotiated by the EU, including those with Indonesia, Mercosur, and Mexico. As Indonesia and Mercosur have no previous history of bilateral preferential trade agreements with the EU, the trade agreements inevitably focus on the ambitious liberalisation of tariffs and trade facilitation measures. On the contrary, the agreement with Mexico is a modernisation of the existing FTA, and thus its agenda is more elaborate. These agreements are expected to bring positive but small increases in GDP and welfare for the EU. Bilateral trade will boost significantly, benefiting both partners, while there are likely to be neutral or marginally positive impacts on poverty reduction.
  • The sectoral impact of the currently-negotiated FTAs on EU producers is also expected to be tiny, with neither large gains nor losses anticipated. A positive impact is expected on chemical production and machine-building—that is, the sectors providing key inputs for the development of the EU’s less developed partners. Conversely, the impact on the agro-food sector and light industry—that is, sectors where partners might have more of a cost advantage—is more uncertain. While the agreement with Mexico is expected to boost agricultural production, the increased competition from Mercosur countries could put negative pressure on European producers, although benefiting EU consumers. Similarly, agreements with Indonesia and Mexico could result in decreased EU production in light industry.
  • Finally, unlike the FTAs concluded with developed countries, however, the environmental implications of agreements under negotiation could be very important, especially in the spheres of land use and deforestationQA0418872ENN.en

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