What would be the impact of a far-reaching free trade agreement between the USA and the EU on growth, prosperity and employment? On behalf of the German Federal Ministry of Economics and Technology, the Ifo Institute has conducted a study on the dimensions and impact of a free trade agreement that would lift customs duties on goods and remove non-tariff trade barriers. The study finds that such an agreement would not only promote trade, but would also lead to greater prosperity and higher levels of employment in both the USA and the EU.
The EU member states and the USA are showing a growing interest in intensifying transatlantic trade relations, especially as emerging economies like China and India gain competitiveness compared to the older industrialised states. Although the Europe-an Union and the USA have already concluded a series of free trade agreements with various countries, these agreements would be dwarfed by a Transatlantic Free Trade Agreement (TAFTA). “Such a set of rules and regulations would create a free trade area representing nearly 50% of global economic output” notes Prof. Gabriel Felber-mayr, head of the International Trade Department at the Ifo Institute.
To determine the effects of a far-reaching liberalisation of trade, the Ifo experts working with Felbermayr compared the trade creation, trade diversion and added prosperity effects of an internal market scenario featuring the removal of non-tariff trade barriers with the effects that would arise from merely abolishing customs duty. With the help of existing free trade agreements, researchers were able to draw conclusions regarding the potential effects of a comparable transatlantic trade agreement.
Full liberalisation will lead to 79% increase in trade
The study shows that a TAFTA would primarily benefit medium-sized companies that have not exported to the USA to date, as they could increase their sales and recruit more staff. This, however, only applies if liberalisation were to go beyond the abolition of customs duties. In this case scenario researchers calculated an average increase of around 79% in trade between EU member states and the USA, namely a far greater increase than would be achieved by merely reducing customs duties. Although exports from Germany to privileged EU countries to date would fall significantly due to diversion effects, any decline would be more than compensated for by the growth in exports to the USA, Canada and Mexico (+94%, +19% and +10%).
The study reveals that a far-reaching transatlantic free trade agreement would also boost the exchange of goods and services between country pairs not directly covered by an agreement by around 3.4% on average. Overall trade would increase in around 56% of country pairs not directly affected by the agreement and transactions would only stagnate between a few countries. Moreover, in principle, only countries that have a free trade agreement with either the USA or the EU would have incentives to reach an agreement with the other major partner.
As far as prosperity effects are concerned, the study shows that real income in EU member states would rise by between 2.6% and 9.7% if sweeping liberalisation were to occur. For Germany this figure would be 4.7%, while for the USA it may even be as high as 13.4%. “Full liberalization would mean that there would be more products on the market for consumers in the long-term, prices would fall due to lower trade costs, which would increase the purchasing power of the income earned. If customs duty alone was to be abolished, on the other hand, prosperity in Germany, for example, would only increase by 0.24%” explains Felbermayr.
A TAFTA would also have positive effects on the labour market. Although 240,000 jobs would be lost worldwide, up to 110,000 new jobs would be created in Germany and a total of 400,000 new jobs could be expected in the EU as a whole. Employment would also increase in the USA, while Mexico and Canada would both enjoy slight upturns. At the same time average productivity would rise, which would increasingly lead to price decreases and better paying jobs. “In the case of the internal market scenario wages would increase by around 268 euros per month from a monthly gross wage of 3,311 euros”, adds Felbermayr. Summing up, the expert emphasized the threefold positive impact of TAFTA: “It is a growth acceleration programme, it supports medium-sized companies and it leads to an increase in secure and well-paid employment.”
