Transatlantic free trade: Boon or bane for economic cohesion in the EU?

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

A comprehensive trade agreement between the EU and United States would result in higher employment rates in the economies that are part of the agreement, argue Samuel George, Thieß Petersen and Ulrich Schoof. Southern European countries would experience an above-average positive effect on employment, which is then reflected in a corresponding reduction in the unemployment rate.

Samuel George, Thieß Petersen and Ulrich Schoof are analysts for the Bertelsmann Stiftung.

"Negotiations on a Transatlantic Trade and Investment Partnership (TTIP) between the United States and the EU are supposed to start soon.

A recent study by the Bertelsmann Stiftung and Ifo institute indicates that the US and EU would profit from such an agreement in economic terms. For the entire EU, the study assumes an increase of the average gross domestic product (GDP) per capita by 5%.

Hence, a broad agreement on free trade would function like a long-term economic stimulus without additional expenditures for public finances. But what will the economic consequences be within the EU? Will TTIP increase economic disparities among EU member countries or will it promote economic convergence?

With a broad free trade agreement that abolishes not only tariffs, but also all non-tariff trade barriers such as quality standards, labeling or technical requirements for imported products and more, the long-term real GDP per capita would grow in every single EU member state.

And it would bring an important gain for economic cohesion: The crisis-ridden southern European countries – Spain, Greece, Cyprus, Portugal and Italy – are among the top winners from TTIP in terms of gains in real income.

Thus, TTIP would not widen the gap between the crisis-ridden southern European countries and other EU member states. In general, the study determines that this agreement does not increase income differences within the EU.

A comprehensive trade agreement between the US and EU would result in higher employment rates in the economies that are part of the agreement. Southern European countries would experience an above-average positive effect on employment, which is then reflected in a corresponding reduction in the unemployment rate.

While unemployment in the OECD declines by an average of 0.45 percentage points, in the four countries in crisis, the decline ranges from 0.57 percentage points in Italy to 0.76 percentage points in Portugal.

In Spain, the number of new jobs created is about 140,000, lowering the unemployment rate there by about 0.62 percentage points. TTIP would therefore have a converging effect on the EU labor markets as well.

Besides these converging effects, TTIP might also have one implication which could weaken economic cohesion within the EU because TTIP redirects trade activities. Thus, increased trade activities between the EU and US comes along with a reduction of trade activities among the 27 EU member states.

For example, in a broad free trade agreement, trade activities between Great Britain and Sweden as well as between Great Britain and Spain are expected to drop by about 45%. Likewise, Sweden’s imports and exports with Spain and Finland will decline by 40%, and Irish-Dutch trade relations will shrink by 35%.

As such, trade integration among EU countries would decline. This trend could weaken economic cohesion within the EU because EU member states are more interested in the economic well-being of the US than other European countries.

Nevertheless, we should not forget that for most EU members the volume of import and export flows between European economies is still larger than trade volumes with the US.

Thus the European single market will remain the most important marketplace for EU member states – even with a broad TTIP.

A transatlantic trade and investment partnership would lower the cost of trade activities between the US and the 27 EU countries. The outcome of lower trade costs is increased imports and exports between the US on the one side and EU states on the other.

Thus TTIP would provide an important vehicle for increased growth and competitiveness in the European Union. Concurrently, such an agreement would not increase economic disparities among EU member countries.

On the contrary: Southern Europeans who are particularly affected by the financial crisis would benefit more than average in terms of real income and employment.

Although the price of intensifying transatlantic trade relations is a reduction of trade activities among EU member states, the overall result strengthens economic cohesion.

And perhaps TTIP could serve as a promoter of political cohesion as well. This argument concerns Great Britain in particular.

Of all the 126 countries taken into account, Great Britain shows the second highest growth in real income (+9.7% in the long run) and would gain about 400,000 additional jobs. And finally, Great Britain would see the largest unemployment rate reduction of all the OECD countries.

In view of these huge economic advantages, TTIP might promote cohesion within the EU by encouraging Great Britain not to withdraw from the EU, which is currently being discussed."

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