TTIP and Jobs: Does the Emperor Have Clothes?

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With negotiations of the Transatlantic Trade and Investment Partnership (TTIP) in full swing, policymakers across the Atlantic are reiterating calls for more support of an agreement.  In the wake of increasing public criticism of the plans for a deal, notably in Europe, policymakers are under pressure to pour oil on troubled water. A public consultation launched by the EU earlier this year attracted a massive wave of critical responses, causing servers to break down and compelling EU Trade Commissioner Karel de Gucht to label the outcome of the consultation as an outright “attack” on TTIP.

Much of the public criticism addresses specific concerns about inter alia the threat of investor protection to democratic institutions, loss of cultural identity or being confronted with unwanted agricultural products like hormone treated beef or chlorinated chicken. Consumers on both sides of the Atlantic display a great deal of distrust vis-à-vis each other’s regulatory regimes and fear a watering-down of long-established standards in the name of free trade. As the TTIP agreement seeks to make those regimes more ‘interoperable’, a healthy dose of skepticism from the greater public as to what the specific regulatory implications are seems unavoidable and, in fact, represents an essential part of democratic consensus building.

Employment Effects

A more general concern centers on the implications of such a deal for employment. Several civil society organizations and campaigns warn that past trade agreements have often failed to deliver on their job promise (see e.g. stopTTIP.net). Nevertheless, TTIP’s presumed potential for net job creation remains a selling point frequently used by policy makers. A closer look at the underlying economic studies, however, reveals that these claims stand on shaky grounds.

The Impact Assessment study commissioned by the EU before the negotiations started is based on a modeling technique that explicitly disregards long-term employment effects. Hence, by definition, the analysis keeps the number of jobs constant and does in no way provide a basis for claims of net employment generation. What it does provide, though, is a useful analysis of potential job reallocation effects across sectors, echoing a long-established finding that there are always winners and losers to trade deals. Such a nuanced view of the effects of TTIP, however, is rarely what policy makers discuss in public.

Another widely cited study conducted by the ifo institute and commissioned by the Bertelsmann Foundation attempts to remedy this shortcoming by explicitly modeling employment impacts, and predicts job creation in the order of 180’000 in Germany and 1 million in the US. But also here the methodology is questionable: the study assumes TTIP trade creation effects (the induced change in trade volumes) to be similar to previous trade agreements and infers the concomitant changes on the labor market, based on the labor market effects of the previous agreements. It is questionable whether TTIP can be likened to other trade agreements which were largely focused on tariff reduction, given that average tariffs are already exceptionally low between the EU and the US (under 3%). The revolutionary characteristic of TTIP is that it is mostly about non-tariff measures!

It is precisely the modeling of non-tariff trade barriers that causes the strongest headache to economists. A recent review of TTIP studies by the European Parliamentary Research Service concludes:

“The regulatory core of TTIP makes it extremely difficult for economists to come to grips with the expected economic meaning of the negotiation outcomes. NTBs [Non-tariff barriers] and mere regulatory heterogeneity create ‘trade costs’ for market access, both ways, but it is exceedingly hard to assess authoritatively what the trade costs are, and what consequences they have, whether for goods or services. Yet, without good proxies of those costs and the scope for their reduction, an empirical economic analysis with proper modeling is basically impossible or mere sophisticated ‘guess’ work.”

One approach to account for this challenge has been to estimate ad-valorem equivalents of non-tariff barriers. It is debatable whether these are ‘good proxies’ for actual costs affected firms are facing. But even if they are, the discrepancy in estimated trade costs across studies is striking. The following table compares the assumed bilateral ad-valorem equivalent rates in the US and the EU used by the EU Impact Assessment study (A) and an earlier study by the ifo institute (B) in the services sector.

 USAEU
ABAB
Construction2.595.44.648.4
Insurance19.143.710.840.8
Finance31.751.311.340.8
Telecommunications1.736.911.727.3
TradeN/A42.3N/A26.8
Air Transport217.5215.8
Maritime Transport898.4848.3
Public ServicesN/A8.8N/A29.9
Business Services3.9N/A14.9N/A

Trade in Services

Trade in services is particularly affected by such non-tariff measures, as trade barriers in services are essentially of domestic regulatory nature. The resulting inability to accurately assess the potential effects of trade liberalization in service sectors is not trivial, given the prominent role that services play notably in developed economies. Service sector employment in both the EU and the US accounts for over 70 percent of total employment.

Trade in services is substantial and increasing, accounting for over 20% of world trade. The EU and the US are the biggest exporters of global services, accounting for 42% of total services trade. Regarding foreign direct investment (Mode 3 trade) the situation is similar. 28% of EU FDI stocks are invested in the USA (1.4 trillion €), 59% of which are in services companies. On the other side, 55% of US FDI stocks are invested in the EU (1.7 trillion €), 57% of which are in services companies.

In addition, trade in services in itself is not the only trade channel through which the service sector is affected. In fact, studies find that services play an increasing role in the value added of manufacturing output. According to WTO/OECD data, services account for more than 50% of EU goods export value added.

“Deep” trade agreements such as TTIP are largely uncharted territory and policy makers need to tread lightly in order not to buttress public anxiety over the topic. Economists are currently not well equipped to consistently support claims of large numbers of jobs created. Developing an enhanced understanding of the link between various forms of liberalization (especially in services) and employment generation should therefore be a key priority. Until that objective is reached, predictions of economic assessments should be taken with a grain of salt.