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Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment Final Project Report March 2013 Prepared under implementing Framework Contract TRADE10/A2/A16 Joseph Francois (project leader) Centre for Economic Policy Research, London

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  • Reducing Transatlantic Barriers to Trade and Investment

    An Economic Assessment

    Final Project Report

    March 2013

    Prepared under implementing Framework Contract TRADE10/A2/A16

    Joseph Francois (project leader)

    Centre for Economic Policy Research, London

  • Colophon

    Reducing Trans-Atlantic Barriers to Trade and Investment

    Primary authors: Joseph Francois, Miriam Manchin, Hanna Norberg, Olga Pindyuk, Patrick Tomberger

    Client: European CommissionPrepared under implementing Framework Contract TRADE10/A2/A16

    Date: March 2013

    Contact:Centre for Economic Policy Research3rd Floor77 Bastwick StreetLondon, EC1V 3PZUKTel: +44 (0)20 7183 8801Email: [email protected]: www.cepr.org

  • Contents

    Colophon ii

    Key Findings vii

    Executive Summary 1

    1. Introduction 5

    2. Economic and Policy Background 72.1. Current trade flows and FDI 82.1.1. Trade 82.1.2. FDI 102.2. Current patterns of tariffs 142.3. Non-tariff barriers 152.3.1. Indexes and econometrics 16

    3. Technical Discussion on CGE Modelling Set Up 213.1. The model 213.2. Sectors and regions in the model 24

    4. The Policy Options Considered 274.1. Scenarios 274.2. Spill-overs 284.3. Sectoral effects: Preliminary ranking 30

    5. Results 335.1. Limited Scenarios 335.2. Full FTA 455.2.1. Macro Results 455.2.2. Output and Trade 495.2.3. Sustainability Impacts 705.2.4. Global Effects 81

    6. FDI Barriers 856.1 Indexes and comparison of levels of openness 856.2 Impact of NTBs on foreign affiliates 91

    7. Conclusions 95

    8. References 97

    Annex 1: Mapping of model sectors 103

    Annex 2: CGE model technical overview 105

    Annex 3: High tariff sectors, ranked by HS2 applied tariff rates 113

    Annex 4: Derivation of foreign investment income equation 115

  • iv

    List of FiguresFigure 1 EU trade in goods with the US by sector (in million euros), 2011 9Figure 2 The bilateral composition of trade in projected benchmark (2027) 9Figure 3 EU27 outward stocks of FDI, 2010 10Figure 4 Top ten hosts of EU outward FDI stocks, 2010 (in 1000 million euros) 11Figure 5 Top ten sources of EU inward FDI stocks, 2010 (in 1000 million euros) 11Figure 6 US outward and inward FDI to the EU and the rest of the World, 2010 (in 1000 million euros) 12Figure 7 EUs direct investment flows to the US, 2004-2011 13Figure 8 EUs direct investment flows from the US, 2004-2011 13Figure 9 Trade Weighted Applied (MFN) average tariff rates 2007 14Figure 10 Value added and impact rankings 32Figure 11 Decomposition of EU output changes, ambitious scenario 63Figure 12 Average Value of NTM Indexes for FDI 87Figure 13 Average NTM index values for FDI located in the EU 88Figure 14 Breakdown of NTBs for FDI by sector 89Figure 15 Income from FDI, market size, and openness, 2007-2009 90Figure 3 Representative nested production technology 106Figure 4 Representative household demand 108

    List of TablesSummary of Macroeconomic Effect 3Table 1 Perceived NTB index by business (index between 0-100) 18Table 2 Total trade cost estimates from NTB reduction in per cent, Ecorys (2009) 20Table 3 Sectors and regions used in the CGE model 25Table 4 Scenario Summaries 28Table 5 Impact ranking indexes 31Table 6 Changes in GDP (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 34Table 7 Changes in GDP (in million euros), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 35Table 8 Changes in trade (in per cent), extra-EU trade for the EU, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 36Table 9 Changes in trade (in million euros), extra-EU trade in case of the EU, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 36Table 10 Changes in EU bilateral exports to US by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 38Table 11 Changes in US bilateral exports to EU by sector, 2027 benchmark, limited agreement, 20 per cent direct spill-overs 39Table 12 Changes in EU trade by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 40

  • vTable 13 Changes in US trade by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 42Table 14 Changes in EU output by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 43Table 15 Changes in US output by sector (in per cent), 2027 benchmark, limited agreement, 20 per cent direct spill-overs 44Table 16 Changes in GDP (in per cent), 2027 benchmark, 20 per cent direct spill-overs 46Table 17 Changes in GDP (in million euros), 2027 benchmark, 20 per cent direct spill-overs 47Table 18 Household disposable income, million euro, 2027 benchmark 48Table 19 Changes in bilateral exports to the partner country (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 50Table 20 Changes in value of total exports (in per cent and million euros), extra-EU exports in case of the EU, 2027 benchmark, 20 per cent direct spill-overs 51Table 21 Changes in value of total imports (in per cent and million euros), extra-EU imports in case of the EU, 2027 benchmark, 20 per cent direct spill-overs 52Table 22 Changes in terms of trade (in per cent), 2027 benchmark, 20 per cent direct spill-overs 53Table 23 Change in EU tariff revenue (in million euros), 2027 benchmark 54Table 24 Trade diverted from intra-EU trade (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 55Table 25 Change in EU exports to non-US, extra-EU destinations (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 57Table 26 Change in EU imports from non-US extra-EU sources (in million euros), 2027 benchmark, 20 per cent direct spill-overs, ambitious experiment 59Table 27 Changes in EU output by sector (in per cent). 2027 benchmark, 20 per cent direct spill-overs 60Table 28 Changes in US output by sector (in per cent), 2027 benchmark, 20 per cent direct spill-overs 61Table 29 Changes in extra-EU exports and imports by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 64Table 30 Changes in US exports and imports by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs. 66Table 31 Changes in bilateral exports from the EU to the US by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 68Table 32 Changes in bilateral exports from the US to the EU by sector (in per cent and million euros), 2027 benchmark, 20 per cent direct spill-overs 69Table 33 Changes in wages for less and more skilled labour, total effects (in per cent), 2027 benchmark, 20 per cent direct spill-overs 71Table 34 Change in more skilled employment in the EU by sector (in per cent), 2027 benchmark, ambitious scenario, 20 per cent direct spill-overs 73Table 35 Change in more skilled employment in the US by sector (in per cent), 2027 benchmark, ambitious scenario 74Table 36 Change in less skilled employment in the EU by sector (in per cent), 2027 benchmark, ambitious scenario 75Table 37 Change in less skilled employment in the US by sector (in per cent), 2027 benchmark, ambitious scenario 76

  • vi

    Reducing Transatlantic Barriers to Trade and Investment

    Table 38 Displacement of less and more skilled labour in the EU and US, total effects (in per cent), 2027 benchmark, 20 per cent direct spill-overs 77Table 39 Changes in CO2-emissions (in thousand metric tons), 2027 benchmark, 20 per cent direct spill-overs 79Table 40 Changes in land use (in per cent), 2027 benchmark, 20 per cent direct spill-overs 80Table 41 Total effects on GDP for rest of the World (in million euros and per cent), 2027 benchmark, 20 per cent direct spill-overs 82Table 42 Change in exports by region (in per cent), 2027 benchmark, 20 per cent direct spill-overs 83Table 43 Regression estimates for NTMs and FDI 92Table A1 Mapping of Model Sectors to GTAP 103Table A2 Mapping of Model Sectors to ISIC rev 3.1 104Table A3 Annualized GDP growth rates 111Table A4 HS-2 Classification, top 2 per cent of tariff lines 113

  • vii

    An ambitious and comprehensive transatlantic trade and investment agreement

    couldbringsignificanteconomicgainsasawholefortheEU(119billionayear)

    andUS(95billionayear).Thistranslatestoanextra545indisposableincome

    eachyearforafamilyof4intheEU,onaverage,and655perfamilyintheUS.

    ThebenefitsfortheEUandUSwouldnotbeattheexpenseoftherestoftheworld.

    Onthecontrary,liberalisingtradebetweentheEUandtheUSwouldhaveaposi-

    tiveimpactonworldwidetradeandincomes,increasingglobalincomebyalmost

    100billion.

    Incomegainsarearesultofincreasedtrade.EUexportstotheUSwouldgoupby

    28%,equivalent toanadditional187billionworthofexportsofEUgoodsand

    services.Overall,totalexportswouldincrease6%intheEUand8%intheUS.

    Reducing non-tariff barrierswill be a key part of transatlantic liberalisation.As

    muchas80%ofthetotalpotentialgainscomefromcuttingcostsimposedbybu-

    reaucracyandregulations,aswellasfromliberalisingtradeinservicesandpublic

    procurement.

    Theincreasedlevelofeconomicactivityandproductivitygainscreatedbytheagree-

    mentwillbenefittheEUandUSlabourmarkets,bothintermsofoverallwagesand

    newjobopportunitiesforhighandlowskilledworkers.Labourdisplacementwill

    bewellwithinnormallabourmarketmovementsandeconomictrends.Thismeans

    arelativelysmallnumberofpeoplewouldhavetochangejobsandmovefromone

    sectortoanother(0.2to0.5percentoftheEUlabourforce.)

    TheagreementwouldhavenegligibleeffectsonCO2emissionsandonthesustain-

    ableuseofnaturalresources.

    Key Findings

  • 1TheeconomiesoftheEuropeanUnionandtheUnitedStatesareveryimportanttrading

    partnersforeachother.Althoughaveragetarifflevelsarerelativelylowalready,various

    non-tariffbarriersorNTBs(oftenintheformofdomesticregulations)onbothsides

    oftheAtlanticconstituteimportantimpedimentstodeepeningtransatlantictradeand

    investmentlinkages.Thisstudyexaminestheimpactofthereductionofsuchbarriers.

    Evenwheretheymightnotbedirectlytargetingcross-borderactivities,domesticrules

    andregulationsneverthelesscanplaceacostontradeandinvestment.However,unlike

    tariffs,itshouldalsobestressedthatmanyregulationscannotsimplyberemovedwhen

    theyservelegitimatedomesticpurposes.Yetinsuchcasesthecostsinvolvedmaystill

    bemitigatedorreducedthroughpartialregulatoryconvergenceandcross-recognition

    ofstandards.Whilethisislikelytobeadifficultprocess,thepotentialbenefitsinterms

    ofproductivityandincomesaresubstantial.

    Thisstudyreviewstheimportanceofthebilateraleconomicrelationshipandprovides

    computablegeneralequilibrium(CGE)-basedestimatesfortheeconomy-wideimpact

    of reducing both tariff and non-tariff barriers (NTBs). Estimates are providedwith

    regardstoexpectedchangesinGDP,sectoroutput,aggregateandbilateraltradeflows,

    wages, and labour displacement, amongother issues.The analysis uses theGTAP8

    database(projectedto2027),inconjunctionwithNTBestimatesreportedintheEcorys

    (2009)study.Thestudyinvestigatesdifferentpolicyoptionsforthedeepeningofthe

    bilateraltradeandinvestmentrelationshipbetweentheEUandUS.Theserangefrom

    partialagreementsthatarelimitedinthescopeofbarrierstheywouldaddress(tariffs

    only, or services only, or procurement only) to a full-fledged free trade agreement

    Executive Summary

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    2

    (FTA) with a comprehensive liberalisation agenda covering simultaneously tariffs,

    procurement, NTBs for goods, and NTBs for services. The comprehensive option

    includestwoscenarios:alessambitiousagreementthatincludesa10percentreduction

    intradecostsfromNTBsandnearlyfulltariffremoval(98percentoftariffs)andan

    ambitiousscenariothatincludestheeliminationof25percentofNTBrelatedcosts

    and100percentoftariffs.Inbothscenariosmoreambitionisimposedonthelowering

    ofprocurement-relatedNTBsthanforotherNTBsaffectinggoodsandservices.Itis

    assumedthatNTBslinkedtoprocurementarereducedby25percentor50percent,

    inthelessambitiousandintheambitiousscenariosrespectively.Theimpactof

    partialalignmentofglobalrulesandstandardswithanewsetofEU-USstandardsand

    cross-recognitionagreementsisalsoincludedintheassessment.

    The results indicate positive and significant gains for both economies. Under a

    comprehensiveagreement,GDPisestimated to increasebybetween68.2and119.2

    billioneuros for theEUandbetween49.5and94.9billioneuros for theUS(under

    the less ambitious and more ambitious scenarios). However, if the FTA would be

    limitedtotariffliberalisationonly,orservicesorprocurementliberalisationonly,the

    estimatedgainswouldbe significantly lower.For example, anFTA limited to tariff

    liberalisationwouldleadtoalower(23.7billioneuro)increaseinGDPfortheEUand

    a9.4billioneurosincreasefortheUS.Thestudyalsoquantifiespotentialbenefitsfrom

    NTBreductionaffectingFDI.Theoverallmessageisthatnegotiatinganagreementthat

    wouldbeofacomprehensivenaturewouldbringsignificantlygreaterbenefitstoboth

    economies.

    Anothercoremessagethatfollowsfromourresultsisthatfocusingeffortsonreducing

    NTBsiscriticaltothelogicoftransatlantictradeliberalization.Differentapproaches

    tothesameregulatorychallengeshavetheunintendedconsequenceofincreasingcosts

    for firms,which have to complywith two regulatory environments, dragging down

    labourproductivity.NegotiationonNTBsprovidestheopportunitytopursueamixof

    cross-recognitionandregulatoryconvergencetoreducethesebarriers.Comparedtoa

    focusonNTBS,justlimitingtheexercisetotariffswouldleadtomuchmorelimited,

  • Executive Summary

    3

    thoughpositive effects. Furthermore, thegains to the transatlantic economies from

    NTBreductionarenotprojectedtobeattheexpenseoftherestoftheworld,thoughthe

    rest-of-worldimpacthingescriticallyonthepotentialforglobalconvergencetoward

    EU-US standards, which could then become de facto global standards and have a

    knock-oneffectloweringNTBsmultilaterally.Suchaprocessimpliesimprovementof

    marketaccessforthirdcountries,helpingtooffsettradediversion.

    Finally, this study also reports estimates on sustainability impacts -- changes in

    emissionsandinnaturalresourceutilization.EliminationofNTBsimpliesimproved

    productivity(i.e.lessprimaryinputsarerequiredforcurrentactivity).Theresultspoint

    tonegligibleeffectsontherateofCO2emissionsandutilisationofnaturalresources.

    Summary of Macroeconomic Effect

    Limitedagreement:tariffsonly

    Limitedagreement:servicesonly

    Limitedagreement:procurement

    only

    Comprehensiveagreement:less

    ambitious

    Comprehensiveagreement:ambitious

    ChangeinGDP EU,millioneuros 23,753 5,298 6,367 68,274 119,212US,millioneuros 9,447 7,356 1,875 49,543 94,904

    Bilateralexportsf.o.b.EUtoUS,millioneuros 43,840 4,591 6,997 107,811 186,965

    UStoEU,millioneuros 53,777 2,859 3,411 100,909 159,098

    Totalexportsf.o.b.extra-EU,millioneuros 43,740 5,777 7,136 125,232 219,970

    US,millioneuros 57,330 5,488 5,942 142,071 239,543

    Note: estimatestobeinterpretedaschangesrelativetoaprojected2027globaleconomy.

  • 5Thetransatlantictraderelationshipisadeepone,rootedincenturiesofsharedeconomic

    history. In thepost-warperiod, this facthasbeen reflectednotonly in early shared

    steps leadingultimately to themodernmultilateral tradingsystem,butalsoperiodic

    initiativestoformaregionaltradeagreement.1Withtherisingimportanceofglobaland

    regionalproductionchainsandinternationalfirms,thelogicforaregional,transatlantic

    agreement seemscompelling.Together, the twoeconomiesaccount for roughlyhalf

    of world output and world trade. They are, mutually, each others most important

    investmentpartnersaswell.

    In 2012, a comprehensive dialoguewas initiated between the EuropeanUnion and

    UnitedStates,regardingpossibilitiesfordeepeningoftransatlantictradeandinvestment

    relations.Thediscussionsregardingthepossibledeepeningoftheselinksareon-going.

    This report offers quantification of the effects of a trade and investment agreement

    underarangeofpossiblepolicyoptions.BoththeEUandtheUShaverelativelylow

    MFNtariffs.But,giventhemagnitudeofbothtradeandinvestmentflowsbetweenthe

    EUandtheUS,removingevenrelativelyminorimpedimentstotheseflowswillhavea

    significantimpact,withpotentialsubstantivebenefitsforbotheconomies.Inaddition,

    sincetheexistingnon-tariffbarriersalsoactasimpedimentstotradeandinvestment,

    therearegoodreasonstobelievethattherearesignificantuntappedgainsfromadeeper

    tradeandinvestmentrelationship.

    1 Past initiativeshave includedboth theNAFTA(NorthAtlanticFreeTradeArea)and theTAFTA(TransatlanticFreeTradeArea).SeeBaldwinandFrancois(1997a,1997,1999)forbackgroundonearlierinitiatives.SeeBaldwin(2012)andFrancois,Manchin,andTomberger(2012)ontheriseinvaluechainsandglobalproduction.

    1. Introduction

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    6

    This report builds on an important previous study benchmarking the current level

    of transatlanticNTBs.That report found that thepotentialgains for theEUandUS

    were substantial (Ecorys, 2009). Since the Ecorys study was published, economic

    conditionshavechanged,whilethelikelyfocusofapossibleagreementisnowbetter

    defined.Workingwith new data (including theGTAP8 database,more recent trade

    and tariff information and new investment income data fromEurostat), the present

    reportprovidesanupdatedandmoreaccuratesetofestimates.WeprovidenewCGE-

    basedestimatesfortheeconomy-wideimpactofremovingnotonlyNTBs(quantified

    onthebasisoftheestimatesinEcorys(2009),2butalsotariffsaffectingtransatlantic

    tradeflows.Inaddition,wehaveexpandedtheanalysisbyprovidinganassessmentof

    theimpactofremovingbarrierstoforeigndirectinvestment(FDI)ontheactivityof

    multi-nationalenterprises(MNEs)acrossthetransatlanticmarketplace.BoththeCGE

    andinvestmentassessmentsbuildonthesurveyandeconometricworkoftheoriginal

    Ecorysstudy.Thereportisstructuredasfollows.Chapter2providesthebackground

    fortheeconomicassessment.ThisincludescurrenttradeandFDIflows,aswellasa

    technical discussion, providing an overviewof howNTBshavebeen identified and

    measured,basedonthe2009Ecorysreport.InChapters3-5wesetoutandemploya

    CGEmodeltoexaminebotheconomicandsocio-economic(sustainability)impactsof

    trade-relatedmeasures.Chapter6focusesonforeigninvestment.InChapter7weoffer

    someconcludingcomments.

    2 InEcorys(2009)study,non-tariffbarriersaredefinedasallnon-priceandnon-quantityrestrictionsontradeingoods,servicesandinvestment,atfederalandstatelevel.Thisincludesbordermeasures(customsprocedures,etc.)aswellasbehind-thebordermeasuresflowingfromdomesticlaws,regulationsandpractices.

  • 7WestartthischapterwithanoverviewofcurrenttradeandFDIrelationshipsbetween

    theEUandUS,aswellastariffsandNTBsthatarecurrentlyinplace.Indoingso,we

    definethecontextinwhichweestimatetheeffectsofliberalisingtradeandinvestment

    betweenthetwoeconomies.

    TheEUandtheUSarerelativelyopentowardseachotherintermsofinvestmentand

    trade,asreflectedinrelativelylowlevelsfortariffs.However,variousNTBs(oftenin

    the formofdomestic regulations)onboth sidesof theAtlantic constitute important

    impedimentstotransatlantictradeandinvestmentflows.Eventhoughtheymightnot

    bedirectlytargetingcross-borderactivities theyneverthelessdobearacostontrade

    andinvestment.ThereductionofsuchbarrierscouldpotentiallybenefitboththeEU

    andtheUS.However,unliketariffs,manyregulationscannotsimplyberemoved,as

    theyoftenserveimportantandlegitimatedomesticobjectiveslikeproductsafetyand

    environmentalprotection. Yetsuchcostsmaybereduced throughpartial regulatory

    convergence and cross-recognition of standards. Still, some amount of regulatory

    divergenceisinevitableandwillremain,asregulationsreflectdifferencesingeography,

    language,preferences,culture,andhistory.Thus,inarealisticanalyticalexercise,while

    itcanbeassumedthatsomeNTBscanbeeliminatedbymutualagreementandeffort,

    their100percenteliminationshouldnotbeconsideredasarealisticoutcome.3

    3 Atthesametime,asbothregionsarehighincomewithhighstandardsfordomesticobjectives,neithershouldregulatoryconvergencebeseenasaprocessforbilateralloweringofstandards,butratherasamechanismforreinforcementofcomparableobjectivesotherwisereachedthroughdifferentregulatorymeans.

    2. Economic and Policy Background

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    8

    2.1. CurrenttradeflowsandFDI

    2.1.1. Trade

    TheUS is themost important trade partner for theEU asmeasured by exports. In

    2011,around17percentoftotalEUexportsweredestinedtotheUSmarket.TheUS

    isalsoanimportantsourceofEUimports.Itisthethirdmostimportant(11percent

    of total imports)afterChinaandRussia4.For theUS, theEUisalsoakeybilateral

    tradepartner.TheEUwasthesecondmostimportantdestinationforUSexports(after

    Canada),representing19percentoftotalexports.Itisalsothesecondmostimportant

    importpartner(afterChina),supplying17percentoftotalUSimports.5

    ThemagnitudeofthetraderelationshipbetweentheEUandtheUS,andtheimportance

    of the two economies as bilateral partners, suggests that anFTA thatwould reduce

    obstaclesandcoststotradebetweenthetwocouldhavesignificantimpactsontradeand

    ontheireconomicperformance.

    Figure1showsEUmerchandisetradewiththeUSdividedbymainsectorsfortheyear

    2011.Mostimportsandexportstakeplaceinthemachineryandtransportequipment

    sector.Thisamountedto70,850millioneurosofEUimportsfromtheUS,and104,429

    millioneurosworthofEUsalestotheUS.Thesecondmostimportantsectorforgoods

    tradebetweentheEUandtheUSischemicals.AlsointhissectortheEUexportsmore

    thanitimports(around50percentmore).

    4 Source:Eurostat.5 Source:Eurostat.

  • Economic and Policy Background

    9

    Figure 1 EUtradeingoodswiththeUSbysector(inmillioneuros),2011

    Source: Eurostat

    Giventhatgoods tradeaccountsforroughly65percentof totalbilateral trade, (see

    Figure2), liberalisationefforts (if thesameacross theboard)are likely to lead toa

    morepronouncedimpactintermsofexchangesofgoodsratherthanservicesbetween

    theUSandEU.

    Figure 2 Thebilateralcompositionoftradeinprojectedbenchmark(2027)

    Source: modelbenchmarkdatabase.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    10

    2.1.2. FDI

    NorthAmericaisthemostimportantdestinationforEUoutwardFDI,ascanbeseen

    inFigure 3.The region hosts about one-third of totalEUoutwardFDI stocks.The

    secondmost important region forEUs outwardFDI stock is the so-called non-EU

    EuroperegionthatincludestheformerSovietUnioncountries,Switzerland,Norway

    andTurkey.Theseeconomiesholdaboutone-fourthofEUFDIstocks.Thethirdmost

    important region forEUsFDI isAsia,whichaccounts for14percentof totalFDI

    outwardstocks.

    Figure 3 EU27outwardstocksofFDI,2010

    Source: Eurostat.

    While inFigure 3we focused on regions, Figure 4 andFigure 5 (below) show the

    breakdown of EU FDI partners by major country (instead of regions).Again, this

    confirmstheimportanceoftheUS.Onacountrybasis,theUSstandsoutevenmoreas

    themostimportantbilateralinvestmentpartnerfortheEU.EUoutwardFDIstocksin

    theUSaremorethantwiceaslargeastothesecondmostimportanthostcountryfor

    EUFDI,whichisSwitzerland.TherelativeimportanceoftheUSassourceofFDIin

  • Economic and Policy Background

    11

    theEUisevenmorepronouncedwhenviewedonacountrybasis,withtheUSowning

    almostfourtimesmoreofEUinwardstocksofFDIthanthesecondmostimportant

    partnercountry,Switzerland.GiventhemagnitudesoftheFDIbetweentheEUandthe

    USanypolicyinfluencingthefurtherflowscouldhaveasignificantimpactonthese

    economies.

    Figure 4 ToptenhostsofEUoutwardFDIstocks,2010(in1000millioneuros)

    Source: Eurostat

    Figure 5 ToptensourcesofEUinwardFDIstocks,2010(in1000millioneuros)

    Source: Eurostat

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    12

    Figure6depictstheevolutionofoutwardandinwardFDItoandfromtheUS.Forthe

    US,theEUisalsothemostimportantFDIpartner.ThestockofinwardFDIfromthe

    EUexceedsthatfromtherestoftheworld.However,thestockofUSoutwardFDIto

    theEUrepresentsanevenhigheramountthaninwardstockfromtheEU.

    Figure 6 USoutwardandinwardFDItotheEUandtherestoftheWorld,2010(in

    1000millioneuros)

    Source: OECDandowncalculations

    FDIactivitybetweenEUandUSsufferedtheconsequencesofthefinancialcrisisbutis

    nowrebounding.Justbeforethefinancialcrisis,EUinvestmentflowstotheUSpeaked,

    withalmost178,510millioneurosofEUinvestmentflowsgoingto theUSin2007

    (seeFigure7).Thisrepresentedabout14percentofthetotaloftheEUsinvestment

    flowsgoingabroad.Duringthecrisis,EUinvestmentflowstotheUSdroppeddown

    toalmost2004levels,withthelowestamountofbilateralflowstakingplacein2010.

    Nevertheless,in2011,bilateralinvestmentflowspickedupagain,althoughnotreaching

    yetpre-crisislevels.

  • Economic and Policy Background

    13

    Figure 7 EUsdirectinvestmentflowstotheUS,2004-2011

    Source: Eurostatandowncalculations.

    InvestmentflowsfromtheUS(andfromtherestoftheworld)totheEUalsodropped

    dramaticallyduringthecrisis(seeFigure8).Thehighestamountofinvestmentfrom

    theUStookplacein2007,amountingto195,660millioneuros.In2010,theincoming

    FDIflowswereonly114,763millioneuros.However,whilethevolumeofFDIinflows

    fromtheUSisstillbelowthepre-crisislevel,theshareofinvestmentcomingfromthe

    UShasreacheditspre-crisislevelasof2010.

    Figure 8 EUsdirectinvestmentflowsfromtheUS,2004-2011

    Source: Eurostatandowncalculations.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    14

    GiventheimportanceandattractivenessoftheNorthAmericanregionforEUinvestors

    andoftheEuropeanmarketforUSinvestorsanypolicyaimingtoremoveregulatory

    barriers to transatlantic investmentscanbeexpected tohaveapotentiallyvery large

    impact.

    2.2. Current patterns of tariffs

    Inthissectionwefocusonexistingtariffbarriers.Figure9showsthatthereissome

    heterogeneityintermsoftariffprotectionsbetweentheEUandtheUS.Whileinmost

    sectors, EU tariffs are slightly higher than those imposed by theUS, they are still

    relativelylow.However,therearetwomainexceptions:motorvehicles,andprocessed

    foods.TheEUaveragetariffsontheseproductsaresubstantiallyhigherthantheUS

    tariffs.Formotorvehicles6theEUappliesanaveragetariff(8.0percent)thatisalmost

    eighttimeshigherthantheUS.Forprocessedfoodproducts,EUaveragetariffs(14.6

    per cent) aremore than four times higher thanUS average tariffs. For agriculture,

    forestryandfisheriesaveragetariffsarealsorelativelyhigh(about3.7percent)butfor

    theseproductsthereisnodifferencebetweentheEUandtheUS.

    Figure 9 TradeWeightedApplied(MFN)averagetariffrates2007

    Source: WTO,CEPII,UNCTADmappedtoGTAP8

    6 Motorvehiclessectorinthiscaseincludesalsopartsandcomponents.

  • Economic and Policy Background

    15

    Giventhecurrenttariffstructure,thescopefortariffreductionstohaveasignificant

    impactontradeflowsislimited.Indeed,formostsectors,afurtherreductionintariffs

    impliesverysmallabsolutechangesinthelevelofprotection.Nevertheless,insome

    sectors,suchasprocessedfoods,agriculture,forestryandfisheries,andmotorvehicles,

    the impact is likely tobemoresubstantial.Forothersectors,NTBsare theprimary

    driverofpotentialimpactaswillbeshowninthenextsection.

    2.3. Non-tariff barriers

    NTBs and regulatory divergence are complex issues to dealwith analytically.Even

    the measurement of the importance of these barriers for trade and investment is a

    difficultexercise.ThisstudyreliesontheearlierworkonthistopicintheEcorys(2009)

    study.TheEcorys study remains themost comprehensive and detailed to date.The

    methodologyincorporatedinthatstudyusedamulti-prongedapproachthatcombined

    literaturereviews,businesssurveys,econometricanalyses(gravitymodellingtogether

    with CGEmodelling), as well as consultations with regulators and businesses and

    inputs by sector experts aiming to obtain a qualitative andquantitative estimates of

    transatlanticNTBs.WhiletheEcoryssurveyfocusedonbothtradeandFDI,wefocus

    hereontrade-relatedbarriers.WewillreturntoFDIbarriersinChapter6.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    16

    2.3.1. Indexes and econometrics

    Toestimatethead-valoremequivalentofNTBs(theimpactonpricesandcosts)and

    toquantifytowhatextentthoseareremovablebetweenthetwoeconomies,theEcorys

    (2009)studyundertookacomplexsetofassessments.Wesummarizethosestepsbriefly

    here.Theassessmentinvolvedsurveyscombinedwithgravity-basedeconometrics.7

    7 ForfurtherdiscussiononthemethodologiesusedforNTBquantification,whichtechnicallyareknownasgravitymodelsseebothEcorys(2009)Chapter3.4,andalsoAnderson,Bergstrand,Egger,andFrancois(2008).Forgoods,selectionbasedgravitymodellingwasused. Servicesbarrierswerebasedon theNTBelasticityestimates fromFrancoisandHoekman(2010).

    Box 1 NTBSandtheconceptsofcostandrents

    NTBs and regulatory differences can have two main effects. NTBs can either

    increase thecostofdoingbusinessfor firms,or theycanrestrictmarketaccess.

    TraditionalNTBs,likeimportquotas,areanexamplewhereNTBsmarketaccess.

    In contrast, regulations that require expensive reconfiguration of products (like

    changing voltage or reconfiguration of an exhaust system) for export are an

    exampleofcostraisingNTBs.Bothcanhavedifferentimpactsbychangingmarket

    concentration and economic power (and thus profits) of companies. In order to

    beabletomakeadistinctionbetweenthosetwotypesofNTBs,theconceptsof

    costandrentareincludedhereinmodellingofNTBs,followingthefindings

    ofthefirmsurveys(andrelatedliterature)intheEcorys(2009)study.Thatstudy

    foundthatabout60percentof theprice impactofNTBscouldbeclassifiedas

    following from actual cost increases on average, while the creation of market

    power(economicrent)wasresponsiblefortheother40percentofpriceincreases.

    Thisisanaverage,andthereissomevariationacrossbothsectorsandcountries

    inthisregard.InthecaseofNTB-relatedcostincreases,thisconstitutesawelfare

    losstosociety.Incaseofanincreaseinmarketconcentration,consumerpricesmay

    alsogoup.Howeverpartoftheincreaseisthenappropriatedbycompaniesasthey

    reapincreasedrevenuesandprofits.Thusthereisaredistributionofwelfare,and

    notsimplyareductionineconomicefficiency.

  • Economic and Policy Background

    17

    TheNTBestimatesinvolvedatwo-partsurveyasafirststep.Thesurveywasconducted

    on firms in theEUandUSengaged in trade, and firms in theEUandUSengaged

    in FDI.Theywere asked both detailed questions aboutNTBs, and amore general

    setofquestionsaboutoverallmarketaccessconditions.8 IncaseswhereNTBswere

    identified,companieswereaskedabouttherelativeimportanceofsuchbarriers.Firms

    also provided a comprehensive generalmeasure ofNTB-relatedmarket access (the

    combinedimpactofallbarriers)intheformofarankingscaledfrom0to100.With

    theoverall rankingquestion, 0 indicated that therewerenoNTBsof any type, and

    100meant therewere prohibitively highNTBs.The business survey restrictiveness

    indicators were then crosschecked against OECD (2007) restrictiveness indicators

    and against the ProductMarket Regulation (PMR) indexes. For the service sectors

    the combinationof theOECD restrictiveness indicators and the survey resultswere

    used.TheresultingmeasuresaresummarisedinTable1below.Thefirmrankingsare

    bilateral(forexampleanAmericanfirminFrancemightgiveadifferentrankingthan

    aGermanfirminFrance).

    ThereportedNTBrankings(theNTBindex)ongoodsonbothsidesoftheAtlanticare

    generallyhigherthanonservices,rangingfrom20percentto56percent.Thehighest

    perceived NTB levels were found on the aerospace and space industry. On goods

    exported to theUS,machinery also exhibits high levels ofNTBs,while the lowest

    levelsarereportedforpharmaceuticals.ForgoodsexportedfromtheUS,highlevels

    ofNTBswerereportedforchemicals,cosmeticsandbiotechnology.Lowerlevelsof

    NTBswerereportedforelectronics,iron,steelandmetalproducts.

    Ofcourse,thefirmrankingsofgeneralopennessarerelative.Theydonottranslateinto

    actualimpactsoncostsandprices.Forthis,thesurveydatawasthenintegratedwith

    asetofeconometricmodels(knownasgravitymodels)toestimatethecorresponding

    ad-valoremofpercentpriceimpactofthevariationsinNTBlevels.Onthatbasis,the

    8 Thegeneralrankingquestionsarereproducedasanannextothisreport.SeetheannextotheEcorys(2009)reportformoreinformationonthemoredetailedquestions.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    18

    Ecorys (2009) report alsoprovidesprice/cost estimatesof existingNTBs for traded

    goodsandservicesinapercentageformthatcanbeinterpretedsimilarlytoad-valorem

    tariffs.TheseestimatesarereportedinTable2below.Theyreflectthehigherpricesthat

    resultbecauseofNTBs.9

    Table 1 PerceivedNTBindexbybusiness(indexbetween0-100)

    Sector EUexportstotheUS USexportstotheEUServices Sectors:Travel 35.6 17.6Transport 39.9 26.3FinancialServices 29.7 21.3ICT 20.0 19.3Insurance 29.5 39.3Communication 44.6 27.0Construction 45.0 37.3OtherBusinessServices 42.2 20.0Personal,CulturalandRecreationalServices 35.8 35.4

    Goods Sectors:Chemicals 45.8 53.2Pharmaceuticals 23.8 44.7Cosmetics 48.3 52.2Biotechnology 46.1 50.2Machinery 50.9 36.5Electronics 30.8 20.0Office,InformationandCommunicationEquipment 37.9 32.3

    Medical,MeasuringandTestingAppliances 49.3 44.5

    AutomotiveIndustry 34.8 31.6AerospaceandSpaceIndustry 56.0 55.1FoodandBeverages 45.5 33.6Iron,SteelandMetalProducts 35.5 24.0Textiles,ClothingandFootwear 35.6 48.9

    WoodandPaper,PaperProducts 30.0 47.1

    Source: Ecorys(2009)

    9 Thereadermaynotesomedifferencebetweenthesectorsinthetablesinthissection.WehavestartedinTable1withthefullsetofsectorsfromtheoriginalECORYSsurvey.Thesehavebeenconsolidatedwhenwemovetosectorsforthemodelling,bothintheoriginalECORYSstudyandinthisreport.

  • Economic and Policy Background

    19

    AccordingtotheestimatesinTable2,non-tariffbarriersarethehighestforfoodand

    beverageproducts,withimportsfromtheUSfacinga56.8percenttariffequivalent,

    whileEUexportstotheUSoftheseproductsfacea73.3percentextracost.Among

    services,financialservicesareoneofthesectorswiththehighestestimatedNTBs.In

    thissector,EUbarriersagainstUSexportsamountto11.3percent,whileUSbarriers

    againstEUexports areestimated tobeabout31.7per cent.Barriers in the services

    sectors arehigheron theEU side for thebusiness and ICT sector, communications

    sector,construction,andpersonal,cultural,otherservices.OntheotherhandtheUS

    barriersforEUexportersintheservicessectorsarehigherthanintheEUinthefinance

    andinsurancesectors.

    Itshouldbestressedthatincontrasttoreducingtariffs,theremovalofNTBsisnotas

    straightforward.Infact,itisunlikelythatallareasofregulatorydivergenceidentified

    actuallycanbeaddressed.Aspreviouslypointedout,therearemanydifferentsources

    of NTBs and thus removing them may require constitutional changes, unrealistic

    legislative changes, or unrealistic technical changes. Removing NTBsmay also be

    difficultpolitically,e.g.becausethereisalackofsufficienteconomicbenefittosupport

    theeffort;becausethesetofregulationsistoobroad;becauseofconsumerpreferences,

    language and geography; or due to other political sensitivities. In recognition of

    thesedifficulties,intheassumptionsofthescenarios,thedegreetowhichanNTBor

    regulatorydivergencecan,potentiallyandrealistically,bereducedistakenintoaccount

    whichisdiscussedinmoredetailsinthefollowingsubchapter.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    20

    Table 2 TotaltradecostestimatesfromNTBreductioninpercent,Ecorys(2009)

    Sector Totaltradebarriers:EUbarriersagainstUSexports

    Totaltradebarriers:USbarriersagainstEUexports

    Foodandbeverages 56.8 73.3Chemicals 13.6 19.1Electricalmachinery 12.8 14.7Motorvehicles 25.5 26.8Othertransportequipment 18.8 19.1Metalsandmetalproducts 11.9 17.0Woodandpaperproducts 11.3 7.7Othermanufactures N/A N/A average goods 21.5 25.4TransportAir 2.0 2.0Water 8.0 8.0Finance 11.3 31.7Insurance 10.8 19.1BusinessandICT 14.9 3.9Communications 11.7 1.7Construction 4.6 2.5Personal,cultural,otherservices 4.4 2.5

    average services 8.5 8.9

    Source: Ecorys(2009),AnnexTableIII.1

    At this stage, therearepatterns inTable2 thatwill carry forward in themodelling.

    FollowingfromtheEcorys(2009)study,businessesperceivedtransatlanticNTBsas

    substantiallylowerforservicesthanforgoods.Thismeansthat,forcomparablecuts

    inbarriers inpercent terms, thedifferences inbarriers(combinedwith theabsolute

    importanceingoodstraderelativetoservicestrade)implythatwecanexpectgreater

    impactfromNTBreductionsingoodsthaninservices.

  • 21

    Thepurposeofthischapteristopresentanddiscussthemodelusedasbasisforthe

    policyexperiments,includingthesectorandregionalaggregationthatwereused.

    Inthisreport,theeconomicassessmentofatradeagreementbetweentheEUandUS

    isbasedonacomputablegeneralequilibrium(CGE)modelofglobalworldtrade.The

    CGEmodellingexerciseismeanttoestimatetheeffectsontheEUandUSeconomies.

    CGEmodelsliketheonesusedherehelpanswerwhat-ifquestionsbysimulatingthe

    price,incomeandsubstitutioneffectsinmarketequilibriumunderdifferentassumptions

    aboutchangesinpolicy.Theeconomicoutcomesofthebaselinescenario(withno

    policy change) can be compared to the different scenario associated with changes

    in tradepolicy.Thebaseline for themodel is thus the equilibriumwithoutpolicy

    change,andthescenarioistheequilibriumafterthepolicychange.Theeffectofthe

    policychangecanthenbebenchmarkedbythedifferencebetweenthetwo.

    3.1. The model

    TheCGEmodelemployedisbasedonthewidelyusedGTAPmodel(Hertel,1997),

    with added features from theFrancois, vanMeijl, and vanTongeren (2005)model.

    Moretechnicaldetailsofthemodelareprovidedintheannex.

    Themostimportantaspectsofthemodelcanbesummarisedasfollows:

    Itcoversglobalworldtradeandproduction

    Itallowsforscaleeconomiesandimperfectcompetition

    3. Technical Discussion on CGE Modelling Set Up

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    22

    Itincludesintermediatelinkagesbetweensectors

    It allows for trade to impact on capital stocks through investment effectswhich

    allowstoobtainlonger-runimpactontheeconomy

    ImperfectcompetitionintheFrancois,vanMeijl,andvanTongeren(2005)model,as

    implementedhere,isexplainedinFrancois,Manchin,andMartin(2012).Itinvolves

    firm level competition and supply of varieties of goods and services to both final

    consumersanddownstreamfirmsunderwhatisknownasmonopolisticcompetition.

    ThemodellingofinvestmenteffectsisbasedonFrancoisandMcDonald(1996).This

    doesnotinvolvegrossforeigndirectinvestmentflows,butratherchangesinregional

    andglobalcapitalstocks(machineryandequipment)asaresultofchangesinlevelsof

    savingsandinvestment.

    Box 2 Keyfeaturesofthemodel

    Modelsimulationsarebasedonamulti-region,multi-sectorglobalCGEmodel.

    Sectorsarelinkedthroughintermediateinputcoefficients(basedonnationalsocial

    accountsdata)aswellascompetitioninprimaryfactormarkets.Themodelincludes

    imperfectcompetition,short-runandlong-runmacroeconomicclosureoptions,as

    wellasthestandardstatic,perfectcompetition,Armington-typeset-upasasubset.

    Onthepolicyside,itofferstheoptiontoimplementtariffreductions,exporttax

    and subsidy reduction, trade quota expansion, input subsidies, output subsidies,

    andreductionsintradecosts.Internationaltradecostsincludeshippingandlogistic

    services(thesourceoffob-cifmargins),butcanalsobemodelledasSamuelson-

    typedeadweightcosts.Thiscanbeusedtocapturehighercostswhenproducingfor

    exportmarkets,duetoregulatorybarriersorNTBsthatdonotgeneraterents(or

    wheretherentsaredissipatedthroughrent-seeking).

  • Technical Discussion on CGE Modelling Set Up

    23

    In theCGEmodel, there is a single representative or composite household in each

    region. Household income is allocated to government, personal consumption, and

    savings. In each region the composite household owns endowments of the factors

    of production and receives incomeby selling the services of these factors to firms.

    It also receives income from tariff revenue and rents accruing from import/export

    quotalicenses.Partoftheincomeisdistributedassubsidypaymentstosomesectors,

    primarilyinagriculture.

    Taxes are included at several levels in the model. Production taxes are placed on

    intermediateorprimaryinputs,oronoutput.Tariffsareleviedattheborder.Additional

    internal taxes are placed on domestic or imported intermediate inputs, andmay be

    applied at differential rates that discriminate against imports.Where relevant, taxes

    arealsoplacedonexports,andonprimaryfactorincome.Finally,whererelevant(as

    indicatedbysocialaccountingdata)taxesareplacedonfinalconsumption,andcanbe

    applieddifferentiallytoconsumptionofdomesticandimportedgoods.

    Ontheproductionside,inallsectors,firmsemploydomesticproductionfactors(capital,

    labourandland)andintermediateinputsfromdomesticandforeignsourcestoproduce

    outputsinthemostcost-efficientwaythattechnologyallow.Inmostsectors,perfect

    competition isassumed,withproducts fromdifferent regionsmodelledas imperfect

    substitutes.

    Heavymanufacturingsectorsaremodelledwithimperfectormonopolisticcompetition.

    Monopolistic competition involves scale economies that are internal to each firm,

    depending on its own production level.An important property of themonopolistic

    competitionmodelisthatincreasedspecialisationatintermediatestagesofproduction

    yields returns due to specialisation, where the sector as a whole becomes more

    productivethebroadertherangeofspecialisedinputs.Inmodelsofthistype,partof

    theimpactofpolicychangesinfinalconsumptionfollowsfromchangesinavailable

    choices(thevarietyofgoodstheycanchoosefrom).Similarlyfirmsareaffectedby

    changes in available choices (varieties)of intermediate inputs.Changes in available

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    24

    varieties also involve changes in available foreign varieties, in addition to domestic

    one.Asaresult,changesinconsumerandfirminputchoiceswillspill-overbetween

    countriesastheytradewitheachother.

    TariffsandtariffrevenuesareexplicitinthestandardGTAPdatabase,andthereforecan

    bedirectlyincorporatedintothemodelusedheredirectlyfromthestandarddatabase.

    However,NTBsaffectinggoodsandservicestrade,aswellascostsavingslinkedto

    tradefacilitationarenotexplicitinthedatabaseandweneedtotakestepstocapture

    these effects.Where NTBs leads to higher costs, we follow the standard approach

    tomodelling icebergordead-weight tradecosts in theGTAP framework,originally

    developedbyFrancois(1999,2001)withsupportfromtheECtostudytheMillennium

    Round (nowknownas theDohaRound).10 Ithas featured in the jointEC-Canadian

    governmentstudyonanEU-CanadaFTA,aswellasthe2009EcorysstudyonEU-US

    non-tariffbarriers.Informalterms,wemodelchangesintheefficiencyofproduction

    forsale inspecificmarkets. In thissense,wecancapture the impact thatNTBscan

    haveinraisingcostswhenservingforeignmarkets.WhereNTBsinsteadinvolvehigher

    pricesbecauseofrents,wemodelthisasadditionalmark-ups(higherprices)accruing

    tofirms.AshighlightedalreadyinthediscussioninChapter2,thereisanapproximate

    60:40splitbetweencostgeneratingNTBsandrentgeneratingNBTs,intermsofimpact.

    3.2. Sectors and regions in the model

    WhileintheGTAPdataabout60sectorsand130differentregionsareavailable,forthe

    purposeofthisstudywehaveaggregatedsectorsandregionstoallowustoconcentrate

    onthekeyresults.ThesectorandregionalaggregationsarepresentedinTable3.

    10 TheoriginalFrancoisapproachhasgrownfromaspecializedextensioninearlyapplicationstoanowstandardfeatureoftheGTAPmodel,followingitsincorporationbyHertel,WalmsleyandItakura(2001).

  • Technical Discussion on CGE Modelling Set Up

    25

    Table 3 SectorsandregionsusedintheCGEmodel

    Sectors RegionsAgrforestryfisheries EuropeanUnionOtherprimarysectors UnitedStatesProcessedfoods OtherOECD,highincomeChemicals EastEuropeElectricalmachinery MediterraneanMotorvehicles ChinaOthertransportequipment IndiaOthermachinery ASEANMetalsandmetalproducts MERCOSURWoodandpaperproducts LowIncomeOthermanufactures RestofWorldWatertransportAirtransportFinanceInsuranceBusinessservicesCommunicationsConstructionPersonalservicesOtherservices

  • 27

    In thischapterwesummarize thepolicyscenariosused in theCGEassessment that

    followsinChapter5.Thisincludessomeexplanationofconcepts,suchaspolicyspill-

    overs,thatareincludedinthescenarios.

    4.1. Scenarios

    Asdiscussed inChapter2,while it isconceivableforall tariffs toberemoved, it is

    not realistic to assume that all NTBs and costs from regulatory divergence can be

    removed.Thisisbecauseoftheunderlyingdifferencesinthenatureofthesemeasures.

    AsaresultwhenmodellingtheliberalisationofNTBswemusttakeintoaccountthe

    degree towhichNTB-related costs can realistically be reduced (via variousmeans

    and techniques).On thebasis of theEcorys (2009) survey, a reasonableunderlying

    ruleofthumbisthatapproximately50percentofthecost/priceimpactofNTBscan

    beremovedi.e. theyareactionable.While there issomevariationbysector, the

    mappingfromoverallprice/costdifferencestothosethatcanbenegotiatedonreflects

    thisfinding,whichisbasedonexpertopinions,cross-checkswithregulators,legislators

    andbusinessessupportedbythebusinesssurveyfromtheEcorys(2009)study.Against

    thisbackground,thestudyissetuparoundscenariosdifferingwithrespecttolevelsof

    ambitionandscopeofcoverage.ThescenariosaresummarizedinTable4below.

    Thescenariossummarizedinthetablearerelativelymodest.Startingfromthelevelof

    barriersreportedinTable2,onlyabouthalfofthebarriersareconsideredasnegotiable

    oractionable.Ofthese,halfarereducedinthemostambitiousscenario(or25percent

    4. The Policy Options Considered

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    28

    oftotalNTBsinTable2).Thisisthemostambitiousscenario.Themodestscenarios

    assumeevenlessreductioninNTBs.Underboththeambitiousandmodestscenarios,it

    isassumedthatmoreaggressiveliberalizationisappliedtoprocurement.Thescenarios

    reported here are therefore far less ambitious than under the original Ecorys study,

    wherefulleliminationofactionableNTBswasassumed.

    Table 4 ScenarioSummaries

    Narrow(limited)FTAScenariosTariffsonly 98percentoftariffseliminatedServicesonly 10percentofservicesNTBseliminatedProcurementonly 25percentofprocurementNTBseliminatedComprehensiveScenarios

    Lessambitious

    98percentoftariffseliminated10percentofNTBseliminatedonbothgoodsandservices(20percentofactionable)25percentofprocurementNTBseliminated

    Ambitious

    100percentoftariffseliminated25percentofNTBseliminatedonbothgoodsandservices(50percentofactionable)50percentofprocurementNTBseliminated

    4.2. Spill-overs

    Thesimulationsthatarecarriedoutalsotakeintoaccountconceptsofbothregulatory

    convergenceandregulatoryspill-overs.Morespecifically,insettinguptheexperiments,

    wehaveincludedtwosetsofpossibleeffectsbeyondbilateralliberalization.Theseare

    definedasfollows.First,wehaveincludeddirect spill-overs.Thesearebasedonthe

    assumptionthatimprovedregulatoryconditionsnegotiatedbetweentheEUandtheUS

    willalsoresultinalimitedfallinrelatedtradecostsforthirdcountriesexportingtothe

    EUandUS.Inotherwords,thiscapturestheextenttowhichthebilateralstreamlining

    of regulationsandstandards,and reduction in regulatoryburdens,alsobenefitother

    exporterstotheEUandUS.Thispositivemarketaccesseffectforthirdcountriesis

    modelledasbeingaround20percentofthebilateralfallintradecostrelatedtoNTBs

    forthecorescenarios.(Wehavealsoexamined10percentspill-oversasarobustness

  • The Policy Options Considered

    29

    check.)ThisconceptwasintroducedintheEU-JapanstudybyCopenhagenEconomics

    (2009).Inpractice,itmeansthatifthereis5percentNTB-relatedtradecostreduction

    betweentheEUandUS,therewillalsobea1percenttradecostreductionforthird

    countriesexportingtotheEUandUS.Thelogicisthatfirmsinthirdcountriesmayfind

    iteasiertomeeteitherEUorUSregulatoryrequirementsifbilateralnegotiationslead

    to simplifications thatarenot inherentlydiscriminatory.KoxandLejour (2006), for

    example,provideevidencethatdifferencesinregulationscanincreaseoperatingcosts

    indifferentmarkets,reducingbilateraltrade.

    Asecondindirecteffectinvolvingthirdcountriesisconsideredaswell:theindirect spill-

    overs.Thesearemeanttogaugetheeconomicimplicationsifthirdcountriesadoptsome

    ofthecommonstandardsagreedbetweentheEUandtheUS.Giventhat,collectively,

    theEUandtheUSwouldstandastheworldsbiggesttradingblock,thereisavery

    realpossibilitythatmutualagreementonregulationsandstandardswouldbeadopted,

    partially,alsobythirdcountries.Thus,wheretheEUandtheUSactasaregulatory

    hegemon,thereisscopeforsettingdefactocommon,globalstandards.Thisimplies

    thatthebilateralagreementwillgiveEUandtheUSimprovedmarketaccessinthird

    marketsfromreducedNTBs.Inaddition,therewillbescopeforreductionsinNTBs

    amongst third countries, as they converge further on common standards.Therefore,

    indirectspill-overswillleadtolowercostsandgreatertradebetweenthirdcountriesas

    well.Wehavemodelledindirectspill-oversas50percentofthedirectspill-overrate.

    Thismeansthatforexamplefora5percenttradecostreductionbetweentheEUand

    US,andwith20percentcorrespondingdirectspill-overs,wewillhavea1percent

    (directspill-over)reductionforthirdcountriesexportingtotheUSorEU,anda0.5per

    cent(indirectspill-over)reductionforEUandUSexportcoststothirdcountries,and

    fortradebetweenthirdcountries.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    30

    4.3. Sectoral effects: Preliminary ranking

    Atthisstage,wehavespelledout tradeflows, tariffbarriers,andnon-tariffbarriers.

    InwhatfollowsinChapter5,wewillfocusoneffects.Beforedoingso,itisusefulto

    benchmarkexpectations.Whatwemeanisthat,beforeweturntomodellingresults,

    wewant toprovideanon-modelbased rankingof some important sourcesof likely

    effects. This involves the data summarized inTable 5 below. In theTable, column

    Asummarizes the totalvalueof tariffsandactionableNTBs(asdefinedbyEcorys)

    appliedbytheUSagainstEUexports.Thenexttwocolumnssummarizetheimportance

    ofeachsectortototalEUexportstotheUS.ColumnBisbasedongrossvalues,while

    columnCisbasedinsteadonthevalueaddedcontainedinexports.11IncolumnC,we

    seethatwhilechemicalsare12.38percentofexportsonagrossvaluebasis,theyare

    somewhatlessimportantonavalueaddedbasis,accountingfor11.21percentofEU

    valueaddedcontainedinexportstotheEU.Asacrudefirstpassatpossibleeffects,

    columnEprovidesanimpact-rankingindex.Thisisbasedonthevalueaddedcontained

    in exports by sector (C), the scope for liberalization (A), and theprice elasticityof

    demandforimports(D).Together,theseprovidearoughestimateofincreasedexports,

    onavalueaddedbasis,followingfromimprovedmarketaccesstotheUSforEUfirms.

    Forexample,ofthetotalvalueaddedcontainedinEUexportstotheUS,columnEsays

    thatfullliberalizationinchemicalscouldyieldan8.39percentincreaseintotalexports

    totheUSonavalueaddedbasis.AsitisvalueaddedthattranslatesintoGDP,theindex

    alsoprovidesacruderankingofoverallGDPimpactsofsector-specificliberalization.

    11 SeeFrancois,Manchin,andTomberger(2012)forexplanationofthevalueaddedcalculations,whicharebasedonourCGEmodeldatabase

  • The Policy Options Considered

    31

    Table 5 Impactrankingindexes

    A B C D E=.01*A*C*D

    actionableNTBs+tariffsgrossexport

    shareexportvalueaddedshare priceelasticity index

    Agrforestryfisheries 3.70 1.73 2.09 4.77 0.37

    Otherprimarysectors 0.00 1.36 1.70 12.13 0.00

    Processedfoods 48.93 4.42 4.71 2.46 5.67Chemicals 14.69 12.38 11.21 5.09 8.39Electricalmachinery 9.91 1.09 0.94 9.65 0.89

    Motorvehicles 22.49 8.81 7.11 10.00 15.99Othertransportequipment 8.63 5.31 4.94 7.14 3.04

    Othermachinery 0.80 16.92 16.25 9.71 1.26Metalsandmetalproducts 6.69 2.75 2.53 13.91 2.36

    Woodandpaperproducts 5.76 2.42 2.61 7.99 1.20

    Othermanufactures 3.20 7.32 4.90 6.56 1.03

    Watertransport 0.65 0.05 0.04 3.80 0.00Airtransport 2.35 3.12 2.41 3.80 0.22Finance 6.46 6.20 7.45 2.04 0.98Insurance 3.84 6.02 7.10 3.18 0.87Businessservices 1.58 10.07 12.28 3.18 0.62Communications 0.65 0.85 1.01 3.18 0.02Construction 0.90 0.35 0.36 4.21 0.01Personalservices 0.66 1.49 1.76 8.71 0.10Other(public)services 0.00 7.36 8.59 3.92 0.00

    Source: CGEcalculations.

    TheestimatesincolumnEofTable5areofcoursepartialequilibrium.Theymisscross-

    sectoreffects,includinglabourmarketinteractionandintermediatelinkages.Theyalso

    missconsumerbenefitsfromaccesstomoregoodsandservices.Evenso,theyprovide

    aclearrankingoflikelyeffects.Thisrankingcarriesthroughtheestimatesinthenext

    chapter, and so it isworth discussing the pattern for the impact indexes briefly, as

    showninFigure10.Fromthefigure,wecanseethatforsomesectors,especiallymotor

    vehicles, though they are not dominant on a value added basis, the combination of

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    32

    highelasticitiesandhightradebarriersmeansthat,overall,thesesectorsarelikelyto

    dominateintermsofimpact.Bythesamelogic,despitethefactthatothermachinery

    isamajorsectoronavalueaddedbasis, the lowlevelofbarriersmeansitdoesnot

    rankhighlyintermsofexpectedbenefitsfromimprovedmarketaccess.FromFigure

    10,themanufacturingsectorsarelikelytohavethegreatestimpactbyfaroverall.This

    includesmotorvehicles,chemicals,processedfoods,andother transportequipment.

    Incontrast,whilevalueaddedsharesarecomparablefortheservicessectors(business

    services is more important on a value added basis than either chemicals or motor

    vehicles), thecombinationof lowelasticitiesand relatively lowbarriersmeans that,

    overall,weexpectthegreatestimpactofmarketaccessonexportsandGDPtobefrom

    liberalizationongoodsectors,andespeciallychemicals,machinery(vehiclesandother

    transportequipment),andprocessedfoods.ThepatterninFigure10revealsitselfagain

    whenreportresultsinChapter5.Manufacturingliberalizationistheprimarydriverof

    benefitsfromimprovedtrade-relatedmarketaccess.

    Figure 10 Valueaddedandimpactrankings

    Source: owncalculations.SeeTable5.

  • 33

    In this chapter we focus on the results of the CGE modelling of bilateral trade

    liberalization.Theresultsarereportedwithrespecttoaneconomicbenchmarkprojected

    outtotheyear2027,whichimpliesthatthattheycapturetheimpactoftheagreement

    afulltenyearsaftertheimplementationoftheagreement,providingthelonger-term

    impactofpolicychanges.First,wepresentresultsforthelimitedscenarios.Wethen

    examinethecomprehensivescenarios,assumingthatanagreementwouldcollectively

    covertariffs,services,andprocurement.Wethenmoveontoreportingestimatedeffects

    on output and trade, first on an aggregate and then on amore disaggregate, sector

    specific level.Wealsoprovideadiscussionof the effectsof removalofbarrierson

    sustainability,i.e.effectsonlabour,CO2emissionsandtheuseofnaturalresources.

    Thelastpartofthischaptersummarisestheresultingeffectsontherestoftheworld.

    5.1. Limited Scenarios

    Inthissection,wepresentresultsassumingthatalessambitious,limitedFTAwouldbe

    implemented.Weanalysetheimpactassumingthatonlyasinglepolicypillar,i.e.only

    tariffliberalisation,oronlyservicesliberalization,oronlyprocurementliberalisation

    wouldbe implemented.Note that the liberalisationefforts thatarebeingconsidered

    for each pillar are similar to those envisaged in the less ambitious scenario of the

    comprehensiveFTAoption(seeTable4),including20percentspill-overs.12Forthe

    tariffonlyagreementthereareobviouslynospill-overs.

    12 Resultswith10percentspill-oversarereportedinseparateannextables.

    5. Results

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    34

    Thefirstconclusiontotakefromtheresultsofthepartialagreementsisthatliberalising

    eachpolicypillarsseparatelyleadstorelativelysmall increasesinGDPforboththe

    USandtheEU(seeTable6andTable7below).FortheEU,thetariffscutsleadtoa

    GDP increaseof0.10percent (23,753millioneuros),while the reductionofNTBs

    inservicesandinprocurementincreaseGDPbyonly0.02percent(5,298and6,367

    millioneuros).FortheUS,thesechangesareevensmaller(rangingfrom0.01to0.04

    percent).

    Table 6 ChangesinGDP(inpercent),2027benchmark,limitedagreement,20per

    centdirectspill-overs

    TariffsOnly ServicesOnly ProcurementOnlyEuropeanUnion 0.10 0.02 0.02UnitedStates 0.04 0.03 0.01Other -0.01 0.00 0.00OtherOECD,highincome -0.03 0.00 0.00

    EastEurope -0.04 0.00 0.00Mediterranean -0.04 0.00 0.00China 0.01 -0.01 -0.01India -0.01 0.00 0.00ASEAN -0.02 0.01 -0.01MERCOSUR -0.01 0.00 0.00LowIncome -0.02 0.00 0.00RestofWorld -0.02 0.00 0.00

    Source: CGEcalculations.

  • Results

    35

    Table 7 ChangesinGDP(inmillioneuros),2027benchmark,limitedagreement,

    20percentdirectspill-overs

    TariffsOnly ServicesOnly ProcurementOnlyEuropeanUnion 23,753 5,298 6,367UnitedStates 9,447 7,356 1,875Other -7,903 -117 -1,595OtherOECD,highincome -5,065 726 -668

    EastEurope -292 26 4Mediterranean -580 60 -8China 2,289 -1,713 -856India -489 137 79ASEAN -832 337 -263MERCOSUR -363 182 -5LowIncome -228 39 47RestofWorld -2,344 90 75

    Source: CGEcalculations.

    Therelativesizeoftheservicesimpactislinkedbothtothemagnitudeofunderlying

    bilateralbarriersthatarereduced(seeTable2)andalsototherelativetradevolumes

    (seeFigure2).NTBsareperceivedbybusinessesasroughly2.5timeshigheringoods

    thanservices,asappliedintheexperiments.ThiscapturesthefactthatboththeEUand

    USarerelativelyopen,byglobalstandards,intheservicesectors.Atthesametime,

    goodstradeistwicethevalueofservicestrade.Thustherelativemagnitudesforgoods

    andservicesNTBsareconsistentwiththebenchmarklevelsofprotectionandtrade.

    Next,welookattheexpectedchangesintradefortheEUandtheUS.Theresultsare

    presentedforeachmeasureseparatelyinTable8andTable9below.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    36

    Table 8 Changesintrade(inpercent),extra-EUtradefortheEU,2027benchmark,

    limitedagreement,20percentdirectspill-overs

    TariffsOnly ServicesOnly ProcurementOnlyExportsEuropeanUnion 1.18 0.16 0.19UnitedStates 1.91 0.19 0.23

    ImportsEuropeanUnion 1.00 0.13 0.18UnitedStates 1.13 0.57 0.14

    Terms of tradeEuropeanUnion -0.01 0.00 0.00UnitedStates 0.04 -0.01 -0.02

    Source:CGEcalculations.

    Table 9 Changesintrade(inmillioneuros),extra-EUtradeincaseoftheEU,2027

    benchmark,limitedagreement,20percentdirectspill-overs

    TariffsOnly ServicesOnly ProcurementOnlyExportsEuropeanUnion 43,740 5,777 7,136UnitedStates 57,330 5,488 5,942

    ImportsEuropeanUnion 44,338 5,742 7,881UnitedStates 47,775 4,655 5,869

    Source:CGEcalculations.

    Amongthepartialagreementoptions, the tariffcutsareshowntodeliver thelargest

    increase in trade flows. Here, both exports and imports are shown to increase by

    between 1 and 2 per cent. Extra-EU exports are estimated to increase by 1.18 per

    cent(correspondingto44billioneuros)whileimportsfromoutsideEUareexpected

    toriseby1.00percent(correspondingalso toabout44billioneuros increase).The

    changesareestimatedtobeslightlyhigherfortheUS.Liberalisingprocurementand

    serviceswill leadtorelativelysmall, less than0.5percent(about6-7billioneuros)

    increases inexportsand imports.Theresultingchanges in termsof tradeareshown

    tobe insignificant.While theprocurementandservicesoptions leadtosimilarGDP

    effects, the trade effects are larger overall for procurement.This traces back to the

  • Results

    37

    underlying trade elasticities.Goods are estimated to bemoreprice sensitive overall

    (seethediscussioninChapter4)andthistranslatesintosomewhatlargertradevolume

    effects.However,bothsetsoftradevolumeeffectsaremuchsmallerthantheestimates

    discussedbelowlinkedtoamorecomprehensiveagreement.

    ThetablesbelowshowtheimpactofthelimitedFTAonbilateralsectoraltradebetween

    theEUandtheUS.Limitingtheliberalisationtoservicesorprocurementonlywould

    haveaverymarginalimpactonsectoraltrade,withtheexceptionofsomeoftheservices

    exportsand imports increasingasbarriers removedunder theservices liberalisation.

    Nevertheless,onaverage,bothbilateralexportsandimportswouldincreasebyabout

    1per centor less if only servicesorprocurement is liberalised.On theotherhand,

    thecutsintariffswouldleadto6.6percentincreaseofEUexportstotheUSandto

    a12.4percentincreaseinimports.Thedifferenceinthemagnitudeofchangeisdue

    totheinitialtariffstructuresbetweenthetwoeconomies,withtheEUhavinghigher

    barrierstowardstheUS.Thusthedifferenceintheseaveragechangesismainlydriven

    bymotorvehicles.Inthissectortheimportswouldsignificantlyincreaseastariffsare

    removedforUSexporters.Inabsoluteterms,thegreatestincreaseinbilateralservices

    exportsunderservices-onlyliberalizationisinfinance,insurance,andbusinessservices

    inthecaseoftheEU,andinfinanceandbusinessservicesinthecaseoftheUS.With

    procurement only,we see bilateral trade growth primarily in goods (chemicals and

    vehiclesexportsfortheEU,chemicalsandmetalsandfabricatedmetalproductsforthe

    US).Thebilateraltradeeffectsoftariffsoutweighboththeprocurementandservices

    only scenarios.There is substantial growth in bilateral trade in chemicals, vehicles,

    machinery, and othermanufactures.Total trade (EU exports to theUS,US exports

    totheEU)expandsbyalmost100billioneurosinthetariffonlyscenario.Thesector

    patternreflectsthebasicpatternoftariffsinthetariffs-onlyscenario,asdiscussedin

    Chapter2,alongwiththeunderlyingelasticitiesasdiscussedinChapter3.Forexample,

    USmanufacturing tariffs are relatively low, and highest on othermanufactures and

    processedfoods(Figure9).

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

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    Table 10 Changes in EU bilateral exports to US by sector (in per cent), 2027

    benchmark,limitedagreement,20percentdirectspill-overs

    TariffsOnly ServicesOnly ProcurementOnly

    Percent Millioneuros PercentMillioneuros Percent

    Millioneuros

    Agrforestryfisheries 17.53 2,024 0.00 0 -0.15 -17

    Otherprimarysectors 0.37 33 0.05 4 0.00 0

    Processedfoods 8.15 2,402 0.00 0 1.50 442Chemicals 5.46 4,509 -0.09 -77 2.59 2,140Electricalmachinery 3.08 225 -0.19 -14 -0.22 -16

    Motorvehicles 13.70 8,048 -0.05 -29 5.69 3,345Othertransportequipment 1.84 653 -0.01 -4 1.50 531

    Othermachinery 8.60 9,705 -0.11 -123 -0.11 -126Metalsandmetalproducts 20.40 3,744 0.01 2 4.13 757

    Woodandpaperproducts 2.23 359 -0.02 -4 -0.19 -30

    Othermanufactures 23.35 11,402 -0.02 -12 -0.05 -27

    Watertransport 0.32 1 3.35 12 0.26 1Airtransport 0.24 50 0.79 164 0.03 7Finance 0.22 93 4.32 1,787 -0.03 -13Insurance 0.27 107 4.35 1,746 -0.06 -24Businessservices 0.43 288 1.23 825 0.13 87Communications 0.20 11 0.73 41 0.07 4Construction 0.45 10 1.73 40 0.48 11Personalservices 0.46 46 2.49 247 -0.26 -25Otherservices 0.27 130 -0.03 -13 -0.10 -50total 6.57 43,840 0.69 4,591 1.05 6,997

    Source:CGEcalculations.

  • Results

    39

    Table 11 ChangesinUSbilateralexportstoEUbysector,2027benchmark,limited

    agreement,20percentdirectspill-overs

    TariffsOnly ServicesOnly ProcurementOnly

    Percent Millioneuros PercentMillioneuros Percent

    Millioneuros

    Agrforestryfisheries 19.33 978 0.03 1 0.15 8

    Otherprimarysectors 0.50 51 -0.04 -4 0.00 0

    Processedfoods 39.82 2,173 0.03 2 0.11 6Chemicals 12.45 9,927 0.16 129 0.54 430Electricalmachinery 3.39 639 0.91 171 1.07 201

    Motorvehicles 109.50 20,808 0.11 20 0.67 127Othertransportequipment 7.61 2,823 0.05 18 0.32 118

    Othermachinery 12.10 5,659 0.16 75 0.28 129Metalsandmetalproducts 23.43 4,995 0.03 6 9.29 1,980

    Woodandpaperproducts 3.74 257 0.07 5 0.73 50

    Othermanufactures 15.80 5,836 0.04 16 0.06 22

    Watertransport -0.25 -1 2.90 17 0.11 1Airtransport -0.17 -29 0.74 125 0.08 14Finance -0.14 -35 2.16 546 0.66 166Insurance -0.24 -9 3.25 116 0.09 3Businessservices -0.36 -130 2.41 862 0.09 32Communications -0.18 -12 4.60 300 0.11 7Construction -0.31 -7 2.76 65 1.14 27Personalservices -0.42 -29 5.07 355 0.30 21Otherservices -0.23 -116 0.07 35 0.14 69total 12.36 53,777 0.66 2,859 0.78 3,411Source:CGEcalculations.

    Table12belowshowsthecorrespondingestimatedchangesintheEUstotalexternal

    trade (extra-EU). Overall, the tariff cuts are expected to cause total imports and

    exports to increaseby1.18and1.00percentrespectively.Theinducedeffectsfrom

    liberalisingtradeinservicesandprocurementaresmaller,rangingfrom0.13to0.19

    per cent respectively.Nevertheless, exports in the insurance and finance sectors are

    estimatedtoincreasebyabout2percentifservicesareliberalised.Meanwhile,finance,

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    40

    communications,andpersonalservicesimportsareestimatedtoincreaseby1-1.8per

    cent due to services liberalisation. Under tariff liberalisation, the highest increase

    in importswould takeplace inmotorvehicleswitha9.21percent,while regarding

    exportsthemostpronouncedincreaseisestimatedtotakeplaceinothermanufactures

    witha5.50percentincrease.

    Table 12 Changes in EU trade by sector (in per cent), 2027 benchmark, limited

    agreement,20percentdirectspill-overs

    Totalexports Totalimports

    Tariffsonly Servicesonly Procurementonly Tariffsonly ServicesonlyProcurement

    onlyPercent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Agrforestryfisheries 0.58 1,303 0.00 3 -0.05 -102 2.64 1,342 0.10 52 0.17 85

    Otherprimarysectors -0.27 -363 0.03 35 0.01 11 0.52 3,643 0.01 98 0.01 47

    Processedfoods 1.33 2,360 0.03 45 0.27 481 2.66 2,282 0.07 64 0.12 100Chemicals 1.23 4,707 -0.01 -47 0.65 2,478 2.46 7,972 0.08 268 0.13 419Electricalmachinery -0.03 -26 -0.02 -15 -0.31 -292 0.39 1,357 0.01 23 0.01 24

    Motorvehicles 3.70 8,399 -0.02 -43 1.47 3,340 9.21 16,799 0.11 193 0.22 404Othertransportequipment 0.56 914 -0.02 -38 0.27 442 2.54 2,345 0.06 55 0.16 151

    Othermachinery 1.73 10,359 -0.08 -487 -0.10 -611 0.82 3,969 0.14 685 0.03 126Metalsandmetalproducts 2.70 3,720 -0.01 -18 1.15 1,589 1.18 4,156 0.06 214 1.45 5,111

    Woodandpaperproducts 0.16 222 -0.01 -17 -0.05 -72 0.67 438 0.11 74 0.29 189

    Othermanufactures 5.50 11,957 0.02 34 -0.02 -36 -0.03 -250 0.05 523 0.04 412

    Watertransport 0.10 47 0.22 100 0.03 14 -0.02 -8 0.31 118 0.05 21Airtransport 0.14 110 0.21 162 0.01 9 -0.09 -84 0.21 203 0.05 51Finance 0.09 87 2.00 1,864 0.00 2 0.09 63 1.02 695 0.32 221Insurance 0.09 86 2.03 1,849 -0.03 -27 0.12 20 0.94 160 0.07 12Businessservices 0.04 183 0.36 1,500 0.02 77 -0.08 -144 0.62 1,127 0.06 103Communications 0.00 0 0.47 127 0.02 6 0.09 35 1.15 420 0.08 29Construction -0.02 -13 0.27 176 0.00 -1 0.09 20 0.47 110 0.22 52Personalservices -0.13 -138 0.50 552 -0.11 -117 0.15 41 1.84 487 0.21 55Otherservices -0.06 -173 0.00 -4 -0.02 -53 0.12 341 0.06 173 0.10 267Total 1.18 43,740 0.16 5,777 0.19 7,136 1.00 44,338 0.13 5,742 0.18 7,881

    Source:CGEcalculations.

  • Results

    41

    ThereductionoftariffswillleadUSimportsandexportstoincreaseby1.91and1.13

    percentrespectively(Table13).Thebiggestincreasesareestimatedtotakeplacein

    theexportofmotorvehicles (15.43percent),chemicals (4.05percent),metalsand

    metalproducts(4.33percent).AscanbeseenfromtheTable,theestimatedeffectsof

    theliberalisationofservicesandprocurementontradearemuchsmaller.Thebiggest

    changes in imports are also attributable to the reduction of tariffs,with the highest

    sectorspecificincreasesexpectedtotakeplaceinprocessedfoodsandmetalsandmetal

    productions(2.37percentand2.43percentrespectively)andmotorvehicles(2.13per

    cent).Theliberalisationoftheservicessectorsishoweverestimatedtoincreaseimports

    offinanceandinsuranceservicesbyaround3percent.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    42

    Table 13 Changes inUS trade by sector (in per cent), 2027 benchmark, limited

    agreement,20percentdirectspill-overs

    Totalexports Totalimports

    TariffsOnly ServicesOnly ProcurementOnly TariffsOnly ServicesOnlyProcurement

    OnlyPercent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Percent

    Mlneuros

    Agrforestryfisheries 0.29 1,386 0.00 -16 0.03 140 1.74 1,814 0.03 35 -0.08 -82

    Otherprimarysectors -0.09 -166 0.00 8 0.01 18 0.14 696 0.05 265 0.00 -2

    Processedfoods 2.39 2,556 0.02 16 0.03 31 2.37 2,490 0.01 14 0.58 608Chemicals 4.05 13,363 0.11 375 0.11 362 1.06 2,857 -0.06 -167 1.00 2,678Electricalmachinery -1.10 -1,534 0.76 1,061 0.59 826 0.94 3,994 -0.26 -1,106 -0.35 -1,467

    Motorvehicles 15.43 23,826 0.05 80 0.31 477 2.13 8,879 0.01 25 0.91 3,773Othertransportequipment 1.55 2,688 0.02 34 0.18 305 1.08 929 0.02 18 0.55 473

    Othermachinery 1.77 4,854 0.08 220 0.17 466 1.46 10,363 0.01 72 -0.14 -1,012Metalsandmetalproducts 4.33 5,171 0.01 10 2.14 2,553 2.43 4,716 0.08 165 0.69 1,339

    Woodandpaperproducts 0.00 0 0.02 14 0.13 96 0.82 1,088 0.03 40 -0.11 -143

    Othermanufactures 3.40 6,989 0.03 69 0.04 84 1.06 8,190 0.03 213 -0.03 -237

    Watertransport 0.07 3 0.09 4 0.03 1 0.22 6 0.63 18 0.04 1Airtransport 0.04 19 0.18 96 0.04 19 0.12 66 0.34 182 0.01 7Finance -0.10 -78 0.98 736 0.27 203 0.26 156 3.14 1,903 -0.02 -13Insurance -0.26 -85 0.68 222 0.03 9 0.31 191 2.81 1,716 -0.04 -26Businessservices -0.29 -398 0.90 1,240 0.04 55 0.39 609 0.55 861 0.05 79Communications -0.18 -36 2.07 411 0.05 11 0.24 36 0.32 48 0.02 3Construction -0.33 -42 0.82 105 0.27 35 0.45 26 0.80 47 0.23 13Personalservices -0.57 -429 0.95 712 0.13 98 0.60 124 1.43 298 -0.18 -38Otherservices -0.28 -758 0.03 90 0.06 152 0.35 544 0.01 9 -0.06 -88Total 1.91 57,330 0.19 5,488 0.23 5,943 1.13 47,775 0.57 4,655 0.14 5,868

    Source:CGEcalculations.

    Wenowturntoanalysingtheestimatedeffectsontheoutputofthedifferentsectors.

    TheunderlyingchangesfortheEUandtheUSarepresentedinTable14andTable15

    below.

  • Results

    43

    Table 14 Changes inEUoutputbysector(inpercent),2027benchmark, limited

    agreement,20percentdirectspill-overs

    Baselinesharesinvalueadded TariffsOnly ServicesOnly ProcurementOnly

    Agrforestryfisheries 0.040 0.03 0.00 0.00

    Otherprimarysectors 0.019 0.00 0.00 0.00

    Processedfoods 0.030 0.06 0.01 0.04Chemicals 0.028 -0.11 -0.01 0.12Electricalmachinery 0.004 -0.31 0.02 0.06

    Motorvehicles 0.015 -0.65 -0.01 0.30Othertransportequipment 0.007 -0.26 -0.02 0.09

    Othermachinery 0.037 0.35 -0.04 0.03Metalsandmetalproducts 0.021 0.03 -0.03 -0.39

    Woodandpaperproducts 0.023 0.06 0.00 -0.01

    Othermanufactures 0.029 0.60 -0.01 0.01

    Watertransport 0.003 0.14 -0.04 0.03Airtransport 0.003 0.15 -0.01 0.01Finance 0.032 0.06 0.11 -0.02Insurance 0.010 0.06 0.32 0.01Businessservices 0.222 0.05 0.01 0.02Communications 0.023 0.05 -0.03 0.01Construction 0.083 0.12 0.03 0.02Personalservices 0.035 0.04 0.02 0.00Otherservices 0.338 0.05 0.01 0.01Source:CGEcalculations.

    AscanbeseenintheTable14,thecorrespondingestimatedchangesinsectorspecific

    outputareverysmall.Noneofthesectorswillexpandorcontractbymorethan1per

    centinthecaseoftheEU,andinmostsectorsoutputwillbasicallyremainunchanged.

    Similarly,onlyslightchangesareexpectedtotakeplaceinUSsector-leveloutputasa

    consequenceofthenon-comprehensiveFTAsthatweresimulated.Inonlytwosectors

    theoutputisestimatedtochangebymorethan1percent:intheelectricalmachinery

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    44

    sectoritisestimatedtodecreaseby1.40percent,whileinmotorvehiclesitisexpected

    toincreaseby1.76percent(oncetariffsarecut).

    Table 15 Changes inUSoutputbysector (inpercent),2027benchmark, limited

    agreement,20percentdirectspill-overs

    Baselinesharesinvalueadded TariffsOnly ServicesOnlyProcurement

    OnlyAgrforestryfisheries 0.031 -0.02 0.00 0.00Otherprimarysectors 0.023 -0.01 0.00 0.00Processedfoods 0.017 0.06 0.02 -0.06Chemicals 0.021 0.81 0.07 -0.27Electricalmachinery 0.003 -1.40 0.64 0.73Motorvehicles 0.010 1.76 0.05 -0.56Othertransportequipment 0.009 0.38 0.03 -0.07

    Othermachinery 0.027 -0.38 0.07 0.13Metalsandmetalproducts 0.014 0.15 0.05 0.07

    Woodandpaperproducts 0.023 -0.05 0.03 0.02

    Othermanufactures 0.010 0.05 0.02 0.00Watertransport 0.002 0.04 0.03 0.02Airtransport 0.004 0.00 0.00 0.02Finance 0.074 0.00 -0.11 0.01Insurance 0.020 -0.04 -0.27 0.01Businessservices 0.099 -0.01 0.01 0.00Communications 0.019 0.00 0.06 0.01Construction 0.080 0.09 0.04 0.01Personalservices 0.036 -0.01 0.04 0.02Otherservices 0.480 -0.02 0.00 0.00Source:CGEcalculations.

    Whilethenon-comprehensiveFTAoption,whichwouldbelimitedtoeithertariff,or

    servicestrade,orprocurementliberalization,wouldresultinpositivechangesinsector-

    leveloutputandtradepatterns,thesebenefitswouldberelativelysmall.Atanaggregate

    level,thechangeswouldbeevensmaller.Whencomparingtheimpactofthesenon-

    comprehensiveFTAswithacomprehensiveFTAthatwillbediscussedinthefollowing

    section,itisclearthattheoverallbenefitswouldbeofmuchlargermagnitudeinthe

    caseofatradeagreementthatcoversmorepolicypillarssimultaneously.

  • Results

    45

    5.2. Full FTA

    5.2.1. Macro Results

    Here,weturntothediscussionofeffectsonmacroeconomicvariables,resultingfrom

    a reductionofbarriers to tradeand investmentbetween theEUand theUSundera

    comprehensiveFTA(seeTable4fordetails).Insodoing,wepresenttheresultswith

    regards to GDP.13As indicated above two FTA scenarios are considered: one less

    ambitiousandonemoreambitious(asdescribedinTable4).

    Table16andTable17belowshowtheestimatedeffectonGDPbothfortheambitious

    andlessambitiousscenariosfortheEUandtheUS.Theresultsarepresentedforthe

    totalimpactandalsodecomposedintothedifferentsubcomponentsthatcorrespondto

    theseveralpolicypillars,namelytariffs,totalNTBsongoods,totalNTBsonservices,

    directandindirectspill-overs,andprocurement.Procurementrelatedbarriersareinfact

    capturedbytheNTBsingoodsandinservices.Aprocurementcolumnisintroduced

    inthetablebelowinordertohighlighttheimportanceofthistypeofbarriersinthe

    negotiations.However,itisimportanttonotethattheimpactofreducingprocurement

    barriersshouldnotbeaddedtotheeffectsfromotherpillarsasitwouldmeandouble-

    counting.

    AscanbeseenTable16,theestimatedimpactonGDPfortheEUandUSrangebetween

    0.2 and 0.5 per cent, for the less ambitious and ambitious scenarios respectively.

    BecausewearedealingwithNTBsratherthantariffs,changesintradevolumesalone

    arenotnecessarilyindicativeofthenetimpactonGDP,andsothereaderiscautioned

    whencomparingTable16toTable20(changesinexports)below.Thisisbecause,as

    13 Theannextablesalsoreportchangesinrealnationalincome.GDPisreportedherebecauseitisaconceptthatwillbemorefamiliartothereader.GDPisthevalueofafixedbasketoffinalgoodsandservicesproducedbytheeconomy.Realnationalincome,ontheotherhand,isameasureoftheactualpurchasingpoweravailableforfinalconsumption,givenchangesinbothoutputandprices. Realnational incomebettercapturesshifts in theeconomytowardamoreefficientbasketofgoodsandservices,aswellaschanges in finalconsumptionprices. Usually these twomeasurestrackeachotherclosely.However,whenthecurrentpatternofGDPreflectsstrongunderlyingdistortions,realnationalincomeisabettermeasureofthebenefitstotheagentsintheeconomy.

  • Reducing Transatlantic Barriers to Trade and Investment An Economic Assessment

    46

    discussedearlierinthereport(seeChapters2and3),NTBsinvolvehighercostsand

    solowerproductivity.TheimpactonGDPwillthereforehinge,inpart,oncostsavings

    linkedtoremovingNTBs.Basically,withNTBsthatraisecoststheopportunitycosts

    ofnewexportsresultingfromNTBreductionarelowerthanwithtariffs,sothatthecost

    sideofthecost-benefitanalysisofincreasedtradeislower.TheimpactonGDPwill

    alsohingeonthevalueaddedcompositionofexports.Assuch,eveniftradevolume

    effects arenot relatively large in aparticular sector (recall ourdiscussionofFigure

    10), theymaystillyield relatively largegainsoverall.The indirectspill-overeffects

    aremorecomplexstill(thoughsmallinabsoluteterms).Therewillbebothincreased

    incomeandtradeinthirdcountries(fromtheothersetsofresultsdiscussedhere),along

    with improvedaccessconditions to thirdmarkets. However, there isalso scope for

    somediversionoftradeawayfromtheUSandEUandtowardintra-thirdcountrytrade.

    Thetotalimpactdependsonallthesethings,andthedirectionisunknownapriori.

    Table 16 ChangesinGDP(inpercent),2027benchmark,20percentdirectspill-

    overs

    A=B+C+D+E+F B C D E F G

    Total

    Stemmingfromtheliberalisationof

    tariffstotalNTBsgoods

    totalNTBsservices

    directspill-overs

    indirectspill-overs procurement

    Less ambitious experiment EuropeanUnion 0.27 0.10 0.12 0.01 0.03 0.01 0.02UnitedStates 0.21 0.04 0.11 0.03 0.03 0.00 0.01Ambitious experimentEuropeanUnion 0.48 0.11 0.26 0.03 0.07 0.02 0.05UnitedStates 0.39 0.04 0.23 0.06 0.06 0.00 0.03Source:CGEcalculations.

  • Results

    47

    Analternativemeasure of aggregate results is provided inTable 18below,where a

    comparisonisprovidedacrossscenariosofhouseholdincomeeffectsfortheEUand

    US.14Startingwiththelimitedscenarios,atariffonlyscenarioyields12.9billionin

    disposable incomegainsacrossEuropeanhouseholds,and5.1billionindisposable

    income gains for US households. The services and procurement agreements yield

    substantiallylessforEuropeanhouseholds,whiletheservicesonlyagreementyieldsthe

    mostforUShouseholdsunderthelimitedscenarios.Theseeffectsarefaroutweighed

    underboththelessambitiousandmoreambitiouscomprehensivescenarios.Herewe

    have estimated gains to disposable income acrossEuropean households of between

    39.8billionand70.82billion.IntheUS,householddisposableincomeincreaseby

    between29.9and58.4billion.Forafamilyof4thecomprehensivescenariosyield

    disposableincomegainsbetween306and545annuallyintheEUandbetween336

    and655intheUS.

    Table 17 ChangesinGDP(inmillioneuros),2027benchmark,20percentdirect

    spill-overs

    A=B+C+D+E+F B C D E F G

    Total

    Stemmingfromtheliberalisationof

    tariffstotalNTBsgoods

    totalNTBsservices

    directspill-overs

    indirectspill-overs procurement

    Less ambitious experiment EuropeanUnion 68,274 25,394 29,250 3,482 7,984 2,164 6,069UnitedStates 49,543 9,784 25,505 6,899 7,404 -72 3,341Ambitious experiment EuropeanUnion 119,212 27,409 64,344 7,014 16,291 4,154 12,312UnitedStates 94,904 10,120 56,202 14,014 14,760 -216 6,707Source:CGEcalculations.

    14 Householddisposableincomeisasubsetoftotalincome(itislessthantotalnationalincome).Itrepresentstheincomeavailabletospendonfinalconsumption(food,clothing,transport,housing),afterallocationstothegovernmentandforsavings.Changesinthisvariablethereforemeasurethechangesinprivateconsumptionvaluedatcurrentprices.

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    Table 18 Householddisposableincome,millioneuro,2027benchmark

    limited

    agreement:tariffsonly

    limitedagreement:servicesonly

    limitedagreement:procurement

    only

    comprehensiveagreement:low

    ambition

    comprehensiveagreement:

    highambition

    totalEU,mill.euro 12,934 3,089 4,295 39,813 70,820US,mill.euro 5,081 4,122 2,246 29,982 58,434EU,percent 0.09 0.02 0.02 0.28 0.49US,percent 0.03 0.02 0.01 0.18 0.35EU,perhousehold 99 41 49 306 545

    US,perhousehold 57 82 21 336 655

    Source:CGEcalculations.Perhouseholdestimatesareforafamilyof4.

    Theexactamountoverall,asreportedinTable16,dependsonthecombinationofvalue

    added,barrier levels, andunderlyingelasticities. It alsohingeson linkagesbetween

    sectors, and final demand responses to price changes. Indeed this is the reason for

    workingwithaCGEframeworkwearethenbetterabletocapturethecombinationof

    theseeffectsacrosssectors.InthecaseoftheEU,ifwereferbacktoTable2,combined

    withtheunderlyingbilateraltradebalancebysector(Figure1),theEUhasastrong,

    positivebalanceingoodssectorswithrelativelyhighNTBlevels.Thismeansthaton

    averageEuropeanfirmsfaceahighercostburdenlinkedtotransatlanticNTBsthando

    USfirms,sothatthereductioninthecostburdenlinkedtoNTBswillbesomewhat

    disproportionateaswell,benefitingEuropeanfirmsmoreonaverage.Assuch,wecan

    expectsomewhatgreaterbenefitsfromimprovedmarketaccessfortheEUthanforthe

    US.ThisisreflectedintheresultinTable16andTable17.Indeed,wherewehavea

    similarchangeintradevolumes,thispositivebalancemeanstheEUwillbenefitmore

    intermsofGDP.ThisisreflectedintherelativemagnitudesoftradeandGDPeffects

    inTable16(above)andTable20(below).

    For the US, around three quarters of the estimated increase in GDP, across both

    scenarios, stemfrom the loweringofNTBs.For theEU,NTBs ingoodsare shown

    tobeaccountableforaroundhalfof the increase,while lowering tariffs isshownto

    belessimportant.Again,thisisconsistentwiththepatternoftrade,NTBsandtariffs

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    asdiscussed inChapter2.Whenviewing these tables, it is alsouseful to recall the

    observationmade in Chapter 4 about the relatively low level of perceived bilateral

    barriers in services, combinedwith a 65 per cent share of goods in bilateral trade.

    Together,thehigherbarriersandtradeshareforgoodsimplythatmostgainswillfollow

    fromNTBsandtariffsongoods.Similarly,theoriginalEcorys(2009)studycovered

    limitedaspectsofprocurement,andthebarriersidentifiedwererelativelyminorasa

    shareoftotalprotection.Assuch,itisnotsurprisingthattheprocurementestimatesare

    relativelysmallasashareofthetotal.

    Insummary,theseresultshighlightthatthepotentialmainimpactfromliberalization

    stemsmorefromNTBliberalization(especiallyincludingspill-overs)ratherthanjust

    reducingtariffbarriers.

    5.2.2. Output and Trade

    Next,wetakeacloserlookatthecorrespondingchangestotradeandoutputforthe

    EUandtheUS.First,welookattheoveralleffectsonimportsandexportsandthenwe

    moveontostudyingtheeffectsonamoredisaggregate,sectorspecificlevel.

    5.2.2.1. Aggregate Effects

    AscanbeseenfromTable19below,liberalisingtradewouldimplysomesignificant

    increasesinEU-UStrade.Inthelessambitiousscenario,EUexports to theUSwill

    increaseby16percentwhileUSexports to theEU increaseby23percent. In the

    ambitiousscenario,thecorrespondingfiguresare28and37percent.Abouttwothirds

    oftheincreaseinbilateraltradeintheambitiousexperimentisattributabletoreducing

    NTBsingoodssectors.Changesintariffsarealsoimportant,thoughasdiscussedabove

    agivenchangeintradetranslatesintogreaterGDPeffectswithNTBs.

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    Table 19 Changesinbilateralexportstothepartnercountry(inpercentandmillion

    euros),2027benchmark,20percentdirectspill-overs

    A=B+C+D+E+F B C D E F G

    Total

    Stemmingfromtheliberalisationof

    tariffstotalNTBsgoods

    totalNTBsservices

    directspill-overs

    indirectspill-overs procurement

    InpercentLess ambitious experiment EuropeanUnion 16.16 7.06 9.34 0.69 -0.76 -0.15 1.04UnitedStates 23.20 13.67 8.80 0.67 0.01 0.02 0.78Ambitious experiment EuropeanUnion 28.03 7.67 21.00 1.40 -1.73 -0.34 2.13UnitedStates 36.57 15.34 19.93 1.37 -0.08 0.03 1.62

    InmillioneurosLess ambitious experiment EuropeanUnion 107,811 47,083 62,289 4,598 -5,089 -989 6,957UnitedStates 100,909 59,476 38,284 2,934 57 77 3,410Ambitious experiment EuropeanUnion 186,965 51,185 140,106 9,332 -11,525 -2,243 14,211UnitedStates 159,098 66,720 86,698 5,966 -335 151 7,043Source:CGEcalculations.

    Table20andTable21provideestimatesfortotal(asopposedtobilateral)trade.For

    theEU,totalexportsareexpectedtoincreaseby3.37to5.91percentundertheless

    ambitiousandambitiousscenariosrespectively.Similartotheresultspresentedinthe

    previoussection, the loweringofNTBs ingoods isshowntobe themost important

    factorinincreasingexports,followedbytheloweringoftariffsonexportstotheUS.

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    Table 20 Changesinvalueoftotalexports(inpercentandmillioneuros),extra-EU

    exportsincaseoftheEU,2027benchmark,20percentdirectspill-overs

    A=B+C+D+E+F B C D E F G

    Total

    Stemmingfromtheliberalisationof

    tariffstotalNTBsgoods

    totalNTBsservices

    directspill-overs

    indirectspill-overs procurement

    InpercentLess ambitious experiment EuropeanUnion 3.37 1.28 1.43 0.11 0.25 0.28 0.19UnitedStates 4.75 2.11 1.69 0.16 0.52 0.27 0.23Ambitious experiment EuropeanUnion 5.91 1.41 3.23 0.23 0.48 0.56 0.42UnitedStates 8.02 2.34 3.79 0.33 1.01 0.54 0.48

    InmillioneurosLess ambitious experiment EuropeanUnion 125,232 47,577 53,341 4,211 9,442 10,564 7,163UnitedStates 142,071 63,219 50,600 4,717 15,505 8,031 5,943Ambitious experiment EuropeanUnion 219,970 52,327 120,313 8,523 18,010 20,959 15,620UnitedStates 239,543 70,265 113,630 9,624 30,042 15,982 14,202Source:CGEcalculations.

    FortheUS,thecorrespondingeffectonexportsislarger.Theyareestimatedtoincrease

    by4.75and8.02percent respectively for the two liberalizingscenarios. In the less

    ambitiousscenario,theloweringoftariffsisaccountableforaroundhalfofthatincrease.

    Inthecaseofthemoreambitiousscenariothemostimportantcontributioncomesfrom

    theloweringofNTBsingoods.Meanwhile,theloweringoftariffsisstillshowntobe

    animportantfactorinrealizingtheseincreasesintrade.It is important torecall that

    theEUhashightariffsonmotorvehiclesandprocessedfoods.Thisdrivespartofthe

    largerexportgainfortheUSinthetablesabove.Theestimatedeffectsalsotellusthat

    spill-overeffectsaremoreimportantfortheUSthantheyarefortheEU.(Seecolumns

    E inboth tables). Thisdifference isdue inpart todifferences in the importanceof

    tradewiththirdcountriesfortheUSandtheEU.Whenwelookatunderlyingbaseline

    tradeflows,fortheUSthefirstmostimportantimportpartnerisChina.TheEUcomes

    secondasasourceofimports.Furthermore,NAFTAcountriesarealsoveryimportant

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    tradingpartners for theUSoverall. IncolumnE inboth tables,givendifferences in