TTIP and Intra-European Trade: Boon or Bane?

Abstract

Abstract:The European Union is the world's deepest free trade zone. Amongst its members, it has abolished tariffs and lowered non-tariff barriers. This has led to trade creation within Europe and to trade diversion between EU countries and outsiders. Deep trade integration and the resulting mutual dependence has, in the eyes of many, facilitated political integration. The Transatlantic Trade and Investment Partnership (TTIP) will undo some of these effects by means of preference erosion, so that cross-country trade links within Europe may lose relative prominence. However, the presence of a rich fabric of regional value chains in Europe and substantial income effects could counter this development. We provide insights on the empirical importance of these effects based on a New Quantitative Trade Model. We show that TTIP could indeed lower trade integration in Europe since predicted income effects turn out not to be large enough to overcome the effects of preference erosion. However, there is substantial heterogeneity across sectors and countries. One way to minimize preference erosion would be to promote projects and programs to further deepen the EU's single market.

How deep is your love? A quantitative spatial analysis of the transatlantic trade partnership

“…28 would achieve a welfare gain of 3.9 percent and the United States of 4.9 percent while the welfare loss that they compute for the rest of the world is −0.9 percent. Aichele et al (), drawing on a nonspatial Ricardian multi‐industry model, also forecast higher welfare gains than we do.…”

“…Egger, Francois, Manchin, and Nelson () complement the use of similar computational methods with econometric techniques to establish a potential TTIP shock. The work by Felbermayr, Heid, Larch, and Yalcin (), Felbermayr, Larch, Flach, Yalcin, and Benz (), and Aichele, Felbermayr, and Heiland () are closest to our approach. Felbermayr et al () use a structurally estimated single‐sector general equilibrium model in the tradition of Helpman and Krugman ().…”

“…Egger et al (), Felbermayr et al (), and Aichele et al () use an alternative “top‐down approach” whereby estimates of the effects of existing trade agreements on bilateral trade volumes in different industries are used to calibrate the TTIP shock to result in these volume changes. Compared with the often considered symmetric barrier cuts in the “bottom‐up” approaches this has the advantage that it allows for shocks to vary across industries, which opens a further channel for welfare effects.…”

“…The assumption of symmetric liberalization is arbitrary, of course. We therefore complement our analysis with robustness checks involving the sectorally asymmetric liberalization paths considered by Francois et al (), Fontagné et al (), and Aichele et al ().…”

“…The strategy pursued in Felbermayr et al () differs from the computable general equilibrium tradition in that the parameters of the model are estimated on those data that the model has to replicate in the baseline equilibrium without drawing on the method established by Dekle et al (). Aichele et al (), in contrast, draw on this methodology, using a model in the tradition of Eaton and Kortum (), and Caliendo and Parro (). We revisit some of these analyses in our robustness checks.…”