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July 11, 2013

TAFTA’s Trade Benefit: A Candy Bar

This week’s launch of negotiations for a massive U.S. “trade” deal with Europe – the Trans-Atlantic Free Trade Agreement (TAFTA) – has spurred several news articles that cite studies projecting large-sounding economic benefits of the deal. 

How realistic are these projected benefits?  How big are they?  And how do they stack up against the potential cost of eroded environmental, financial, health, and consumer protections?  (A smorgasbord of public interest groups highlighted such threats in a letter to Obama and EU officials on Monday and in briefings before TAFTA negotiators yesterday.) 

Based on one study touted by prominent publications this week, the trade-related benefits we should expect from TAFTA amount toan extra three cents per person per daystarting in 2029. 

TAFTA TwixSo if you’re willing to subscribe to a deal that implicates the stability of our climate and the safety of our food, and you’re willing to wait until today’s newborns reach driving age to see any benefits, you would be able to save enough TAFTA trade benefits over the course of a month to almost buy a candy bar.

The study was cited in a Washington Post Wonkblog piece this week, which praised the potential economic impact of TAFTA-produced tariff reductions between the EU and the United States:

Tariffs on stuff traded between the United States and Europe are currently pretty low, in the 5 to 7 percent range. Getting rid of them entirely means that buyers pay less for goods, and also that firms get more productive to stay competitive — a “dynamic” effect that could boost trans-Atlantic trade by around $180 billion a year.

But this deal is not principally about traditional trade matters like tariffs.  Given that (as stated) tariffs between the U.S. and the EU are already quite low, many corporate proponents of the deal see little to gain from tariff reduction and much more to gain from TAFTA’s stated goal of “elimination, reduction, or prevention of unnecessary ‘behind the border’” policies.  Click here for some of the specific financial stability, climate security, and food safety policies that industries have requested to be placed on TAFTA’s chopping block.  And click here for our retort to a different, oft-cited study that projects economic gains from the gutting of such public interest policies. 

Though the Wonkblog later acknowledges that TAFTA is not primarily about tariffs, it is content to tout a study projecting a large-sounding benefit from tariff reductions. Strangely, however, the touted figure – a $180 billion “boost” to trans-Atlantic trade – does not actually appear in the cited study

It’s not clear how the Wonkblog extracted the $180 billion trade increase figure from a study that projects a $51-122 billion trade increase.  Perhaps the intent was to cite the study’s theoretical projection of a $182 billion increase to U.S. GDP – a result of the most starry-eyed scenario the study could envision.  That number assumes that tariff reductions will cause strong “dynamic” economic growth, a contentious proposition that academics have repeatedly assailed with empirical evidence showing no such trade-growth causation (see here and here).  After dropping this dubious assumption, the supposed $182 billion GDP growth for the U.S. shrivels to just $20.5 billion, according to the study (and to just $1.6 billion for the EU). 

The supposed economic benefits shrink even further when examining the study’s projection of what the deal would mean in terms of actual income (a more relevant indicator than the obtuse GDP benchmark). The pro-TAFTA study projects that total annual U.S. national income would be just $4.6 billion higher under the deal (with EU total income just $3.2 billion higher).  Even this number is unreasonably high, given that it assumes that 100% of existing tariffs between the EU and the U.S. would be fully eliminated under the deal.  While both sides have stated this as an aspirational goal, the EU negotiating mandate already states that “both Parties will consider options for the treatment of the most sensitive products, including tariff rate quotas.”  This ex-ante position suggests a lesser degree of tariff reduction than that assumed by the $4.6 billion figure.  But even proceeding with this inflated figure, we find a rather deflated projection of “benefits.” 

The study assumes that this supposed benefit would occur five years after implementation of the deal.  President Obama has stated his intent to get the deal signed by the end of 2017.  The deal would be quite controversial if negotiators grant industry groups’ wishes for a substantive weakening of consumer and environmental safeguards.  Under the unlikely scenario that such a deal could get past the U.S. Congress, it would probably take several years to do so (the controversial pacts with Korea, Panama, and Colombia languished under protest for about 5 years after getting signed, even under Fast Track), suggesting that ratification wouldn’t happen until 2023, meaning the deal likely would not take effect until 2024.  According to the study, the supposed economic benefits of the deal could be fully felt five years later, in 2029. 

What would the projected $4.6 billion be worth in 2029?  After adjusting for inflation and population growth, that amounts to about an extra three cents per person per day.  Again, after a wait of 16 years, you’d get a candy-bar-sized benefit from each month of TAFTA-provided tariff reductions. 

A dose of reality and simple math confirms that proponents of TAFTA cannot seriously sell the deal with the standard promise that tariff reductions will bring increased welfare.  Once again, this deal in not primarily about “trade,” as traditionally defined.  Industry demands and leaked documents reveal that this deal has more to do with whether we maintain or roll back Wall Street reforms, restrictions on genetically-modified food, data privacy policies, carbon emissions controls, and other key protections.  An honest debate about TAFTA is a debate about whether we like these safeguards, not whether we like trade.  

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