A Transatlantic Zero Agreement: Estimating the Gains from Transatlantic Free Trade in Goods
ECIPE Occasional Paper No. 4/2010
By Fredrik Erixon, Matthias Bauer
- This study examines the potential gains from a transatlantic zero-tariff agreement on trade in goods. The idea of deeper transatlantic economic integration has be- come more attractive in recent years. The hopes for an ambitious multilateral trade deal in the Doha Round negotiations have diminished; few countries appear ready to accept ambitious liberalisation on the global level. Leaders have increasingly turned to bilateral or regional trade initiatives, but few of them are capable of de- livering sizeable gains to big economies like the European Union and the United States.
- Transatlantic economic integration is not likely to spell the end of the Doha Round or the World Trade Organisation (WTO). In fact, it could have the opposite effect. Like big regional initiatives in the past (e.g. the EU Common Commercial Policy, the EU single market and the NAFTA), a transatlantic free trade accord, properly designed, could give the WTO and its members the jolt they need to get on track again.
- Tariffs between the EU and the US are comparatively low (they average at 5-7 percent). But transatlantic free trade in goods could still deliver sizeable gains. Existing tariffs prevent trade and import competition. The EU and US economies are big, and bilateral trade is to a large degree composed of intra-firm trade. Both these factors suggest potential trade gains of great magnitude. As a significant part of the trade is intra industry, competition could increase as a consequence of lib- eralised trade.
- The static effect on GDP from a transatlantic zero-tariff agreement is estimated to be 0.01 percent for the EU and 0.15 percent for the US. Dynamic gains – account- ing for improved productivity and reduced trade facilitation costs – are estimated to be 0.32-0.47 percent for the EU (or $46 to $69billion) and 0.99-1.33 percent for the US (or $135-$181 billion).
- The estimated welfare gains – measured as national income effects – are more evenly distributed between the two economies. The static effect is $3 billion for the EU and $4.5 billion for the US. The dynamic welfare gains are estimated to be $58-$86 billion for the EU and $59-$82 billion for the US.
- The estimated change in EU exports to the US is 7 percent (or $28 billion) in a static scenario and around 18 percent (or $69 billion] in the dynamic scenario. The US is estimated to increase exports to the EU by 8 percent (or $23 billion) in the static scenario and 17 percent (or $53 billion) in the dynamic scenario.
- The purpose of the study is to examine if the potential gains from a transatlantic trade accord is big enough to motivate such an initiative. Based on the results of the simulations in this study, the answer is Yes.