Non-Tariff Barriers, Integration, and the Trans-Atlantic Economy
Added on 2023-06-15
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Non-Tariff Barriers, Integration, and
the Trans-Atlantic Economy
Peter Egger
ETH Zurich, CESifo, and CEPR
Joseph Francois
University of Bern and CEPR
Miriam Manchin
University College London
Doug Nelson
Tulane University
June 2014
Abstract:
the Trans-Atlantic Economy
Peter Egger
ETH Zurich, CESifo, and CEPR
Joseph Francois
University of Bern and CEPR
Miriam Manchin
University College London
Doug Nelson
Tulane University
June 2014
Abstract:
1. Introduction
In the wake of the great recession and ancillary financial crises, the European
Union and the United States launched a joint, ambitious effort in 2013 to
negotiate a comprehensive trade and investment agreement. Known as the
Transatlantic Trade and Investment Partnership Agreement (T-TIP), the
negotiation process that has ensued is supposed to bring about tariff-free trade
in goods, reduction of non-tariff barriers (NTBs) for goods and services,
liberalization of public procurement markets, and greater cooperation on market
regulation. Systemically, the negotiations have been characterized as both an
important step forward for the multilateral trading system, and an existential
threat to that same system. Given that the EU and US account collectively for a
substantial share of global production and world trade in goods and services,
these negotiations have the potential for a major economic impact on third
countries.
At this stage, the shape and coverage of a final T-TIP agreement remain
uncertain. Indeed, the T-TIP would actually be as a set of trade agreements.
While the negotiations are formally bilateral, the agenda means that they entail
the 50 States in the US and the 28 Members of the EU. A successful agreement
needs to take into account particularities of a great number of different partners
and thus on substance amounts to a new type of mini-lateral agreement. It also
needs to cover areas ranging from broad tariff concessions to sector-specific
questions of regulation. While tariff reductions are relatively straightforward, an
important ambition under T-TIP actually relates to greater coherence and
convergence of regulatory standards. Any progress on regulatory convergence
(and better cross-recognition of standards) would require enhanced cooperation
in rule making. As such the agenda is not as straightforward as tariff elimination.
Indeed, there is growing recognition that a successful T-TIP agreement would
likely combine rapid liberalization in some areas (such as tariffs) with
institutional mechanisms set up to allow progressive, long run liberalization in
1
In the wake of the great recession and ancillary financial crises, the European
Union and the United States launched a joint, ambitious effort in 2013 to
negotiate a comprehensive trade and investment agreement. Known as the
Transatlantic Trade and Investment Partnership Agreement (T-TIP), the
negotiation process that has ensued is supposed to bring about tariff-free trade
in goods, reduction of non-tariff barriers (NTBs) for goods and services,
liberalization of public procurement markets, and greater cooperation on market
regulation. Systemically, the negotiations have been characterized as both an
important step forward for the multilateral trading system, and an existential
threat to that same system. Given that the EU and US account collectively for a
substantial share of global production and world trade in goods and services,
these negotiations have the potential for a major economic impact on third
countries.
At this stage, the shape and coverage of a final T-TIP agreement remain
uncertain. Indeed, the T-TIP would actually be as a set of trade agreements.
While the negotiations are formally bilateral, the agenda means that they entail
the 50 States in the US and the 28 Members of the EU. A successful agreement
needs to take into account particularities of a great number of different partners
and thus on substance amounts to a new type of mini-lateral agreement. It also
needs to cover areas ranging from broad tariff concessions to sector-specific
questions of regulation. While tariff reductions are relatively straightforward, an
important ambition under T-TIP actually relates to greater coherence and
convergence of regulatory standards. Any progress on regulatory convergence
(and better cross-recognition of standards) would require enhanced cooperation
in rule making. As such the agenda is not as straightforward as tariff elimination.
Indeed, there is growing recognition that a successful T-TIP agreement would
likely combine rapid liberalization in some areas (such as tariffs) with
institutional mechanisms set up to allow progressive, long run liberalization in
1
others. Such institutional mechanisms, if they offer solutions that can be
translated to other situations, might then offer solutions to a broader set of
countries that are also grappling with regulatory barriers to trade and
investment. Alternatively, there is legitimate worry that they may instead offer
new channels for discriminatory management of trade and investment flows.
The T-TIP is attention grabbing, in part, simply because of the magnitudes
involved. From Table 1-1, together the two T-TIP partners accounted for 46
percent of global GDP and almost 60 percent of world trade. Yet most of this
trade is not actually trans-Atlantic trade. Rather, despite their collective shares
of world production and trade, trade flows between the two blocks is relatively
low compared to their trade with other regions. This is again illustrated in the
data in Table 1-1, but perhaps better visualized with Figure 1-1. Focusing first on
directions of trade, the US has far more trade with Asia than it does with Europe.
Asia counts for almost 60 percent of US exports and imports. Similarly, the
region accounts for roughly 39 percent of EU exports and imports. Other upper
and middle-income countries (Canada and Mexico primarily for the US, and
EFTA and the Euro-Med economies for the EU) account for most of remaining
trade.
To appreciate the context of T-TIP, both for the EU and US, but also for third
countries, it is also useful to focus on trade intensity, reported in the Figure 1-1 as
trade scaled by partner GDP. For example, EU and US trade with the world is
valued at roughly 13 percent of global GDP. This means that for each $100
billion in global income, we see $13.3 billion in trade involving the EU and/or the
US. In the case of Asia, for every $100 billion in GDP, there is $9.9 billion in trade
(exports and imports) with the US, and $7.6 billion in trade with the EU. Asian
trade with the EU and US combined is therefore worth 17.6 percent of Asian
GDP.1 Stark asymmetries are evident, especially with low-income countries.
For low-income countries, while trade with the US and EU is worth 18.3 percent
of their GDP, its worth roughly 0.2 percent of EU and US GDP.
1 We are fully aware that scaling trade by GDP is not the same thing as quantifying the impact on
GDP. It does however provide a useful metric for comparison.
2
translated to other situations, might then offer solutions to a broader set of
countries that are also grappling with regulatory barriers to trade and
investment. Alternatively, there is legitimate worry that they may instead offer
new channels for discriminatory management of trade and investment flows.
The T-TIP is attention grabbing, in part, simply because of the magnitudes
involved. From Table 1-1, together the two T-TIP partners accounted for 46
percent of global GDP and almost 60 percent of world trade. Yet most of this
trade is not actually trans-Atlantic trade. Rather, despite their collective shares
of world production and trade, trade flows between the two blocks is relatively
low compared to their trade with other regions. This is again illustrated in the
data in Table 1-1, but perhaps better visualized with Figure 1-1. Focusing first on
directions of trade, the US has far more trade with Asia than it does with Europe.
Asia counts for almost 60 percent of US exports and imports. Similarly, the
region accounts for roughly 39 percent of EU exports and imports. Other upper
and middle-income countries (Canada and Mexico primarily for the US, and
EFTA and the Euro-Med economies for the EU) account for most of remaining
trade.
To appreciate the context of T-TIP, both for the EU and US, but also for third
countries, it is also useful to focus on trade intensity, reported in the Figure 1-1 as
trade scaled by partner GDP. For example, EU and US trade with the world is
valued at roughly 13 percent of global GDP. This means that for each $100
billion in global income, we see $13.3 billion in trade involving the EU and/or the
US. In the case of Asia, for every $100 billion in GDP, there is $9.9 billion in trade
(exports and imports) with the US, and $7.6 billion in trade with the EU. Asian
trade with the EU and US combined is therefore worth 17.6 percent of Asian
GDP.1 Stark asymmetries are evident, especially with low-income countries.
For low-income countries, while trade with the US and EU is worth 18.3 percent
of their GDP, its worth roughly 0.2 percent of EU and US GDP.
1 We are fully aware that scaling trade by GDP is not the same thing as quantifying the impact on
GDP. It does however provide a useful metric for comparison.
2
Figure 1-1 Composition of Trade by Destination
note: trade excludes intra-EU flows. sources: IMF, COMTRADE, GTAP9.
Viewed in this context, though the EU and US account for high shares of GDP and
trade, in a sense the flows between them seem relatively low. For example,
while in Asia each $100 billion in exports is associated with $17.6 billion in trade
with the EU and/or the US, a similar figure for the EU and US themselves tells us
that for each $100 billion in transatlantic GDP, we see only $2.7 billion in trade in
goods and services. In other words, scaled by GDP, the EU and US both have
much more intense trade relationships with other countries and regions than
they do with each other. Much of this is may be explained by economic structure.
Both economies are mature, with high GDP shares derived from services: 75
percent of the EU value added is in services; 82.3 percent of US value added is in
services. As services are less traded, this helps explain the lower bilateral flows.
Such factors should be controlled for when we turn to gravity modelling, as
otherwise we may mislead ourselves into thinking low trade intensity means
high trade barriers. Yet even controlling for such factors, at this stage we should
already note the sense reflected in the negotiating mandate that transatlantic
trade underperforms. The logic is that with shifts in technology and organization
3
note: trade excludes intra-EU flows. sources: IMF, COMTRADE, GTAP9.
Viewed in this context, though the EU and US account for high shares of GDP and
trade, in a sense the flows between them seem relatively low. For example,
while in Asia each $100 billion in exports is associated with $17.6 billion in trade
with the EU and/or the US, a similar figure for the EU and US themselves tells us
that for each $100 billion in transatlantic GDP, we see only $2.7 billion in trade in
goods and services. In other words, scaled by GDP, the EU and US both have
much more intense trade relationships with other countries and regions than
they do with each other. Much of this is may be explained by economic structure.
Both economies are mature, with high GDP shares derived from services: 75
percent of the EU value added is in services; 82.3 percent of US value added is in
services. As services are less traded, this helps explain the lower bilateral flows.
Such factors should be controlled for when we turn to gravity modelling, as
otherwise we may mislead ourselves into thinking low trade intensity means
high trade barriers. Yet even controlling for such factors, at this stage we should
already note the sense reflected in the negotiating mandate that transatlantic
trade underperforms. The logic is that with shifts in technology and organization
3
of production toward more global and regional value chains that cross
international borders, behind the border issues whose trade cost impacts were
once second or third order are increasingly important. Without necessarily
changing policy, what were once domestic regulatory issues have emerged as
potential sources of NTB-related trade costs in a world of international
production and associated returns to scale. To some extent, the US has dealt
with these changes in NAFTA with respect to its North American partners
(especially for motor vehicles). The same holds for Europe in the context of the
EU single market. The T-TIP is approached with the combined NAFTA and EU
single market experience helping to frame the current negotiations on regulatory
divergence and mutual recognition of standards.
We have organized our discussion as follows. In Section 2, we focus first on
important qualitative issues (i.e. things we do not try to quantify primarily
because we can’t) that help frame the more quantitative analysis that follows. In
Section 3, we then turn to structural gravity modelling (i.e. estimating equations
based on the trade equations in our computational model introduced in Section
4) to control for factors like economic structure and both physical and cultural
distance that affect trade flows. On this basis, we gauge possible trade cost
reductions under T-TIP, based on a mix of past experience with regional trade
agreements (RTAs) with respect to goods trade, firm-based evidence on goods-
based trade costs not addressed by past RTAs, and recent data from the World
Bank, OECD, and WTO on services barriers and recent services commitments.
With trade cost estimates in hand, we then turn to a computational model of the
world economy in Section 4. This model reflects actual production and trade in
2011. On this basis, we discuss possible impacts of T-TIP based trade cost
reductions for the EU and US economies, but also for third countries. Concluding
comments, thoughts, and ruminations are offered in Section 5.
4
international borders, behind the border issues whose trade cost impacts were
once second or third order are increasingly important. Without necessarily
changing policy, what were once domestic regulatory issues have emerged as
potential sources of NTB-related trade costs in a world of international
production and associated returns to scale. To some extent, the US has dealt
with these changes in NAFTA with respect to its North American partners
(especially for motor vehicles). The same holds for Europe in the context of the
EU single market. The T-TIP is approached with the combined NAFTA and EU
single market experience helping to frame the current negotiations on regulatory
divergence and mutual recognition of standards.
We have organized our discussion as follows. In Section 2, we focus first on
important qualitative issues (i.e. things we do not try to quantify primarily
because we can’t) that help frame the more quantitative analysis that follows. In
Section 3, we then turn to structural gravity modelling (i.e. estimating equations
based on the trade equations in our computational model introduced in Section
4) to control for factors like economic structure and both physical and cultural
distance that affect trade flows. On this basis, we gauge possible trade cost
reductions under T-TIP, based on a mix of past experience with regional trade
agreements (RTAs) with respect to goods trade, firm-based evidence on goods-
based trade costs not addressed by past RTAs, and recent data from the World
Bank, OECD, and WTO on services barriers and recent services commitments.
With trade cost estimates in hand, we then turn to a computational model of the
world economy in Section 4. This model reflects actual production and trade in
2011. On this basis, we discuss possible impacts of T-TIP based trade cost
reductions for the EU and US economies, but also for third countries. Concluding
comments, thoughts, and ruminations are offered in Section 5.
4
Table 1-1 GDP and Trade Orientation, 2011
US EU EU & US
EU-US GDP
billion dollars 14,991 17,645 32,636
share of world GDP 21.3 25.1 46.3
Trade with world
billion dollars 4,096 5,036 8,241
share of world trade 29.4 36.2 59.3
share of own GDP 27.3 28.5 25.3
share of world GDP 5.8 7.2 13.0
Trade between EU & US
billion dollars 891 891 891
share of own GDP 5.9 5.0 2.7
share of partner GDP 5.0 5.9 2.7
share of world trade 6.4 6.4 6.4
share of own trade 21.7 17.7 10.8
Trade with Asia, Pacific
billion dollars 2,443 1,945 4,388
share of own GDP 16.3 11.0 13.4
share of partner GDP 9.9 7.7 17.6
share of world trade 17.6 14.0 31.5
share of own trade 59.6 38.6 53.2
Trade with other upper &
middle income countries
billion dollars 740 2,142 2,882
share of own GDP 4.9 12.1 8.8
share of partner GDP 5.9 17.0 22.8
share of world trade 5.3 15.4 20.7
share of own trade 18.1 42.5 35.0
Trade with low income countries
billion dollars 22 58 80
share of own GDP 0.1 0.3 0.2
share of partner GDP 5.0 13.3 18.3
share of world trade 0.2 0.4 0.6
share of own trade 0.5 1.2 1.0
note: trade excludes intra-EU flows. sources: IMF, COMTRADE, GTAP9.
5
US EU EU & US
EU-US GDP
billion dollars 14,991 17,645 32,636
share of world GDP 21.3 25.1 46.3
Trade with world
billion dollars 4,096 5,036 8,241
share of world trade 29.4 36.2 59.3
share of own GDP 27.3 28.5 25.3
share of world GDP 5.8 7.2 13.0
Trade between EU & US
billion dollars 891 891 891
share of own GDP 5.9 5.0 2.7
share of partner GDP 5.0 5.9 2.7
share of world trade 6.4 6.4 6.4
share of own trade 21.7 17.7 10.8
Trade with Asia, Pacific
billion dollars 2,443 1,945 4,388
share of own GDP 16.3 11.0 13.4
share of partner GDP 9.9 7.7 17.6
share of world trade 17.6 14.0 31.5
share of own trade 59.6 38.6 53.2
Trade with other upper &
middle income countries
billion dollars 740 2,142 2,882
share of own GDP 4.9 12.1 8.8
share of partner GDP 5.9 17.0 22.8
share of world trade 5.3 15.4 20.7
share of own trade 18.1 42.5 35.0
Trade with low income countries
billion dollars 22 58 80
share of own GDP 0.1 0.3 0.2
share of partner GDP 5.0 13.3 18.3
share of world trade 0.2 0.4 0.6
share of own trade 0.5 1.2 1.0
note: trade excludes intra-EU flows. sources: IMF, COMTRADE, GTAP9.
5
2. Regulation, politics, and keeping NTBs in context
It should be stressed that in contrast to reducing tariffs, the removal of NTBs is
not so straightforward. There are many different reasons and sources for NTBs.
Some are unintentional barriers while others reflect deliberate public policy. As
such, for many NTBs, removing them is not possible because, for example, they
require constitutional changes, unrealistic legislative changes, or unrealistic
technical changes. Removing NTBs may also be difficult politically, for example
because there is a lack of sufficient economic benefit to support the effort;
because the set of regulations is too broad; or because consumer preferences or
language preclude a change. Indeed even where public perception is not
congruent with scientific evidence, we need to keep in mind that it's the public
that votes, not the evidence. In recognition of these difficulties, we follow recent
studies by focusing on the set of possible NTB reductions (known as “actionable”
NTBs) given that many will remain in place. Of those NTBs that can feasibly be
reduced, we focus on different levels of ambition for NTB reduction.2
This raises the issue of what might we plausibly expect to be the result of a
successful T-TIP negotiation. In addition to differences over matters of fact
(economics as a body of knowledge is far from settled on many positive issues
with respect to what drives outcomes in national economies and their
relationship to other economies), we expect difficulties to arise over matters of
genuine differences in social goals and the way those goals are embedded in
national legal orders and we also expect outcomes to be affected by distributive
struggles in the national (and in the case of the EU, in the Community level)
political arena.
2 In benchmarking studies leading into the T-TIP talks, such as ECORYS (2009), there was a
strident debate between regulators and trade officials centred on semantics and acronyms. One
man’s barrier is another man’s reasonable measure, or in other words regulatory measures
might not be deliberate barriers. While noting the importance of this distinction in some circles,
for simplicity here we will call all regulatory and non-tariff instruments that impede trade as
non-tariff barriers (NTBs) while recognizing that some of these are perfectly legitimate
measures, and in such cases the less pejorative term perhaps ought to be non-tariff measures
(NTMs). Calling them all NTBs, we focus instead on dividing the trade-restricting aspects of all
measures into those that can be reduced and those that cannot, defined elsewhere in this paper
as “actionable” and “non-actionable” NTBs.
6
It should be stressed that in contrast to reducing tariffs, the removal of NTBs is
not so straightforward. There are many different reasons and sources for NTBs.
Some are unintentional barriers while others reflect deliberate public policy. As
such, for many NTBs, removing them is not possible because, for example, they
require constitutional changes, unrealistic legislative changes, or unrealistic
technical changes. Removing NTBs may also be difficult politically, for example
because there is a lack of sufficient economic benefit to support the effort;
because the set of regulations is too broad; or because consumer preferences or
language preclude a change. Indeed even where public perception is not
congruent with scientific evidence, we need to keep in mind that it's the public
that votes, not the evidence. In recognition of these difficulties, we follow recent
studies by focusing on the set of possible NTB reductions (known as “actionable”
NTBs) given that many will remain in place. Of those NTBs that can feasibly be
reduced, we focus on different levels of ambition for NTB reduction.2
This raises the issue of what might we plausibly expect to be the result of a
successful T-TIP negotiation. In addition to differences over matters of fact
(economics as a body of knowledge is far from settled on many positive issues
with respect to what drives outcomes in national economies and their
relationship to other economies), we expect difficulties to arise over matters of
genuine differences in social goals and the way those goals are embedded in
national legal orders and we also expect outcomes to be affected by distributive
struggles in the national (and in the case of the EU, in the Community level)
political arena.
2 In benchmarking studies leading into the T-TIP talks, such as ECORYS (2009), there was a
strident debate between regulators and trade officials centred on semantics and acronyms. One
man’s barrier is another man’s reasonable measure, or in other words regulatory measures
might not be deliberate barriers. While noting the importance of this distinction in some circles,
for simplicity here we will call all regulatory and non-tariff instruments that impede trade as
non-tariff barriers (NTBs) while recognizing that some of these are perfectly legitimate
measures, and in such cases the less pejorative term perhaps ought to be non-tariff measures
(NTMs). Calling them all NTBs, we focus instead on dividing the trade-restricting aspects of all
measures into those that can be reduced and those that cannot, defined elsewhere in this paper
as “actionable” and “non-actionable” NTBs.
6
Consider first distributive politics. There is now a sizable literature, in
Economics and Political Science, on the ways political struggles over the returns
to trade (and the losses realized by particular households and sectors in both the
short- and long-run) affect the outcomes of domestic trade politics and, more
relevant for the purposes of this paper, the outcomes of trade negotiations
(Grossman and Helpman, 1995a, b, Ornelas, 2005a). The usual goal of political
economy papers in general is to explain deviations from optimal policies, so it is
not surprising that most of this work emphasizes how politics cause deviations
from “Liberal trade“(Krishna, 1998, Levy, 1997, Ornelas, 2005b).3 Certainly in
the case of T-TIP there is no shortage of special interests in both the US and
Europe seeking to use the negotiations to either increase access to foreign
markets or reduce access to domestic markets. In this paper we identify sectors
that may gain and lose from liberalization of trade between the US and the EU,
and it should not surprise us to discover that those sectors are actively lobbying
their governments on those issues.4
At the same time, contemporary negotiations between the EU and the US take
place in a context that offers interesting differences relative to expectations
based on standard models. Most obviously, a substantial amount of trade
between the US and the EU takes place in differentiated intermediate goods
along the lines of Ethier (1982). At least since the classic paper of Balassa
(1966), intra-industry trade (IIT) has been seen as less disruptive than inter-
industry trade (Brülhart, 2002, Dixon and Menon, 1997, Menon and Dixon, 1997)
and while this inference is not as well-grounded theoretically as we tend to think
(Lovely and Nelson, 2000, 2002), there appears to be empirical support for the
claim.5 Thus, just as integration among the early members of what became the
EU was eased by the relatively low adjustment costs to liberalization of trade, the
3 Though Ethier (Ethier, 1998, 2001) and Ornelas (Ornelas, 2005a, 2008) are exceptions here.
4 For example, US cultural industries seek strong intellectual property protections and increased
access to European markets, while European producers in these sectors seek exemptions to
protect national culture. An interesting case we note below is the US financial sector, which
seeks regulatory harmonization not only to increase its presence in Europe but, perhaps more
importantly, to secure reduced domestic regulation.
5 Consistent with Lovely and Nelson (2000, 2002), Trefler (2004) finds that rationalization
effects dominate in the long-run, but that short-term adjustment induced by rationalization
involve non-trivial costs in the short-run.
7
Economics and Political Science, on the ways political struggles over the returns
to trade (and the losses realized by particular households and sectors in both the
short- and long-run) affect the outcomes of domestic trade politics and, more
relevant for the purposes of this paper, the outcomes of trade negotiations
(Grossman and Helpman, 1995a, b, Ornelas, 2005a). The usual goal of political
economy papers in general is to explain deviations from optimal policies, so it is
not surprising that most of this work emphasizes how politics cause deviations
from “Liberal trade“(Krishna, 1998, Levy, 1997, Ornelas, 2005b).3 Certainly in
the case of T-TIP there is no shortage of special interests in both the US and
Europe seeking to use the negotiations to either increase access to foreign
markets or reduce access to domestic markets. In this paper we identify sectors
that may gain and lose from liberalization of trade between the US and the EU,
and it should not surprise us to discover that those sectors are actively lobbying
their governments on those issues.4
At the same time, contemporary negotiations between the EU and the US take
place in a context that offers interesting differences relative to expectations
based on standard models. Most obviously, a substantial amount of trade
between the US and the EU takes place in differentiated intermediate goods
along the lines of Ethier (1982). At least since the classic paper of Balassa
(1966), intra-industry trade (IIT) has been seen as less disruptive than inter-
industry trade (Brülhart, 2002, Dixon and Menon, 1997, Menon and Dixon, 1997)
and while this inference is not as well-grounded theoretically as we tend to think
(Lovely and Nelson, 2000, 2002), there appears to be empirical support for the
claim.5 Thus, just as integration among the early members of what became the
EU was eased by the relatively low adjustment costs to liberalization of trade, the
3 Though Ethier (Ethier, 1998, 2001) and Ornelas (Ornelas, 2005a, 2008) are exceptions here.
4 For example, US cultural industries seek strong intellectual property protections and increased
access to European markets, while European producers in these sectors seek exemptions to
protect national culture. An interesting case we note below is the US financial sector, which
seeks regulatory harmonization not only to increase its presence in Europe but, perhaps more
importantly, to secure reduced domestic regulation.
5 Consistent with Lovely and Nelson (2000, 2002), Trefler (2004) finds that rationalization
effects dominate in the long-run, but that short-term adjustment induced by rationalization
involve non-trivial costs in the short-run.
7
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