An innovative CGE assessment of the impact of the TTIP including multinationals and Foreign Direct Investment

This paper analyzes the impact of the Transatlantic Trade and Investment Partnership (TTIP) on the EU and the US. The outcomes are derived at the microeconomic, as well as at the macroeconomic level in a consistent framework by using a computable general equilibrium (CGE) model. With respect to the sectoral results, the effects on production, exports and imports are derived for the twenty one sectors (including manufactures and services) in which the economies are split. Regarding the macroeconomic outcomes the impact for GDP, aggregate exports and imports, wages, capital rates of return and welfare will be obtained. We will consider that both moderate or ambitious scenarios (regarding tariff and non-tariff barriers reductions) could be reached in the negotiations that are actually taking place. One important characteristic of our model is that, contrary to the few previous analyses of the TTIP, it includes the impact of the operations of foreign multinationals in a context of imperfect competition and increasing returns to scale. The model is the successor of a number of recent models devoted to the study of Foreign Direct Investment (FDI) in services. Beginning with the stylized model from Markusen, Rutherford and Tarr (2005) further extensions led to applications to real economies, including the accession of Russia in the WTO (Rutherford and Tarr, 2008) and other integration processes of African and East European countries. A number of previous CGE models have analyzed the same topic (Francois and Manchin, 2014; Francois et al., 2013; Fontagne et al., 2013; Francois and Pindyuk, 2013). To the best of our knowledge none of them has included the impact of multinationals within the same CGE model, thus deriving their impact in a consistent framework. This absence of foreign multinationals’ effects in the analyses of the TTIP has been lamented by several authors (e.g., Aichele, Felbermayr and Heiland, 2014; Messelin, 2015). In fact, more generally, only a few number of CGE models consider the presence of multinationals (for a summary see Latorre, 2009, 2010). Tarr (2012) has recently reviewed the recent models with FDI in services. There is a particularly relevant analysis in this type of models in order to analyze employment outcomes, which could be summarize as follows. The advanced services provided by foreign multinationals or FDI, could be a partial equilibrium substitute for labor. However, the may well turn to be a general equilibrium complement, thus leading to employment increases. Foreign multinationals may economize on labor, compared to domestic firms, due to their more capital intensive technologies and to the use of foreigm imported intermediates (partial equilibrium effect). However, they may increase labor demand because after their arrival more varieties of services would be available reducing their prices through the Dixit-Stiglitz endogenous productivity effects. These reductions in prices would increase the final demand for more services and increase the productivity of firms using these services as intermediates, thus boosting their production. More labor may turn out to be employed if this general equilibrium perspective, including final demand and intermediate use is adopted. Several applications to the real economies have confirmed these overall positive outcomes for employment (Tarr, 2012). Is there an employment increasing case in the present study of the TTIP? Yes, we find that there is an overall job creation following the reductions of Non-Tariff Barriers NTBs to export and FDI in both sides of the Atlantic. We use the publicly available estimations for FDI barriers from Jafari and Tarr (2012). The results indicate that there is indeed an increase in the number of firms providing advanced services which leads to cost reductions in other sectors of the economy. This, in turn, causes an overall output increase trend across sectors and may even dumpen or turn positive the initial output reductions in the sectors that had been negatively affected by the reductions of NTBs in the exports of both goods and services. Our model exhibit other relevant features for the analyses of the TTIP, such as the presence of imperfect competition and scale economies in a Dixit Stiglitz setting, which are important to grasp more accurately the impact of trade (e.g., Francois and Reinert, 1997). Furthermore, we also pay attention to the impact of deepening services’ integration among European countries. Even though the Services Directive has been implemented in the period 2006-2009, several authors (e.g., Messerlin, 2015), envisage the TTIP as an important opportunity to continue the process of integration in services in Europe. Clearly, services’ integration within Europe is much deeper than in other parts of the world, but there is still scope for further integration (Mustilli and Pelkmans, 2014; Monteagudo, Rutkowski and Lorenzani, 2012). If Europe and the US are able to agree reductions in barriers to services, it seems reasonable that Europe could advance in its own integration in this area. We find that the possibility of further integration in services exports would have a rather reduced impact but that in the case of FDI the effects would be more sizeable. The former effect is an outcome of the rather low initial level of NTBs in services derived by Ecorys (2009), which is what we use for this modelling exercise. The latter arises in a framework consistent with the estimations of Copenhagen Economics (2005a; 2005b), which despite the initial low levels of barriers turns out to be of larger importance. Another special feature of this CGE models it that it includes unemployment, by means of a wage curve (Blanchflower and Oswald, 1994a; 1994b; 2005). This curve describes a negatively sloped curve linking the wages earned by employees to the unemployment rate in their region. This feature allows grasping the impact of the TTIP on the unemployment rate and a more nuanced study of job creation. It further distinguishes between skilled and unskilled workers across regions. We convert the five skilled labor categories available in the last release of the GTAP 9 Database, into two levels of skills due to the difficulties in estimating future unemployment rates for (only) both types of categories. 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