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

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  • Maria C Latorre
  • Hidemi hi Yonezawa

Abstract

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. All in all, the present modelling approach offers several novelties that should facilitate a better understanding of the effects of the TTIP, particularly focusing on the beneficial impact of foreign multinationals operating in advanced services sectors. References: Aichele, R., Felbermayr, G. and Heiland, I. (2014) “Going Deep: The Trade and Welfare Effects of TTIP”, Cesifo Working Paper No. 5150. Balistreri, E.J., Tarr, D. G. and Yonezawa, H. (2014) “Reducing trade costs in east Africa: deep regional integration and multilateral action”, Policy Research working paper no. WPS 7049. Washington, DC: World Bank Group. Available at: http://documents.worldbank.org/curated/en/2014/09/20250345/reducing-trade-costs-east-africa-deep-regional-integration-multilateral-action Blanchflower, D. G. and Oswald, A. J. (1994a) The Wage Curve, MIT Press, Cambridge, MA. Blanchflower, D. G. and Oswald, A. J. (1994b) "An introduction to the wage curve", Journal of Economic Perspectives, Summer, 9(3), pp. 153-167. Blanchflower, D. G. and Oswald, A. J. (2005) “The wage curve reloaded”, paper presented at the National Bureau of Economic Research conference, Cambridge Mass, on April 15, 2005 Copenhagen Economics (2005a) “Economic Assessment of the barriers to the internal market for services”, Final Report, May. Copenhagen Economics (2005b) The economic importance of the country of origin principle in the proposed Services Directive”, Final Report. Ecorys (2009), Non-Tariff Measures in EU-US Trade and Investment – An Economic Analysis, Report prepared by Berden, K., J. Francois, M. Thelle, P. Wymenga y S. Tamminen for the European Commission, Reference OJ 2007/S180–219493. Fontagné, L., J. Gourdon and Jean, S. (2013), Transatlantic Trade: Whither Partnership, Which Economic Consequences?, CEPII Policy Brief No 1, September, 2013. Francois, J. and Manchin, M. (2014) “Quantifying the Impact of a Transatlantic Trade and Investment Partnership (T-TIP) Agreement on Portugal”, Final Report, July. Francois, J. F. and Reinert, K. A. (1997) Applied Methods for Trade Policy Analysis: A Handbook, Cambridge University Press, Cambridge. Francois, J. and Pindyuk, O. (2013) “Modeling the Effects of Free Trade Agreements between the EU Canada, USA and Moldova/Georgia/Armenia on the Austrian Economy: Model Simulations for Trade Policy Analysis”, FIW Research Reports 2012/13. Francois J., Manchin M., Norberg H., Pindyuk O. and Tomberger P. (2013) “Reducing Transatlantic Barriers to Trade and Investment, An Economic Assessment”, Study for the European Commission, CEPR Report. Jafari, Y. and Tarr, D.G. (2014) “Estimates of Ad Valorem Equivalents of Barriers Against Foreign Suppliers of Services in Eleven Services Sectors and 103 Countries”, World Bank Policy Research Working Paper 7096. Latorre, M.C. (2009) “The economic analysis of multinationals and foreign direct investment: A review”, Hacienda Pública Española/Revista de Economía Pública, vol. 191, pp. 97-126. Latorre, M. C. (2010) “The impact of foreign-owned companies on host economies: A Computable General Equilibrium approach”, Nova Science Publishers, New York. Markusen, J. R., Rutherford, T. and Tarr, D. G. (2005) “Trade and Direct Investment in Producer Services and the Domestic Market for Expertise”, Canadian Journal of Economics, vol. 38, pp. 758-777. Messerlin, P. (2015) “The Transatlantic Trade and Investment Partnership: The Services Dimension”, Paper No. 6 in the CEPS-CTR project “TTIP in the Balance’’ and CEPS Special Report No. 106, May. Monteagudo, J., Rutkowski, A. and Lorenzani, D. (2012), “The economic impact of the services directive: A first assessment following implementation”, European Economy, Economic Papers No. 456, European Commission, Brussels. Mustilli, F. and Pelkmans, J. (2013) “Access Barriers to Services Markets Mapping, tracing, understanding and measuring”, CEPS Special Report, No. 77, June. Rutherford, T. F. and Tarr, D. G. (2008) “Poverty effects of Russia’s WTO accession: Modeling “real” households with endogenous productivity effects”, Journal of International Economics, vol. 75, pp. 131–150. Tarr, D. G. (2012) “Putting Services and Foreign Direct Investment with Endogenous Productivity Effects in Computable General Equilibrium Models” in Dixon, P. And Jorgenson, D. (Eds.) Handbook of Computable General equilibrium modeling, Elsevier, North-holland, available at: http://www-wds.worldbank.org/ external/ default/ WDS ContentServer/IW3P/IB/2012/03/26/000158349_20120326084225/Rendered/PDF/WPS6012.pdf

Suggested Citation

  • Maria C Latorre & Hidemi hi Yonezawa, 2016. "An innovative CGE assessment of the impact of the TTIP including multinationals and Foreign Direct Investment," EcoMod2016 9333, EcoMod.
  • Handle: RePEc:ekd:009007:9333
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    References listed on IDEAS

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    1. Tarr, David G., 2013. "Putting Services and Foreign Direct Investment with Endogenous Productivity Effects in Computable General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, Elsevier.
    2. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, January.
    3. repec:wsi:wschap:9789813108448_0019 is not listed on IDEAS
    4. Lionel Fontagné & Julien Gourdon & Sébastien Jean, 2013. "Transatlantic Trade: Whither Partnership, Which Economic Consequences?," CEPII Policy Brief 2013-01, CEPII research center.
    5. Latorre, María C. & Bajo-Rubio, Oscar & Gómez-Plana, Antonio G., 2009. "The effects of multinationals on host economies: A CGE approach," Economic Modelling, Elsevier, vol. 26(5), pages 851-864, September.
    6. Latorre, María C., 2016. "A CGE Analysis of the Impact of Foreign Direct Investment and Tariff Reform on Female and Male Workers in Tanzania," World Development, Elsevier, vol. 77(C), pages 346-366.
    7. Joseph Francois & Miriam Manchin & Hanna Norberg & Olga Pindyuk & Patrick Tomberger, 2013. "Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment," IIDE Discussion Papers 20130401, Institue for International and Development Economics.
    8. James Markusen & Thomas F. Rutherford & David Tarr, 2017. "Trade and direct investment in producer services and the domestic market for expertise," World Scientific Book Chapters,in: Trade Policies for Development and Transition, chapter 19, pages 439-458 World Scientific Publishing Co. Pte. Ltd..
    9. María C. Latorre, 2012. "Industry restructuring in transition after the arrival of multinationals: a general equilibrium analysis with firm-type costs differences," Post-Communist Economies, Taylor & Francis Journals, vol. 24(4), pages 441-463, June.
    10. María C. Latorre, 2009. "The economic analysis of multinationals and foreign direct investment: a review," Hacienda Pública Española, IEF, vol. 191(4), pages 97-126, December.
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    14. Jens Matthias Arnold & Aaditya Mattoo & Gaia Narciso, 2008. "Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence from Firm-Level Data," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(4), pages 578-599, August.
    15. Zhou, Jing & Latorre, María C., 2013. "The impact of FDI on the production networks between China and East Asia and the role of the U.S. and ROW as final markets," MPRA Paper 51384, University Library of Munich, Germany.
    16. María C. Latorre, 2013. "On the Differential Behaviour of National and Multinational Firms: A Within- and Across-sectors Approach," The World Economy, Wiley Blackwell, vol. 36(10), pages 1294-1317, October.
    17. Fernandes, Ana M. & Paunov, Caroline, 2012. "Foreign direct investment in services and manufacturing productivity: Evidence for Chile," Journal of Development Economics, Elsevier, vol. 97(2), pages 305-321.
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    Keywords

    Europe and the US; General equilibrium modeling; Trade issues;

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