Why the TTIP Should Be Signed

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Members of European Parliament vote on the draft recommendations to the TTIP in European Parliament. May 28, 2015. (European Parliament/Flickr).

The Trans-Atlantic Trade and Investment Partnership (TTIP) is a free-trade agreement, yet to be signed, that goes far beyond simply lowering tariffs. It establishes an almost definitive market union between the US and the EU. The agreement will indeed tear down obstacles to trade (Non-Tariffs Barriers (NTBs)), making countries’ technical standards, norms and regulations converge to facilitate business across boundaries.

Its historical proportions make pundits’ debate on it fairly heated. In particular, the economic assessment released by the Center for Economic Policy Research (CEPR) strongly favors the signing of the agreement, whereas Tufts University’s professor, Jeronim Capaldo, released a study that considers the agreement utter nonsense.

Capaldo asserts that signing the TTIP would be an uninformed decision. According to the professor, the agreement would severely contract the GDPs, personal incomes and employment rates on both continents. Furthermore, he asserts that the TTIP would lead to increasing financial instability and the continuing impoverishment of the lower strata of the population. Overall, three major problems would arise from the implementation of TTIP: 1) the dissolution of the economic stability for the countries involved, 2) the dissolution of international stability and 3) the dissolution of EU unity.

On the other hand, CEPR’s study shows that the TTIP achieves partial regulatory convergence and cross-recognition of standards, and would ensure substantial benefits to productivity and per capita income. According to CEPR, the volume of bilateral trade is projected to increase by 186,985 million Euros for Europe and 159,098 million Euros for the US. Moreover, the Spillover Effect (the increase in exports towards other countries outside the TTIP) should increase the volume of European and American exports by 33 and 80 billion Euros, respectively. The overall message is that negotiating a comprehensive agreement would bring significantly greater benefits to both economies.

While Capaldo’s point of view stems from noble social concerns, his claims that signing the TTIP would ultimately result in economic losses worse than those of the 2007 world crisis seem biased. Both the history of the European Economic Community (EEC) and the principles of a free-market economy demonstrate that Capaldo’s argument is either based on incorrect assumptions or follows a logical fallacy, while CEPR’s reasoning provides a solid analysis of the issue. The US and the EU could gain remarkable economic and geopolitical benefits from the agreement if both qualitative and cooperative standards are respected. Thus, the agreement should be signed quickly.

The purpose of this article is to take Capaldo’s argument apart by analyzing the three major problems he claims would arise from the implementation of TTIP.

I. The Dissolution of Economic Stability

Regarding the dissolution of economic stability, we can split Capaldo’s argument into two smaller parts: cutting salaries and increasing unemployment.

Cutting Salaries

The economic argument of Capaldo’s study is fairly straightforward: increased competition forces firms lower their costs by cutting wages in order to keep their products competitive. Upon the signing of the TTIP, Capaldo argues that wage cuts would lower per capita income, and both the US and the EU aggregate demand would fall. This would in turn trigger a spiral of psychological despair and economic regression, while the distribution of new profits would only benefit multi-national companies.

However, the professor’s abstract formula forces empirical data into mathematical structures that do not correspond to reality for two reasons.

First, not only would national minimum wage policies prevent the extreme salary cuts the model predicts, but also there is no historical evidence that companies will enact these primitive policies in response to the TTIP. Since 1957, when the European Economic Community (EEC) was founded, the European free-market agreement has boosted European national economies without severe cuts to wages. The reduction of tariffs, the economic deregulation and the stability of intra-European international relations favored a strong growth of international trade and widespread spirit of cooperation. In the aftermath of World War II, the EEC geared Western European countries towards thirty years of incredible economic growth. These three decades are now remembered as the age of the “Economic Miracle” in Germany (Wirtschaftswunder), France (Trente Glorieuses), Italy (Miracolo Economico), Sweden and Greece, all countries that had been devastated by the war.

Second, the low cost of labor in South East Asia poses further doubts on the validity of Capaldo’s argument. As Business in Asia reports, in 2013, the average salary in South East Asian states oscillated between $0.50 and $10.00 on a daily basis. These low numbers explain why transatlantic companies would inevitably fail if they strived to win the race on lower salaries against emerging economies. Quality, not price, is their competitive advantage. For this reason, Capaldo’s claim that firms will cut salaries with the implementation of the TTIP seems uninformed. It contradicts the core message of the agreement: to facilitate higher quality standards for firms.

Increasing Unemployment

Capaldo’s study insists that smaller or less competitive companies will suffer from competition with bigger firms and eventually be forced to shut down. He rejects CEPR’s assumption that possible lay-offs due to the TTIP will be absorbed by more competitive firms, reasoning that people with specific technical knowledge will have a hard time switching from one industry to another. Thus Capaldo asserts that, instead of opening the US’s and the EU’s markets to each other, governments should protect national businesses, even unhealthy ones, in order to guarantee full employment and growth.

While Capaldo’s reasoning must be granted some logical coherence, again his conclusions aren’t entirely substantiated. While signing the TTIP would initially provoke a difficult time of adjustment for workers, the long-run result of protecting unhealthy national businesses would prospect a far worse scenario. If protecting national industry also means protecting noncompetitive businesses, American and European countries’ national economies would ultimately become weaker and less efficient, doomed to fail in an ever more aggressive international context.

On the contrary, the implementation of the TTIP would, in the long-run, guarantee better international conditions to do business by regulating competition and augmenting companies’ international marketability. This will help healthy businesses (especially small and medium sized ones) take advantage of unprecedented opportunities.

In addition to higher standards for the business environment, Columbia University Professor Anu Bradford claims that the TTIP seals a competitive alliance in favor of higher quality standards for products. She argues that globalization obliges exporters to adjust to the standards of the largest consumer base (people with similar standards for the products they are willing to buy). The justification of this observation is that exporters minimize costs and maximize profits if they can focus their investments in opening as few production systems as possible while selling to the largest number of people. In this regards, the TTIP enlarges the US and the EU consumers’ base (since it would eliminate NTBs), making countries’ technical standards, norms and regulations converge. Ultimately, the agreement should enable the largest consumer base, western consumers, to dictate what the most convenient standards are.

As opposed to Capaldo’s claim that the TTIP would destroy quality standards, the agreement precisely aims at compelling businesses to follow an ongoing shift in consumers’ behavior towards higher quality standards. Take the food industry, for example. Both Euromonitor International, the world’s leading independent provider of strategic market research, and Nielsen’s 2015 “Global Health & Wellness Survey” highlight that consumers are nowadays willing to pay a premium for healthier food. In particular, the Health & Wellness industry is growing faster than the Non-Healthy food industry, continuing to drive growth and innovation in the wider food and beverage industries. Surprisingly enough, 88% of those polled globally are willing to pay more for healthier foods, all demographics represented.

II. The Dissolution of International Stability

Capaldo argues that the TTIP could trigger aggressive inflation policies and eventually a war between the EU and the US.

It is true that some countries implement strong and consistent inflation policies to promote exports. Let’s follow the example of Italy to explain. During the 70’s, Italy consistently devalued its national currency, the lira. This inflation policy aimed to incentivize foreign buyers to purchase national products with a stronger currency, which would have been indeed available at a comparatively lower price. For example, the same gallon of milk would have cost less in Italy than in the UK, because the pound was stronger than the lira. Now, take that difference in the price of milk between Italy and the UK and apply it to every other good or service. It is clear why an investor would want to open a new business in Italy rather than in the UK.

What Capaldo alleges is that if one country does this to compete better internationally, then all the other countries will do the same, triggering a climate of international aggressiveness. In particular, he continues, this is true when countries sign free-trade agreements and open their national market to tougher competition. He concludes that the competitively aggressive devaluations of national currencies led to international political instability before WWI and WWII.

But if Capaldo’s worries are justified, countries in the EU would have found themselves continuously at war with one another from the signing of the EEC until the implementation of the euro in 2001. Also, past international agreements on commerce, such as Bretton Woods and Trans-Pacific Partnership, serve as concrete evidence that the facilitation of commerce is accompanied by regulations precisely aimed at avoiding conflicts.

In the TTIP’s case, two of the three parts of the agreement are specifically aimed at establishing these fundamental ground rules. Along with the “Pivot to Asia” and the other free-trade agreement, the “Trans Pacific Partnership”, the TTIP is a tile of Obama administration’s geopolitical strategy aimed at strengthening American alliances. Specifically, the TTIP aims to crown the lasting economic and political cooperation between the US and the EU. Just like former trade deals, the TTIP does more to prevent conflict and in-fighting than to cause it.

III. The Dissolution of European Integration

Capaldo insists the TTIP would push the EU to the edge of default in the event of an American economic crisis.

He argues that since the Maastricht agreement imposes strict financial policies on the EU, and the European Central Bank keeps European monetary policy rigid, open markets under the TTIP would make the EU more vulnerable to US market fluctuations. Therefore, he concludes a weak, stagnant economy like Europe’s should prefer not to undertake risky investments.

But the EU and US economies are already heavily interdependent. As Dr. William H. Cooper, a specialist in international trade and finance, reveals in his report, the US and the EU economic relationship is the largest in the world. In 2012 (latest data available), it generated goods and services trade flows of about $2.7 billion a day and a total of 6.8 million jobs (2010 estimate). Supporters of the TTIP argue that definitive integration of the two market areas could eventually complete the historical economic integration of the EU and the US market—vital to prosperity on both sides of the Atlantic.

Conclusions

Having demonstrated several holes in Capaldo’s arguments about the dangers of the TTIP, what impacts can we expect on growth for either side? A CEPR analysis shows a GDP increases of 0.5% and 0.6% for the US and the EU economies, respectively. Given the size of the US and EU economies, those figures are huge. Furthermore, the TTIP will allow more companies to access both the EU and the US markets. More companies entering the market mean more choices for the same product, higher quality and lower prices for consumers in a wide range of goods.

In the context of a stagnant economy, the TTIP would create new investment opportunities, revitalizing and improving EU and US businesses. It would also seal a long lasting political and economic relationship, allowing western countries to embrace higher quality standards. Ultimately, the massive changes the TTIP promises represent an enormous opportunity for the EU and the US, and should not be wasted by protectionist hesitation.

The views expressed by the author do not necessarily reflect those of the Glimpse from the Globe staff, editors or governors.

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About Author

Edoardo Del Vecchio is a World Bachelor in Business freshman at the University of Southern California. He is from Rome, Italy, and as part of this program he will study in Hong Kong and Milan in the next years. At the beginning of 2016, he has started a collaboration with Limes, the Italian leading geopolitical magazine, for which he is conducting a research paper on Downtown Los Angeles. In 2015, he directed a project to bring Geopolitics in high-schools in collaboration with the MSOI, the juvenile branch of the Italian Society for International Relations. On campus, he has just joined TAMID, a consulting and investing student organization, focused on the high-tech and promising start-up market of Israel.

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