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Economic impacts of TTIP in Ireland

Economic impacts of TTIP in Ireland. Martin H. Thelle Copenhagen Economics Dublin, June 2014. Department of Jobs, Enterprise and Innovation. Purpose of the Study. Objectives Quantify the sectoral and overall macro-economic impacts of the TTIP on the Irish Economy

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Economic impacts of TTIP in Ireland

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  1. Economic impacts of TTIP in Ireland Martin H. Thelle Copenhagen Economics Dublin, June 2014 Department of Jobs, Enterprise and Innovation

  2. Purpose of the Study Objectives • Quantify the sectoral and overall macro-economic impacts of the TTIP on the Irish Economy • Identify key sectors • In-depth analyses of key sectors Approach • Large scale model from the CEPR (2013) study • Adapted to the Irish economy • Sectors adapted to reflect the Irish economy • Introduction

  3. Approach What we have done so far • Stakeholders • CGE simulations • Data analysis What is still to come • Sector analyses • Recommendations • Introduction

  4. Background

  5. TTIP and the Transatlantic Economy • TTIP aims to link the world’s two biggest economies* • 22% of global GDP • 25% of global exports • 33% of global imports • More than 50% of global R&D spending • Will have considerable economic consequences • Extending beyond the two economies involved • More than just economic impacts • Difficult to speculate about detailed outcomes *) According to Hamilton & Quinlan (2013) The Transatlantic Economy

  6. The transatlantic relationship • The idea is not new: A transatlantic trade deal has been discussed before • Circumstances are new: How we trade and produce has changed • About 20% of EU and US trade is with each other • Most of trade is intermediate products within a very integrated value chain

  7. New Regionalism • Global supply chains mean more trade in parts and components • Now almost 80% of world trade • Production spans multiple regulatory regimes • Almost 20% of EU costs follow from global (extra-EU) inputs • Demand for progress in areas outside WTO • Behind the border measures – regulatory differences • Increased importance of NTBs • Trade-related IPR issues • Impact on productivity and wages • Finding solutions that can be multi-lateralized • Important to avoid race to the bottom • Also important to prevent disguised regulatory protection

  8. Current trade between Ireland and the US

  9. Ireland’s trade in goods with U.S. Billions of US dollars on a nominal basis Export Import

  10. Composition of Ireland’s goods exports (total) Value of exports 2013 Note: Irelands total export to world Source: Copenhagen Economics based on data from Irish CSO € billions

  11. Composition of Ireland’s goods exports to the U.S. Value of exports 2013 Note: Irelands export to the U.S. Source: Copenhagen Economics based on data from Irish CSO € billions

  12. Composition of Ireland’s Current Account for services Source: CSO, Ireland

  13. Ireland’s exports to the US Composition of Ireland’s bilateral exports to the US (% of total goods + services) Source: Copenhagen Economics based on GTAP9 data, 2011 base year Goods exports Service exports

  14. Current barriers to transatlantic trade

  15. Tariffs are low Tariffs applied by the US on imports from the EU Agriculture average 6.6% Industry average 1.7% Total average 2.2% Tariffs applied by the EU on imports from the US Agriculture average 12.8% Industry average 2.3% Total average 3.3% Source: Cepii (2014)

  16. Tariffs are low … but with certain peaks Tariffs applied by the US on imports from Ireland Dairy products, average 6.4% Pharma and chemicals, average 1.9% Metal manufacturing, average 2.8% Other manufacturing, average 5.2% Irish exporters pay in excess of USD 300m in tariffs to the US Treasury Source: GTAP 9 data (2014)

  17. Non-tariff barriers and regulation Regulation is legitimate • ensuring consumer information • improving health • product safety • preserving the environment Regulation in itself does not hinder trade … but differences in regulation may increase the cost of selling in foreign markets • Familiarisation costs • Conformity assessment costs • Certification costs • Adaptation costs • Blocking products

  18. Non-tariff barriers estimations The trade cost impact of regulatory differences The Ecorys (2009) study represented a concerted effort to triangulate barriers: • Firm surveys – including overall rankings and detailed barriers • Industry, legal, regulatory experts • Econometrics, fed into models of production and trade

  19. Non-tariff barriers estimations – some basic findings • Not all regulatory barriers can actually be negotiated and reduced. For example, the Japanese require legal documents in Japanese. This concept is called actionability. • Barriers can be grouped broadly into those are cost creating barriers, and those that instead are rent generating barriers (i.e. they generate rents by limiting competition and market access). • Current differences and actionabilitydefine scope for the NTB negotiations.

  20. Non-tariff barriers may affect firms in several ways NTBs implies both • Upfront fixed costs of selling in a foreign market • On-going variable costs of exporting to that market This in turn affect firms’ • Probability to export • Value of export • Export prices Impact can measured as a tariff equivalent, but impact differ from that of a tariff – e.g. NTBs are heavier burden on SMEs

  21. Cost impact estimates and actionability Objective: Achieving greater regulatory compatibility, without compromising the existing levels of protection Cost equivalent of NTBs in the US for imports from the EU Manufacturing goods average 22% Cost equivalent of NTBs in the EU for imports from the US Manufacturing goods average 25% Source: CEPR (2013)

  22. NTBs differ from sector to sector Cost equivalent of NTBs in the US for imports from the EU Food and beverages, average 73% Pharma and chemicals, average 19% Motor vehicles, average 27% Electrical machinery, average 15% Source: CEPR (2013)

  23. Scenarios and model used

  24. The model used: CGE model • Same model as in the CEPR (2013) study for the EU Commission • Using updated GTAP9 data with base year 2011 (can be projected to 2030) • Includes intermediate linkages between sectors (e.g. processed food buying meat) • Includes cross-border linkages between sectors (e.g. pharmaMNEs in Ireland using US inputs) • Includes tariff barriers • Includes non-tariff barriers (NTBs) both cost raising NTBs and rent generating NTBs • Services trade modelled • 11 regions, more than 20 sectors (adapted from CEPR 2013 to reflect Ireland’s key sectors) • Integrates econometric estimates of elasticities and NTBs • Background

  25. The scenario analysed Main scenario • Tariffs reduced to zero • Except for food products where only a 50% tariff cut is assumed • NTBs for goods reduced as in CEPR (2013) • Half of actionable NTBs, i.e. 25% of the total friction caused by NTBs is removed • Service barriers reduced as in CEPR (2013) • Spill overs of NTBs as in CEPR (2013) • Direct spill overs are modelled at 10 to 20% of direct NTB reductions. Indirect spill overs are modelled as half of the direct spill over reductions. Variants of the scenario for key agriculture sectors • We have simulated multiple experiments which are variants of the main scenario. • Background

  26. Main results

  27. This is an EU-US agreement … not Ireland-US • TTIP will boost transatlantic economy by €90 bn and €120 bn in US and EU respectively (CEPR, 2013) • Realising an untapped potential • Limited trade diversion • Trade with third parties will go up TTIP will change how Irish firms: • …trade with the US • …trade with rest of EU • …trade with the rest of the world Trade liberalisation – and in particular NTB reductions – has different impacts on SMEs and MNEs • Main results

  28. Main economic impacts in Ireland: Positive • Overall export up • National income up • GDP increase • Production will increase • Real wages will improve for all skill groups • Investment increase • Main results

  29. Macro-results • TTIP impact on Ireland (DRAFT – NOT for distribution) Source: Copenhagen Economics based on CGE-simulations by prof. J. F. Francois 2014

  30. Tariff reductions and NTB reductions for goods are main sources of the GDP gain of 1.1 percent Total GDP change +1.1% NSource: Copenhagen Economics based on CGE-simulations by prof. J. F. Francois 2014

  31. Opportunities for Ireland Strengthening Ireland’s position as hub for MNEs in the EU market • Increased MNE exports to both the US and EU market • More attraction of FDI (MNEs) Improving market access in the US for Irish SMEs Increased demand and competition in EU market Lower input costs enhances Ireland’s attractiveness as hub

  32. Opportunities are expected mainly in… Manufacturing • Pharmaceuticals and chemical industry • Electrical machinery • Other advanced machinery Services • Insurance • ICT Agriculture and processed food • Overall increase in exports • Attention to certain subsectors such as dairy and beef

  33. Trade effects are driven largely by three sectors Goods trade changes Predicted increase with TTIP 2011-base Change from baseline, € millions Note: Results for trade value change from baseline in experiment 1. Based on CSO goods exports of €91 bn and goods imports of €48 bn. Source: Copenhagen Economics based on CGE-simulations by prof. J. F. Francois 2014

  34. Pharmaceuticals and chemical industry Pharmaceuticals and chemical industry Exports 2011 A large export sector • The sector exported around €6o billion in 2011, which by far is the largest export sector in Ireland • Pharmaceuticals and chemicals accounted for over 60% of goods exports in 2011 according to CSO statistics • Close to half of the export from the sector is pharmaceuticals and more than a third of the sector export is organic chemicals With large impacts from TTIP • Our simulations the TTIP’s impact in Ireland predict an increase in export from the sector of €2.7 billion, which is largely driven by the assumed reduction in NTBs in the sector • Tariffs and spill overs are only small contributors to the export increase. Service liberalisation has a slightly negative impact for the sector in isolation • Opportunity 1 Source: Irish CSO Pharmaceuticals and chemical industry Predicted increase with TTIP 2011-base Change in exports, Spillovers Note: Results for trade value change from baseline in experiment 1. Based on total CSO reported goods exports of €91 bn . Source: Copenhagen Economics based on CGE-simulations by prof. J. F. Francois 2014

  35. EU Positions on pharma and chemicals Pharmaceuticals Chemicals • Mutual recognition of Good Manufacturing Practice (GMP) inspections of manufacturing plants, to avoid duplicating work • Exchanginginformation • Harmonising requirements for approving 'biosimilars' - products similar to already-licensed biological medicines, such as vaccines • Streamlining systems for authorisinggeneric drugs • Harmonisingthe terms used, and carrying out more joint assessments • Working together to revise thepaediatrics guidelines issued by the International Conference on Harmonisation (ICH) • Prioritise chemicals for assessment and agree on how best to test them • Classify and label chemicals • Identify and address new or emerging issues • Share data and protect confidential business information more effectively. Ensuring that current levels of protection and quality is obtained more efficiently and thereby cut firms' costs.

  36. Electrical machinery industry A special export sector • Sector exports were around €17 billion in 2011 • Sector is heavily reliant on imported inputs and has a highshare of foreigncosts in total cost • The sector is exporting a wide range of mostly high-technology products (for example computers, mobile phones, iPads and other such devices). With large impacts from TTIP • Our simulations the TTIP’s impact in Ireland predict an increase in export from the sector of €2.3 billion, which is largely driven by reduction of tariffs but also fuelled by the assumed reductions in service barriers • Reductions of NTBs and spill overs are having a negative, but smaller impact on the sector’s export • The TTIP’s positive impact for Ireland is different from the EU-wide sector, which is expected to contract • Opportunity 2 Electrical machinery industry Predicted increase with TTIP. 2011-base Change in exports, Note: Results for trade value change from baseline in experiment 1. Based on total CSO reported goods exports of €91 bn. Source: Copenhagen Economics based on CGE-simulations by prof. J. F. Francois 2014

  37. Other machinery industry Another high-tech export sector • Sector exports were around €13 billion in 2011 • The sector is exporting a wide range of mostly high-technology products such as medical, precision and optical instruments. With large impacts from TTIP • Our simulations the TTIP’s impact in Ireland predict an increase in export from the sector of €0.7 billion, which is largely driven by reduction of non-tariff barriers • Reductions of tariffs and service barriers are having a negative, but smaller impact on the sector’s export • Opportunity 3 Other machinery industry Predicted increase with TTIP. 2011-base Change in exports, Note: Results for trade value change from baseline in experiment 1. Based on total CSO reported goods exports of €91 bn . Source: Copenhagen Economics based on CGE-simulations by prof. J. F. Francois 2014

  38. Service trade impacts • Small increase in overall service exports • Significant increase in service imports • Service output will expand Irish service exports are predicted to increase in • Insurance (incl. pension funding, except compulsory social security) • Financial services (financial intermediation) …while decrease in Irish export of • Business, professional and ICT services • Other services Service barrier estimates Services EU US • Water transport • Air transport • Finance • Insurance • Business/ICT • Communications 8% 2% 11% 11% 15% 12% 8% 2% 32% 19% 4% 2% Source: CEPR (2013) and Ecorys (2009)

  39. Agri-food benefits expected in processed foods • Exports of primary agriculture, beef and dairy go down • Exports of processed foods go up Small overall increase in exports for the agri-food sector Export changes Predicted increase with TTIP 2011-base Change from baseline, € millions Note: Results for trade value change from baseline. Source: Copenhagen Economics based on CGE-simulations by prof. J. F. Francois 2014

  40. Ireland will have the means and time to adapt TTIP will strengthen Ireland’s most productive sectors Sector composition will change over time. There is time to adapt and find appropriate policy responses. Certain sectors shall be assessed with great care, e.g. quotas and SPS rules affecting Irish farmers: • Ensure rules do not pose unwarranted obstacles to trade • Ensure that Europeans can continue to enjoy safe, high-quality beef, pork, poultry, and other products • Ensure that TTIP will not lead regulatory race-to-the-bottom

  41. Closing remarks

  42. Closing remarks • NTBs for goods dominate the impact for trade • Productivity gains from TTIP likely to be important • Scope for regulatory spill overs is also important • Quantitatively TTIP has considerable gains, but requires timely policy considerations to manage the long-term adjustment in particular sectors • Important to position Ireland’s sectors to pursue opportunities • The potential benefits are substantial, but hinge on difficult issues: NTB actionability. This will not be easy.

  43. Contact Martin H. Thelle mht@copenhageneconomics.com Copenhagen Economics A/S Sankt AnnæPlads 13 DK-1250 Copenhagen K copenhageneconomics.com

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