New Economic Study Indicates EU-Canada Trade Deal Will Cause 'Unemployment, Inequality And Welfare Losses'

As Techdirt noted back in January, it is astonishing that the TPP negotiations proceeded for years with almost no detailed analysis of whether they would be beneficial. It was only recently, after the text had been finalized, that a number of studies started to appear which explored the likely impact of TPP in some depth. Strikingly, every single one of them predicted almost no benefit for the US economy from the deal.

The situation for TPP is rather better than for the other big US trade negotiations currently underway, TAFTA/TTIP, where attempts to model its impact are thin on the ground. The same is true for CETA, the EU-Canada trade deal that was supposedly "finished" two years ago, and yet still hasn't been passed because of the text's deep problems, not least because of its corporate sovereignty provisions. Despite the fact that CETA may be quite close to final ratification -- although growing resistance to it in Europe may still stop it -- we have very few studies of what benefits it might bring. The main one is the official analysis that was used to kick off the talks (pdf) in the first place, published in 2008. Here's the key result:

The annual real income gain by the year 2014, compared to the baseline scenario, would be approximately a11.6 billion for the EU (representing 0.08 percent of EU GDP), and approximately a8.2 billion for Canada (representing 0.77 percent of Canadian GDP). Total EU exports to Canada go up by 24.3 percent or a17 billion by 2014 while Canadian bilateral exports to the EU go up by 20.6 percent or a8.6 billion by 2014.

Leaving aside the fact that 2014 has come and gone, it's clear even from these figures that CETA will produce almost negligible annual GDP uplift for both sides, since the quoted figures are cumulative extra growth that would come from CETA. But an important question is just how reliable even these small gains are, since they implicitly form the main justification for the whole deal. A new study from the Global Development And Environment Institute at Tufts University, which also conducted one for TPP last year, offers a useful perspective. Its results are pretty damning, and include the following:

CETA will lead to wage compression. By 2023, workers will have foregone average annual earnings increases of a1776 in Canada and between a316 and a1331 in the EU depending on the country. Countries with higher labor income shares and unemployment, such as France and Italy, will experience the most pronounced wage compression.

CETA will lead to net losses of government revenue. Competitive pressures exerted by CETA on governments by international investors and shrinking policy space for supporting domestic investment, production and investment will reduce government revenue and expenditure. Government deficits will also increase as a percentage of GDP in every EU country, pushing public finances closer or beyond the limits set by the Maastricht treaty.

CETA will lead to job losses. By 2023, about 230 thousand jobs will be lost in CETA countries, 200 thousand of them in the EU, and 80 thousand more in the rest of the world, adding to the rising dependency ratio (the average number of people supported by one job).

CETA will lead to net losses in terms of GDP. As investment and foreign demand remain sluggish, aggregate demand shortfalls nurtured by higher unemployment will also hurt productivity and cause cumulative welfare losses amounting to 0.96% and 0.49% of national income in Canada and the EU, respectively. While the United Kingdom (-0.23%) and Germany (-0.37%) may be least affected, France (-0.65%) and Italy (-0.78%) will lose more than other EU countries (-0.53%).

The full 40-page paper (PDF) goes into the details. Along the way, it provides a highly critical analysis of the underlying econometric model used for almost all of the official studies of CETA, TPP and TTIP -- the so-called "computable general equilibrium" (CGE) approach. In particular, the authors find that using the CGE model to analyze a potential trade deal effectively guarantees that there will be a positive outcome ("net welfare gains") because of its unrealistic assumptions:

In these CGE analyses, the Canadian and EU economies instantaneously and costlessly adjust to the trade reform, and as any increase in unemployment or loss of aggregate income, even temporarily, is ruled out beforehand, CGE analyses can only point to net welfare gains. Blinded by such strong but palpably unrealistic priors, neoclassical CGE modelers have merely defined away the problem. In light of such a lack of intellectual diversity and empirical realism, this paper contends that, already by their design, these studies do not represent a reliable basis for assessing CETA and meaningfully informing policy-makers.

Another new paper on CETA (pdf) points out a further issue with existing analyses of the economic impact: the fact that CETA -- like TTIP -- is mostly about regulatory convergence, rather than simple tariff reduction. And yet no account whatsoever is taken of the negative consequences of these moves in the official study or in those that follow its approach:

The additional burden on regulators from the various additional steps due to CETA -- and even more after its potential extension to other countries -- in the context of diminished regulators' resources, is likely to lead to delays, blockages and a reduction in the standard of regulation. Use of the precautionary principle is likely to be under great pressure in a number of areas. All of this is done in the name of economic gains which turns out in the official impact assessment to be vanishingly small -- the equivalent of a cup of coffee every three months for each European in terms of disposable income -- and if the omitted effects of constrained regulations in the areas of climate change, finance, toxic chemicals, etc., were included in a more thorough assessment, then the economic evaluation would turn out to be heavily negative. Locking such provisions into an international treaty would turn out to be the height of folly.

These two new studies offer valuable perspectives on CETA. It's a pity they weren't produced years ago, when more might have been done to mitigate the harmful effects they reveal. As it is, it seems the only option now is to reject CETA completely.

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