Menu Close

Dodgy economics of the transatlantic free trade deal

Fewer trade hurdles won’t necessarily help Britain’s economy. Martin Rickett/PA

The Conservative Party’s 2010 general election manifesto could not have been clearer: “A sustainable recovery must be driven by growth in exports”. As George Osborne specified, the target was “net exports”. Rising exports had to go alongside falling imports, as Britain once again became a nation of “makers”, rather than consumers.

Yet the data on Britain’s trading position since the coalition government took office is equally clear: the trade deficit is getting worse rather than better. The proposed free trade agreement between the US and the EU, known as Transatlantic Trade and Investment Partnership (TTIP is being sold in the UK as part of the solution to this deficit. However, the notion that TTIP will lead to a rebalancing towards export-led growth is somewhat fanciful.

Since 1984, the UK has run a current account deficit every single year. Last year the deficit was more than £59 billion, almost 4% of GDP, the largest since 1989.

The trade balance has improved slightly in 2013, as exports increased. However, the increase was largely in line with overall economic growth, with exports accounting for no greater a portion of GDP than in the past few years. This limited improvement has been assisted by the pound falling in value, so our exports are cheaper – but this trend is actually quite worrying, as it is driven by a decrease in foreign investment into the British economy.

Is free trade the answer?

Clearly, the recovery is not being led by exports. This helps to explain the government’s enthusiasm for TTIP (which has received virtually no mainstream media attention). Britain’s exports more to the US than anywhere else, and indeed the US is also our second biggest source of imports (just behind Germany, and just ahead of China and the Netherlands).

The deal will virtually eliminate trade tariffs between the US and the EU. But most of the benefits lie in eliminating “non-tariff barriers”, that is, the rules and regulations by which those wishing to sell to or invest in other countries must abide. Depending on the extent of the final agreement, government-commissioned research claims the deal could lead to an increase in between 0.3% and 0.7% of GDP for the UK.

However, such an increase is unlikely and, even if it did come about, it would not represent re-balancing towards export-led growth.

TTIP has attracted a little controversy recently due to the implications of seeking to harmonise regulatory practices across different jurisdictions. The deal would not only require national governments to alter legislation to conform to the agreement; they would also have to compensate any company which successfully argued its ability to operate freely in other countries was being impeded by excessive regulation.

Compensation would be agreed by investor-state dispute settlement mechanisms: shadowy, quasi-judicial bodies which meet in secret and are not led by an independent judiciary. Such mechanisms are already a feature of many trade deals between developed and developing countries. George Monbiot, writing in the Guardian, understandably labelled this aspect of the deal “a full-frontal assault on democracy”.

Dodgy economics, dodgy deal

But the faulty economics of the agreement are just as interesting. Firstly, Britain already has a very liberal regime in terms of openness to American firms. This is why our European partners stand to benefit much more than we will. The same government research already acknowledges that harmonisation between the US and continental Europe will actually divert trade away from Britain.

Secondly, the estimated benefit to UK GDP appears to take no account of the negative economic impact of additional imports from the US. Trade works both ways: it will be easier for Britain to export to the US, but it will also be easier for the US to export to Britain. Clearly, there will be a short-term economic benefit arising from cheaper American imports; but there may also be a longer-term impact on skills and investment in Britain if our producers suffer as a result.

Thirdly, and I believe most importantly, estimates of the cost of non-tariff barriers is based largely on asking firms about the extent of these expenses. Hardly the most rigorous research method - when asked, firms will invariably exaggerate the cost of regulatory compliance.

Finally, cabinet minister Ken Clarke’s response to Monbiot suggests that TTIP is actually quite progressive, as it helps small firms more than large firms as smaller firms don’t have the resources to comply with different regulations in different areas.

But TTIP is more concerned with enabling overseas firms to establish a physical presence in other countries than with encouraging arms-length trade. Few small firms have the capacity to operate across borders, regardless of tariffs and regulations, and as such, TTIP will almost certainly benefit the largest corporations more than smaller firms.

Increased investment in new technology and the UK manufacturing base is the surest path to export-led growth. Deregulation will, at best, provide a temporary boost before exacerbating long-term structural defects in the British economy.

A version of this article first appeared on SPERI Comment - part of the Sheffield Political Economy Research Insitute’s website

Want to write?

Write an article and join a growing community of more than 179,000 academics and researchers from 4,895 institutions.

Register now