February 14, 2013
That’s what readers of this NYT piece hyping a European-U.S. trade agreement should be asking. It begins by telling readers:
“President Obama’s call for a free-trade agreement between the United States and the European Union has unleashed a wave of optimism on both sides that a breakthrough can be achieved that would lift trans-Atlantic fortunes, not just economically but politically.’
Really? How much of an economic boost should be anticipated from this deal? Will it make up for the impact of the sequester and the end of the payroll tax cut?
That’s not very likely. We don’t know what a final deal will look like, but a couple of months ago David Ignatius was touting the prospect of a deal in a Washington Post column. He cited a study that projected that the complete elimination of all tariff barriers would raise GDP in the U.S. by about 0.9 percent.
Note that this 0.9 boost to GDP is a one-time gain and not an increase to the growth rate. The provisions in these deals are typically phased in over a period of years and it also takes the economy time to adjust to a reduction in tariff rates. If we assume that the effects of an agreement are seen over ten years, we would expect to see an increase in the growth rate of 0.09 percentage points, if the projections from this model prove accurate. Of course since we are unlikely to see the complete elimination of tariff barriers, the actual impact on growth will almost certainly be less than 0.09 percentage points annually.
The point is that this deal is not a serious way to boost the economy in the sense of providing an alternative to stimulus. The deal may well be beneficial to the economies of both the U.S. and the EU, however portraying it as a way to move these economies back to full employment badly misleads readers.
This piece uses the term “free-trade” to describe the proposed pact five times. Many of the provisions of the pact will likely have nothing to do with reducing barriers to trade and some, such as increased patent and copyright protection, may actually increase them. It would therefore be more accurate to simply refer to the pact as a “trade agreement.”
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