September 22, 2014
The Broker, September 22, 2014
It is clear that politicians on both sides of the Atlantic are likely to face difficulties in getting an agreement on the Trans-Atlantic Trade and Investment Pact (TTIP) through the relevant legislative bodies. In both Europe and the United States there is considerable suspicion of trade pacts in general, based on a history in which the benefits of such deals were grossly oversold. There is also opposition from many segments in society based on parts of deals which are likely to weaken consumer, environmental or worker protections.
Some proponents of the TTIP have decided to sell the deal as a way to create jobs to respond to widespread public opposition. This is clearly a desperation tactic since, by design, the job gains from a trade deal like the TTIP would be minimal.
The benefits of an agreement like TTIP are intended to come from increasing efficiency. It can be argued that by reducing or eliminating tariffs and other barriers to trade, the economies on both sides of the Atlantic would become more efficient since goods and services would be purchased from the lower cost producer.
The impact of greater efficiency on employment, however, would be minor. If the economy was already operating with full employment before the trade deal and the TTIP increased the overall efficiency of the economy, it would lead to higher real wages, which would in turn induce more people to work rather than stay at home. Note that this is a reduction in voluntary unemployment, i.e. people choosing not to work and pursue leisure activities would now opt to work at the new higher real wage rate.
Even in the best case scenarios this employment impact would be trivial. The deal is projected by its supporters to increase output in the range of 0.3-0.5% of GDP, with the full effect only being realized over a dozen years or so. The real wage would rise by roughly the same amount, which would not likely lead to a massive increase in labour supply.
In fact, the actual effect is likely to be considerably smaller. The 0.3-0.5% estimate does not correct for the negative effect of higher prices of drugs and other patent protected items, which is likely to be one of the main outcomes of the deal. If these were included in the analysis, the net effect on output would be even smaller and quite possibly negative.
The employment effects will quite likely be negative in many countries. The result of any trade agreement is to redirect some demand from domestic to imported items. Even if this may be a plus for the economy as a whole, there will inevitably be sectors that are losers. In such cases workers will be displaced. Given the continuing weakness of the economies on both sides of the Atlantic, displaced workers may end up unemployed for a long period of time.
In short, there are arguments for the TTIP but employment is not one of them. The long-term effect is likely to be negligible and in the short-term it is virtually certain to lead to some amount of worker displacement.