Monthly Archives: December 2014

Predicting the Effects of TTIP, or: Whose Crystal Ball Can We Trust?

In a paper called “TTIP: European Disintegration, Unemployment and Instability”, economist Jeronim Capaldo argues that there are flaws in four prominent studies on the effects of the proposed TTIP agreement between the U.S. and the European Union. The problem is two-fold. First, all studies use similar models and data, which means that they all share the same set of assumptions and should thus not be treated as independently reaching similar conclusions:

Methodologically, the similarities among the four studies are striking. While all use World Bank-style Computable General Equilibrium (CGE) models, the first two studies also use exactly the same CGE. The specific CGE they use is called the Global Trade Analysis Project (GTAP), developed by researchers at Purdue University. All but Bertelsmann use a version of the same database (again from GTAP).

A detailed discussion of the shared heritage of the different CGE models can be found in a paper by Werner Raza and colleagues (pp. 37-49), which Capaldo cites.

He then goes one step further and alleges that the underlying econometric models are simply false, or at least inappropriate. According to him, CGE models rely on several flawed assumptions:

  • High labor mobility is supposed to allow workers in less competitive industries to switch to those that benefit from trade liberalization, which are assumed to grow enough to absorb the new workforce.
  • Overall, the gains for workers with the right skills are supposed to outweigh the losses for others.
  • The model assumes that new trade between countries/regions is created (rather than diverted from elsewhere, which would be a zero-sum result).

While I have no training in economics and don’t know the econometrics literature, I realize that all large-scale models of social science need to rely on simplified assumptions. Nevertheless, it seems to me that Capaldo has a point. If his account is correct, then European policymakers should look for more diverse academic input. More generally, if the most widely used models really are blind to potential downsides for labor, then that goes against the interest of European citizens. (As they ought to be very loss averse when it comes to employment as well as skeptical about the distribution of pay-offs from economic gains.)

So how do we come up with an estimate that pays more attention to potential negative effects? Capaldo uses the UN Global Policy Model (GPM), which models economic activity as demand-driven, explicitly models different regions, and includes an estimate of employment. (Again, I lack the knowledge to assess how this works and how much sense it makes.) In this model, unemployment and household income are projected to deteriorate in the long term (2025) for several European countries, as aggregate demand is lowered due to trade diversion (see pp. 10-19 for this and other findings).

capaldo-figure4
Jeronim Capaldo, “The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability”, Global Development and Environment Institute Working Paper No. 14-03, October 2014, p. 14.

Capaldo is pretty transparent about the limitations of this approach:

  • the non-TTIP baseline scenario (which serves as a comparison) might be wrong
  • the chosen model might be as ill-specified as the ones he is criticizing
  • policy responses down the road are not included (and that’s hardly possible)
  • …and the paper completely ignores the investment dimension of TTIP (which is a weakness shared by the CGE models, according to Raza et al., p. 49)

So the headline “TTIP will lead to a loss of 600,000 jobs” does not really do the paper justice, although the author himself uses pretty strong language in the conclusion.

No matter which forecast turns out to be better in the end, this discussion shows that policy decisions should not rely on a single strand of academic analysis. There is a lot of uncertainty involved in these negotiations, and I don’t see how there can be a confident forecast of net effects.

One final note for the political debate in general: TTIP opponents should not forget that the status quo will not necessarily be maintained or improved just by inaction. The people likely to lose from TTIP are probably heading for difficult times anyway, leading to questions about how to compensate them. Whether European leaders will decide in favor or against TTIP, they are making high-stakes bets on how globalization will play out over the next decades.

Thanks to Zoe for pointing me to the study. And if anyone can add insight regarding the comparison between the different models, please let me know!

Investor-State Dispute Settlement in Europe

In the last few months, criticism of  TTIP’s proposed investor-state dispute settlement  (ISDS) provision has become  so mainstream that even The Economist is questioning whether it’s such a good idea. More to the point, some of the biggest players this side of the Atlantic have also come out against it, largely it would seem, mirroring public sentiment.   French officials now claim that TTIP is a no-go if ISDS is kept in, while Germany has spoken out against its inclusion in TTIP, and has gone so far as to backtrack on agreements already made, saying that they want ISDS scrapped from CETA, the EU-Canada free trade agreement (which, until recently, nobody outside of Canada seemed to care about).

The perception of the  threat that ISDS poses is connected to the different health, food and environmental standards in Europe and the US. ISDS allows investors to sue host state governments for unfair or discriminatory treatment, and critics argue that investors will use arbitration (or even the threat of it) to force Europe to lower its regulatory standards based on treaty provisions. As proof of the potential for investors to employ ISDS to attack regulatory standards, critics frequently cite the cases of Philip Morris v. Australia, in which the tobacco company is suing over the country’s decision to require plain packaging of cigarettes, and Swedish energy company Vattenfall suing Germany over Merkel’s nuclear phase-out.

A threat does exist, as investors, and more importantly, arbitration lawyers are expanding the use of investment arbitration. As this article/advertisement  written by arbitration lawyers suggest, there is money to be made by actively looking for “innovative” uses for ISDS.

However, others argue that Europe’s sudden distrust of ISDS is hypocritical. European states, or at least European investors, have been a driving force behind ISDS in the past. The first Bilateral Investment Treaty was signed by Germany (with Pakistan) in 1959, and since then,  EU member states have signed at least 1400 BITs. Between 2008-2014 alone, EU investors made up 53% of all claimants in investor-state disputes.

Of course, more interesting to critics is likely the track record of EU states as respondents in these lawsuits. So here’s a breakdown of the cases Europe has faced so far, based on my own research.

eu

 

Here we see the EU member states which have been respondents in arbitration cases. The majority are transition economies, although Spain, Germany, Belgium and the UK have also been faced lawsuits. The concentration of disputes in formerly Communist countries is not surprising, given the logic that has (up until TTIP and CETA) governed BITs. That is, these agreements have usually been signed by pairs of countries between which the investment generally flows only in one direction – most often from developed to developing countries (or at least countries perceived to have unreliable domestic courts).  In other words, when the US and the Czech Republic signed a BIT in 1991, the implicit goal was to protect US investments in the Czech Republic. On the other hand, Western European states and the US have not found it necessary to sign BITs between themselves, as both sides have been confident in the domestic courts and investment climate of the other. At least, until now.

industries

The above shows the industries most often implicated in investor-state disputes involving EU members. How does this compare to investment disputes worldwide? At the global level, electricity and other energy, as well as oil, gas and mining, are the industries that see the greatest number of disputes. Not surprising, given that these industries are often politically interesting already. Extractive industries seem to attract  a range of governance problems, while public utilities are often are privatized to the detriment of low-income consumers.   What appears to be Europe-specific here is the concentration of cases in media and health insurance (although both relate to a number connected cases in Czech Republic and Slovakia).

measures

And here we have a breakdown of the state “measures” which are triggering disputes in Europe. The top two categories are the very specific measure of canceling an agreement, permit, or license of an investor, while the second category – regulatory change – encompasses a range of measures  which effect an entire industry or even the general public.

Finally, how litigious are US companies? Of the 561 known arbitration cases listed on UNCTAD’s IIA database, 124 cases, or 22%, involve US investors.  It’s impossible to know how often US investors will use ISDS under TTIP, if the agreement ultimately includes the provision. All we can say for certain at this point is that if it is left in, a great deal more of global FDI flows will suddenly be covered by ISDS.

Note: Edited to add French dispute to graph which had previously been left off.