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Reducing Transatlantic Barriers to Trade and Investment – An Economic Assessment
16
2.3.1. Indexes and econometrics
To estimate the ad-valorem equivalent of NTBs (the impact on prices and costs) and
to quantify to what extent those are removable between the two economies, the Ecorys
(2009) study undertook a complex set of assessments. We summarize those steps briefly
here. The assessment involved surveys combined with gravity-based econometrics.
7
7 For further discussion on the methodologies used for NTB quantification, which technically are known as gravity models
see both Ecorys (2009) Chapter 3.4, and also Anderson, Bergstrand, Egger, and Francois (2008). For goods, selection
based gravity modelling was used. Services barriers were based on the NTB elasticity estimates from Francois and
Hoekman (2010).
Box 1
NTBS and the concepts of cost and rents
NTBs and regulatory differences can have two main effects. NTBs can either
increase the cost of doing business for firms, or they can restrict market access.
Traditional NTBs, like import quotas, are an example where NTBs market access.
In contrast, regulations that require expensive reconfiguration of products (like
changing voltage or reconfiguration of an exhaust system) for export are an
example of cost raising NTBs. Both can have different impacts by changing market
concentration and economic power (and thus profits) of companies. In order to
be able to make a distinction between those two types of NTBs, the concepts of
‘cost’ and ‘rent’ are included here in modelling of NTBs, following the findings
of the firm surveys (and related literature) in the Ecorys (2009) study. That study
found that about 60 per cent of the price impact of NTBs could be classified as
following from actual cost increases on average, while the creation of market
power (economic rent) was responsible for the other 40 per cent of price increases.
This is an average, and there is some variation across both sectors and countries
in this regard. In the case of NTB-related cost increases, this constitutes a welfare
loss to society. In case of an increase in market concentration, consumer prices may
also go up. However part of the increase is then appropriated by companies as they
reap increased revenues and profits. Thus there is a redistribution of welfare, and
not simply a reduction in economic efficiency.
32
Economic and Policy Background
17
The NTB estimates involved a two-part survey as a first step. The survey was conducted
on firms in the EU and US engaged in trade, and firms in the EU and US engaged
in FDI. They were asked both detailed questions about NTBs, and a more general
set of questions about overall market access conditions.
8
In cases where NTBs were
identified, companies were asked about the relative importance of such barriers. Firms
also provided a comprehensive general measure of NTB-related market access (the
combined impact of all barriers) in the form of a ranking scaled from 0 to 100. With
the overall ranking question, 0 indicated that there were no NTBs of any type, and
100 meant there were prohibitively high NTBs. The business survey restrictiveness
indicators were then crosschecked against OECD (2007) restrictiveness indicators
and against the Product Market Regulation (PMR) indexes. For the service sectors
the combination of the OECD restrictiveness indicators and the survey results were
used. The resulting measures are summarised in Table 1 below. The firm rankings are
bilateral (for example an American firm in France might give a different ranking than
a German firm in France).
The reported NTB rankings (the NTB index) on goods on both sides of the Atlantic are
generally higher than on services, ranging from 20 per cent to 56 per cent. The highest
perceived NTB levels were found on the aerospace and space industry. On goods
exported to the US, machinery also exhibits high levels of NTBs, while the lowest
levels are reported for pharmaceuticals. For goods exported from the US, high levels
of NTBs were reported for chemicals, cosmetics and biotechnology. Lower levels of
NTBs were reported for electronics, iron, steel and metal products.
Of course, the firm rankings of general openness are relative. They do not translate into
actual impacts on costs and prices. For this, the survey data was then integrated with
a set of econometric models (known as gravity models) to estimate the corresponding
ad-valorem of percent price impact of the variations in NTB levels. On that basis, the
8 The general ranking questions are reproduced as an annex to this report. See the annex to the Ecorys (2009) report for
more information on the more detailed questions.
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Reducing Transatlantic Barriers to Trade and Investment – An Economic Assessment
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Ecorys (2009) report also provides price/cost estimates of existing NTBs for traded
goods and services in a percentage form that can be interpreted similarly to ad-valorem
tariffs. These estimates are reported in Table 2 below. They reflect the higher prices that
result because of NTBs.
9
Table 1 Perceived NTB index by business (index between 0-100)
Sector
EU exports to the US
US exports to the EU
Services Sectors:
Travel
35.6
17.6
Transport
39.9
26.3
Financial Services
29.7
21.3
ICT
20.0
19.3
Insurance
29.5
39.3
Communication
44.6
27.0
Construction
45.0
37.3
Other Business Services
42.2
20.0
Personal, Cultural and
Recreational Services
35.8
35.4
Goods Sectors:
Chemicals
45.8
53.2
Pharmaceuticals
23.8
44.7
Cosmetics
48.3
52.2
Biotechnology
46.1
50.2
Machinery
50.9
36.5
Electronics
30.8
20.0
Office, Information and
Communication Equipment
37.9
32.3
Medical, Measuring and
Testing Appliances
49.3
44.5
Automotive Industry
34.8
31.6
Aerospace and Space Industry
56.0
55.1
Food and Beverages
45.5
33.6
Iron, Steel and Metal Products
35.5
24.0
Textiles, Clothing and
Footwear
35.6
48.9
Wood and Paper, Paper
Products
30.0
47.1
Source: Ecorys (2009)
9 The reader may note some difference between the sectors in the tables in this section. We have started in Table 1 with
the full set of sectors from the original ECORYS survey. These have been consolidated when we move to sectors for the
modelling, both in the original ECORYS study and in this report.
23
Economic and Policy Background
19
According to the estimates in Table 2, non-tariff barriers are the highest for food and
beverage products, with imports from the US facing a 56.8 per cent tariff equivalent,
while EU exports to the US of these products face a 73.3 per cent extra cost. Among
services, financial services are one of the sectors with the highest estimated NTBs. In
this sector, EU barriers against US exports amount to 11.3 per cent, while US barriers
against EU exports are estimated to be about 31.7 per cent. Barriers in the services
sectors are higher on the EU side for the business and ICT sector, communications
sector, construction, and personal, cultural, other services. On the other hand the US
barriers for EU exporters in the services sectors are higher than in the EU in the finance
and insurance sectors.
It should be stressed that in contrast to reducing tariffs, the removal of NTBs is not as
straightforward. In fact, it is unlikely that all areas of regulatory divergence identified
actually can be addressed. As previously pointed out, there are many different sources
of NTBs and thus removing them may require constitutional changes, unrealistic
legislative changes, or unrealistic technical changes. Removing NTBs may also be
difficult politically, e.g. because there is a lack of sufficient economic benefit to support
the effort; because the set of regulations is too broad; because of consumer preferences,
language and geography; or due to other political sensitivities. In recognition of
these difficulties, in the assumptions of the scenarios, the degree to which an NTB or
regulatory divergence can, potentially and realistically, be reduced is taken into account
which is discussed in more details in the following subchapter.
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Reducing Transatlantic Barriers to Trade and Investment – An Economic Assessment
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Table 2 Total trade cost estimates from NTB reduction in per cent, Ecorys (2009)
Sector
Total trade barriers: EU
barriers against US exports
Total trade barriers: US
barriers against EU exports
Food and beverages
56.8
73.3
Chemicals
13.6
19.1
Electrical machinery
12.8
14.7
Motor vehicles
25.5
26.8
Other transport equipment
18.8
19.1
Metals and metal products
11.9
17.0
Wood and paper products
11.3
7.7
Other manufactures
N/A
N/A
average goods
21.5
25.4
Transport
Air
2.0
2.0
Water
8.0
8.0
Finance
11.3
31.7
Insurance
10.8
19.1
Business and ICT
14.9
3.9
Communications
11.7
1.7
Construction
4.6
2.5
Personal, cultural, other
services
4.4
2.5
average services
8.5
8.9
Source: Ecorys (2009), Annex Table III.1
At this stage, there are patterns in Table 2 that will carry forward in the modelling.
Following from the Ecorys (2009) study, businesses perceived transatlantic NTBs as
substantially lower for services than for goods. This means that, for comparable cuts
in barriers in per cent terms, the differences in barriers (combined with the absolute
importance in goods trade relative to services trade) imply that we can expect greater
impact from NTB reductions in goods than in services.
22
21
The purpose of this chapter is to present and discuss the model used as basis for the
policy experiments, including the sector and regional aggregation that were used.
In this report, the economic assessment of a trade agreement between the EU and US
is based on a computable general equilibrium (CGE) model of global world trade. The
CGE modelling exercise is meant to estimate the effects on the EU and US economies.
CGE models like the ones used here help answer what-if questions by simulating the
price, income and substitution effects in market equilibrium under different assumptions
about changes in policy. The economic outcomes of the “baseline” scenario (with no
policy change) can be compared to the different scenario associated with changes
in trade policy. The “baseline” for the model is thus the equilibrium without policy
change, and the ‘scenario’ is the equilibrium after the policy change. The effect of the
policy change can then be benchmarked by the difference between the two.
3.1. The model
The CGE model employed is based on the widely used GTAP model (Hertel, 1997),
with added features from the Francois, van Meijl, and van Tongeren (2005) model.
More technical details of the model are provided in the annex.
The most important aspects of the model can be summarised as follows:
• It covers global world trade and production
• It allows for scale economies and imperfect competition
3. Technical Discussion on CGE
Modelling Set Up
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Reducing Transatlantic Barriers to Trade and Investment – An Economic Assessment
22
• It includes intermediate linkages between sectors
• It allows for trade to impact on capital stocks through investment effects which
allows to obtain longer-run impact on the economy
Imperfect competition in the Francois, van Meijl, and van Tongeren (2005) model, as
implemented here, is explained in Francois, Manchin, and Martin (2012). It involves
firm level competition and supply of varieties of goods and services to both final
consumers and downstream firms under what is known as monopolistic competition.
The modelling of investment effects is based on Francois and McDonald (1996). This
does not involve gross foreign direct investment flows, but rather changes in regional
and global capital stocks (machinery and equipment) as a result of changes in levels of
savings and investment.
Box 2
Key features of the model
Model simulations are based on a multi-region, multi-sector global CGE model.
Sectors are linked through intermediate input coefficients (based on national social
accounts data) as well as competition in primary factor markets. The model includes
imperfect competition, short-run and long-run macroeconomic closure options, as
well as the standard static, perfect competition, Armington-type set-up as a subset.
On the policy side, it offers the option to implement tariff reductions, export tax
and subsidy reduction, trade quota expansion, input subsidies, output subsidies,
and reductions in trade costs. International trade costs include shipping and logistic
services (the source of fob-cif margins), but can also be modelled as Samuelson-
type deadweight costs. This can be used to capture higher costs when producing for
export markets, due to regulatory barriers or NTBs that do not generate rents (or
where the rents are dissipated through rent-seeking).
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