David Martin MEP

Labour Member of the European Parliament and one of the six MEPs representing Scotland in Brussels and Strasbourg

On CETA and economic models

In a recent mass-email directed at me from an anti-CETA campaign group it is asserted that:

“The official study of CETA estimates that it will add 0.01% per year (0.08% after seven years) to EU GDP. A UN study finds that CETA will result in reduced economic growth in the EU, job losses and a dangerous reduction in intra-EU trade.”

The economic study in question also finds that CETA will cause the loss of 204,000 jobs within the EU, 10,000 in the UK, as well as losses in GDP of almost 0.5%.

Why the Global Policy Model is not suitable for trade policy analysis

Firstly, the ‘UN study’ cited is not a UN study, but an assessment from a group of academics from Tufts University in the USA, led by the economist Jeronim Capaldo. They have used a UN-developed analytical model to carry out their research, but the researchers themselves are not linked to the UN.

The Global Policy Model (GPM) used by Capaldo and his colleagues is not used for trade policy analysis by most international organisations, nor by the majority of the academic community. It is useful for analysing a number of global macroeconomic issues but it is not suited for trade policy analysis.

This is because, unlike the Commission’s model, it has no information on trade policy variables such as tariffs and other trade costs and, by only covering four broad sectors - energy products, primary commodities, manufacturing and services - it does not contain sufficient sectorial detail to capture how trade policy affects complex economies.

Most critically in my view, it does not contain the complexity required to capture the gains from comparative advantage and specialisation, which are essential features of most trade models used in the world, and are also the theoretical underpinning for trade liberalisation in the first place. For this and the reasons above, the study is far too negative in its conclusions.
This model would likely produce negative impacts for any trade agreement. However, this is not the experience we have had with trade liberalisation over the past sixty years, which in general has created economic growth and jobs both in Europe and across the world, especially in China and East Asia.

Of course, trade policy needs to be managed more effectively so that the benefits are widely shared, but there are very few economists that doubt the overall positive economic effects. What CETA is, from my perspective, is a new kind of trade agreement that sets progressive global trade rules. Labour MEPs will closely monitor the way that CETA is put into practice to ensure that it brings actual benefits to our citizens and that those benefits are equally distributed.

The official study: its advantages and limitations

The Computable General Equilibrium (CGE) model used by the European Commission, as well as the World Trade Organization, the World Bank, the OECD amongst others, is clearly an imperfect tool. All economic assessments must be treated critically as they are by definition estimates and not established facts.

It is indeed surprising that certain anti-CETA activists who derided the Commission’s official study now unquestioningly accept every conclusion of the more critical Tufts study.

Bearing all this in mind, for the reasons I described above the traditional CGE model still represents the best and most trusted tool the academic community has for forecasting the economic effects of trade agreements. Therefore I will continue to refer to it as a signpost for the general economic effect of trade agreements like CETA.

The results from this model are admittedly modest in terms of their overall effect on EU GDP. But it must be remembered that Canada, although an important ally, is still only a country of around 35 million people, compared with the half a billion in the EU. Its positive effects will clearly be limited by this fact, but it also makes wild predictions of hundreds of thousands of job losses in the EU sound silly, frankly.

On its own, this trade deal is not the silver bullet that will eradicate unemployment in Europe, but any increase in GDP should be welcomed. Furthermore, even a small percentage increase in an economy of almost £14 trillion will translate into important gains for Europe.

The economic benefits of an open trade policy

CETA must also be seen in a wider context. Since the stall in talks at the World Trade Organization, the EU has increasingly looked to conclude free trade agreements (FTAs) with individual countries or groups of countries. Through the EU, we have deals with more than 50 countries across the world with another 60 countries at the negotiating table.

To give a recent example of a successful EU trade deal, in the four years after the EU-Korea agreement came into force, EU exports to South Korea rose significantly – in goods by 55%, and in services by over 40%. This shows that trade deals offer real opportunities for UK companies and for increased employment.

We are not the only ones looking for trade deals - in the last decades the amount of FTAs between countries around the world has increased dramatically. If the EU does not keep moving forward we will simply be left behind to face the consequences, including trade being diverted from the EU in favour of somewhere else.

Individually these trade deals might have a relatively small economic effect, yet altogether they represent a huge positive for the EU economy. In the Brexit debate, this is why so many people are worried about our economy ‘falling off the cliff edge’, whereby Britain would lose access to the EU trade deals without having our own in place. British businesses and their workers rely on these deals and without them could see very large tariffs placed on their products, rendering them uncompetitive and potentially endangering thousands of British jobs that rely on exports - not just to the EU but all over the world.

 

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