Impact of Tariff Reductions and Liberalization of Pro-Curement Markets on the EU and US

Tasks

The White House and the incumbent US president have been hitting the headlines since the beginning of Donald Trump’s term in office. In the process, this has focused media attention on protectionism and the threat of measures turning away from free trade and multilateral agreements. This study offers an alternative, constructive approach: instead of worst-case scenarios, it examines the potential effects of trade liberalization measures between the EU and the US.

Specifically, the effects of a reciprocal tariff reduction between the US and the EU on industrial products and, in a subsequent scenario, the reduction of import tariffs in the agricultural sector between the two trading partners are examined. The study also examines the consequences of liberalising the US public procurement market. Trade cost-cutting measures are simulated and the resulting consequences are analysed for Germany, the EU, the USA and third countries.

Methods

Presentation of the bilateral economic and trade relations of the EU states with the USA. Use of a quantitative foreign trade model to simulate scenarios of tariff and non-tariff trade cost reductions. Use of econometric results to estimate long-term effects.

Data and other sources

Destatis, Eurostat, World Input Output Database, ifo-tariff database, WITS-TRAINS and IDB

Results

According to this study, a sole reduction of tariffs would lead to positive real income effects for Germany and the EU, but not for the US. This can be attributed to the fact that bilateral liberalisation in a multilateral world does not necessarily lead to welfare gains. Trade creation effects between the EU and the US are evident, but there are also trade diversions with third countries. Furthermore, high tariff revenues, which the US generates through its high trade deficit in goods with the EU, have been eliminated. At the same time, no noteworthy market share gains are expected in the EU or in Germany. Even abolishing import tariffs does not increase the competitiveness of US exporters in Europe to any significant extent. A bilateral transatlantic trade agreement should, if possible, go beyond mere tariff reduction to benefit all parties. An ambitious opening of the US public procurement market, on the other hand, leads to positive but small welfare gains for the US. The EU could stand to benefit more than the US.

The simulated tariff reductions do not lead to drastic changes in international trade structures in the long term. Coincident with the prevailing literature, the reduction of non-tariff trade barriers, not the abolition of tariffs, primarily influences international trade.

All considerations lead to the conclusion that a balanced, fair agreement with measurable mutual advantages can only be achieved through a comprehensive negotiation process. Even if the negotiations were freed from the most difficult chapters that have led to much controversy in the past, there is still a great deal of uncertainty about the political feasibility of such an agreement.