Big Claims, Little Support: Finding Flaws in Capaldo's Doomsday Predictions for TTIP
Several economic studies conclude with positive predictions for the Transatlantic Trade and Investment Partnership, with the growth benefits depending on the level of integration. One study, however, assumes that TTIP will lead to a contraction of GDP, job losses for 600.000 EU citizens, a loss of labor income and government revenue as well as an "increase in financial instability and a continuing downward trend in the labor share of GDP".
A working paper by Jeronim Capaldo of the Global Development and Environment Institute at Tufts University has gained widespread popularity with TTIP critics and has been used to add credibility to their arguments that the hotly debated trade agreement will hurt the European economy.
In response, Matthias Bauer and Fredrik Erixon of the European Center for International Political Economy (ECIPE) decided to take a closer look at whether the way Capaldo reached his conclusions, and the methodology and data he used to back them up were sound. Their consensus: Not at all.
Despite different results on how much TTIP's impact will truly be felt, most research looking to predict the trade agreement's effects conclude that it will be positive for the European economy, write Bauer and Erixon, with many simulations actually underestimating gains from it. Capaldo radically departs from this prevailing wisdom by contending that TTIP would be "no less than a grand destroyer of jobs and income in Europe," the ECIPE authors write. But such extreme claims require big evidence and sophisticated methodology, and Capaldo's paper, under closer scrutiny, lacks both, they argue.
At the core of the ECIPE authors' argument debunking Capaldo's claims is criticism of the model he used to derive his results; while most trade economists favor variations on a Computable General Equilibrium (CGE) model, which focus on the supply side, Capaldo chooses to use the aggregate demand-driven United Nations Global Policy Model (GPM) as the basis for his analysis.
This poses a number of problems. According to Erixon and Bauer, the GPM has no history of being used to estimate the effects of changes in trade policy, and furthermore doesn't have the capacity to do so because it doesn't attempt to capture the supply side effects of trade, which are what react most to liberalization. Because of this blind spot in the model, Capaldo is forced to make several assumptions about the effects of trade reform to make his study work, and as a result makes the model, and the resulting estimates of TTIP, even less reliable, they write.
In addition, Erixon and Bauer write, not only were they denied access to the GPM to do their own calculations, despite the model being owned by a U.N. agency, but a U.N. assessment using the GPM that looked at global rebalancing in the U.S. and EU regarding export levels conflicted with Capaldo's findings as well, which should have raised red flags for him on his model's abilities.
The core mercantilist message of Capaldo's argument when it comes to trade, simply put, is that if net exports do not rise, output cannot be positively affected. This basic argument gets trade fundamentally wrong, write Bauer and Erixon, who point to the U.S. as an example of a country that has run a persistent account deficit and still not suffered the dramatic fall in income and welfare that Capaldo's predictions foretell.
Bauer and Erixon use several pages of graphs and charts to address the fact that Capaldo's claims ignore the historical results of low barriers to trade, using the European Single Market and NAFTA, the most comparable economic integration projects to date, as their examples.
While explaining that it's hard to isolate the effects of a free trade agreement from those of other simultaneously occurring socioeconomic changes, Bauer and Erixon point out that Europe has not seen the mass unemployment or economic disintegration Capaldo predicts would happen under TTIP in the last 15 years under the European Single Market.
As globalization has accelerated over the same time frame, they write, and competition from imports has increased, economic integration within the ESM has not suffered -- in fact, every single EU-15 country has continued to expand trade with other EU economies in the past 15 years. Along the same lines, the real-world developments in the job market discredit Capaldo's claims on employment and wages as well. The ECIPE authors write: "Compared to levels of 1999, EU-15 employment ratios increased. ... And all EU-15 countries except Greece and Spain experienced positive growth in real wages over the periods 1999 to 2007 and 1999 to 2013."
By pointing out the flaws of the applied methodology of Capaldo's study as well as providing real-world historical examples that disprove his predictions, Bauer and Erixon want to convince readers that Capaldo's study was constructed to provide the results he wanted. If TTIP critics want to challenge the prevailing consensus on the trade agreement's positive aspects, the ECIPE authors write, then they will have to find other studies to back up their point.
Miranda Lee Murray is a Fulbright Journalism Fellow in Berlin and has written this summary for the TTIP Review project.
- Atlantic-Community.org in Transition
- Towards a More Inclusive Transatlantic Partnership: Update on the 2nd Atlantic Expedition
- Topic of the Month: The Future of Health Care
- Do We Need Data Donations?
- eHealth - Tele-Monitoring and Tele-Medicine - Digital Innovation in the Life Science Sector in Germany