Experiencing a period of economic stagnation, the European Union (EU) has started to look for different ways to enhance its economic growth rates. One solution is represented by the Transatlantic Trade and Investment Partnership (TTIP). However, this solution is also one of the most debated issues within the circles of economists due to economic and social costs at stake. Among these costs, the issues of corruption and corporatism should not be neglected. Although they do not make the TTIP-related headlines, these issues are very important because they could minimize and even overcome the positive effects of trade liberalisation.
At the beginning of every economics course, students are taught that the free-market concept represents the solution to all the world’s economic problems. Markets alone are able to self-adjust so that there is no misallocation of resources. Hence, entrepreneurs know that absence of state interventionism will help them better predict the future, in which only consumers’ preferences matter.
TTIP stands for the free-market concept – the elimination or alleviation of state interventionism (represented by Tariff and Non-Tariff Measures) that restricts the free exchange of goods between the EU and USA. Various studies have shown the positive impact TTIP will bring to the EU, such as unemployment reduction (more than 1 million jobs will be created), positive economic growth (around 1% for the next 20 years), and the increase in trade flows between the two parties (between 5-10%).
However, only later do students learn that undisrupted free markets may not be ultimately desirable. A market needs “perfect competition” and strong institutions in order to deliver the promised results. If there is perfect competition, the consumers are price-determinants, while producers are price-takers.
Anti-TTIP supporters claim that European SMEs would not be able to compete in terms of productivity and efficiency with their counterparts from the other side of the Atlantic Ocean as they already benefit from economies of scale. Once European competitors are forced out of the market through their inability to compete, large companies would act as price-determinants. Moreover, consumer power decreases as the number of providers diminishes, transforming consumers into price-takers. Therefore, there will be no more “perfect competition” – one of the core concepts of the free-market.
The strong institutions are a must-have because of their importance in applying the rule of law which governs market activities (e.g. ensuring the business contracts). However, it is often neglected that the quality of the institutions is not the same across the European Union. If in Northern Europe we see low levels of corruption, the situation reverses when we head towards South and South-East (e.g. Italy, Greece, Romania, and Bulgaria). Bribing officials is a more common practice in these parts of the EU. If the benefits of opening a business in South-East Europe are higher than the costs of getting caught bribing an official, then entrepreneurs will proceed unhindered.
Of course, these points are arguable from the free-market supporters’ standpoint. I discussed above the inability of SMEs to resist in front of big American conglomerates. But at the same time, SMEs would be unable to harness the benefits enjoyed by large multinationals provided by the economies of scale. By liberalising trade flows, SMEs are offered the chance to expand their businesses into new markets, which in turn could allow the competitive companies achieve economies of scale. The second issue related to the quality of institutions is debatable because once a state is a member of the EU, it has already quality institutions that enforce the rule of the law upon the market. However, corruption scandals still exist not only at the local level, but also at the level of the European Parliament. After all, people tend to act from self-interest in order to maximise their own personal utility, making them vulnerable in front of consistent financial incentives.
It is hard to come up with a concrete answer regarding the desirability of TTIP for the EU. However, what should be taken from this op-ed is that more critical thinking is required in assessing the for and against arguments. Even though the free-trade concept sounds tempting, some degree of protectionism still sounds desirable for some EU members. Firstly, SMEs from Eastern and Southern Europe are not ready yet to face the American multinationals. Further and quick increase of competitiveness would not be achievable in the aftermath of the Eurozone crisis. Secondly, some multinationals are in position to use their financial resources to bribe local officials to enact laws in their favour. Further liberalisation could harness even more the corrupted systems of some countries.
However, given the current economic status of the EU, with the lack of economic growth and a high level of unemployment, inaction is not a desirable solution. TTIP could definitely boost the economy. But for an equitable share of TTIP-related benefits across the continent, the EU has to put more efforts into fighting corruption and keeping the market competitive.2 comments