Abstract
The international economic debate on the Transatlantic Trade and Investment Partnership (TTIP) has focused mainly on trade induced real income gains while the Foreign Direct Investment (FDI)-related and innovation induced benefits have been largely neglected, although the EU and the US are leading FDI host countries and FDI source countries. Moreover, from a theoretical perspective a knowledge production function has to be considered in order to analyze FDI and innovation dynamics – and this can then be linked to output and economic growth, respectively. It is argued that such a Schumpeterian approach for an open economy is needed to understand deep integration dynamics while the standard CGE model used by Francois et al. (2013) leads to an underestimation of deep integration projects such as TTIP. The panel data estimation of knowledge production functions for 20 EU countries between 2002 and 2012 shows clear empirical evidence that a rise of the number of researchers and of the FDI stock-GDP ratio (or related variables) will raise patent applications. Additionally, a higher per capita income – that could reflect trade related real income gains in the context of TTIP – also contributes to new knowledge and a fortiori to higher GDP. Time series data analysis for Germany indicates additionally that FDI induced higher innovation dynamics will raise output - combining trade benefits and FDI/innovation related real income gains plus transatlantic macroeconomic interdependency effects a real income gain of nearly 2% should be expected for Germany (and the EU). As the Trump Administration is focusing on bilateralism, the US is essentially renouncing a considerable output increase and opportunities to improve its current account; instead the Trump Administration has adopted a policy of protectionism which is likely to undermine trade dynamics and economic growth. In the long run, transatlantic trade perspectives could improve.
Highlights
The negotiations between the European Union and the US on a Transatlantic Trade and Investment Partnership (TTIP) began in 2013 and were expected conclude in 2016/17 – after the end of the Obama administration; political resistance had been strong in Germany, often for rather unclear reasons
Based on an empirical panel data analysis we can plug the results under certain assumptions into the macroeconomic production function of the European Union (EU)’s largest economy, namely Germany, in order to get an assessment of how the combined effects of trade, Foreign Direct Investment (FDI) and innovation affect real output; in a nutshell the same key question can be raised in a kind of reverse perspective of Brexit where the UK is expected to leave the EU single market and largely give up on the intra-EU dynamics of trade, FDI and innovation involving UK firms with trade, production and knowledge networks in the EU28 (Welfens 2017)
While one may anticipate that the FDI and innovation effects would be core elements of TTIP dynamics, the European Commission focused only on trade and FDI; the small TTIP benefit identified by the Francois et al study – basically a 0.5% increase of GDP in the EU
Summary
The negotiations between the European Union and the US on a Transatlantic Trade and Investment Partnership (TTIP) began in 2013 and were expected conclude in 2016/17 – after the end of the Obama administration; political resistance had been strong in Germany, often for rather unclear reasons. While the study of Francois et al covers at least the main trade aspects and basic FDI perspectives, it is obvious that a broader analysis of FDI and innovation dynamics is not included It is not fully clear as to what extent reduction of non-tariff barriers brings about direct output gains through cost cutting by firms as a result of new - common transatlantic - norms. As will be shown for the case of Germany, which represents about one quarter of the EU’s GDP, it is not FDI that has a direct impact on output; the relevant channel is clearly from (cumulated) FDI to knowledge and from knowledge to the macroeconomic production function and output, respectively A key issue in open economies is how factor inputs are related to the innovation process and here the analytical focus has to consider the knowledge production function
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