What effects will TTIP have on European SME’s?
Promoters claim it is good for all business while critics claim it will hurt SME disproportionally. This is what you should know about the impact of the TTIP on European SMEs.
The Transatlantic Trade and Investment Partnership (TTIP) is a series of trade negotiations between the EU and US. With the aim of promoting trade and multilateral economic growth. The two economic giants currently represent 60% of the global GDP and 33% of world trade.
The European Commission says that the TTIP would boost the EU’s economy by €120 billion, the US economy by €90 billion and the rest of the world by €100 billion while creating millions of new jobs. However, the Commission also reports that 1.3 million European workers might lose their jobs.
Besides the economy benefits in general The European Commission has frequently stated that SMEs in particular stand to get more benefit from TTIP than large companies. However, strangely enough, large multinationals have been the main advocates for TTIP and lately various SMEs movements have emerged in order to protest against the largest regional free-trade agreement in history.
What are the most important advantages?
- Strengthen US & EU global competitiveness
The last decades there has been a shift in the world order. The BRICS economy has been growing rapidly, while the growth rates of the US and the EU have been declining steadily. A new trade agreement can help the US and EU to regain their economic power.
- Higher GDP & Income
Economy 101 stipulates that free trade helps all the parties involved focus better on the areas where they have a relative advantage in producing, which should then generate economic growth.
- Ease of doing business & New trade opportunities
Products typically restricted by protectionist trade barriers will be free to be sold in completely new markets which could enable businesses to grow significantly.
- Cheaper products & Greater variety
From the consumer and procurement point of view, free trade means a lower price when buying a product and can increase the variety of options
What are the most important disadvantages?
- Increased competition
The agreement will stimulate firms abroad to enter new markets. This means increased competition, which can push firms out of business.
- Affect social work models
The agreement will put Europeans workers in direct competition with American workers and indirectly with Mexican workers (due to the North American Free Trade Agreement). On average US salaries are 30 to 40% lower than in the EU, which would mean that the EU will lose jobs to the US.
- Reduction of public health standards
Conventional trade barriers are already low between the US and the EU and therefore the deal will focus more on regulation. The deal seeks to bring EU standards on food safety and the environment closer to those of the US. However, US regulations are less strict, reducing the standards in the EU.
- Reduction of environmental standards
The same goes for the harmonisation of the environmental regulation. The EU is much stricter on environmental regulation than the US.
- Unknown effects & Uncertainty
Estimated results vary from job gains to job losses, depending on the economic model used and assumptions used for predictions. The truth is we do not really know what is going to happen.
So does TTIP pose a real opportunity for European SMEs?
Two factors seem to show that if the trade barriers would be removed, the US will be more competitive than the EU. Firstly, US firms deal with less demanding regulations. This makes the regulatory demands easier to satisfy which in turn decreases their production costs. Secondly, the US loans are up to 40% lower than in the EU, meaning they can offer profitable products at a lower price. In this sense US companies should be able to take significant market shares from SMEs in many sectors.
As for comparing SMEs to large firms, we can say that SMEs tend to be more regionally based and provide niche products to a specific market. It is likely that these kind of products will be more expensive when more foreign competitors enter the market, and only time will tell if these products are valued high enough to make up for the price difference after the TTIP.
Another difference between SMEs and large firms is that the latter has more resources in terms of money, know-how and experience. Increased competition will inevitably be a result from the TTIP and the previously mentioned capabilities are of critical importance when dealing with increased competition. However, these resources are also needed to overcome trade hurdles, when trying to export. Taking into account that SMEs have less resources and struggle more with trade barriers they will also gain more benefits when these obstacles are removed.
The opportunity for SMEs depends on a lot of things.
- Is your business competitive?
The market will become increasingly competitive, and whether you will succeed or not will depend on whether you have a competitive product. Firms that do not export will definitely be worse off after the agreement since they will deal with increased competition while not enjoying any of the gained benefits.
- Do you currently deal with high trade barriers?
SME’s that operate in sectors with high tariff rates can deal with significant cost reductions potentially resulting in the difference between making or breaking a deal.
Sectors that traditionally deal with a demanding regulatory climate such as the pharmaceutical, the mechanical and the engineering sector are likely to enjoy greater benefits from the TTIP, since it will be easier and thus more cost efficient to comply to the regulations.
Whether the TTIP in the end it will have a negative or positive impact is hard to say and depends on your point of view, in which industry you operate and whether you are internationally competitive.
Whether you are worried or exited, don’t let your emotions get the best of you.
At least not just yet. The agreement will not be finished before 2019.
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