The Economist: What Free Trade Agreement means to Texas
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The Potential Economic Benefits for Texas of a Free Trade Agreement between the United States and the European Union
Import and export activity is an essential aspect of optimizing economic performance. By allowing each nation to focus resources on those goods and services where it has a competitive advantage and import other products, foreign trade helps improve business conditions and quality of life around the globe.
From the beginnings of such exchanges centuries ago, there have been tariffs, quotas, and other impediments to free trade. Over time, many of these have been eliminated through free trade agreements. It is a widely accepted economic principle that free trade is beneficial from both the import and the export side, and additional efforts to enhance exchange are worthy of consideration. While the world has become highly integrated and complex, with extensive intra-industry trade in addition to that between sectors, the basic principles remain in place.
The Perryman Group was recently asked to examine the potential impact of a Transatlantic free trade agreement between the United States and the European Union on business activity in Texas. (You can access the full report on our website at www.perrymangroup.com.) This analysis revealed that the state would likely see significant economic benefits, with additional potential gains stemming from productivity enhancements and efforts to eliminate non-tariff barriers to trade.
The volume of trade between the United States and the European Union has risen markedly over the last decade, and Texas has significant trading relationships with many EU countries. In fact, five of Texas’ top 20 exporting countries are EU members (Netherlands, Belgium, United Kingdom, France, and Germany). In 2012, Texas exports to these countries totaled over $24.5 billion. Five of the top 25 countries from which Texas imports are EU countries including Germany, United Kingdom, France, Italy, and Netherlands. Texas’ imports from these countries in 2012 were almost $19.9 billion.
Eliminating tariffs on goods traded between the United States and the European Union would lead to an expansion in international commerce. In addition, there are typically efficiencies gained when costs and barriers to trade are reduced and industries optimize production patterns. A Transatlantic free trade agreement has the potential to enhance the economic performance of all of the countries involved, and Texas would realize a significant portion of the gains.
If all tariffs are removed on goods traded between the United States and the European Union, we estimate that the potential gains in business activity in Texas include $9.1 billion in output (gross product) each year and 89,600 permanent jobs (measured as of 2020 to allow time for market adjustments, but in constant dollars to account for the effects of inflation). Even if tariffs are eliminated, however, there are still impediments such as excessive or inconsistent regulation or complex customs processing.
Full removal of non-tariff obstacles is not possible due to a variety of internal policy, precedents, contractual commitments, and other factors. Nonetheless, working toward reducing such constraints has the potential to further enhance economies on both sides of the Atlantic. If half of non-tariff barriers are eliminated in a harmonized manner, we estimate that economic benefits for Texas in 2020 would include $17.0 billion in gross product (representing more than 0.8% of expected aggregate output at the time), and $11.0 billion in personal income every year, as well as 166,400 jobs. This additional activity generates significant tax receipts of some $581.4 million for the State and $344.1 million for various local taxing authorities.
Clearly, a Transatlantic free trade agreement between the United States and the European Union would lead to sizable gains for the economies of all nations involved. Given the strength of Texas’ trading relationships with EU countries and volume of export/import activity, the Lone Star State would certainly benefit.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.