Ferdi De Ville (Ghent University) & Gabriel Siles-Brügge (University of Manchester) & - PDF

The Transatlantic Trade and Investment Partnership and the Role of Computable General Equilibrium Modelling: An Exercise in Managing Fictional Expectations Presented at the 44 th Annual UACES Conference,

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The Transatlantic Trade and Investment Partnership and the Role of Computable General Equilibrium Modelling: An Exercise in Managing Fictional Expectations Presented at the 44 th Annual UACES Conference, Cork, Ireland, 1-3 September, Currently under consideration for publication at the journal New Political Economy. Abstract Ferdi De Ville (Ghent University) & Gabriel Siles-Brügge (University of Manchester) & Negotiations between the world s two largest trading partners, the European Union (EU) and the United States (US), on a Transatlantic Trade and Investment Partnership (TTIP) have been on-going since July Anticipating the controversy the agreement has sparked, EU trade policymakers in the European Commission have put considerable effort into discursively framing the agreement on their terms. Drawing on Computable General Equilibrium (CGE) models of the agreement s likely impact, the central claim has been that the TTIP promises to deliver much-needed growth and jobs without stretching the public purse at a time of austerity. Our main argument in this paper, drawing on the insights of the economic sociologist Jens Beckert, is that these CGE models and the figures they have produced represent an important exercise in the management of fictional expectations. The models make overly optimistic predictions about the ability of the EU and US to eliminate regulatory barriers to trade which are unlikely to be realised in the face of considerable political opposition and also downplay the potential social and environmental impact of an agreement. Rather than act as a reliable guide to future outcomes, we thus show that these models serve the pro-liberalisation agenda of the European Commission and other advocates of the TTIP. 1 Keywords: Transatlantic Trade and Investment Partnership (TTIP); Computable General Equilibrium (CGE); fictional expectations ; economic sociology; European Union (EU); trade policy. 1. Introduction The proposed European Union (EU)-United States (US) free trade agreement (FTA), also known as the Transatlantic Trade and Investment Partnership (TTIP), will potentially represent the world s most significant bilateral trade deal. While bringing together the world s two largest economies into a single transatlantic marketplace is by no means an entirely new idea it is the first time that policymakers are seriously seeking to translate it into practice: negotiations have been on-going since July 2013, initially with the aim of completing them within two years (Parker and Houlder 2013). There are, however, important political obstacles in the way of achieving the TTIP, obstacles which in the past led to the abandonment of plans for an FTA. When such an agreement was last on the cards in 2004 it was viewed as over ambitious and unlikely to be realised (Peterson et al. 2005: 76-9) against the backdrop of over a decade of transatlantic economic cooperation that had only yielded mixed results (Pollack 2005; Smith 2009). In this vein, and in the light of past failures to effectively communicate trade policy decisions to the public and other potentially hostile actors (Siles-Brügge 2014: 151-7), EU trade policymakers have realised the importance of discursively framing the agreement on their terms. As a leaked European Commission Issues Paper on Communicating on TTIP lays out, [s]trong political communication will be essential to the success of the Transatlantic Trade and Investment Partnership (TTIP), both in terms of achieving EU negotiating objectives and of making sure that the agreement is eventually ratified. More 2 importantly, the aim of such communication should be to define, at this early stage in the negotiations, the terms of the debate by communicating positively about what the TTIP is about (i.e. economic gains and global leadership on trade issues) (European Commission 2013d). The central message of this information campaign (which has brought together the European Commission and certain pro-liberalisation Member States, including the UK) has been the claim that, in a period of economic recession, the TTIP represents the cheapest stimulus package you can imagine (De Gucht 2013), a once-in-a-generation prize that we should be determined to seize (David Cameron, cited in BBC News 2013). At the heart of this rhetoric lie the claims, repeatedly invoked by the pro-ttip camp, that the agreement will yield substantial economic gains for both parties (see, for example, European Commission 2013e; De Gucht 2014: 4; Clarke 2014). Drawing on a Commission impact study on the matter (European Commission 2013a), the headline figures are of annual GDP gains of 119bn for the EU (and 95bn for the US), which translates into extra annual disposable income of 545 for a family of four in the EU (or 655 for a family in the US). These figures are derived from two key economic studies on EU-US trade liberalisation contracted by the European Commission (CEPR 2013; ECORYS 2009). These draw on Computable General Equilibrium (CGE) modelling techniques to arrive at estimates, which are then presented by advocates of the TTIP as reasonable predictions of the agreement s economic impact. In this, they join a lineage of studies that have modelled the supposedly positive effects of trade liberalisation, most notably of the North American Free Trade Agreement (NAFTA) (see Stanford 2003) and the Doha Round of multilateral trade talks (see Scott and Wilkinson 2012). 1 3 Our central argument in this paper, drawing on the insights of the economic sociologist Jens Beckert (2013a,b), is that these CGE models and the figures they have produced represent an important exercising in the management of fictional expectations. Beckert s notion of fictional expectations implies that although these models are shrouded in uncertainty, as the social world is too contingent to be modelled in terms of the assumptions of neoclassical economics, they are presented as reliable predictions of future outcomes. We show how the models make overly optimistic predictions about the ability of the EU and US to eliminate regulatory barriers to trade which are unlikely to be realised in the face of considerable political opposition. Rather than act as a reliable guide to future outcomes, we show that these models serve the pro-liberalisation agenda of the European Commission and other advocates of the TTIP, much in the same way as previous studies of NAFTA and the Doha Round (Cypher 1993; Scott and Wilkinson 2012) exaggerated the economic gains from trade liberalisation for political effect. Actors deploying such models are engaged in an exercise of managing fictional expectations by presenting their findings as incontrovertible evidence in favour of the agreement. Moreover, by glossing over the differences in impact that different forms of liberalisation will have in the case of the TTIP a mutual recognition (hereafter: MR) of standards is more likely to lead to a potential downgrading of standards across the Atlantic than regulatory harmonisation and focusing simply on the gains of ill-defined regulatory liberalisation, the economic studies have been used to disguise the privileging of interests calling for market access gains over those concerned with social and environmental protection. Our contribution to the literature is thus two-fold. On the one hand, we offer an up-to-date complement to the myriad of studies that have focused on the obstacles to and modalities of transatlantic regulatory cooperation and are only beginning to study the TTIP (see, for 4 example, Pollack 2005; Smith 2009; Pollack and Shaffer 2009; on the TTIP see Lester and Barbee 2011). We also add grist to the mill of accounts which have pointed to the strategic use of economic ideas, such as the notion that the EU has no choice but to liberalise in a globalised economy, to legitimate external trade liberalisation in the EU in the wake of the crisis (Siles-Brügge 2014; De Ville and Orbie 2014). Against a rising tide of opposition to the TTIP from civil society and some Member States over (amongst other things) the agreement s likely social and environmental impact (De Ville and Siles-Brügge 2014), the Commission clearly hopes that repeatedly invoking the (supposed) economic benefits of the agreement is likely to serve as an ideational counterweight in much the same way that CGE models strengthened (at least for a time) the discursive armoury of those pushing for liberalisation in the case of NAFTA and the Doha Round. The remainder of this paper is structured as follows. In section 2 we introduce Beckert s notion of managing fictional expectations and show how it can be applied to CGE models. In section 3 we turn to the history of transatlantic economic relations and suggest why past efforts at EU-US regulatory cooperation have struggled to get past anything but limited MR. In section 4 we turn our attention to the impact assessment study used by the Commission to justify the TTIP negotiations and reveal the Commission s preference for MR as a means to deliver market access gains for EU business interests. In section 5 we then focus on how the impact assessment and the CGE models on which it relies papers over the uncertain liberalisation gains of the TTIP and serves to disguise the Commission s MR agenda, with its potentially problematic consequences for levels of social and environmental protection in the EU. We conclude the paper in section 6. 5 2. Managing fictional expectations : a political economy of Computable General Equilibrium analysis Within the so-called ideational turn to political economy (for a review, see Bell 2011), the work of Mark Blyth (2002, 2010) has been particularly influential. He argues that actors are unable to rationally determine their interests and instead rely on ideas to navigate the treacherously uncertain waters of the social world. While Blyth s work has been taken to be the reference point for an allegedly new stream of constructivist IPE (see Abdelal et al. 2010), it has its roots in the (slightly) older tradition of the new economic sociology (for a review, see Convert and Heilbron 2005). Much as the ideational turn in political economy has critiqued rationalist research programmes in political science and their exogenous models of interest-formation, so the new economic sociology has sought to re-assert a sociological understanding of the market in the wake of the rise of neoclassical economics and its atomised view of market relations. More specifically, Blyth draws on the work of the economic sociologist Jens Beckert (1996, 1997), who argues that managing and reducing uncertainty is the underlying feature of markets. However, the premise of fundamental or radical uncertainty underpinning such work has been criticised for providing insufficient guidance in determining why certain ideas matter (Siles-Brügge 2014: 34-6; see also Bieler and Morton 2008), or, as Beckert (2013a: 222) recently put it, how actors interpret the social situation. In other words, and to use the metaphor from above, what drives actors to choose one current rather than another when navigating the uncertain waters of the social world? Beckert s recent solution to this issue is to put forward this idea of fictional expectations, or imaginaries of future situations that provide orientation in decision-making despite the uncertainty inherent in the situation (Beckert 2013a: 222, emphasis in the original). Beckert (2013a: 225-6) draws an important analogy here to literary texts: both literature and fictional 6 expectations involve the suspension of disbelief on behalf of the reader/social participant. That said, in the case of the former this is down to the choice of the reader, who may well take enjoyment from learning about the fictional exploits of Tom Sawyer, while fictional expectations are a coping mechanism for actors facing an uncertain future: represent[ing] future events as if they were true, [they] mak[e] actors capable of acting purposefully [ ] even though this future is indeed unknown, unpredictable, and therefore only pretended in the fictional expectations (Beckert 2013a: 226, emphasis in the original). Fictional expectations shape economic decision-making not just by providing a series of static predictions of the future, but more broadly by providing a story of how the present will be transformed through several causally linked steps into the depicted future state (Beckert 2013a: 226). Focusing on whether such narratives are true or false, however, is missing the point; they are necessarily wrong because the future cannot be foreseen (Beckert 2013a: 226, emphasis in the original). In this vein, fictional expectations remain ever fragile because the images can be contested and the actual future development remains open (Beckert 2013a: 225). Of course, fictional expectations much like Blyth s ideas are necessary for actors to navigate the inherently uncertain social world. It would be difficult, for example, to imagine a firm without some form of business plan. But they also play a role in the realm of political contestation. As Beckert highlights in a subsequent article, [a]ctors have different interests regarding prevailing expectations and will therefore try to influence them (Beckert 2013b: 326). Our argument here is that the idea of managing fictional expectations can be seen as a useful contribution to the growing literature on the role of strategic or communicative discourse in political economy, whose purpose it is to communicate [policy decisions] successfully to the public at large (Schmidt 2002: 234; see also, amongst others, Hay and 7 Rosamond 2002; Watson and Hay 2003; De Ville and Orbie 2014; Siles-Brügge 2014). Such accounts have, in much the same way as Beckert, emphasised the strategic agency of specific actors deploying particular ideas about the economy to further their ends. Beckert s focus on how such actors conceptualise the future allows us to turn to a specific form of strategic imaginary, namely the economic modelling that is so crucial in shaping economic decisionmaking. As Lorenzo Fioramonti claims in his recent book How Numbers Rule the World (2014: 6), numbers have been used and abused in governance processes to entrench the power of markets and undermine public debate. In this vein, the rest of the section will show how elites can draw on the imaginary provided by economic forecasting. This often takes the form of computable general equilibrium (CGE) modelling. CGE models take the Arrow-Debreu model of general equilibrium model at the heart of modern neoclassical economics as their starting point (see Arrow and Debreu 1954; for a critique see Ackerman and Nadal 2004). They thus assume the existence of macroeconomic general equilibrium links among incomes of various groups, the pattern of demand, the balance of payments and a multisector production structure (Thissen 1998: 2). In such a situation there is no excess demand and all markets clear under conditions of perfect competition. As their name suggests, CGE models must also be computable, that is, they must involve numerical data and results (Grassini 2007: 317). Starting with the work of Leif Johansen (1960), the availability of increasingly powerful computers capable of more sophisticated computations has allowed such models to grow in importance within the economics profession (for a history of CGE modelling, see Dixon and Rimmer 2010). They have become, in this way, particularly influential when it comes to measuring the economic welfare implications of policy decisions, including the effects of trade liberalisation where the creation of the Global Trade Analysis Project (GTAP) in 1993 was instrumental to the 8 improved quantification of trade policy impacts (Scott 2008: 93) and the impact of economic decisions on various other domains such as social welfare and the environment/sustainability (see Decanio 2005; Ackerman and Gallagher 2004; George 2010). While CGE models have been the subject of some critique, this has generally failed to appreciate their broader political significance (e.g. Taylor and von Armin 2006; Scrieciu 2007; for exceptions, see Cypher 1993; Scott and Wilkinson 2012). In contrast, our argument is that the use of CGE modelling should be conceptualised as an important exercise in the management of fictional expectations. CGE models correspond to such expectations in that, while presented as reliable forecasts, they are underpinned by considerable uncertainty. This is first and foremost a product of the simplifying modelling assumptions taken from general equilibrium theory that individuals are rational optimisers and that all markets clear. With respect to the first, this ignores that individuals are often driven by a more complex set of values (Scrieciu 2007: 680), while there are also often information asymmetries between parties involved in market transactions (see the seminal piece by Akerlof 1970). General equilibrium conditions, moreover, are unlikely to be met in the real world, where labour and product markets rarely all clear at a given moment in time (Ackerman 2004: 16; Grassini 2007). Indeed, the Sonnenschein-Mantel-Debreu theorem (one of whose authors was also one of the fathers of general equilibrium theory, Gérard Debreu himself) mathematically demonstrates that (even assuming perfect rationality) it is axiomatically impossible to arrive at a unique equilibrium point in the macroeconomy by scaling up individual market equilibria (Watson 2014: 22-4). Thus, as one experienced modeller, Clive George, has ultimately noted, [e]conomic models are limited in what they are capable of modelling, and require many simplifying assumptions and approximations [ ] This limits the accuracy and reliability of the findings. Moreover, George highlights how policymakers are willing to 9 accept an extremely high degree of uncertainty: [i]n some cases, the uncertainty is bigger than the number itself, such that a number predicted to be positive could easily be negative (George 2010: 25). This apparently wanton disregard for the accuracy of the predictions points to how CGE models are used as a political tool. They often generate a headline figure or series of statistics that are likely to be widely quoted by policymakers and politicians in defence of particular policy decisions: the TTIP is a case in point (for a discussion of the role of such models in the public debate around NAFTA, see Cypher 1993; for the case of the Doha Round, see Scott and Wilkinson 2012). However, aside from these widely publicised numbers, CGE models suffer from a remarkable lack of transparency, making them hard to scrutinise by the lay reader (Decanio 2005: 423). This black-box feel to CGE models (Piermantini and Teh 2005: 10) serves to mask the incredible uncertainty underpinning the modelling. To use Beckert s (2013a) turn of phrase, we are willing to suspend our disbelief because the models seem plausible, with their inherent uncertainty and fragility shielded from public view. However, if we open up the black box of the CGE model, we can begin to discern in what ways CGE models skew the terms of economic debate. Drawing on Ross McKitrick s (1998) categorisation of the information contained within CGE models analytical (relating to underlying assumptions); functional (relating to how the model is specified algebraically) and numerical (relating to the calibration of the models, such as the magnitude of coefficients in the model specification) we can see how the models themselves privilege certain interpretations of socioeconomic interaction and can thus be used as tools to push a particular political economic agenda. 2 10 Beginning with their underlying assumptions (i.e. analytical model information), it is clear that these privilege a particular weltanschauung. As a number of critics have noted, the Arrow-Debreu model of general equilibrium appears to be agnostic on the ques
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