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There are currently two large trade agreements under negotiation that could have a major economic impact on the global economy as they involve a dozen Pacific countries, including the US, and the EU, and would intensify trade across both the Pacific and the Atlantic Ocean.
The Trans-Pacific Partnership (TPP), comprising 12 countries on both sides of the Pacific is expected to intensify trade flows between the countries involved. The Trans-Atlantic Trade and Investment Partnership (TTIP) is a large comprehensive trade negotiation between the US and the EU and includes innovative provisions on regulatory cooperation that could lead to global standards in automotive and pharmaceutical sectors.
Lower trade barriers will lead to increased competition and re-allocation of labor and capital towards the most productive sectors of the participating countries, which will spur efficiency in these countries.The exact benefits of both free trade agreements are difficult to quantify as models tend to be sensitive to assumptions about price elasticities and reductions of non-tariff barriers.
"Overall, we expect a positive effect of both agreements on trade and GDP in participating countries through 'trade creation'. However, countries not involved in the trade agreements may suffer in trade and GDP as a result of 'trade diversion", says Rabobank .
While a participating country is expected to gain from free trade, opening up markets could lead to considerable re-allocations of production and income. These 'allocative' and 'distributional' effects will make certain industries and occupational groups worse off under free trade. This could require redistributional measures by the government to compensate those who lose from the free trade agreement.
