Economic Policy Review ISSN 1313 - 0544

Potential effects of TTIP on Bulgaria: facts versus fallacies

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In mid-2013 the European Union and the United States started negotiating the Transatlantic Trade and Investment Partnership, going through nine rounds of talks by April 2015. Since then a series of papers have been published with the aim to analyse the potential effects that the aforementioned treaty may have on the economies of the EU and the USA. The research papers focusing on the potential effects for the EU typically contain specific estimates for Bulgaria as a member of the Union, usually by evaluating the possible effect the liberalization of trade with the US may have on Bulgarian exports and GDP.

However, up until this moment, no in-depth analysis (by a government body or an academic institution) that focuses specifically on the possible effects the future treaty would have on the Bulgarian economy has been published, to our knowledge. This vacuum is likely one of the causes for the emergence and public propagation of various myths about TTIP in the last few months. Some of the most popular myths are that the USA will flood the Bulgarian market with GMO products, that only big corporations will benefit from the treaty, and so forth. These myths rest both on the lack of familiarity with the documents of the treaty, and on the open manipulation of public opinion by some groups.

With the above in mind, the IME has set the objective to analyze the trade and investment flows between Bulgaria and the United States and on this basis to evaluate the potential effects that freeing up trade between the EU and the US will have on the Bulgarian economy. The paper, published by the IME, debunks some of the most popular myths surrounding the treaty, at least as far as its possible effects on Bulgaria are concerned.

The analysis indicates the growing importance of the US market for Bulgarian producers of goods and services. The trade balance remains positive for Bulgaria, while exports to the US market are about 1.5 times higher than imports. The exports of goods and services from Bulgaria to the United States has experienced double-digit growth in the last five years, as the United States have become one of the main export markets for Bulgaria outside of the European Union. This growth is even more impressive if we account for the fact that around 50% of goods exported are subject to tariffs. 

One of the most common myths about the treaty is that only big corporations will benefit from the liberalization of trade. However, looking at a recently published analysis of the European Commission, titled “Small and Medium Enterprises and the Transatlantic Trade and Investment Partnership”, we can see that small and medium enterprises (SMEs) are an active participant in international trade. More specifically, 88% of all EU exporters to the US are SMEs, and 28% of the total value of exports is generated by them. In the case of Bulgaria, 87% of all exporters to the US are SMEs, and they are also responsible for 40% of the total amount of exports to the US. This data very clearly shows the important role that small and medium enterprises play both in exports from the EU to the US overall, and in exports from the Bulgarian to the American market.

Another popular myth is that tariffs are already relatively low and their abolition will not have a serious effect. However, in the case of Bulgaria and its exports to the US, this is not true, because half of the exports are actually subject to import duties. Therefore the expected abolition of tariffs in mutual trade would have direct positive effects for 50% of Bulgarian exports to the American market. Noteworthy, about 40% of the goods exports are subject to relatively high tariff barriers (above 2%), while in the case of a number of goods, the duty reaches double-digit figures. Therefore, the direct positive effect of the anticipated abolition of tariffs will be especially pronounced for 40% of Bulgarian exports to the United States.

Amongst the myths against the treaty we also find the claim that Bulgaria as a whole does not produce competitive goods and therefore its export is not competitive as well. Some go further and say that Bulgaria exports goods with low value added, while importing goods with high value added. Neither of these claims is supported by the data.

The two items with the biggest share of exports from Bulgaria to the US, accounting for nearly 30% of total exports, are machines and electric and electronic equipment. Both of those product groups have experienced serious growth in the last five years – around 30% yearly. By looking at the statistics we can also see that around ¾ of exports from Bulgaria to the United States are highly competitive, i.e. with an Index of Revealed Comparative Advantage higher than 1. If the tariffs in mutual trade are abolished, we can expect that products which are less competitive and are not yet exported to the US, will be able to break into the American market. This is confirmed by the current exports of several Bulgarian products, which have an Index of Revealed Comparative Advantage lower than 1, i.e. they are relatively less competitive, but are subject to no tariffs for the US market.

Besides the direct export of goods from Bulgaria to the United States, when analyzing the potential effect of TTIP on Bulgarian exports, indirect supply chain effects must also be considered. Bulgarian firms are participating more and more actively in such supply chains in recent years, emerging as suppliers of materials and components for big European manufacturers. The latter then sell part of their final products on the American market, thus indirectly exporting the said materials and components from Bulgaria to the US.  

According to IME’s estimate, the indirect export value of goods from Bulgaria to the United States via such supply chains equates to around 200 million dollars. If we add the value of the direct export of goods from Bulgaria to the American market, which for 2013 is around 400 million dollars, then the sum total value of goods exported from Bulgaria to the United States is roughly 600 million dollars. To the export of goods we must also add the export of services which is worth about 300 million dollars (for 2013). Thus, the value of Bulgaria’s total exports to the United States reaches 900 million dollars, or about 1.6 billion levs.

Insofar as the export of services between the EU and the US is concerned, if the European Commission’s stated goals of abolishing a number of non-tariff barriers in that area is achieved, that would also have a direct positive effect on Bulgarian exports. The EC’s goals directly concern businesses services, sea transport, finance, insurance, and communication services, which account for more than 20% of Bulgarian services exported to the US, i.e. we can expect an increase in the exportation of these services. Parallel with this we can also expect that the loosened requirements for the export of services from the EU to the US will open possibilities for the exportation of other services as well, which for the moment is not possible because of the high non-tariff barriers.   

We must also note the fact that some of the main exporters of goods and services from Bulgaria to the US are American investors in Bulgaria. The United States are the 9th biggest investor in Bulgaria according to the statistics for cumulative foreign direct investments in the country for the period from 1996 to 2014. In this period American companies have invested grossly 1.5 billion Euros which accounts for 3.4% of all FDI’s for the period. Unlike some other leading investors on the Bulgarian market such as Cyprus, Netherlands and Switzerland, whose investments to a large degree are due to Bulgarian entrepreneurs taking advantage of the favorable tax regime in these countries, the investments coming from the United States are authentic, i.e. in most cases they reflect a genuine inflow of American capital.

It is notable that a big part of American investment in Bulgaria is in the sphere of advanced technologies, electronics and computer services – Microsoft, Tumbleweed, IBM, Hewlett Packard, AMIS, VMware, Johnson Controls are some prominent examples. In the last several years smaller American software developers have also entered the Bulgarian market, exporting a share of their developed products back to the US. These investments also stand behind the sudden rise in the export of computer services (software development), which now accounts for over 40% of all services exported from Bulgaria to the American market.

We can assume that the possible signing of the Transatlantic Trade and Investment Partnership will lead to an increase in investments from the US in Bulgaria for the following reasons:

1/ Abolishing tariff and non-tariff trade barriers between the EU and the US will inarguably increase the goods flow across the Atlantic ocean (all else being equal). Considering that a part of the exports from Bulgaria to the United States is produced by subsidiaries of American companies in Bulgaria, we can expect American investments in the country to increase as well.

2/ The part of the treaty, dedicated to investment protection, will reduce the risk of nationalization or other detrimental actions on the part of the host country (i.e. Bulgaria) against investors from the US.  

3/ The serious difference in the level of wages, which is likely to remain in place in the long term, will continue to encourage investment by American companies in Bulgaria, especially in labor-intensive sectors.

Aside from the export of goods and services from Bulgaria to the United States and investments of American companies on the Bulgarian market, the treaty will also affect the importation of American goods to the Bulgarian market. Foreign trade data show that out of a total of 100 groups of products which Bulgaria imports from the US, only 8 are not subject to import tariffs. At the same time the tariffs on some groups of products (dairy, eggs, honey, meat, sugar) are of the magnitude of 40-50%. The planned removal (or serious reduction) of tariffs through TTIP will affect over 40% of the direct imports from the US to Bulgaria.

All in all, free trade and the abolition of tariff and non-tariff barriers to imports and exports lead to serious benefits both for the entire economies of the countries involved and for the consumers of each good and service which will be freely exchanged. The planned treaty between the EU and the US is not going to be an exception. The direct positive effects of TTIP, specifically for Bulgaria, will come via the direct and indirect export of goods and services to the US, which is increasing with every year, thus making the United States a more and more important export market for Bulgaria. Investments from the US in Bulgaria is also likely to receive a push, since the abolition of tariff and non-tariff barriers to trade will encourage exportation, part of which is done precisely by American firms in Bulgaria. Last, but not least, consumers in Bulgaria will also benefit from the treaty, because around 40% of imports from the US are currently subject to tariffs.