This is from the Draft Interim Technical Report, Trade Sustainability Impact Assessment on the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA, prepared by the consultancy Ecorys for the European Commission:
14. Main expected social impacts from TTIP: long-term wages and prices rise, short-term and sectoral adjustment
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Consumer prices are expected to go up marginally in the EU (+0.3 percent) and to have no effect in the US (0.0 percent). This is because higher demand from the US market for European goods and services could lead to slightly higher consumer prices in the EU in the long run. However, for most household groups this is more than offset by higher wages. The increase in consumer prices could also, however, be overestimated as a result of not modelling a reduction in NTMs in processed foods. Since trade costs are not modelled to decrease in this sector, producers can no longer transfer the benefits of free trade to the consumer;
That's on pages 20-21. There's more detail on pages 115-116:
The impact of TTIP on consumer prices is calculated in the CGE model. Before going further it is important to note that changes to prices coming from this modelling set up also reflect closely the assumptions made regarding the labour market closure. The fixed labour market closure means that any increase in demand for labour will be met by wage increases, which will in turn push up firms' costs, and will be eventually be passed on to consumers as higher prices. In fact, the fixed labour supply closure can be said to lead to more pronounced price effects.
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The first category contains non-tradable goods and services such as haircuts. The theoretical effect of TTIP on their prices in the EU can, without any loss of generality, be assumed to be marginal (and only due to general equilibrium effects). However, the CGE results show that a number of non-tradable goods and services do see an increase in prices. Higher income for the average EU citizen will push demand for personal services to a higher level. This leads to an increase in their respective price level.
The second category refers to tradable goods and services produced in sectors for which a large share of the production is exported. In other words these are sectors for which the EU economy has a competitive advantage. Given the size of the US market, the reduction of trade barriers may lead in these sectors to a significant increase in demand. If labour demand increases in those sectors to accommodate the higher demand for EU goods and services, this is likely to lead to price increases (notably due to the fixed labour supply assumption).
The third category consists of domestic producers of tradable goods, but which will have to face stronger (price) competition from the US in case of a concluded TTIP agreement. Finally the fourth category represents goods that the EU only imports, which will now more freely enter the market (if barriers vis-a-vis the US were previously in place). For the latter two categories, the effect of TTIP on the consumer prices is similar; more competition leads to a downward pressure on domestic prices. The aggregated effect on consumer prices is the end result of the interplay between both opposing forces and of the composition of the consumption basket for the average EU consumer.
In the modest scenario, consumer prices will, on average, increase by 0.2 percent in the EU, and decrease by 0.1 percent in the US. In case of an ambitious agreement, however, consumer prices are not expected to change in the US while they are expected to increase in the EU (by 0.3 percent).129 This reflects the price dynamics discussed above and the composition of consumption baskets for the average EU and US citizen. One factor that plays a role is the fact that in the updated CEPR (2013) results, the NTMs in the processed food sector are not reduced. This means that the reduction in import prices of processed foods products would be more limited than if the liberalisation were more ambitious. Finally the price effects in the EU also reflect the higher estimated GDP effects. It is important to note that these larger impacts on prices for European consumers should be seen in combination with the larger overall GDP impact and larger wage increases for European workers, compared to the impact on the US consumers.
I'm a little skeptical of the idea that liberalized trade will lead to higher prices, but I don't know enough about these CGE models to figure out how they reached this conclusion. Any economists or political scientists out there want to weigh in on this?
