Research 11 1. CONTEXT AND MOTIVATION Free Trade Agreements (FTAs) have become an increasingly popular policy instrument during recent years. The WTO reports that the number of active bilateral or regional FTAs has increased from around 50 in 1990 to more than 400 in 2015. Likewise, the EU is cur- rently engaged in a number of FTA negotiations, inter alia with MERCOSUR, ASEAN, the ACP group of countries, Japan, and most importantly, with the US on TTIP. However, the first third generation FTA is not TTIP, but the Comprehensive Economic and Trade Agree- ment (CETA) between the EU and Canada. Negotiations started already in June 2009, and were concluded in September 2014. Discussion and, eventually, the launching of the ratifi- cation process of the agreement are scheduled for fall 2016 in the European Parliament. As many commentators believe, in many regards CETA serves as a blueprint for the TTIP negotiations. Crucial and, notably, extremely controversial features of TTIP, in particular investor-to-state-dispute settlement and regulatory cooperation prominently feature already in CETA. The decisive question for policy-makers when confronted with FTA negotiations is of course: Cui bono? More precisely: What are the effects of trade liberalization on economic growth, the structure of the economy and the distribution of income? These questions have preoccupied trade policy-makers throughout, in fact, modern history. While advocates of free trade have traditionally emphasized the positive welfare gains of trade, it is well-known that trade liberalization leads to a – often sizable – redistribution of income between owners of production factors. Those negatively affected will eventually resist trade liberalization, making it difficult for governments to pursue a pro-liberalization agenda. Thus there exists a political need to base political decisions about trade liberalization upon reliable empirical information about the likely impacts of a particular FTA on the countries involved. In an effort to promote the political debate on CETA, several ex-ante reports have been published by the European Commission and others, that try to shed light on what the agreement would mean in terms of economic benefits to be expected (see below for de- tails). In general, the studies find comparatively small but positive effects on trade and in- come. So far, these reports have been instrumental in delivering a message that there are substantial, and above all, easy gains to be harvested. In times of economic crisis, this is indeed an appealing message to the general public. The standard tool for ex-ante assessments of the impacts of trade liberalisation are so- called Computable General Equilibrium (CGE) models. The latter have become a routine element of the Trade Sustainability Impact Assessments of the European Commission, and are also the methodological backbone of most of the pro-CETA studies produced so far. However, most of these CGE studies are constructed upon a methodology that is heavily biased towards demonstrating the positive effects, while sidelining potential negative effects of the agreement. The lack of providing information on central macroeconomic variables like employment, government balances or the current account, has to be seen as a severe shortcoming of mainstream CGE-models. The neoclassical, and also New Keynesian, justi- fications that all possible adjustment costs, such as job losses due to trade liberalisation, are short-term and will eventually disappear, as the economy moves towards a new equilib- rium, are certainly not convincing, neither from a theoretical point of view, nor on empirical grounds. In order to tackle any negative impacts in due time, from a policy-making perspec- tive it is therefore imperative to identify them as precisely as possible. Only afterwards can appropriate remedies be designed and implemented. Furthermore, it is not the case that any adjustment costs are short-term and temporary. There may well be persistent impacts on employment, or on the environment. These need to be identified and taken into consid- eration, before taking far-reaching decisions about trade negotiations.