A bimonthly magazine on international affairs, edited in Germany's capital

Filling the Void


Free trade is under fire, from the United States to Europe and beyond. So how can the European Union address growing concerns over globalization and advance its trade agenda at the same time?

© REUTERS/Fabian Bimmer

In his State of the European Union address on September 13, EU Commission President Jean-Claude Juncker called strengthening European trade his top priority. Following his speech, the Commission presented a package of new trade measures called “A Balanced and Progressive Trade Policy to Harness Globalization.” The proposal lays forth a comprehensive negotiating agenda for the EU on a multilateral and bilateral level.

The EU depends on open markets and a rules-based international trading system. According to the World Trade Organization, the EU is the second largest exporter and importer of merchandize goods worldwide (excluding intra-EU trade), accounting for 15.4 percent of global merchandize exports and 14.8 percent of merchandize imports in 2016. Regarding commercial services, the EU is the number one exporter and importer, with approximately 25 and 21 percent respectively.

The EU is not only a global player in trade but also the world’s biggest investor. According to Eurostat, in 2015 the EU accounted for 48 percent of global foreign direct investment stocks (outward FDI) totaling €6.89 trillion. It was also a major recipient of FDI, drawing in upwards of €5.74 trillion that same year.

So Juncker’s emphasis on open markets makes a lot of sense – even more so considering that the open, rules-based trading system is under attack. Protectionism has been on the rise since the global financial crisis erupted in 2008. From October 2009 until May 2017, according to the WTO, the number of new trade-restrictive measures skyrocketed from 140 to 1,392.

Through May 2010, G20 countries had implemented 73 protectionist measures; by May 2017 that number had skyrocketed to 723. The G20 is struggling to find common ground on the future of the multilateral trading order, open markets, and the fight against protectionism. US President Donald Trump’s “America first” policy has left a void of uncertainty on the global stage. The EU could fill that void, but it will only succeed by doing the requisite homework. Only an internally strong and unified EU can be a strong actor globally.

In Search of New Partners

The EU’s efforts to pursue deep and competitive free trade agreements (FTA) with various partners are not new. The European Commission unveiled its “Global Europe: Competing in the World” strategy already in 2006. However, the EU’s most recent blueprint, a 2015 package called Trade for All, is a marked shift from its predecessors. The strategy was clearly inspired by the popular backlash against the perceived pitfalls of globalization; it aims to align the benefits of free trade with safeguards to protect norms and regulations as well as underlying values. Trade for All is intended to be a holistic free trade concept benefiting a whole range of actors, from producers to consumers, workers, citizens, and small- and medium-sized companies.

The EU sees free trade deals as a complement to the multilateral trading system and the WTO, not an alternative. FTAs can provide access to new markets but they also shape globalization by introducing new rules and regulations to meet current needs in trade. It would be a mistake, however, to think that FTAs are an easy route – the EU-India negotiations launched in 2007 are a case in point.

In the last four years, the Transatlantic Trade and Investment Partnership (TTIP) emerged as the EU’s top priority. Negotiations began with great enthusiasm in the summer of 2013. But by January 2017, when President Barack Obama’s second term drew to a close, the deal was still far from finished. In fact, TTIP had run aground well before President Trump moved into the White House. Negotiations stalled last year because the partners could not find common ground over a wide range of issues, including investment protection, government procurement, and trade in services. While TTIP has faced stark opposition in many EU member states and in Germany in particular, the Trump administration has not rejected the agreement outright. In late May 2017, a few days after his first visit to the EU, US Commerce Secretary Wilbur Ross said he was open to talks about TTIP. However, given President Trump’s “America first” agenda, the EU says it needs more time to assess the transatlantic agreement’s future.

While TTIP is still in a deep freeze, the EU has been busy negotiating other trade deals. Last month, the majority of the Comprehensive Economic and Trade Agreement (CETA) with Canada entered into force. The European Parliament ratified the treaty in February 2017, but the chapter on investment protection still needs to be approved by more than 40 national and regional parliaments. Nonetheless, even provisional application is a huge success for the EU, especially considering the major protests that erupted around TTIP and CETA.

Next Stops Asia and Latin America

Following the successful (partial) ratification of CETA, the EU is now looking further afield, aiming to improve market access and deepen economic ties with fast-growing Asia and Latin America. In its communication about a “balanced and progressive” trade policy, the European Commission has emphasized that it wants to pursue deeper economic ties with the Asia-Pacific region, and to expand the alliance of partners committed to progressive rules for global trade.

The EU is negotiating a free trade agreement with Japan, its second largest trading partner in Asia. Just prior to the G20 summit in Hamburg earlier this year, the EU and Japan reached an agreement in principle on the main elements of the EU-Japan Economic Partnership Agreement. They signed a symbolic framework that is supposed to pave the way for a more comprehensive accord at the end of this year. However, many difficult issues remain. Among them is the EU’s new permanent Investment Court system that is to resolve disputes between investors and member states. Japan opposes such a court.

The EU is also negotiating with India (launched in 2007) and several ASEAN countries like Malaysia (launched in 2010), Thailand (launched in 2013, stopped due to military takeover in 2014), Philippines (launched in 2015), and Indonesia (launched in 2016). The agreements with Singapore and Vietnam were signed in October 2014 and December 2016 respectively and are awaiting ratification in the EU.

The other potential growth region is Latin America. In May 2016, the EU and Mexico started negotiations to modernize their trade agreement that has been in place since 1997. In addition, negotiations between the EU and the four founding members of Mercosur (Argentina, Brazil, Paraguay, and Uruguay) relaunched in 2010 gained fresh momentum in May 2016 after four years of stagnation.

Moreover, in his speech, Juncker announced new negotiations with Australia and New Zealand, as well, to be concluded as an EU-only agreement by 2019. The EU is aiming to wrap up negotiations with Japan, Mexico, and Mercosur by the end of this year.

The Right Strategy

All of these efforts raise the question: Is this the right strategy? Large parts of the European public were highly skeptical of the negotiations on CETA and TTIP. A poll by the Pew Research Center from June 2017 revealed that a majority of Greeks (63 percent), French (56 percent), and Hungarians (55 percent) as well as about half of Poles, Spanish, and Italians wanted their national governments to negotiate trade deals instead of the EU. Only Germans (60 percent) wanted the EU to retain trade agreement authority. The survey highlights a deep distrust in the European Commission’s negotiating capacity and strategy.

Nonetheless, the answer is yes. The EU must try to fill the void and negotiate FTAs with strategic countries and regions. Trade and investment mean jobs and growth in the EU. Exports provide jobs for 31 million Europeans; in other words, one in seven jobs in the EU depends on exports – jobs that pay on average better than other sectors. Ensuring market access abroad is key to prosperity in Europe. Even so, the EU needs to carry out internal reforms and pursue both bilateral and multilateral initiatives:

Forging consensus among EU members: The European Commission represents 28 member countries in negotiating trade policy, and it is precisely that large, unified common market that makes the bloc attractive on the global stage. At the same time, the interests and sensitivities of each and every member country must be taken into account during negotiations, and this is not always easy. Still, the answer cannot be the lowest common denominator. In October 2017, French President Emmanuel Macron threw a wrench into the EU-Mercosur talks because of concerns over beef and ethanol market access to Europe. The EU’s trade policy is clearly at a crossroads: Either it risks being held hostage by competing interests or it can prosper and shape globalization in the absence of US leadership in trade. Germany and France in particular share a responsibility for forging consensus among all EU member countries. They should not fall for the concept of reciprocity, as has become a central part of Washington’s new trade strategy. It is a dangerous idea and should not be adopted by the EU as reciprocity underestimates the importance of imports for the competitiveness of a country.

Making trade work for all: Despite the overall benefits of trade flows, not everybody has reaped the promised rewards of globalization. A growing part of Western societies feel left behind. The EU needs to address that discontent, not by abandoning trade deals but by engaging the public. This should be done through more transparency about the goals and limitations of trade negotiations; engaging advisory councils that include all relevant stakeholders; and conducting thorough studies on the winners and losers of a trade deal, along with possible social measures to counteract imbalances. At the same time, EU member states need to ensure that the benefits of trade are widely shared.

Fighting for an effective WTO: Its economic and political weight lends the EU a special responsibility for the world trade order. The WTO is still the most important guardian of rules-based world trade, but the organization is facing severe challenges. Its rules need to be updated and its dispute settlement procedure protected against political influence. The upcoming ministerial conference (MC11) should be used to agree on roadmaps for discussing important issues such as digital trade and investment facilitation within the WTO. The EU can play the important role of facilitator in this regard.

FTAs as stepping stones, not stumbling blocks: FTAs are not without risk for the multilateral trading order. They may remove barriers to trade and investment among members, but they contradict a central WTO principle by granting partners certain benefits that are denied to others. Accordingly, they are permitted only as an intermediate step in the multilateral liberalization process and are subject to (albeit rather vague) rules. The EU therefore needs to take extra care that its FTAs are compatible with the WTO and ensure that any new rules do not exacerbate global regulatory chaos or discriminate against non-members.

Choose your partners wisely: President Trump has pulled the US out of the Transpacific Partnership agreement (TPP), but the other eleven countries in the Pacific Rim are pushing ahead with the agreement, including Japan, Mexico, Australia, and New Zealand. In addition, there has been an increasing number of bilateral deals in the Asia Pacific region (e.g. Australia-China). The EU needs to stay in the game to remain competitive, but its negotiation capacities are not endless (especially with Brexit weighing on Brussels). The EU should therefore clearly prioritize its negotiations with strategic partners such as Japan, Mexico, and Mercosur. TTIP should not be abandoned, but before reopening negotiations, the EU has to ensure that talks have a realistic chance of succeeding.

Update trade rules for the 21st century: The EU needs to modernize existing trade rules to reflect current realities. Trade has changed (e.g. global value chains) and new rules are crucial to adapting to these changes. European FTAs should therefore integrate new rules on issues like small- and medium-sized businesses, digital trade, energy, competition and state-owned enterprises as well as investment facilitation. This will be no easy task, in particular with partners like India. However, “old school” FTAs would not be worth the paper they are written on. Then again, investment protection and investor-state dispute settlement may be best negotiated in separate (investment) agreements – which was the norm before the EU’s Lisbon Treaty came into force – as they fall into the shared competence of the EU and its members. Thus the ratification of trade agreements would become much easier.

Fostering open markets and sustainable trade: The EU is right to promote its values and standards through trade agreements in order to shape globalization. This means maintaining high environmental, social, and labor standards. The Commission has recently drafted a paper on the effective implementation and enforcement of sustainable development in its FTAs; the hope is to engage with EU members, but also the wider public. At the same time, these accords cannot be a panacea for the world’s problems. They are first and foremost agreements on how to govern trade. Therefore, they should not substitute existing labor and environmental accords and organizations but work in harmony with them.

In short, the EU has right strategy, but it needs to do its homework.