Shaping the future of EU trade policy: How to maximise the gains from trade in a globalised world?

Lucian Cernat

07 September 2010

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When the new European Commission took office in early 2010, President Barroso set out its new policy platform – ”Europe 2020”. The Commission is now filling in the details through concrete programmes in several policy areas. This includes trade, where it will set out the future direction for trade policy late this autumn. In preparation for this it has been engaged in exchanges with relevant stakeholders and launched a public consultation process.

This column launches an online discussion of EU trade policy; my aim in this column is to stimulate debate and raise some initial questions. I hope that in engaging Vox readers, the resulting online discussion can provide fresh ideas and recommendations that can help us achieve our EU 2020 objectives. This column first presents the elements of the still-forming policy and its justifications in a way intended to stimulate this debate. Many questions are left open; I look forward to seeing the responses from the Vox community.

The EU 2020 strategy and the triple benefit from trade

Europe, like many other developed regions and countries, is trying to find the best policy mix to promote sustained economic recovery. According to the IMF, GDP growth in Europe is expected to remain modest at around 1%. However, world growth is projected at around 4.5 % in 2010 and 2011, and around 7% in emerging and developing economies (IMF 2010). With subdued domestic demand in the EU, trade is going to become an important driver of growth.

The Commission’s “Europe 2020” strategy targeted, inter alia,

  • smart and green growth (in particular in terms of limiting greenhouse emission and encouraging renewable energies and energy efficiency),
  • job creation (employment rate should increase from the current 69% to at least 75% by 2020),
  • boosting innovation and the digital economy (investing 3% of GDP in R&D),
  • higher education, training and lifelong learning, and
  • poverty reduction in Europe (lifting over 20 million people out of poverty)1

A range of EU and national policies and instruments should contribute directly or indirectly to these targets and objectives. An ambitious trade strategy, that could build on growth in the rest of the world to boost growth at home is a key component in getting this mix right.

International trade has been a major driving force behind the integration of fragmented national markets for decades. The pace of this process has been extraordinary. According to the WTO, the value of world merchandise trade grew 73% in the last decade. Exports per capita have increased tenfold since 1950s. The trade-output ratio increased fourfold during the last ten years. This trend continues despite the negative shock of the 2008-2009 global crisis.

Promoting trade liberalisation brings a triple benefit that can underpin progress in the EU:

  • Economic growth: Trade liberalisation creates additional opportunities for innovation and stronger economic growth (see Bloom et al. 2009)2. For instance, finalising the Doha Development Agenda and all the ongoing Free Trade Agreement negotiations would add in the range of 0.5 percentage points to the EU GDP. Making further progress on our relations with strategic partners, in particular an enhanced transatlantic partnership with the US would double this growth effect. This effect is quite significant in its own right. But this contribution of trade policy to the EU 2020 objectives is even more important, if recovery in Europe remains subdued over the next years.
  • Consumer benefits: Apart from access to cheaper products, an important but often neglected source of consumer welfare stems from access to a wider range and variety of products and services. For example, a recent study estimates the consumer gain to American consumers of global variety growth during 1972-2001 to be about $2.6% of GDP (see Langenfeld and Nieberding 2005, Broda and Weinstein 2006, and Mahler and Seitz 2010). Translating these "variety gains" in EU context would indicate that the average European consumer benefits in the range of €600 per year.
  • Labour effects: Although trade opening is often perceived as a threat to jobs in Europe, the truth is that trade leads to a significant net job creation effect in Europe. In 2000 alone, around 14 million jobs (around 7.2% of EU employment) were dependent on the EU’s ability to export to the rest of the world. This includes the jobs of those working directly for the production of the exported goods and services as well as those employed in downstream sectors producing inputs that are embodied in sales to foreign markets. If we imagine a world in which the EU closed its borders and stopped trading with the rest of the world, this would be equivalent to a reduction by 18% in EU employment, or a reduction in real wages by 7% on average3.

Global Europe: Assessing the current EU trade strategy and beyond

The EU's Global Europe trade policy adopted in 2006 launched a series of new bilateral free trade agreement negotiations with fast-growing emerging market economies in Asia.

Global Europe, while maintaining the completion of the Doha trade round as a first priority, marked the end of a de facto moratorium on launching new competitiveness-driven trade agreements4, while reaffirming the EU’s commitment to the multilateral system and the Doha Round. As a result, a series of more economically-oriented negotiations were launched with Korea, India and ASEAN in 2007 and Canada in 2009. Negotiations with Mercosur were re-launched in 2010. Priority was also given to other important economic partners (e.g. the Gulf Cooperation Council) with whom the Commission has been negotiating trade agreements. Global Europe is still unfolding but the first success of this strategy is the EU-Korea agreement, which is in the process of approval and ratification by both parties.

This brief presentation of goals and existing initiatives raises many questions.

What else should be envisaged in the future EU trade strategy?

  • Given the existing Global Europe initiatives and the available trade tools, how should Europe maximise the impact of the “triple benefits” and contribute to the overall ‘Europe 2020’ goals?
  • What should be the new and most important priorities – at the multilateral level, in bilateral negotiations, and unilaterally?

The limits of “tariff-driven” trade policymaking and the critical importance of services and non-tariff barriers

Before searching for new initiatives, it has to be acknowledged that major progresses in “traditional” trade policy were achieved over the last few decades.

  • Today, from the point of view of tariffs, the EU is an open market, arguably the most open G20 economy.
  • The common external trade weighted tariff for industrial products stands at 1.6%;
  • When bilateral free trade agreements, autonomous preferential tariffs and duty free products are taken into account the trade-weighted tariff on industrial goods is 0.3%. On agriculture the average protection is higher, not only in the EU but also in the most parts of the world.

However, when it comes to trade in services, FDI, government procurement, and non-tariff barriers affecting both goods and services, it is worth remembering that we are still quite far from the borderless world predicted by Kenichi Ohmae in 1989 (Ohmae 1989). Typically estimates of ad valorem equivalents for such barriers places them in double digit figures.

It is clear that the most important contribution to the EU 2020 objectives would stem from non-tariff issues, notably in behind-the-border trade initiatives, such as regulatory issues, non-tariff barriers, intellectual property rights, government procurement, trade and environment, to name but a few.

  • How exactly can we make greater inroads in addressing these beyond-tariff issues both in a multilateral and bilateral context, and in particular vis-à-vis strategic trading partners for the EU like the US, Japan, China, Russia, and other emerging economies?

The interplay between progress in the Single Market and trade negotiations

One possibility to advance the depth of services and non-tariff barrier liberalisation is to pursue the reforms and initiatives aimed at completing the Single Market. The benefits are potentially twofold. First, well functioning and well-connected EU markets where competition and consumer access stimulate growth and innovation would, in itself, serve the Europe 2020 goals. For instance, the full implementation of the Services Directive could increase trade in commercial services by 45% and foreign direct investment by 25%, bringing an increase of between 0.5% and 1.5% increase in GDP.

Second, lowering of intra-EU costs of doing business through a Single Market for services will also lead to more gains from trade with the rest of the world as well. Offering market access as part of trade negotiations to an integrated Single Market for services would create stronger incentives for third countries to reciprocate and offer more ambitious commitments in services. The Lisbon Treaty also confers new responsibilities to EU trade negotiators in the area of foreign direct investment, granting new possibilities to deepen the integration process between the EU and third countries.

Beyond these general considerations, some open questions still remain:

  • Is there any scope for an initiative in this area and if so what are the best ways to further facilitate services trade and investment? The same goes for overcoming regulatory differences that may have the effect of barriers to trade, in particular with the largest trading partners.
  • Is there a need for a difference in approach vis-à-vis developed and emerging economies?
  • Multilateral and bilateral negotiations have only partially succeeded in opening trade in services so far. Given the inherent difficulties in making further progress in these areas, what specific trade initiatives would generate greater trade opportunities, commensurate with the untapped economic potential in the services sectors?

Enforcing global trade rules

Striving to promote existing or new trade agreements and rules would be meaningless if commitments would not be properly enforced. But many partner countries still give unfair advantages to domestic firms, for example in procurement markets or by restricting exports of raw materials and energy. The EU has therefore been a longstanding supporter of a strong multilateral system that can enforce effectively trade rules for the benefit of all WTO Members. In addition, the EU has developed a comprehensive Market Access Strategy aiming to identify trade barriers before they appear and tackle existing obstacles to trade. The EU 2020 strategy puts renewed emphasis on such efforts and calls for an annual trade and investment barriers report identifying ways to improve market access and regulatory environment for EU companies.

  • Apart from these important mechanisms, are there any other initiatives the EU could best engage with major trading partners who maintain an asymmetric level of openness and resort to protectionist measures?

“Smart” and green growth: Challenges for the future

The EU 2020 strategy singled out very clearly the importance of “smart” and green growth for a sustained economic recovery in Europe. Ideas and innovations are embodied in a wide array of EU products that are traded daily on a global scale. The EU has clearly recognised the need for an effective protection of intellectual property rights worldwide. As a result, an “Enhanced IPR Protection and Enforcement Strategy” in third countries is due to be launched in 2011. Beyond promoting a stronger enforcement strategy, two important questions stand out:

  • What else can EU trade policy do to further improve the protection of IPR in key markets, such as China and other emerging markets?
  • What trade policy instruments can be mobilised to reinforce the “smart” dimension of the Europe 2020 strategy and facilitate trade in high-tech goods and services?

When it comes to trade and “green growth”, the role that trade policy could play is clearly of increased importance to many stakeholders, particularly in the absence of a global agreement on greenhouse gases. We should be careful however to avoid “green protectionism”. Instead, one step in the right direction is the proposal to further liberalise environmental goods and services. Beyond this initiative, “greening” the world economy and putting it on a more sustainable footing, in particular, will require considerable more work to properly address possible negative environmental and social effects. So, how can trade policy best support green and inclusive growth around the globe?

Looking into the future

When looking into the future of EU trade policy one could address many other “new” cross-cutting areas where the linkages between trade and broader policy objectives are becoming more complex. Trade and development, trade and labour, and many other “trade ands” are usually brought to the fore when designing new trade initiatives. But the aim of this short paper was not to be exhaustive. Instead, it tries to highlight some critical areas for further reflection regarding the future EU trade policy and the EU2020 strategy.

This column has touched on a wide range of topics and questions, but there is certainly a need to think even more broadly and to tackle Europe’s fundamental challenges on trade with an open mind and the help of Vox contributors.

In writing this column, I hope that engaging in an online discussion forum with a specialised audience of trade economists will further enrich the pool of possible recommendations to be considered, in particular new ideas and policy recommendations on how to sharpen the existing trade tools and make them better equipped to contribute to the EU 2020 objectives.

The opinions expressed are personal to the author and do not necessarily reflect the views of the European Commission.

References

Bloom, N, M Draca, and J Van Reenen (2009), "Trade induced technical change? The impact of Chinese imports on innovation, diffusion and productivity", Stanford University working paper.

Broda, C and D E Weinstein (2006), “Globalization and the Gains from Variety”, The Quarterly Journal of Economics, 541-585.

IMF (2010), World Economic Outlook Update, July 2010, IMF.

Langenfeld J and J Nieberding (2005), "The Benefits of Free Trade to U.S. Consumers", Business Economics, 40(3):41-51

Mahler L and M Seitz (2010), “The gains from variety in the European Union”, Munich Discussion Paper 2010-24

Ohmae, K (1989), "Managing in a Borderless World." Harvard Business Review, May/June: 152-161.


1 The threshold used to define relative poverty is 60% of the median disposable income in each EU Member State.
2 Using a panel of over 200,000 European firms through 2007, they demonstrated that import competition led to both within-firm technology upgrading and between-firm reallocation of employment towards more technologically advanced firms or subsidiaries. These effects account for about 15-20% of technology upgrading between 2000-2007.
3 Calculations were performed with the use of the latest version available of the GTAP model and database. It was assumed that the EU stopped trading with its external partners (but continued intra-EU exchange) and capital flows were restricted. In the second simulation, real wages in the EU were kept fixed, which allowed the European labour to adjust.
4 The main criteria used to prioritize such trade agreements were the size of the market, its growth potential, level of trade barriers applied by EU trading partners.

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Topics:  Europe's nations and regions International trade

Tags:  trade policy, European Commision, Europe 2020

Chief Trade Economist of the European Commission

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