EU Trade Policy: a modest step towards non discriminatory deep integration

Posted by Peter Holmes on 11 October 2010

This commentary was co-authored by Peter Holmes and Jim Rollo of Sussex University.

Our focus

Standoffs in domestic and international political economy make this a particularly difficult time to point to clear directions of travel for EU trade policy. We try to identify one specific way forward that could bring market opening through the bilateral route that does not undercut further the multilateral system, namely focussing on non-tariff measures in the form of conformity assessment issues – boring but vital. The EU-Korea deal shows that this is possible, and there is evidence that a similar package with the US could deliver very large gains.

Politics, protectionism and 'play stoppers'

At home, even before the financial crisis the appetite for liberalisation and market extension through enlargement had lost its lustre for elites as well as voters. The anti-globalisation movement and the rise of populist political causes are symptoms of that. More generally, the aftermath of the financial crisis increased scepticism about the efficacy of markets, while increasing government intervention gave more credence to the role of the state as an effective actor in markets. At a key sectoral level, the 5th enlargement brought a swathe of countries that benefited from the Common Agricultural Policy into the EU. More recently food security concerns as well as ‘good old protectionism’ after enlargement intensified the pressures against agricultural liberalisation. This left the EU internally divided on the correct path for reform of agricultural policy. As a result the policy has been subject to autonomous reforms that have been presented to trading partners in the WTO on a ‘take it or leave it’ basis.

In the WTO there are no more playmakers – as the US was during the cold war or the EU and US combined were in the Uruguay Round. There are only ‘play stoppers’. The developing countries (many of whom - see India - are enthusiastically liberalising unilaterally) are unwilling to bind further opening of their markets for goods or services, not least because developed countries remain protectionist on agriculture and have little market access left to offer on NAMA and have little appetite to open up on mode 4 services. There is not enough for either side in the reciprocal bargain currently on offer. In any case the DSU is proving a useful lever to open markets – eg, on sugar or anti dumping, but one can wonder whether that tool will remain effective if the WTO loses its ability to deliver additional MFN liberalisation on a significant scale.

Where next for EU policy?

Against that background EU Policy has taken on a more explicitly bilateral and market opening cast under the rubric of Global Europe1 but this strategy is far from successful. There is still no apparent progress on EU-GCC or EU-Mercosur – which are negotiations that began in the 1990s. EU approaches to ASEAN have morphed from a proposed region-to-region agreement to possible bilaterals with selected individual members of ASEAN. EU-India is hanging fire notably on the “Trade and…” commitments that now form a standard element in EU bilaterals. Only EU-Korea is anything like a success. Even with the ACP countries, where the EU’s leverage is greatest, the EPAs hardly represent a vision of successful negotiations. Overall, Lucian Cernat’s column seemed to us to signal a possible rowing back from bilateralism, even despite enthusiasm among some member states for transatlantic economic integration and the potential for EU-Japan after EU-Korea.

If neither multilateral nor bilateral liberalisation strategies are working well, where next? We could as others have done make some far-reaching suggestions about what the EU should do to help revive Doha. A substantially better EU offer on agricultural market access seems to us the minimum that Europe must deliver to have any chance of encouraging developing countries and even the US to the table. But we see little chance of that in current circumstances.

Is there anything in the bilateral agenda that offers a model for market opening which is not damaging to the multilateral system?

Non-tariff measures

It has long been held that agreement on regulatory and non-tariff measures is likely to be easier among a small rather than a large group and therefore the bilateral or regional route to deep integration is more likely to be fruitful. In truth there is as yet limited evidence, other than the EU itself, for this proposition except for the willingness of prospective members of the EU to align their norms with those of the EU prior to accession. To this we can add that the EU’s immediate neighbours, such as Switzerland, have little choice but to adopt EU standards if they are to sell into their biggest market.

However regulatory alignment in FTAs as such has been very limited. Even in the pre-accession period for the new MS of the EU it was the accession negotiations not the Europe Agreements that drove the process. The EU Turkey Customs Union agreement is proving to have lots of holes. Lucian’s own earlier work at UNCTAD on the significance of competition provisions in bilaterals sums it up nicely. “Eager to ink but ready to act?”2 Among EPA partners only CARIFORUM has so far accepted any non-trade provisions: these were ones that the CNRM negotiators hoped would help underpin their own single market, an incentive absent in other cases.

General studies of non trade provisions3 suggest that across-the-board EU trade agreements have included provisions on regulatory issues that were either too vague to be enforceable or explicitly non-binding. This leads one to be cautious about scope for deep integration.

But it can be argued that these agreements all reflect an older generation of negotiations. The recent EU-Korea agreement offers interesting possibilities.

Trade in goods and standards

With regard to trade in goods, the key element that is usually missing from trade agreements is Mutual Recognition of testing and certification. Emphasis on standards harmonisation is potentially misleading. Even if a country adopts EU standards and makes them mandatory, the EU is not obliged to accept imports without further administrative procedures because the EU does not necessarily accept that conformity assessment systems in the partner country are good enough to ensure that EU standards really are met. This is a very delicate issue. For many years within the EU, the car industry was able to ensure continuing segmentation of even the EU market by persuading governments not to accept “Type approval certificates” issued by other member states, even when the standards had been unified. In 1997 the EU and the US signed an agreement on Mutual Recognition of Conformity Assessment – a framework agreement that required detailed sector-specific agreements, which remain limited in scope. The EU Turkey Customs Union agreement provided for early adoption of EU standards by Turkey but it was not till 2006 that steps were taken to recognise Turkish conformity assessment labs. EU Chile provides pathways for establishing procedures to agree equivalence in SPS rules but substance had to wait. EU Korea takes a major step forward however. In cars and electronics both partners agree to recognise each other’s conformity assessment procedures. EU electronics and cars do not need additional inspection in Korea. The USTR in its comments on the agreement observe that this goes further than KORUS.4

The sectoral coverage here is still not 100%. But it represents a major breakthrough. Moreover the discriminatory element is small. In electronics the FTA commits both sides to basing regulations on international standards, though in cars EU standards are privileged.

The potential benefits are very significant. A study of the impact of regulatory barriers between the EU and the US estimated that the removal of all potentially actionable barriers between the EU and the US would lead to a rise in EU GDP of 0.7%,5 a significantly greater amount than from the removal of tariffs and a non trivial fraction of the estimates made for the impact of the creation of the original common market!

Looking forward

The EU-Korea agreement provides for mutual recognition not just of standards but also of conformity testing and certification. This might prove useful more widely, and could be offered conditionally erga omnes to any country that met the technical requirements. This is a potential template that could be used with the US, Japan and potentially even China. Crucially however, such agreements can only work when there is a degree of trust in the regulatory arrangements. Extension to developing economies would require investment at the level of the firm as well as in regulatory institutions, but could be a priority for EU ‘aid for trade’ spending.

But this does not require the negotiation of a full FTA. Clearly more trade-offs are possible when other forms of market access can be mutually offered, and inclusion of NTBs in an FTA can make the package more attractive, but such regulatory agreements can be stand-alone.

The essential conclusion of our argument is that there are market access gains potentially available, on a bilateral and regional basis, that primarily involve the mutual recognition of testing and certification. This issue is politically and technically hard to address and has mostly been sidestepped in FTAs, but EU-Korea shows it can be done, albeit within limits, in an FTA. But it can also be done in other ways. The gains are potentially large and seem genuinely likely to provide stepping stones to non-discriminatory trade expansion.

Authors' note: We are extremely grateful to Michael Gasiorek and Kamala Dawar for comments and advice.

1 See EU Commission, (2006), Global Europe: Competing in the World, COM (2006567, Brussels and Rollo, Jim (2006), Global Europe: old Mercantilist Wine in New Bottles?, Aussenwirtschaft 61, 403-414
2 Cernat, L. 2005. “Eager to ink, but ready to act?” In Brusick, P.; Alvarez, A.M.; Cernat, L., ed., Competition Provisions in Regional Trade Agreements: How to Assure Development Gains. UNCTAD
3 Sapir, André and Horn, Henrik and Mavroidis, Petros C. (2009) Beyond the WTO? An anatomy of EU and US preferential trade agreements; Bourgeois, J, Kamala Dawar, and Simon Evenett (2007) "A Comparative Analysis of Selected Provisions in Free Trade Agreements." August 2007. Report prepared for DG Trade, Brussels; Peter Holmes "Deep Integration in EU FTAs"
5 See Lucian Cernat and Bertin Martens “Untapping the EU-US trade potential: Taking the Transatlantic Economic Council forward” 7 May 2010 and ECORYS Nederland BV (2009). “Non-Tariff Measures in EU-US Trade and Investment – An Economic Analysis,” Study for European Commission, Directorate-General for Trade".