A transformation economy: shaping the future of EU trade policy

Posted by on 17 September 2010

In a recent Vox Talks interview, David O’Sullivan, Director General for Trade at the European Commission, joined our EU trade policy debate. He talked to CEPR's Viv Davies about, amongst other things, the EU’s responsibility within the world trading system, trade governance and the WTO, the role of reciprocity, the BRICs, and the importance of successfully concluding the DDA negotiations; he also comments on the issue of ‘multilateralising regionalism.’

Listen to the interview here.


Viv Davies: Hello and welcome to Vox Talks. I’m Viv Davies from the Centre for Economic Policy Research. It’s the 15th of September 2010 and I am speaking to David O'Sullivan, Director General for Trade at the European Commission. The Commission has recently launched a public consultation process designed to help shape the future direction of Europe Union trade policy. As part of the consultation process, VoxEU is currently hosting an online debate to gather the views and reactions of leading economists.

I began the interview by asking Mr. O’Sullivan what he considered to be the fundamental issues and key challenges in terms of defining and developing a European Union trade policy.

David O’Sullivan: Well, I think from the perspective of the European Commission and in particular Commissioner De Guch,t who wants to bring forward a communication on this subject, we are anxious to take stock of the situation after a few years on from the “Global Europe” paper, which Commissioner Mandelson issued in 2006.

But, since then, a lot has happened. Firstly, we have made a lot of progress on doing the things which we set out to do on the Global Europe communication, but more importantly the global scene has changed. We have had the dramatic events following the collapse of Lehman Brothers; we’ve had the financial crisis – which in turn generated an economic crisis and a recession, and an unprecedented fall in trading patterns, which we are now witnessing a small recovery and some improvement. But obviously, this all needs to be taken into account in looking forward and seeing where our policies go from here.

So, we are first and foremost looking at the lessons learned from the Global Europe experience: what has succeeded; what are the areas where we still need more work; how to leverage trade as an instrument of recovery, and as a means of putting the global economy back on the road to recovery; how to continue to project publicly the benefits of trade and globalization, because recent events have given rise to some criticism and some suggestions that perhaps trade or globalization might even have contributed to the difficulties, whereas we would strongly maintain that trade and globalization are very much part of the solution and not part of the problem.

And of course all of this as part of the institutional framework in which trade policy is now defined, in particular the enhanced role for the European Parliament, which is foreseen under the Lisbon Treaty; but also the institutional changes of the creation of a High Representative and Vice President, Catherine Ashton; a new diplomatic service, the European External Action Service; and a clear desire as witnessed by tomorrow's European Council for our member states to project more clearly a European position on issues of global importance.

Viv Davies: The European Union is collectively one of the world's largest traders. What do you consider to be the key responsibilities that should go with such a dominant position within the world trading system and to what extent do you think that future EU trade strategy should reflect those responsibilities?

David O'Sullivan: We are not only one of the world’s largest traders, we are the largest trader. We are the largest economy in the world by the way, and we are the largest importer, and the largest exporter; we are the largest recipient of foreign direct investment, and we are the largest owners of foreign direct investment in countries outside Europe.

So Europe, if you like, to a certain extent, almost invented globalization. I mean we are at the centre of this process of global supply chains and of the evolving nature of global markets. So, we not only have a responsibility but we have a self-interest in ensuring that this system works and that this system works effectively and fairly.

And of course that starts first and foremost with our very strong support for the multilateral system and the WTO. We have been and continue to be very strong advocates of a successful outcome for the DDA. I know that this can sound like a broken record because we have had so many missed opportunities, but we continue to believe that bringing this round to a successful conclusion is intrinsically important because the round has economic value, but just as importantly, systemically it is necessary to reinforce the relevance of the WTO as a global governance organization in the 21st century.

So, we will continue to push for this and indeed push for the WTO to be recognized as a truly global organization, which of course it is in terms of its membership, but I think it is probably true to say that a number of the developing countries who have joined perhaps more recently still don't feel in some way that it is “their” organization. They feel they have entered a club set up and dominated by the major powers, the traditional major western powers. And I think the DDA with its development emphasis provides the unique opportunity to set the WTO firmly as not only the primary vehicle for multilateral trading, but also one which is able to take on board the diversity and the differences between the richest countries in the world such as the European Union or the United States or Japan, the emerging economies such as Brazil, China, India, and of course the poorest, even the Least Developed Countries.

So, support for the WTO is absolutely vital, similarly support for the work of the G20, which of course has emerged again reflecting the changes of recent years, and the fact that you can no longer deal with global governance issues without talking to and involving China, Brazil, India, Russia and so forth.

And of course finally in our bilateral dealings, we have to set very high standards for bilateral free trade agreements. We only, therefore, should subscribe to highly ambitious agreements which will not be “Doha instead”, but will be “Doha plus”, in other words they will go beyond what is possible in the WTO. And I would point for example to our recent agreement with South Korea as an example of an extremely ambitious and high quality free trade agreement. And those are the kinds of agreements we will continue to push in our other negotiations.

Of course we also need to show generosity in dealing with the developing world and in particular, for example, in relation to the African, Caribbean and Pacific countries where we are negotiating new trade arrangements to replace the previous autonomous regime. It is clear that there we fully accept that we are dealing with poor countries from whom we cannot expect the same level of ambition or the same degree of reciprocity.

So, I would say full support for the multilateral system, a high ambition in any bilateral trade agreements we enter into, particularly with countries of a similar level of development, and generosity and development awareness in our dealings with the less well-off countries of the world.

Viv Davies: The EU has been criticized by some commentators in the past for not giving enough attention to the importance of reciprocity in its trade deals and what it will be prepared to give up in return for concessions by others, both in the context of Doha round and regional trade agreements. Is the criticism justified and to what extent do you think that the EU’s future trade strategy should take into account the issue of reciprocity?

David O'Sullivan: I think in the abstract we can all agree that as a general concept reciprocity is what we want in the trading world, because we want a level playing field and it is in everyone’s benefit to open their markets. Of course a strict interpretation of reciprocity defining it sector by sector or trying to define it country by country without differentiating between the level of development or the specific situation of the trading partner you are dealing with, would ultimately be counterproductive.

But I think that we have pursued an approach of fair trade deals, but whether it is in the WTO I think the package which was on the table in July 2008 was a fair deal in the sense that of course the developed countries were giving slightly more and getting slightly less, but we always intended that the DDA would be unbalanced in favour of the developing countries.

In our free trade agreements once again I think here we have to differentiate between dealing with countries of comparable economic development such as, for example, South Korea or Canada, with whom we are engaged in negotiations where I think it is only fair to drive a hard bargain and to expect a comparable degree of liberalization on both sides, even if there maybe some exceptions and some different sensitivities between ourselves and our partners.

But, broadly speaking, it is important to insist on a high degree of ambition versus situations where you are dealing with a partner who is not at the same level of development. I have already cited the example of the ACP and the Economic Partnership Agreements, which are clearly lopsided in favor of the ACP countries for development reasons, and even taking into account countries such as India, for example, which though it is a powerful emerging country, it remains a developing country with legitimate development concerns which we will have to take into account in our negotiations.

So, I think reciprocity is an important concept. We have to demonstrate to our citizens that we are defending their interests and that we are not just naively opening our markets without obtaining benefits in return. But, I do think you need a sophisticated understanding of how to apply reciprocity on a day-to-day basis in our dealings with trading partners who are very often in very different economic situations.

Viv Davies: What do you consider to be the main benefits for European countries and their citizens within the context of a common EU trade policy?

David O'Sullivan: Well, I think firstly and foremost, it gives us greater weight in negotiations. By creating a Single Market, we have created the largest economy in the world. We have gained huge benefits for our member states through the integration of our markets here in Europe, and of course what we offer to any trading partner is access to one of the richest and largest markets in the world with 500 million consumers.

And the fact that in this area uniquely Europe speaks with one voice with the Commission acting as the negotiator on behalf of the 27 member states, clearly means that we are able to have an important role in shaping trade policy. This is true in Geneva where the EU sits at the table with the United States, with China, with India, Brazil as an equal in shaping the agenda in a way that not even the largest of our member states could hope to do if they were acting individually.

More generally, of course, having created the Single Market which is a huge benefit for our citizens, being able then to connect that Single Market with global trading opportunities brings huge benefits for our citizens. First of all, it brings higher economic growth because as we know trade expands welfare and we estimate that if we were to complete all the ongoing trade negotiations in which we are currently engaged, we could increase growth in Europe by as much as half a percentage point. Now, that may not sound like a huge amount but when you are talking about that making the difference between two or two and a half, or between two and a half and three, that adds up to quite a lot of economic value.

Secondly, there are benefits for both consumers and producers in having access to goods at cheaper prices. To consumers it is self evident, it keeps inflation down, it makes better quality products available at lower prices, but also to producers because Europe has become a transformation economy. We live by trade. Two-thirds of our imports are actually used as inputs to the production process which are then very often re-exported. So it is absolutely indispensable to our industries that if they are to remain globally competitive, they have access to the highest quality inputs at the lowest possible prices.

And finally, in terms of employment, trade makes a huge contribution to job creation in Europe. We create many, many more jobs through trade then are lost through some outsourcing. We estimate that at the moment that about seven percent of EU employment depends directly or indirectly on exports and this is a very significant number of jobs.

Viv Davies: What factors do you think are responsible for so many emerging markets being reluctant to take on binding obligations beyond tariff reductions and other long established border barriers?

David O'Sullivan: Well, I think there are two factors. One is what I referred to earlier when I talked about the sense of ownership in the WTO. We have to accept that the post-war era and the history of colonialism and the history of the emergence of these countries has left some scars in terms of their sense of the fairness of the system and of the extent to which their views are genuinely taken into account in the shaping of the rules.

That’s why it is terribly important that we make a success of the Doha Development Agenda so that we can really demonstrate that we are capable of producing a multilateral system in which all countries can feel their interests are heard and protected.

In this context, it is natural that many of these countries want to retain a high degree of policy space, particularly in areas where they feel they are not yet competitive and where they believe that continuing to have barriers or continuing to have a degree of control over the issue might enable them to build up a capacity which would otherwise not be possible if they liberalize too quickly.

Now, I think we have to have some sympathy for this because we in Europe did not discover the benefits of free trade overnight. We went through periods of protecting our markets and then progressively opening up. So there is some legitimacy in this point.

On the other hand, I think we have to try and persuade these countries of the fact that to recreate the path of development that, for example, Europe took over several hundred years is not necessarily their way forward. They need to leapfrog this and move into the 21st century very quickly. And in this regard, sectors such as services or investment are not optional extras but will in fact be the way of the future. It may be nice to say, well, let’s keep some state monopolies because this creates policy space, but if a developing country does not develop very quickly in the 21st century an effective and competitive telecommunication system or an effective and competitive financial system, then that country will very quickly hit a wall in terms of its development capacity.

And so I think that is why we need to explain why it is important also to move forward in these new areas. And I know that there is controversy in dealing with some of these issues because they are seen to be particularly sensitive, but I think the intellectual case and the analytical/economic case for persuading countries that they need to look at having, for example, clear rules in place for the protection of investment so as to become attractive places for investment … that competition rules are not necessarily a hindrance but actually a help in the development of the economic attractiveness of their countries, that regional integration is a very important way forward whether that is in Africa or in Asia or in Latin America.

I think these are ideas, the benefit of which we have to continue to explain, but I do understand why there is reluctance and I do understand that this is a debate that will have to continue and we will have to continue to make the case, that the benefits of trade increasingly in the 21st century will not just flow from reducing tariffs, but also from addressing beyond the border issues, non-tariff barriers, technical barriers to trade, issues like government procurement, like investment, like services, like competition rules. We will have to find ways also of addressing these multilaterally and in bilateral agreements if we are to continue the process of globalization in supply chains and economic activity which we have seen flourish in recent years.

Viv Davies: You referred earlier to the BRICs – Brazil, Russia, India, China. In terms of helping shape future EU trade policy, what do you consider to have been the main lessons learned by the European Commission from its dealings in recent years with the BRICs?

David O'Sullivan: Well, I think first and foremost that while the term captures a concept which is important, namely that they are a group of emerging developing countries who by their size and by their economic potential are destined to play an important role in shaping the 21st century, they are all very different and they all present different challenges for Europe in terms of engaging with them.

China clearly is dominating much discussion these days, not least because of the sheer size of the country, but also because of its fantastic economic performance in the last 10 or 15 years, and the fact that it has had a pretty good recession and that it has come through the recent economic crisis rather better than many places in the developed world.

We have a very active dialogue with China, notably through the high level economic and trade dialogue and we will continue to discuss with China how to take forward our relationship. We are now China’s largest export market, so we are very important destination for Chinese exports.

We understand that China wants to develop its own economy, that it still has many, many millions of people, hundreds of millions of people living in poverty, that it has huge challenges of ensuring a more prosperous future for 1.5 billion people. But, we also think that the way to do that is for China to continue on the path of opening its market and engaging actively with the global community and resisting any temptation towards a more narrow nationalist national economic approach.

In the case of Russia, of course, the key issue is to secure the accession of Russia into the WTO. Russia remains the last major economy to be outside the system. There are encouraging signs recently and we will work extremely hard on that in order to bring that to fruition.
In the case of Brazil, our economic relations of course pass through Mercosur which is a regional integration project of which we are hugely supportive. We have re-launched our negotiations for a free trade agreement with Mercosur and that could be a deal which would bring benefits both to the countries of Mercosur and to the EU, and we would hope that we could conclude those negotiations next year.

India, of course, is a major priority and we are engaged in a free trade agreement negotiation, and again while this is challenging, because it is the first time that we have entered into a negotiation of a free trade agreement with a country, which is on the one hand one of the major powerful emerging new economies clearly with a very bright future, but which on the other hand still has many of the characteristics of a developing country and has many development challenges to face.

And we would have to get the balance right between the right level of ambition of the agreement and taking into account the legitimate development concerns that India put forward in these negotiations. But, I am very confident that we are moving forward very constructively and I would hope that this agreement could also come to a successful outcome in the first half of next year.

Viv Davies: You touched on the issue and importance of governance and the role of the WTO. In his response to Lucian Cernat’s opening commentary in the current Vox debate, Richard Baldwin has suggested that a key goal of an EU trade policy should be to address what he considers to be a fundamental gap between what he calls “21st century trade” and “20th century governance”. He suggests that bilateral and regional trade deals have been designed to try to fill that gap, but that these are not enough and that more should be done in terms of “multilateralizing regionalism”. Would you agree with that and if so how, and to what extent, do you think such a consideration could feature in shaping the design of EU trade strategy in the future?

David O'Sullivan: Well, I do agree that there is always a risk that trade negotiations are dealing with yesterday’s agenda, because the world of business and the world of commerce moves much more quickly than the world of administration. But, on the other hand, I think there are certainly very significant governance issues for the world trading system, and in particular for the WTO, which will need to be addressed in the 21st century. And these are not necessarily figuring prominently in the DDA negotiations.

On the other hand, I am convinced that it will be extremely difficult to get the developing countries to engage in a debate on how we design a new agenda for the 21st century until we have closed the chapter of the 20th century which is the DDA negotiations. So, this is yet another reason why I think it is terribly important to try to move forward and close the DDA negotiations as quickly as possible so that we can indeed then calmly sit down and talk about, well, what are the key issues that need to be addressed in the WTO in the 21st century.

And taking into account the fact that the DDA, if successful, will, to a large extent, have dealt with classic tariff issues and there will be not a lot left to dismantle in a further round, whereas there will be many, many other sensitive issues which would need to be addressed, in particular what I have mentioned already, which is technical barriers to trade, regulatory issues, sanitary and phytosanitary issues and going on then to the even more difficult material of investment or competition or government procurement.

So, I fully sympathize with anyone who says that we need to get quickly to a discussion of a 21st century trade agenda, but I am absolutely convinced that we will not have momentum to do that unless we successfully close the DDA.

Now, on the question of the role of regional and bilateral, I think we have to accept that even if we have a very successful conclusion of the DDA, the fact is there are things that can be done in the multilateral system that cannot be done bilaterally. And the most obvious example there is the case of disciplining for example agricultural subsidies and trying to have greater liberalization of agricultural trade including disciplining of subsidies. This is classically something that we can only do at the multilateral level. It is very difficult to address that bilaterally.

On the other hand, there are things that if you want to take forward at the present time, it is very difficult to do it multilaterally. Trade and services is one example where the multilateral negotiations and services are mainly about binding what is already liberalized, whereas if you want to go beyond that, very often you have to get into a bilateral discussion, and in fact multilateral negotiations on services are really just an accumulation of a series of bilateral discussions.

The same is true, for example, in areas of government procurement where there is only a relatively limited commitment on the government procurement agreement in the WTO and where some countries, such as China, for example, are still not a part of the GPA, and where other countries are sometimes are reluctant to take multilateral commitments but more willing to do that in a bilateral context.

The question of intellectual property rights and their protection, again often difficult to address multilaterally but more easy to progress bilaterally. And I could say the same thing for competition rules, for example, or investment which is clearly a very important area. By the way, the Lisbon Treaty has now conferred on the European Union exclusive competence for investment matters and we will be able to have much more ambitious investment chapters in our bilateral agreements in the future.

So, I think, if we want to see progress in these areas, I think inevitably they will have to be through bilateral agreements and/or regional agreements. But, I absolutely agree with Mr. Baldwin that our objective should be, over time, to multilateralize this process and that these bilateral deals – that is why I said that we would see them as “Doha plus”, not “Doha instead”. And we would hope that in due course it would be possible to bring this kind of liberalization into the multilateral framework, and that is probably one of the challenges of the 21st century. But, I think the key to doing that is firstly to ensure that the bilateral agreements are genuinely additional to WTO commitments, i.e., that they go further, but more importantly to closing the current round of DDA negotiations so that we then can cautiously and prudently begin to think about what the next wave of multilateral liberalization would look like, and I agree hopefully it would cover a number of those issues which are currently not in the DDA agenda.

Viv Davies: David O’Sullivan, thanks very much indeed for taking the time to talk to us today. I look forward with interest to reading the debate on Vox as it continues through the month.