Estonia – Watchdog of free

Marina Kaljurand Undersecretary for Economic and Development Affairs, MFA

In October of this year Swedish Minister for Trade Ewa Björling, who was speaking in Tallinn, called upon to continue as the watchdog of . Of course, this challenge would have sounded more forceful and carried greater weight if it had been made to a great power. However, it was made to Estonia. This was a compliment, an assessment of our current economic policy and a request to continue in the same manner. One might rightly ask what is really known about a small country with an open economy, which is oriented to exports and is largely dependent on trade – how much attention is paid to such a country? I think attention is paid to Estonia because it speaks about the nature and success of free trade based not only on economic theory, but on 20 years of experience. And hopefully its example will be followed, because Estonia has repeatedly attracted international media attention with its reforms and economic experiences. For instance, according the Bertelsmann Transformation Index (BTI) that was issued in November, which assesses reforms in transition countries, Estonia is the fourth most successful transition country after the Czech Republic, and Taiwan.

Estonia has been a spokesperson for free trade in the European Union as well as globally, primarily in the Estonia has been a spokesper- World Trade Organisation (WTO). In this article I will son for free trade in the Euro- focus on two levels of Estonia’s foreign trade policy pean Union as well as globally, – in the WTO and in the European Union. Although primarily in the World Trade the European Union and the WTO differ signifi cantly Organisation (WTO). in regard to their membership, work methods, prin- ciples and decision-making mechanisms, they are united by the understanding that an important component of economic development for countries and people is trade that is subordinated to rules – both regionally and globally.

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For Estonia, both organisations offer an opportunity to participate in the shaping and implementation of international foreign trade policy. Estonia obviously supports free and open trade in both organisations. I dare say that Estonia’s positions regarding trade are more European than those of many European Union member states and the EU as a whole, as well as more liberal than those of the majority of WTO member states and the WTO as a whole, not to mention the countries that do not belong to the WTO. How do I dare to make such a provocative claim?

To answer in brief – because ever since the reforms of the 90s, it has been Estonia’s goal to create and sustainably develop a free, open and enterprise-friendly economy. Estonia was the country that, ten years ago when it joined the WTO and 5 years ago when it acceded to the European Union, had to implement additional economic regulations in order to conform to the rules of those organisations and their accession requirements. This was quite unusual, because generally countries need to liberalise their economies and lower their customs tariffs.

To provide a more detailed answer, one would have to talk about Estonia’s interests and goals in the given organisations. In the European Union, foreign trade is under the jurisdiction of the EU and the member states are represented by the European Commission. Therefore Estonia, represented by the Commission, participates in the shaping and implementation of the European Union’s trade policy. In the WTO, Estonia is represented by the European Commission, or more accurately, Estonia is represented in the WTO as an independent country as well as an EU member state, which is in turn is represented by the Commission. In the WTO, Estonia may speak, participate in discussions, and express its opinion, but only within the limits that are agreed upon in the European Union. The EU trade policy is a good example of how the European Union forms common positions and speaks with one voice.

The role of the WTO in shaping the rules for global trade has been under constant scrutiny in recent years. The protection of free trade and prevention of protectionism has acquired a different meaning under conditions where many countries are imple- menting protectionist measures. These include WTO members and G20 countries, or countries that should be setting an example with their words and actions. With 156 member states and 23 acceding states, the WTO remains the only organisation that actually represents the 21st century world economic order. The WTO proved its worth by demonstrating that a rules-based trading system can help to avoid a protectionist backlash. Partly because of that we can say today that the economic crisis has not turned into a trade crisis, although global trade volumes have declined signifi cantly. According to the annual WTO overview, the world trade turnover for this year will decline 10% to the same level as 2005.

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Globally, economic experts are unanimous in their opinion that recovery from the economic crisis depends on the stimulation of trade and the restoration of consumer confi dence. The harmfulness of protectionist measures has been analysed and calcula- tions have been made regarding how much the world economy would lose if the WTO member states established legally permissible restrictions, i.e. abandoning the status quo. Almost all WTO members agree that it is vitally important to continue the process by bringing the WTO Development Round to a successful and early conclusion. Although political leaders like to repeat that the Doha Development Agenda is worth hundreds of billions of euros to the global economy, they are not always ready for fi nal compromises and fi nal decisions, mainly for internal political reasons.

The further enlargement of WTO membership is very important, since it means the increasingly widespread recognition of WTO rules. Today’s global economy must be regulated by generally recognised principles and rules. Such regulation provides busi- nesses additional guarantees in economic relations and helps to create a predictable and stable economic environment – the same comprehensible rules exist everywhere, and the unilateral establishment of restrictive measures by countries is brought under control, including rules for the resolution of disputes, etc. The WTO analysis illustrates vividly that most protectionist measures are established by countries that do no belong to the WTO.

Today 23 countries are conducting accession negotiations with the WTO; some have been doing so for more than 10 years. Russia is among them. Russia’s accession to the WTO is the only possible way to subordinate Russia to the trade regulations es- tablished by the WTO, or more accurately, to any rules at all. Unfortunately, Russia is sending out very mixed signals about their plans to accede to the WTO. At the political level, Russia declares that it wishes to complete the accession negotiations as quickly as possible. However, it simultaneously takes steps to create a customs union with Belarus and Kazakhstan effective as of 1 January 2010 and it continues to establish discriminatory tariffs. The latest examples are the higher customs tariffs on goods that are important export articles for Estonian and other businesses, From the standpoint of the which were announced on 8 December 2009 and European Union and Estonia, will come into force on 1 January 2010. This is it is important that Russia ac- being done within the framework of the customs cede to the WTO as quickly as union, which means that Kazakhstan, which had possible, but only if it does not relatively low customs tariffs to date, will also negotiate any exemptions or raise its tariffs. Russia’s unpredictable trade policy otherwise waste time but fulfi ls does not create fertile ground for the development all the established requirements of trade relations, it rather hinders their develop- and accepted obligations. ment. From the standpoint of the European Union

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and Estonia, it is important that Russia accede to the WTO as quickly as possible, but only if it does not negotiate any exemptions or otherwise waste time but fulfi ls all the established requirements and accepted obligations. However, it seems that today Russia lacks the will to do so. It is also in the interests of the European Union and Estonia to have other trading partners, including Kazakhstan and Belarus, accede to the WTO.

Unlike the WTO, the European Union is ready for signifi cantly more liberal trade and is also a spokesperson for free and open trade in the WTO. The European Union shares the position that trade policy must build upon the premise that Europe’s economic prosperity is inextricably linked to that of other regions of the world. And the answer to growing global competition is not to protect the European Union from fair competi- tion, but to adopt an increasingly active policy of openness at home and abroad. Thus, although the united position is that the EU must play a leading role in sharing best practice and developing high-quality global rules and standards, achieving mutual agreement on these rules is very diffi cult.

As in the case of many other European Union policies, the trade policies of various countries are often very different. There are countries that support free and open trade in principle and there are countries that try to actively protect their own market and thereby that of the European Union, and are actually inclined toward soft protectionism. It is not exceptional that the discussions in the Council of the EU’s Trade Policy Com- mittee (TPC, formerly the 133 Committee; the name changed when the Lisbon Treaty entered into force) may be long and emotional, since the best solutions are being sought. Estonia is among those countries in the European Union that support liberal and free trade. If we ask what goals Estonia has in regard to EU foreign trade policy, a brief answer can be given – in addition to promoting Estonian business interests, Estonia is interested in a European Union that functions well, including in the foreign trade context. This in turn means if things are going well for the European Union as a whole, they are also going well for the individual member states, including Estonia.

Hereafter, I will give some examples of recent lively discussions in the TPC and Esto- nia’s positions. The full members of the TPC have been discussing issues related to a Free (FTA) between the European Union and the Republic of Korea for over a year. In 2006 the EU adopted the Global Europe Initiative, which foresees the conclusion of new-generation FTAs. These new agreements are far-reaching, which means that along with traditional trade topics (quotas and customs duties), they include other fi elds of activity related to trade – services, government procurements, the protec- tion of intellectual property, etc. Based on the Global Europe Initiative, the European Union is conducting negotiations for the conclusion of bilateral free trade agreements with several countries and regions: India, Central America (Mercosur), the Andean Community, the Association of Southeast Asian Nations (ASEAN), and Ukraine.

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The greatest progress has been made with the EU – Korea FTA. Negotiations have been conducted for several years; the agreement is ambitious and ultimately benefi - cial to both parties. All the European Union member states are in agreement. How- ever, then the domestic interests and lobby groups of various countries come into play, primarily those of the auto industry. The auto industries in several European Union member states see Korea as a competitor and these member states were ready to block this agreement until the very last minute. Of course, one must understand the motives of representatives of various branches of industry – they are obligated to fi ght for and protect the interests of the companies they represent. Moreover, if one or another interest group is strong and infl uential in a particular European Union member state, this affects the behaviour of that country. During the last year, Estonia has considered an ambitious trade deal with Korea to be important and has sup- ported the quick conclusion of the free trade agreement, since the compromise that has been negotiated is favourable and benefi cial for the European Union as a whole, even though there may be differences in the protection of the interests of individual branches of industry.

Estonia has supported the Commission and the member states that consider the big picture – the Estonia has supported the economic interests of the European Union as a Commission and the member whole – to be more important than the interests of states that consider the big pic- any individual branch of industry. We have acted ture – the economic interests of in the name of an agreement that is balanced and the European Union as a whole in the interest of the European Union as a whole. – to be more important than Therefore, we feel it is a victory for the entire Euro- the interests of any individual pean Union that the agreement was initialled in branch of industry. October. Now we can only hope that the agree- ment will advance quickly through the legal pro- cedures and enter into force as soon as possible. In addition to economic interests, one cannot ignore the political importance of free trade agreements. The free trade agreement with Korea will be the fi rst comprehensive free trade agreement of its kind, and the only one that can realistically be concluded with the European Union at this time. It is also important that, although the European Union has close and mutually benefi cial partnership and economic relations with the U.S., including an active trade agenda, the European Union and the U.S. are at the same time competitors, and the U.S. and Korea are also conducting negotiations for concluding a free trade agree- ment. Who signs an agreement fi rst, and thereby achieves an economic as well as political victory, is also quite important. Of course, the details of any agreement must always be evaluated and weighed, but one must not ignore the big picture. The interests of one’s country must always be protected, but one must also see the European Union as a whole and be willing to make compromises on its behalf. This is what I mean when

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I say that Estonia supports a European attitude and behaves in a more European way than many other member states.

Although the European Union is already conducting several free trade negotiations (in addition to the aforementioned countries, negotiations are being conducted with the Persian Gulf states, Libya, and Canada), the TPC has started discussions about if, and with whom, the European Union could start the next free trade negotiations. It is clear that it is not practical to simultaneously conduct negotiations with too many partners, but waiting for the conclusion of current negotiations before starting new ones is also not the best solution. In practice, negotiations with different partners progress at different tempos, depending on the interests of the country and their readiness for compromise. Practical experience also shows that negotiations tend to progress slowly rather than quickly. At the same time, one must take into account that, in addition to direct economic interests, the European Union may have supple- mentary and broader interests in concluding FTAs. All this needs to be considered most carefully when deciding to start negotiations with new partners.

Estonia supports the position that the European Union should start negotiations for concluding Deep and Comprehensive Free Trade Agreements with those Eastern Part- nership countries that wish to do so and who are politically ready and have the necessary administrative capacities. The countries to be mentioned in this context are Georgia and . One can agree with the assertion that the markets of these countries are small, their economies are open anyway, and they are not economically interesting for the European Union, etc., etc. Fundamentally, it is hard to argue with these facts, although these agreements – specifi cally Deep and Comprehensive FTAs – have a broader objective. These agreements help countries reform their economies, reinforce their market economies, adopt European standards, and establish intellectual property and competition policies and phytosanitary regulations, hile also assisting in other fi elds of activity. As such, free trade agreements possess a signifi cantly wider meaning and are more important than just providing direct economic benefi ts.

Estonia also supports the start of free trade negoti- ations with the ASEAN countries, primarily Singa- Estonia also supports the start pore, who has expressed its interest and readiness. of free trade negotiations with Again, one must agree that Singapore’s economy the ASEAN countries, primarily is small and open, and therefore the conclusion of Singapore, who has expressed an FTA is not important to the European Union. Esto- its interest and readiness. nia’s trade with Singapore is practically non-existent. However, this agreement would have broader im- portance. Singapore would be the fi rst ASEAN country with whom the EU would start negotiations. Singapore would be a gateway region for the EU, and hopefully the other

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countries in the region – Thailand, Vietnam, Malaysia, etc – would follow. However, in order to achieve this, an ambitious, intelligent, balanced and sophisticated 21st century FTA must be signed, not just an ordinary FTA.

These are some examples of Estonia’s trade policy positions in the WTO and Euro- pean Union. Many other examples can be provided. In all cases, it can be said that in matters related to trade policy, Estonia is guided by the principles of liberalism and openness. One could assert that in the case of a country like Estonia, an open economy is the only possible economic model for success. Apparently, this is true. At least this is what current practice proves. At the same time, in the case of Estonia this also means a fundamental political commitment, i.e. the purposeful functioning of the entire political system. What seems to be the only possible choice and correct path in 2009 may not have been so in 1991. We are used to the idea that Estonia has been successful for years, the wunderkind of successful economic reforms. Today, when the most optimistic economic forecasts predict a 12% decline in economic growth for Estonia in 2009, it will be interesting to see how Estonia overcomes the current economic crisis. This does not depend exclusively on our own efforts, but to a great extent on the actions of our trading partners and their rate of recovery.

Could a “demand” for protectionist measures also develop in Estonia – be it a preference for “made in Estonia” products or favouritism toward Estonian companies and workers? Hardly. It is not impossible that some protectionist proclamations may be heard, but they will not garner broad support. Estonia’s current economic model has been suf- fi ciently successful, and today the efforts of the public and private sectors are directed at overcoming the economic crisis as successfully as possible. As a popular saying goes – one should not waste a good economic crisis. It is increasingly recognised that there is no good or bad protectionism. There is only one – trade-restricting protec- tionism. And even if some protectionist measure seems to be benefi cial in the short term, these measures are not good in the mid- and long-term. There is consensus in society in this regard.

An assessment of sorts is also provided for Esto- nia’s economic model by the economic forecasts According to the OECD, the Es- of various international organisations, which com- tonian economy will stabilise in ment on whether and to what extent Estonia’s 2010 and it predicts 4% growth current economic model is sustainable. The OECD for our economy in 2011. Economic Survey indicates that the current eco- nomic situation is the most challenging since the early 1990s and makes several recommendations for bringing Estonia back onto a high sustainable growth path. According to the OECD, the Estonian economy will stabilise in 2010 and it predicts 4% growth for our economy in 2011. The Economic Survey was

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completed at a very interesting time – during the economic crisis – and it is even more valuable because it provides a very professional evaluation of the Estonian economy that is not infl uenced by domestic politics. The OECD overview does not provide an assessment of “right or wrong”, but makes recommendations based on economic analysis and the practical experience of other countries. As such, overviews provide food for thought and action for analysts, offi cials, and most important, politicians.

Several other organisations and agencies are also moderately optimistic about Estonia’s future. The IMF considers it possible that the recovery of economic growth in Estonia will start in the middle of 2010. The European Commission predicts 4.2% economic growth for Estonia in 2011, or the highest in the European Union. Moody’s rating agency considers Estonia’s actions for recovering from the economic crisis to be effective and believes the impact of the global economic crisis on Estonia will be short-lived.

Making any predictions, especially in economics, is not easy and often thankless. The next few years will demonstrate how accurate these predictions are. One can defi nitely say that Estonia will continue to be a spokesperson for free trade in the European Union, the WTO and elsewhere. Because this is in Estonia’s interests, it is in the interests of the European Union, and it is in the interests of global trade.

Yes, madam minister, Estonia will continue to be the watchdog of free trade.

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