The Challenges Facing EU Trade and Investment Policy

Discussion Paper for the Conference the European Parliament in External Trade and Investment Policy: five years after Lisbon

Brussels 22nd-23rd September 2014

Steve Woolcock London School of Economics

Introduction

The purpose of this paper is to provide discussion points for the final session of the conference on the broader challenges facing EU trade and investment policy. This is intended to augment the more specific discussion of the Transatlantic Trade and Investment Partnership, which is clearly relevant to the current debate. These are outward looking rather than inward looking at the EU policy process, although as will be suggested below a broad domestic consensus on the balance of aims and expectations of EU policy is a condition of effective policy projection. In each case I have suggested what the challenges are and then tried to go a little further by indicating how these challenges might be addressed.

Working to establish a ‘domestic’ EU consensus Perhaps one of the greatest challenges facing EU policy makers is to establish a solid domestic consensus on the (balance) of EU policy aims. Balance because EU trade and investment policy inevitably entails a number of potentially conflicting policy priorities.

In some respects the EU benefits from the existence of an established acquis that embodies such a consensus. Thus trade and investment policies that are compatible with the acquis could be said to be based on a ‘domestic’ consensus. The EU acquis constitutes a ‘model’ in the sense that market forces are free to operate within an agreed regulatory framework designed to ensure competition and serve legitimate social and environmental policy objectives. But the acquis cannot remain static and there remain areas not covered by the existing acquis. It also has to be recognised that all trade policy entails adjustment of domestic policies. So the need to retain a consensus on trade and investment policy remains.

For some time it has been argued that a consensus reached within the policy community of senior Commission and Member State trade officials is no longer adequate. But trade policy makers must work to establish support for EU trade and investment policy. This is a challenge for the Member States as well as for EU level policy makers. The implication here is that there is a need to be

1 | P a g e proactive in seeking such a consensus based on an informed debate on the costs and benefits of EU trade and investment policy. The basis for such a consensus would have to be an understanding on the desired balance between a range of policy objectives (reciprocal market access, defence and promotion of EU norms in terms of regulatory policy, sustainability, development and foreign policy objectives) as well as an understanding on expectations. Trade and investment policy is important but cannot be used to resolve mainly problems and in some cases it may be necessary to ensure that it does not exaggerate problems.

Defining coherent, balanced EU policy objectives

All trade and investment policy needs to find a balance between competing policy aims and this is no different for the EU. The EU needs to articulate a policy that balances the following aims.

…market access for economic growth and jobs. EU economic prosperity requires that the EU engages with other economies and markets and especially the large and growing markets. While trade policy has been shaped by reciprocal market opening and is likely to continue to be so shaped, the EU must decide how to define ‘reciprocity’. This can be either along the lines of the liberal, GATT/WTO usage of ‘global reciprocity’ in which there is a broad balance of benefits across the parties to any negotiation. Or a more mercantilist, narrower definition. Recent EU policy positions have favoured negotiating with emerging markets and now large strategic partners.

….trade governance. EU trade and investment policy must seek to ensure that the EU acquis remains compatible with its international commitments. The EU also has an interest in ensuring that EU norms find maximum application in international agreements. This reduces costs for EU exporters of goods and services and helps ensure that EU domestic preferences as expressed in the acquis are not undermined.

…an open, inclusive but differentiated international trading system. See discussion below. While the EU may wish to promote its norms in terms of trade governance this cannot mean that it expects all its trading partners, no matter what level of development, to adopt the EU ‘model’. At the same time trade policy should be based on objective, consistent criteria that differentiate between trading partners.

…coherence between trade and investment policy and other policy objectives whether in the field of development, environment or foreign policy. This aim has been reaffirmed in the Lisbon Treaty.

2 | P a g e …. effectiveness/efficiency and accountability in decision making. This concerns how the various actors in EU policy making interact. In the past this took for the form of close cooperation between the Commission and the Member States in the Trade Policy Committee. Accountability then flowed through the formal channel of Member State representation. With the Lisbon treaty and the greater role of the European Parliament the EP also now needs to be integrated into the regime.

Ensuring the sustainability of an open and inclusive international trading system

The relative demise of ‘multilateralism’ in the shape of progress in extending WTO disciplines and commitments and the growth of various forms of preferential agreements is well known. Whilst recognising the reality that trade and investment policy is (and always has been) multi-level (i.e. multilateral, plurilateral, regional and bilateral) a key challenge for the EU is to ensure that an open trading system remains sustainable. Whilst few see the WTO under threat in the short term as a body of trade rules and disciplines and as a forum for resolving disputes this will be threatened if there is no progress on a number of fronts. These include:

.. ensuring that the trading system remains inclusive. While the use of the single undertaking and shifts in market power within the trading system have been seen as the causes of difficulties reaching agreements in multilateral trade negotiations. An underlying cause has been the lack of agreement on how to differentiate between countries in terms of their level of development. In other words the emerging markets should move to assume greater commitments and responsibility for the trading system, but smaller or least developed economies still need special treatment. This rather than the single undertaking has been a major impediment in trade negotiations.

….addressing the issues of the Doha Development Agenda. The shift to negotiate smaller packages, such as the Bali package, does not remove the need to address the core issues in the DDA, namely agriculture, industrial tariffs and services. At some point these will need to be addressed, even if this is not in the current form of a multilateral trade round. The issues in agriculture in particular cannot be dealt with through preferential agreements.

… integrating preferential agreements into an open trading system. Many of the PTAs negotiated and concluded to date are broadly in line with the norms established under previous multilateral negotiations. They tend to extend coverage, whether in terms of tariff liberalisation, service (and investment) commitments and in some aspects intellectual property rights. But there remains some scope for trade diversion and there is a danger that the continued use of PTAs rather than more inclusive approaches to trade will result in a divergence between the PTAs themselves and the PTAs from any agreed set of WTO norms.

3 | P a g e Integrating PTAs into a broad trading system therefore remains a challenge. This will not be easy of course as past efforts have failed, but an approach based on enhancing the existing transparency procedures for PTAs and building on these to develop best practice or a code of conduct for PTAs would begin to provide a set of multilateral norms. Such an approach is in line with past practice in trade in which transparency provides the basis for developing a consensus on norms which then provide the basis for more binding obligations. At the very least work on PTAs would help to ensure that the proliferation of PTAs does not take place against a complete vacuum in the field of international norms.

….addressing the challenge of plurilateral agreements. Plurilateralism has been a feature of the GATT system in particular, with policies developed among a group of likeminded countries providing the basis for future multilateral agreement. But plurilateralism runs the risk of being the end rather than the means and undermining an open, inclusive international trading system. The challenge is to shape plurilateral agreements in such as fashion as they serve this broader aim. For example, through the inclusion of MFN or MFN once a critical mass of countries/trade has been achieved. ‘Mega-regional’ agreements also risk further undermining the credibility WTO principles if they are adopted under Art XXIV of the GATT. The mega regional could be seen as de facto plurilateral agreements, which should be subject to the rules of the WTO under Annex VI (consensus on their adoption).

…addressing new issues. Ensuring the sustainability of an open, inclusive trading system means ensuring that it remains relevant. The fact that the last major multilateral agreements were concluded in the early 1990s, nearly a quarter of a century ago means that there is a need to update the debate. But the addition of new issues in trade has been systematically opposed by developing countries. This opposition is in part because the developing countries fear that discussion of a topic (such as trade and climate change, or investment) will lead ultimately to them coming under pressure to accept commitments. Here the need to differentiate between countries according to their level of development is important, but new issues might be discussed in the context of the WTO with the explicit understanding that such discussions do not constitute pre- negotiations. The premise here is that the WTO remains the only viable inclusive forum for discussing new issues.

Policy on PTAs In 2006 and 2010 the EU adopted broad policy objectives with regard to PTAs. These were then pursued with mixed success to date (agreement with Korea, Central America, Columbia Peru, now Ecuador, Singapore and Canada) but not with India or Mercosur. The question is whether there is

4 | P a g e a need to reformulate EU PTA policies in light of the shift towards more mega regional agreements. A challenge for the EU will be to balance the pressure to conclude preferential agreements to match ‘competitive liberalisation’ with a coherent approach to preferential agreements that meets other aims of EU policy, such as ‘differentiation’ to match the development needs of its trading partners and ‘trade governance’ objectives as mentioned above. If one considers the preferential agreements concluded by the EU since the mid 2000s, the desire to compete with other major traders (such as the United States) has been an important factor shaping the EU’s partners in PTAs and the scope of agreements.

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