In order to brighten its economic prospects and to strengthen its competitiveness, the EU depends on better trade opportunities. Despite this, the majority of policy action over the last five years has, in fact, served to limit those opportunities. The focus now needs to shift to enacting policies that increase our ability to trade globally, rather than further limiting the economic space for our companies to operate.
The EU is the world’s largest trading zone, and trade is immensely important to European economies. However, our share of global trade is falling. Is that a problem? No. The fact that 85 % of global growth is taking place outside of the EU is not a problem in itself; with the EU hosting only 5.5 % of the world population, this is only natural. Instead, it is our lack of connections – arguably even increasing detachment - to this 85 % growth taking place outside of our borders that is the real problem.
The lack of better trade opportunities manifests itself in two ways. First, it is a market access issue; we need improved access to these fast(er) growing markets in order to be able to sell our goods and services. This is not easy in a world where the WTO cannot provide new market access, where the US and China is engaged in an escalating trade conflict and where security concerns trump economic considerations. In addition, there are massive state aid schemes distorting competition. It also seems increasingly hard to progress on any bilateral track and to conclude Free Trade Agreements (FTAs).
The number of non-tariff barriers (NTBs) facing European firms has increased twentyfold since 2008. As for exports of services, there are now over 100 data localisation schemes in 40 export markets, which limit the business opportunities for European ICT-firms.
All these barriers act to restrict the potential for businesses in the EU to connect to growing markets, to scale up production and to finance R&D and specialise in areas where they have comparative advantages.
Second, there is an import problem. Imports are needed both for satisfying European consumer demand and to provide inputs for EU production (including for exports). The EU needs frictionless, secure and stable access to essential goods and services, not least for the green and digital transitions. To avoid being overly dependent on any single country, diversified sourcing requires open markets without unnecessary restrictions.
It is not simply the rising number of export restrictions in various countries - such as, for example, Indonesia banning exports of nickel - that are causing problems. In recent years, the EU itself has enacted a range of polices that will serve to restrict imports. For the most part, this is not traditional protectionism but rather a mixture of well-intentioned (and partially necessary) policies for advancing sustainability, increasing EU security, combatting unfair trade practices and regulating the digital economy. Despite the good intentions, the effect is that they still restrict imports. Furthermore, their effect in coming years will continue to grow, as most of these polices are relatively new or – in some cases have not yet even entered into force.
So, what realistically can be done by the incoming European Commission and European Parliament in order to strike a better balance between trade opportunities and other policy desirables? A new report from ECIPE, commissioned by the business coalition Europe Unlocked, has some interesting recommendations.[1]
The first priority should be to get the EU Mercosur agreement over the finish line and conclude the almost finished negotiations with Australia – these are the lowest hanging fruit. Considerably more complex, but definitely worth the effort, is to advance the talks with India once the new government in Delhi has been installed. There is also a renewed interest among the ASEAN countries in concluding FTAs with the EU. The EU should thus focus on Indonesia, Thailand and the Philippines, all of which are important markets. The EU should also seriously consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which would create better trade conditions with the vital Pacific region, where a large proportion of projected global growth is expected to take place in the coming years.
However, given the complex nature of FTAs, the EU also needs to focus on potentially striking ‘mini deals’ in parallel with these negotiations. A mini deal of substance may yield greater benefits than traditional shallow FTAs or those with small markets.
These deals may serve to address regulatory divergence with major trading partners, not least in the US, where a Mutual Recognition Agreement (MRA) on industrial goods should be a no-brainer. Such an agreement would provide impetus to transatlantic integration and could be done under the umbrella of the EU-US Trade and Technology Council (TTC).
Mini deals can also serve to secure supplies of raw materials and metals for the twin green and digital transitions. These deals should provide mutual benefits to the EU and the countries rich in these commodities, and serve to support elements such as development, recycling and R&D.
Furthermore, the EU should continue its work within the Ottawa Group to secure supply chains in the event that any new international emergency – such as the COVID-19 pandemic – should occur. This would act as an insurance policy against new trade restrictions, which may make any future emergency harder to address.
Last, in spite of all the talk of a “green lash”, it is unlikely (and on the whole, undesirable) to roll back the unilateral polices enacted during the last years under the auspices of the Green Deal. The same applies to other areas of recent EU legislation that affect trade; these new laws are here to stay. This means that the focus must shift to making these work in a way that is the least restrictive to trade, in order to minimise negative effects on the trade flows. An avenue worth exploring here would be to develop a framework - inspired by the digital regulatory sphere - for ‘adequacy decisions’ for non-EU firms to prove their compliance with EU regulations efficiently and transparently.
All of this will require political willingness, both in the EU and in partner countries throughout the world. Much of this is uncontroversial and should be within the realm of the possible. The main task for businesses might then be to ensure politicians are interested in these issues and to understand the importance of trade for strengthening our competitiveness and addressing our current challenges. It is time, immediately after the EU elections in June to get started on that task.
[1] Trading Up: An EU Trade Policy for Better Market Access and Resilient Sourcing | (ecipe.org)