The Commission’s Trade Policy Review - Between Idealism And Realism

In addition to the 77 agreements, another 24, to which the December 30 agreement with China should be added, are awaiting some form of ratification - often by EU member states. Yet another 4 are under negotiation. Negotiations have also been suspended with another 24, among which India. Investor to state disputes and their arbitration have generated a large opposition to the ratification of the trade agreement with Canada, following which the EU has moved to promoting an investment court of justice system: this has not gone well with many other parties. Thus, recent agreements tend to have a missing investment chapter (that is the case for the Economic Partnership with Japan, and now with China). In fact, there is a trend to separate some issues that require ratification by member states in order to achieve results on other issues: this is so with Japan, where a Strategic Partnership Agreement involving many economic issues awaits these ratifications. 

And second, in the meantime, the emphasis in European external economic policies has switched to trade defense, economic resilience and industrial policies, to a "strong" and "geopolitical" Europe that "protects" its population, and recognizes that the world has become more multipolar. 

A priority for defensive measures

One might have expected that the trade policy review would address these difficult issues squarely. It hardly does so for the first category of issues: the investment court system is only mentioned in passing, and one might reason that questioning the dual European ratification process is above the pay grade of this report. What realism cannot be applied to Europe itself on ratification is hinted, however, when the solutions to the WTO crisis (or crises) are listed: although the review hails multilateralism, it also endorses "plurilateral agreements", and recommends that the WTO make use of a forgotten article of GATT to include them in the WTO framework. It squarely warns that "if no effective formula is found to integrate plurilateral agreements in the WTO, there would be no other option than developing such rules outside the WTO framework". 

In fact, the review openly deplores that in WTO processes, "topics such as environmental degradation, climate change or decent work are considered taboo". One could hardly state more openly that currently, these objectives are only enforceable via persuasion or political negotiation. Beyond recommending the creation of a Chief Trade Enforcement Officer (CTEO), other proposals involve largely unilateral defense measures. Currently under active consideration is an "instrument to deter and counteract coercive actions by third countries". The review lists investment screening: the Commission will "consider enhancing the cooperation mechanism" and calls for member states to create their national process. The same plea is made for the Council "to finalise its work as a matter of urgency" on the International Procurement Instrument (IPI): that is indirectly a call for Germany to stop blocking its adoption; several other member states are not keen to see more openness for their own public procurement. The Commission proposal for an anti-subsidy instrument aimed at third parties and their state actors is also mentioned. This is part of the new realism, of course. But the review maintains a key feature that distinguishes the EU from the US: it is the need for "proportionality" in sanctions and remedies, something which is often said to result in less convincing tools for remedial action. In the drive towards a green and digital economy, it even considers exempting these sectors from anti-subsidy requirements: that would literally risk giving a free pass to China’s solar panel, wind turbines, battery, hydrogen developments and dooming European competitors, who will never achieve the same level of support. Contradictorily, export credits are considered by the review to help European industry. This is another realist aspect - but one that could be challenged at WTO.

The defensive proposals extend to enforcing commitments to a sustainable economy in two areas : on climate change, the review puts forward the Carbon Border Adjustment tax as a necessary tool. And it innovates by proposing to impose due diligence on enterprises regarding issues such as forced labor. This remains "subject to impact assessment" - e.g. one presumes, for example, to the cost of doing without cotton and tomatoes from Xinjiang, or cutting back on FDI in the region. But this is indeed the only realist way to deal with the issue, particularly with China, and it is a laudable development if it is followed through.

Openness, coordination with the US and alliances with the like-minded

But apart from the proposal regarding forced labor, the other proposals were already in the pipeline. The review confirms their continued endorsement by the Commission. On the shift to resilience, strategic autonomy in the industrial and technological area, the review is much more guarded. Predictably, it endorses "open strategic autonomy", and in fact spells out the "openness and engagement" more than the autonomy. Again, a key development is conjunctural - it concerns the fall-out from the Covid pandemic, and therefore the issue of vaccines, where the review is more forthright about the need for resilience and diversifying value chains. Leaving this and the pharmaceutical sector aside, the ideas broached remain very abstract. In fact, most of the job regarding resiliency and value chains is left to the "private sector" that has a "central role" to play. One senses here a reluctance towards industrial policy, in spite of its formal adoption by the Commission. 

Regarding China, the review drily notes that some of the world’s largest trading economies keep claiming derogatory status under WTO rules: obviously, that applies first to China. Arguing from GDP per capita and actual share of world trade, the review does not ask China to give up its developing economy status (something that simply cannot be forced under existing WTO conditions), but to renounce the exemptions that this status allows. Implicitly, other emerging economies, as they cross these thresholds, would also be required to move in this direction - but in the near future, this is about China and China only. Here, one might add, the requests for structural changes to the Chinese economy will inevitably reappear.

Renouncing no goals, but setting realist priorities and tools 

To sum up immediate impressions: as is often the case with Commission documents, there are too many simultaneous goals. Happily, these goals are listed in a certain order, which places the reform of WTO at the top of the Commission’s new trade agenda. In terms of ways and means, priorities do stand out: coordinating with the United States, challenging the challenger that is China, and also putting the emphasis for future trade deals with Europe’s neighborhood, including a large accent on Africa, are notable. The absence of almost any mention of Asia, the world’s fastest growing region, and the total lack of mention of ASEAN are surprising. Yet RCEP, a low cost trade agreement that clearly aims to target more exports to third countries, is a problem to the European economy, while the better quality CPTPP or TPP-11 opens again the issue of American - or even Chinese - participation. Instead, India stands out: indeed, reaching more agreement and integration with India is a strategic goal.

The Chinese challenge comes out almost on every page. The offensive goals towards China seem more limited than previously. Rather than reciprocity, the review stresses verifying commitments including for the "work towards ratification" of the EU-China CAI. Other defensive measures aim to limit the "negative spillovers" from China's "state-capitalism". Gaining market access remains as an offensive goal.  An overriding positive ambition reappears on WTO reform - which China must go along with. Or, between the lines, the EU could also move "plurilaterally". Or even, should reform be blocked, the EU might acknowledge that WTO is sidelined. 

The 2021 Trade Policy Review comes out as a careful and guarded document, but it includes a push for realist and defense-based instruments alongside with "openness and engagement". In a way, this is a welcome change from political hype. The review, by contrast, is more about the toolbox, and about coordination and consultation to achieve policy goals. Let us hope that more tools are found, and that they prove effective.

Copyright : Francisco Seco / POOL / AFP