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

ARTICLES - 19 February 2021

By François Godement

The Commission’s long-awaited trade policy review is out. This is in a context where the proposed EU-China investment agreement has stirred controversy, and when we do not know the Biden administration’s future trade policy beyond campaign statements and a simultaneous pledge to "multilateralism" and to a foreign policy "for the middle class" in America. One can sense some of the writer’s embarrassment: "forced labor" occurs four times in the text, while "child labor" which is seven times more frequent, only gets two mentions: Xinjiang has left its mark. The document expects cooperation on WTO reform from the new administration, and makes the important remark that US-China trade relations are "currently largely managed outside WTO disciplines". As of now, the Biden team has abrogated neither the Phase One Trade deal with China, nor the trade measures taken by its predecessors regarding that country. Perhaps unavoidably, some of the review’s points are therefore conjunctural, and could evolve as the holding pattern of US trade policies ends.

The Chinese challenge and the risks to the global economic order

Nonetheless, some aspects stand out. First, China is everywhere in the document as a challenge and a challenger - to existing trade rules and institutions, to the international economic order, whether it is named or not. Yet simultaneously, China is cited as "a dialogue partner" in order "to develop alliances in support of effective institutions". One gets the impression that this is out of a feeling of inevitability rather than by preferred choice. Only India, Africa and the members of the Canadian-inspired "Ottawa Group" rate the same mention.

The overall diagnosis is indeed somber: "the existing international economic governance framework is being undermined"; "A key driver of the crisis is that China’s accession to the WTO has not led to its transformation into a market economy". WTO, in fact, "is an organization that seems to have lost its sense of purpose". At the same time, the review recalls the EU’s diminishing share of global GDP and trade in the coming decade. The review also notes that the rise of global value chains has "left some individuals and communities behind" - leading to "calls for de-globalisation". None of this is really news; yet, these mentions testify to a politically realist awareness. As we shall see, this realism also permeates some of the outcomes that the Commission recommends - or simply predicts.

The document expects cooperation on WTO reform from the new administration, and makes the important remark that US-China trade relations are "currently largely managed outside WTO disciplines".

For it is of course on solutions that the report has been awaited. The Commission’s bilateral trade and/or investment agreements are both numerous and increasingly ambitious in their scope - a "new generation" includes commitments on sustainable development such as CSR, climate mitigation and labour issues. This has not come without its problems.

First, out of 77 agreements listed by the Commission as in force, 44 are only "provisionally" implemented, usually because procedural steps have not been completed - sometimes for many years.

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".

On the second category of issues, the review adds goals rather than subtract some of them. "Reciprocity" is perhaps the only recent mantra that has disappeared from the text, which instead encourages small steps and sectoral agreements to reach larger goals in due course. There is a good reason for that: the review does not suggest in any way that China’s "state-capitalist" system is likely to change, and it therefore recommends that the EU address only its "negative spillovers". Concretely, this means prioritizing defensive measures, and perhaps market access requests, over structural changes to the Chinese economy which are out of reach. The text stands pat on the lofty objectives of the "new generation" trade agreements - from climate to labor or gender issues. Yet a stronger accent here is on the search for policies to ensure enforcement of signed agreements.

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.

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.

The review is most outspoken around WTO issues - which deserve a special Annex -, cooperation with the United States citing "convergence" regarding WTO reform, and the requests implicitly or explicitly made to China. Sometimes in conjunction with Japan, but most often alone, the US is singled out as the key partner to coordinate with and achieve results - whether on the environment or on WTO reform. Apart from enforcing existing export controls, however, the report is remarkably silent on technology transfer issues. This is perhaps a wise decision, since the actual policy of the Biden administration is simply not known at this point, and the issue of decoupling is both vague and sensitive.

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.

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

By François Godement

The Chinese challenge and the risks to the global economic order

A priority for defensive measures

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

Renouncing no goals, but setting realist priorities and tools

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