Industrial policy and raw materials, Latest news, Perspectives

Post-pandemic EU trade policy: an integrated agenda emerges

The European Commission’s Thierry Breton, key driving force behind the EU’s industrial policy, with STMicroelectronics’ Jean-Marc Chéry. 21 July 2021. Credit: EC.

July is the traditional time to take stock of EU trade policy, August usually being a more reliable and lengthy pause than the end of the year.

The European Commission’s initially rather low-key trade agenda in the first semester of 2021 has become far more interesting and fast-moving. This is likely to continue, particularly coupled with similar changes in the United States.  Here’s why.

Awkward (with) neighbours

Notwithstanding continued difficulties over implementing the Northern Ireland protocol, EU trade has moved on swiftly from Brexit.

The United Kingdom found a new home, joining Turkey and Switzerland in the EU’s ‘awkward neighbours’ club. The relationship with the Helvetic nation in particular fell to a low ebb as talks over a new partnership treaty broke down.

Perhaps as a precedent to recognise, the Northern Ireland Protocol was involved with the two most significant developments of this year so far in EU trade policy. Both happened in January, shaping the following months. First came the inauguration of President Biden, whose dedication to renewing international alliances would see a remarkably swift renaissance in EU-US relations, including support at the G7 summit over Brexit.

Days later the EU’s threat to override the protocol in controlling COVID-19 vaccine exports were the first step on the road to a significant economic policy shift, towards far greater policy intervention. The EU’s swift reversal on the Northern Ireland element contained but did not prevent relationship damage – but seen from Brussels this has been a second-order concern.

A new industrial strategy

The COVID-19 outbreak triggered an immediate discussion of its implications for global trade. The initial view that a backlash against globalised production was inevitable soon dissipated as supply chains held and research cooperation flourished. However the shortage of promised vaccine supplies in the first quarter of this year, particularly from Astra Zeneca, seems to have tilted the balance in favour of a quest for greater government intervention in supply chains, or at the very least providing support to ensure ‘autonomy’.

It is instructive to compare the EU’s industrial strategy from March 2020 with this year’s update. While the first saw “localisation as an opportunity to bring more manufacturing back” it is also clearly stated that “being competitive requires competition – both at home and in the world”.

After the shock of having to contemplate an insufficient supply of vaccines there was a different emphasis: to reduce ‘strategic dependencies’.

The renewed industrial strategy comes across as more integrated with the Green Deal, with last week’s carbon border adjustment announcement further demonstrating the new interventionism at work.

This is a European Commission which now believes it has the impetus to strengthen the EU economy by direct intervention and indirect extra-territorial regulation, such as carbon border adjustments and supply chain ‘due diligence’ obligations.

In this vision trade policy is subordinate to economic transformation. Yet not far below the surface lies an unresolved argument between French-led interventionism, and what remains of the EU’s more liberal approach. Such a tension is likely to endure particularly as vaccine shortages are in the past.

Robust recovery of EU-US relations

The EU’s confidence in a shift towards interventionist industrial and trade policy has probably been bolstered by the similar approach pursued by the Biden administration. Since his inauguration the constant message from the US government is that domestic production is the priority, with a particular target of what is seen as China’s unfair manipulation of trade rules.

Given that target, the stage might have been set for a difficult relationship with an EU given the signing of the investment agreement late in 2020. Yet the return of old-fashioned transatlantic diplomacy and joint working overcame this – helped to a large degree by China sanctions on EU diplomats, politicians and academics.

The result in a few months has been the suspension of Airbus & Boeing tariffs, a global tax agreement, and the establishment of an EU US Trade and Technology Council.

These substantive achievements are probably the peak of EU trade in 2021 to date, even if none are definitive, and others issues remain difficult.

More worrying however has been the failure to make any progress at the WTO beyond the US clearing the way for the appointment of a new DG.

Enforcement becomes a core EU trade activity

With the expiry of Trade Promotion Authority the US has no serious Free Trade Agreement programme.

Meanwhile for the EU several trade agreement negotiations remain on the agenda, including with Australia and New Zealand. There are renewed efforts to conclude an agreement with India.

Yet concluding such FTAs no longer seems so central in the EU’s priorities as has previously been the case. To fit in with the new economic approach, such deals will have to pass a high bar with reference to what the EU considers ‘fair competition’.

This is in line with the rising importance of trade policy enforcement for this commission.

In January the outcome of the legal dispute with South Korea over its implementation of labour right commitments in the EU Korea FTA of 2010 was a boost for Brussels’ agenda.

It is likely that there will be a continued enforcement emphasis as part of everyday DG Trade activities. Implementation is now as important as launching new initiatives.

There might be slow progress in the adoption and use of specific ‘defensive’ trade policy instruments such as a proposed ‘anti-coercion’  tool or a new regulation seeking to foster ‘reciprocity’ in international procurement markets.

Such an agenda, focused more implementing than liberalising, in turn seems consistent with the wider EU economic plan as it evolves.

Given the large number of related legislative files the exact policy mix of the second half of 2021 is still uncertain. However there is no doubt that this year has brought a much clearer sense of direction for EU trade policy:  more ‘autonomy’, less ‘openness’.

The question is then whether this can be maintained given likely pressure from those who would rather want the opposite.

We can expect significant debate after the summer.

 

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David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

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