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Perspectives: The EU’s new trade policy gives developing countries the short shrift

As the shape of global trade changes, so does the EU need to update its thinking about its trade relationships with developing countries.

There were low expectations ahead of last week’s summit between the EU and African Union, and they were not exceeded. Against the backdrop of the Russia-Ukraine crisis it was understandable that political attention was modest, but possibly that was useful to cover up the paucity of deliverables headed up by a relatively vague investment package.

Trade policy did not play a large role in the summit declaration, with just four mentions of the word ‘trade’. The most important of these came in the context of discussions around intellectual property and vaccines, the other three related to existing agreements, between the EU and Africa, and the African Continental Free Trade Area. There were also separate references to supporting the work of the World Trade Organization.

As so often with such summits, it was worth thinking about what was not included in the declaration. Clearly there was no sense of agreement on intellectual property waivers for COVID-19 vaccines, an issue which seems destined to never be resolved while the pandemic hopefully fades.

Equally there was no sense of review or change to any of the EU’s trading relationships as they apply to developing countries, beyond the general intention of working “gradually towards the progressive and mutually beneficial integration” of markets. Most notable of all, as the EU proceeds with various trade affecting initiatives under the ‘Green Deal’ or ‘Open Strategic Autonomy’ headings there was no sense of how these could adversely affect developing countries.

As is becoming increasingly evident across trade policy, the EU approach to developing countries is reflected also in the UK and US. The UK version is to put trade deals with agricultural exporters ahead of unilateral preferences, the US to continue seeing any imports as threatening domestic producers.

It seems like trade with developing countries is slipping in priority.

Economic Partnership Agreements agenda unfinished, still controversial

The centrepiece of EU developing country trade policy in recent years has been supplementing unilateral preferences with a network of Economic Partnership Agreements. Progress in negotiating these has been relatively slow in Africa, with problems in particular over the regional groupings of countries with different interests, such that East, West, and Central Africa agreements remain in different stages of incompleteness.

The EPAs have always been controversial in economic terms, for despite the presence of various allowances for liberalising developing country markets, it is often seen that their domestic industries could be harmed. Recent research suggests equally that rising exports from them is unlikely, though it is too early to tell on the overall impact.

It should be noted that the UK has followed a similar approach to the EU, notwithstanding some suggestion of positive changes to unilateral schemes in particular. Trade agreements with Australia and other major agricultural exporters could make matters worse in reducing the usefulness of developing country tariff elimination through trade diversion, for example in terms of sugar cane.

Whether in response to a view that more needs to be done for developing countries, or to China’s Belt-and-Road Initiative, there is a renewed emphasis on investment. An EU Investment Package was an outcome of the Africa summit, but it is unclear how this will operate or what impact it may have.

Regulatory barriers high and increasing for developing countries

While unilateral preferences and preferential trade deals have helped developing countries in terms of tariff reductions for their products, the challenge of regulatory barriers to their exports has been increasing. And this set to get much worse. The combination of increasingly stringent EU regulation for food and inadequate quality infrastructure in developing countries creates a significant barrier for growing exports.

It isn’t just stringent new government regulations that developing countries need to meet. The increasing prevalence of private certification schemes such as those for supermarkets adds to the barriers, deepening the advantage for larger potentially multinational businesses over the smaller and locally owned.

This situation is likely to get worse as the new wave of EU trade-related regulations creates further barriers which will hit smaller companies and developing countries hardest.

There have already been discussions about whether developing countries should be exempted from the EU’s carbon border adjustment mechanism, with the current consensus suggesting not.

Deforestation and due diligence regulations are likely to raise compliance costs, while a developing country exemption in the International Procurement Instrument might not prevent this also having an impact.

And increased use of state aid as part of current industrial policy initiatives will only add to the grievances. Developing countries already feel disadvantaged by agricultural subsidies that can be offered by richer countries.

Multilateral trading system more important for smaller countries

It is worth recalling that ‘special and differential treatment’ for developing countries is a core part of global trade rules in the WTO. These exemptions are being objected to by the US and others have to because they can be self-declared – and China does so.

This dispute is in danger of overshadowing a fundamental point, which is that developing countries are more likely to face difficulties in a system where large trade powers are able to set their own rules, as compared to a multilateral order. The decline of the WTO is likely to hit developing countries harder.

The progressive development of the Africa Continental Free Trade Area may help many developing economies through encouraging trade between them. But market access to the largest economies will still be crucial for Africa, not just for commodities but also in terms of supply chain participation. This is particularly the case given green transformation pressures ahead which will affect all countries.

All of which suggests that we need to recognise that existing frameworks for developing countries are not sufficient for modern trade and the evolving global rules.

Ideally adapting these rules for the benefit of developing would start at the WTO, but if this can’t happen, then the EU should be looking far more at the cumulative impact of all of its measures, and finding ways to lighten the burden of compliance.

 

 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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