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Slumbering EU FTA agenda gets small boost from Ukraine war

Much is in flux in the European Union’s geostrategic – hence also trade policy – positioning following the war in Ukraine. A lot will also depend on how China positions itself on this matter in the coming weeks and months. But diversification of trade relationships is now on top of minds in Brussels and business circles.

Whether the openly articulated disagreements revealed at the EU-China summit early April over Russia’s invasion of its neighbour will help stabilise a difficult political relationship marred by rising distrust, or assessed ex post as an exercise in signing off on a broken political relationship still remains to be seen.

Whatever happens, nothing will ever be the same again after the fateful 24 February 2022 when Russia marched into Ukraine.

China: What if?

The situation is so unsettling that European business groups are openly worrying that the brutal, almost total, shutdown of Western business with Russia witnessed in recent weeks – not exactly a small, meaningless market – might one day repeat itself with China if a big conflict bursts in the open, for example on the issue of Taiwan.

Such a scenario would have devastating consequences for the global economy – and for European business and its economy.

The war in Ukraine is also raising fears of an economic recession and exacerbating pre-existing pandemic-related supply chain disruptions and critical raw material shortages.

This means the political calculus in Brussels and European capitals on a range of trade policy files is shifting – and the one on the pursuit of bilateral free trade agreements is shifting most rapidly, as these are now seen as much-needed sources of export and import diversification.

The ongoing French presidency of the EU had initially sought to choke off any open discussion of bilateral FTAs. 

This posture was partly due to its state’s traditional scepticism of trade liberalisation. But is also due to a heated pre-electoral context back home, where a surge in far right and far left voting intentions ahead of presidential elections beginning this coming week-end shows how globalisation-sceptic the French electorate has become.

But four months into their presidency, even the French have been responsive to a growing number of calls from businesses, including domestic, and member states, to revive the hitherto dormant or slow-paced free trade agreement agenda.

On Monday, only days before the presidential election, the French EU presidency hosted a high-level market access conference in Paris, where it tried to explain to a French-speaking audience how EU trade policy and FTAs can help French exporters gain access to other markets.

On that day a range of business groups made it clear they wanted the EU’s FTA negotiation and ratification agenda put back on track.

This very week, the head of Sweden’s National Board of Trade Anders Ahnlid circulated a note calling for “the EU’s free trade agreement with Argentina, Brazil, Paraguay and Uruguay (Mercosur)” to “enter into force as soon as possible.”

“Negotiations for free trade agreements with Australia, New Zealand and Indonesia should be concluded, as should the modernization of EU agreements with Mexico and Chile,” the head of the Swedish think tank said.

Ahnlid called more broadly for greater trade cooperation with democratic countries. This echoes an emerging strand of thought in Brussels which sees trade with countries that are like-minded in their political outlook as ultimately a safer bet for EU business.

Trade committee chair Lange says four FTAs will come into force by 2024

“The global situation will lead to more focus on the bilateral agenda,” said the chair of the international trade committee Bernd Lange at a webinar hosted by BusinessEurope today.

The countries that have the biggest potential in helping the EU source raw materials for its planned decarbonisation agenda in a politically stable environment might get the biggest boost: Chile and Australia.

Bernd Lange said these two countries were good potential sources of green hydrogen imports. The German steel industry in particular would benefit from these imports as it bets on this hydrogen produced with renewable energies to help it meet its carbon emission reduction goals.

Lange also pointed to Chile’s role as top lithium producer – a key raw material used for electric car batteries.

Negotiations with Chile on an update of their existing FTA were technically concluded in November 2021. But there are expectations that the labour and environment chapter of the agreement will be reopened to fit the EU’s emerging new approach to these chapters in its FTAs.

Negotiations with Mexico on an updated agreement for their own FTA were finalised in 2020. The ratification process was held up by disagreements over Mexico’s energy policies and over the EU’s own inter-institutional wrangling over whether to split up the Association Agreement in which the trade deal is embedded to help get it ratified more easily.

Negotiations with New Zealand and Australia are ongoing. A twelfth  round of negotiations was held in mid March, and there are hopes the agreement could be sealed in the coming months.

With Australia – a bigger market and a more important source of critical imports than New Zealand– negotiations are tougher.

“I am convinced all four of these [agreements] will be concluded and ratified by the end of the [parliamentary] term,” said Lange. The term ends in May 2024.

Mercosur, Indonesia, India agreements remain elusive

Prospects for the ratification of the Mercosur agreement – which include the very large and dynamic market of Brazil – are still dim as planned negotiations towards a protocol on deforestation to make it more palatable to the European public are stuck in the Commission itself. The EU’s position appears to be that it will not conclude an agreement with the current president of Brazil and wait for a possible Ignacio Lula da Silva presidency next year to revive the discussions.

Negotiations towards an FTA with Indonesia are also ongoing. For the EU Indonesia would be a big prize, given the country’s large size and its role as major producer of raw materials. But the talks are advancing at a very slow pace.

EU business also wants to have a free trade accord with India: a market of 1.4 billion people and a country that is seen as a broadly like-minded democracy. Negotiations towards an FTA with New Delhi are in the process of being re-launched. But so far there are doubts any outcome can be achieved rapidly.

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