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Perspectives: EU FTA agenda will clash with quest for Brussels effect

With the recent conclusion of negotiations with New Zealand one can say that the European Union’s free trade agreement agenda has come back to life. But there are new challenges ahead for Brussels’ trade policy, not least making FTAs fit alongside unilateral measures that seek to regulate global markets or secure its geo-strategic autonomy.

The extent of the change in the European Commission’s trade policy agenda since 2019 has been so great that doubts had begun to grow that even a free trade agreement with small, prosperous, environmentally conscious New Zealand would be possible.

While the EU FTA agenda never entirely disappeared under the von der Leyen commission, it appeared both de-prioritised and subject to higher political hurdles – possibly even ones designed to be impossible to overcome.

Given such doubts, one of the main feelings among FTA proponents that greeted the announcement of a deal between the EU and New Zealand was relief. Not only is there a new EU FTA, but one with a major agricultural exporter, with both sides seemingly happy with the outcome.

With the full text yet to be released at the time of writing, detailed evaluation of the content of the deal will take time. But judging from the initial summary, the FTA appears to offer very few evolutions compared to deals agreed under the previous commission. The most notable new development is the introduction of potential sanctions for breach of sustainable development provisions.

The EU-New Zealand FTA is very much in the traditional space of the EU gaining Geographical Indication protection and removal of industrial goods barriers in return for allowing some extra agricultural access to its market. That development will have been facilitated considerably by New Zealand’s progressive politics on sustainable development subjects, as well as their acceptance of the EU retaining various agricultural protections.

Given the agreement’s traditional nature, it isn’t really clear how this FTA aligns with the strategic and regulatory autonomy that has increasingly become the EU’s trade policy priority since 2019.

There is an increased emphasis on enforcement of commitments in general, but only as a very last resort in very specific circumstances in the New Zealand FTA. It is even less apparent how a subject like carbon border adjustment is handled with regard to FTA partners.

While celebrating the fact that the EU FTA agenda is alive and can hopefully move on from where it is now, there should be a recognition that there is now an inconsistency requiring further attention.

New optimism on EU FTA agenda

Having waited so long for a first FTA under this commission, there are hopes that others could follow much more quickly. Representatives of the incoming Czech Presidency of the Council of the European Union has been expressing hopes about Australia and the Mexico renegotiation in particular.

Australia’s recent change in government should mean that in can now agree with the EU on climate change content in the planned FTA ‘trade and sustainable development’ chapter. However, agriculture could still be a big problem for a country that starts off with less market access to the than New Zealand in key areas like lamb.

There has been talk that the stalled EU-Mercosur agreement could also be revived if Lula returns as Brazilian president in elections scheduled for October. If this were to happen, and the renegotiated Mexico and Chile agreements can be ratified, then that would present a very different picture on FTAs to that expected only a few months ago.

While that may be slightly optimistic, the change of mood is notable.

EU unilateral trade measures and cooperation with rest of the world

While the ‘openness’ part of EU’s recent trade policy has run slowly, the EU ‘autonomy’ agenda has been proceeding more quickly than expected – both trends being interrelated.

The most obviously far-reaching of these measures is surely the Carbon Border Adjustment Mechanism, which is intended to have a fundamental impact on trade in industrial goods.

As CBAM proceeds through EU institutions, there have been varied discussions about this may affect trading partners. These seem to have been most advanced in discussions about steel and aluminium production with the US, as part of the process easing of Trump-era tariffs. There have also been various discussions in other formats, such as shown by the recent G7 announcement of a ‘carbon club’.

There are rather more questions than answers at the moment about how international cooperation on carbon pricing might work – including for the EU’s FTA partners. It seems reasonable to presume that many negotiations will be required during and after the EU’s own internal discussions are concluded.

Other autonomy measures including banning products causing deforestation, corporate sustainability due diligence, foreign subsidies, and an anti-coercion instrument are also of interest to EU trading partners. Considerable thought will be needed to bring these together with FTAs both live and under discussion.

Future relations with FTA partners need managing

With many of its proposed autonomous legislations the EU is deploying its own regulations as a deliberate attempt to affect global policy in a number of areas – through what is often termed the ‘Brussels effect’.

There is a deep-rooted belief across the institutions in Brussels that this is the right thing to do in particular for climate change. But there is rather less recognition of the consequences in terms of relations with third countries.

EU partners will now reasonably expect discussions about market access barriers or the implementation of FTAs to incorporate operation of what is in-effect extra-territorial regulation. Preferential trade partners will expect to have some say in how their exports are affected.

Any initial thought that third countries will just have to fall in line with the EU approach feels is both arrogant and risky in terms both of tackling the issues of concern and for the future of a trading system on which EU companies rely.

Tackling global problems such as climate change should be about global cooperation rather than unilateral action, and the latter could easily lead to more messy fragmentation of the trading system.

Free trade agreements were an answer to the question of going further on market access with favoured third countries. For the moment, they are not the EU’s answer for new challenges such as climate change.

This is an inconsistency which is going to cause trouble unless it is addressed.

 

 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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