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EU free trade agreements and sustainability: a 2023 preview

The EU looks likely to conclude more trade deals in 2023 and finalise some critical legislative files in the lead-up to EU elections in 2024.

But global geopolitical tensions are unlikely to ease, and this will lead to potential tensions with other key players, notably the United States as well as major players in Asia.

Sweden, an EU bulwark of free trade, is chairing council meetings for the first half of the year.

“The Swedish presidency will work to ensure that the EU continues to build open, strong and sustainable trade links with the rest of the world, and that it enters into modern bilateral and regional free trade agreements,” says the presidency programme.

In July Stockholm will hand over the presidency baton to Spain.

Although Madrid is not traditionally as committed to open trade as its Scandinavian fellow EU member it is nonetheless keen to strengthen relations with Latin America in particular.

Russia’s invasion of Ukraine and China’s flexing of military muscle in the Taiwan Strait has focused minds in Brussels and EU capitals.

There now appears to be consensus across the bloc that the EU needs to diversify its trading relations and strengthen its relations with “likeminded” partners.

FTA prospects for 2023

In 2022 the European commission concluded negotiations with New Zealand on a new trade agreement and with Chile on an upgraded deal.

The trade element of both agreements is expected to be ratified by the current European Parliament and the council of member states before the EU elections in May 2024.

Talks with Australia are expected to conclude in 2023, some hope in the first half of this year.

In December the country’s trade minister said that he sees Australia as a “renewable superpower”, rich in critical minerals and rare earths which are critical to help Europe – and the rest of the world – achieve its environmental goals.

There is also an expectation that the European Commission will agree with Mexico on the structure for ratifying the upgraded EU Mexico bilateral agreement in the next twelve months.

There has been a proposal from the EU executive on the way forward which includes separating the trade part of the deal from the rest and placing it in an annex. Mexico is still analysing this proposal.

The election of Luiz Inácio Lula da Silva to the Brazilian presidency in October has rekindled hopes of moving forward with the trade agreement with the Mercosur region of South America, which also includes Argentina, Paraguay, and Uruguay.

Difficulties persist, however.

Lula could yet decide to reopen the agreement, whilst the commission needs to carefully pick its moment to present the so-called “additional instrument” on climate and deforestation which it wants to see attached the EU Mercosur trade deal originally concluded in 2019.

Meanwhile across the Río de la Plata, Argentine Prime minister Alberto Fernández said in December that the deal should be renegotiated as it poses a threat to the region’s car industry.

Free trade agreement and investment protection talks with India were relaunched in June but are unlikely to be concluded by the end-of-year deadline given the gaps between the two sides.

Similarly with Indonesia, negotiations are likely to continue into 2024 and are tainted by ongoing bilateral disputes at the WTO related to sustainability concerns around  EU palm oil policies and Indonesian export restrictions on nickel and other raw materials.

Other countries, notably the Philippines, are keen to relaunch talks with Brussels.

But there remains the fear in some third countries that the EU is setting the bar too high in asking for non-trade related commitments in its trade agreement.

The bloc’s new model ‘sustainable development’ chapter is viewed with trepidation in the eyes of many potential trade partners from Canberra to Jakarta, with countries now to be held liable for breaches of key international conventions.

Across the Atlantic, despite warm words stemming from the transatlantic Trade and Technology Council, EU-US relations continue to be characterised by firefighting.

Brussels views Washington’s Inflation Reduction Act as discriminatory, and the commission is not ruling out bringing a case to the WTO if the task force fails to make progress.  

2022 began with a major EU-Africa summit and ended with the conclusion of a sustainable investment facilitation agreement with Angola. More African countries could follow Luanda’s lead.

But the EU’s attempts to upgrade the economic partnership agreements with the group of small Eastern and Southern African countries is proving trickier, with money a constant sticking point.

The EU-China  agreement on investment known as CAI is also in a state of abeyance and is unlikely to move anywhere as long as the sanctions remain on individual europarliamentarians – and more generally in a difficult geopolitical context.

Enacting carbon border adjustment, deforestation – bringing forward corporate sustainability due diligence

From a legislative perspective 2023 should see the EU institutions enact new legislation agreed in recent months.

These include the world’s ever carbon adjustment scheme and a law preventing products which have caused deforestation from entering or circulating within the EU.

Pressure will also be on MEPs and member states to conclude legislation related to corporate sustainability due diligence and a new law banning products made with forced labour, draft legislation of which was tabled by the European Commission, but where member states and in particular the parliament have taken their time in making progress on.

Trilogue negotiations will also begin on the new version of the Generalised Scheme of Preferences which will start in 2024. The scheme will make trade preferences for poor countries conditional on their compliance with the Paris Agreement on climate change and expand labour and environmental obligations. Its current version also obliges countries to take back unwanted migrants from the EU.

The EU executive’s introduction of a number of unilateral measures in recent months has seemingly won the support of MEPs and member state capitals.

The view from outside the EU

But third countries are looking on with growing concern at what is happening in Brussels.

Last summer 14 developing countries complained to the EU institutions about the EU’s deforestation-free products legislation, saying that their concerns expressed earlier in the process have been given “scarce consideration”.

Many trade watchers in Brussels expect the carbon border measure to be the subject of a challenge at Geneva at some point. The fact that developing countries are not exempt from the EU scheme is a further source of irritation.

Combatting forced labour may be seen as an obvious action to take in Brussels. But further afield there are concerns that the EU either does not take into account local specificities and realties related to the employment market on the ground or chooses to ignore them.

The EU for its part believes it can encourage other countries to engage in a ‘race to the top’ when it comes to the environment and labour rights, given the attractiveness of its market.

Recent years have brought to light the EU’s vulnerabilities when it comes to security of supply of critical components or key commodities used to drive the green and digital transition.

2023 could therefore be the year that the EU’s trade partners finally begin to drive a harder bargain when it comes to trade relations with Europe.

How the EU responds to these demands will be determined by the extent to which it prioritises its principles over its practical needs.

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