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Perspectives: The challenges of using the expanded EU trade toolbox

The EU’s new economic security strategy mentions 18 unilateral legislative tools and toolkits it can deploy to meet its essential interests. Many among those tools are new. Working out how they are best used will be a major task for the next Commission.

Some years ago, under the previous European Commission, senior officials at DG Trade berated member state representatives at working group meetings for failing to them the tools they needed to obtain the best result for EU interests.

The main issue back then was the failure to make progress the International Procurement Instrument – which was long held up due to disagreements in Council.

Times have most definitely changed.

The EU’s new economic security strategy  discusses the bloc’s relationships with a range of countries, seeing them either as partners or as countries against which one needs to defend oneself. The tools discussed to achieve those goals were all available. By contrast, there were few new elements to the strategy.

Free trade agreements, ‘digital partnerships’, ‘green’ alliances and partnerships, ‘trade and technology councils’, ‘raw materials partnerships’ and the Raw Materials Club are all mentioned as partnership options. Only the first of these was well known before 2019.

Four years on, as well as the aforementioned procurement instrument, potential protection against perceived forms of unfair competition now comes from new regulations on anti-coercion, inward investment screening, imports of products from deforested land, sustainability corporate due diligence, carbon border adjustment, foreign subsidies and trade rights enforcement.

Then there is a new industrial strategy and the Green Deal which act as frameworks for a range of new ‘competitiveness’ measures, leading to, among others, the EU Chips Act and Critical Raw Materials Act.

All this clearly constitutes a transformation in the options the EU now has for managing its external trade relations.

This leads to a fresh challenge, however. There is an expectation that these tools can and will be used effectively to resolve diverse policy issues, including economic security.

As yet there has been too little discussion about how this might come about. The key challenges are: defining objectives for which the tools can deliver, ensuring institutional agreement, and managing the reactions of third countries.

Defining the objectives for which EU trade tools can be deployed

Modern trade policy has multiple objectives. Growth and competitiveness are important, but it is also expected to deliver manufacturing jobs, contribute to tackling climate change, prevent dependencies, and much more besides that.

To simplify slightly, we could argue that ten years ago EU trade policy mainly used of one major tool, free trade agreements, to deliver one single aim, economic growth.

Now there are many options to deliver many different aims. This is of a much more complex order.

Most obviously, some objectives will conflict with each other.

For example, tackling the climate emergency requires working with China, but economic security apparently requires ‘de-risking’ from China.

A prosperous Europe would lower the costs to competition, yet many of the climate and economic security measures raise barriers to doing business in Europe.

There are many more such policy conundrums. The risk is that use of different tools will see them working against each other.

Working across EU institutions

One of the traditional strengths of the EU in trade policy has been its unity. The commission leads, but works closely with member states and European Parliament to ensure that third countries can’t successfully seek to divide the bloc.

This feature of policymaking in Brussels has come under pressure. Competence for trade agreements has become increasingly fraught. This means the commission is seeking to avoid resorting to ‘mixed’ international trade agreements requiring member state ratification.

Maintaining institutional unity given the broad set of policy objectives and of tools to meet them will be a tough challenge going forward.

One of the main issues that is already under discussion is the role of member states versus the commission in their implementation. Meanwhile the parliament has been constantly seeking to leverage those tools to defend EU industry, arguably pushing matters to the point of outright protectionism.

Navigating the new complexity of trade policy and of the different tools available is not just an EU problem. Similar frustrations can be seen in the US in balancing traditional market access, industrial strategy such as the Inflation Reduction Act, and international dialogue such as the Indo Pacific Economic Framework for prosperity.

There will need to be a degree of experimentation. So much has happened so quickly that inevitably all the answers are not available.

That is not unheard of in discussions between institutions, but it may well lead to frustrating situations where the tools are not being used due to internal disagreement.

Working with other countries

Internal considerations for using the new trade policy tools are complex enough. Considering that this process must be carried out while engaging third countries affected by the measures adds to the difficulty.

An example of this has been illustrated this week at the summit between the EU and Latin American and Caribbean leaders. The political linkage between the Mercosur FTA and deforestation concerns is already well known.

The EU’s approach to concluding the Mercosur process by seeking an agreement on an additional instrument attached to the FTA related to sustainability and deforestation assumes the EU has leverage because of its market size. However the EU’s new focus on sourcing critical raw materials for its green tech industry may change that political calculation. If the US and China impose fewer environmental or labour conditions on Latin American or other exporters of critical minerals, this may affect how the EU’s tools are deployed.

The EU’s deforestation regulations has caused political ructions with Indonesia and Malaysia – and is complicating the negotiations with Indonesia on a bilateral trade accord.  In the ongoing FTA negotiations with Australia, balancing the EU agricultural market access offer with guaranteed European access to the country’s raw materials is one of the causes in the recent delay in completing the talks.

This is even before the likely legal challenges to the EU’s Carbon Border Adjustment Mechanism at the World Trade Organization in Geneva. Or the possible return of divisions between the US and EU over steel and aluminium.

Given the extent of the challenge ahead, one would hope that thoughts inside DG Trade, member state trade teams, and the international trade committee of the European Parliament were already turning to how to manage these successfully.

In any case, now is a good moment to start, at least in preparing for the programme of the next commission that is due to come to power in 2024.

 

 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.

One Comment

  1. Pasi-Heikki Vaaranmaa

    Great article, David. Will require some new modelling tools as well to catch the positive/negative effects of FTAs on the one hand and trade regulation on the other. Especially as some effects take time to materialize.

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