Internal EU politics, Latest news, Mercosur, Perspectives, United States

Perspectives: The steep learning curve of forging new trade policy compromises

Two ongoing EU trade policy sagas – over the Association Agreement with Mercosur and the United States over steel and aluminium – show how the nature of the required decisions is becoming more complex as climate regulation and economic security are thrown into the mix.  New ways for forging political compromises over trade policies are needed. 

Forging trade agreements has always required accepting trade-offs between different interests. In the EU this has traditionally involved granting greater market access in particular for agricultural goods to partner countries, in exchange for various concessions by these countries in both market access and acceptance of EU regulatory norms.

Regular farmers’ protests in Brussels were a reminder that this has never been easy. French representatives in Council would typically lead those urging a defensive position although their own industrial, agriculture, luxury and services companies would also be beneficiaries of new market access.

Such domestic discussions will not disappear while free trade agreements continue to be negotiated. This European Commission’s hugely expanded global ambitions for the green transition, ‘open strategic autonomy’ and economic security are however adding new issues to trade negotiations, be they handled through FTAs or through other channels.

Most apparently, third countries cannot be expected to simply accept EU ambitions to in effect set global regulation with regard to the net-zero transition. This is now leading to discussions for which there is no established commission playbook, as shown currently with Mercosur and the United States.

For as the EU seeks regulatory space to act according to its own interests, other countries seek to constrain that freedom. Those with resources crucial to achieving net-zero also find these of interest.

Without a clear approach to the question of what the new trade policy compromises will be, the next commission will find itself constantly under major political pressure.

Mercosur – Sustainability, market access, and raw materials

After so many years of negotiations, the fundamentals of the EU-Mercosur Association Agreement are well known. At core, this has been a classic negotiation involving trading off market access, with a result which EU agricultural producers have never fully accepted.

Increasingly though, the most fraught part of negotiations is about the linkage between market access and environmental regulation.

Given concerns over Brazilian practices with regard to cutting down rainforest to free up agricultural land, the EU has insisted on an additional sustainability instrument to be annexed to the agreement originally concluded in 2019.

Now, in return, Mercosur countries are seeking assurance that the enhanced market access they negotiated in the agreement will not be reduced by EU regulation such as with regard to deforestation or carbon border adjustment.

This is a reasonable third country response to the new EU agenda. Accommodating it is difficult.

To add to the complication, there is extra incentive for the EU to make a deal given that Mercosur countries have significant reserves of rare earths important to Brussels’ current economic security and green tech agenda.

What was once a deal predicated on the prize of access to the EU market is now  more about a balance of incentives between the two sides.

Recognition of this changed landscape and the new compromises that may be required has been slow in Brussels.

US – steel, carbon border adjustment and China

The level of frustration generated over time by EU trade relations with the US come close to matching those with Mercosur. Indeed, market access disputes over agriculture and public procurement have never come close to resolution.

Cooperation through the Trade and Technology Council has brought a renewed sense of that cooperation can yield results. Yet as we see in the negotiations over steel and aluminium, which initially are about removing US tariffs enacted in 2018 on national security grounds, are now linked to the EU carbon border adjustment mechanism and the two sides’ approaches to China.

Attempts to negotiate a Global Arrangement on Sustainable Steel and Aluminium have been strained. The recent US-EU summit confirmed that an October deadline was not met with negotiators now aiming for conclusion in December.

Once again, environmental regulations are a key sticking point in these negotiations. Briefings and counter-briefings don’t change a fundamental difference of approach between the parties to achieving decarbonisation in their respective steel sectors.

While both the US and EU want to encourage sustainable domestic production at the expense of China, their proposed approach is based on their respective domestic approaches.

For the EU, CBAM should be a core element supplemented by trade defence. The United States, which does not plan to set a national carbon price, envisages instead a tariff system linked to emissions that the EU is concerned would breach WTO rules.

Observers have little confidence that these two positions can be easily reconciled. There may be a fudge that can be found to prevent a return of US and EU retaliatory tariffs in the short term.  But this would not be a stable compromise.

Future challenges – Neighbours, new and enhanced FTAs, and more

The cases of Mercosur and the US are only two major examples of the challenges raised by seeking to reconcile the new EU trade policy with the interests of third countries.

There is tension in EU Australia FTA negotiations similar to those with Mercosur, between EU industry’s need for raw materials, against not making a generous agricultural market access offer.

How neighbours such as the UK and Switzerland fit into the regulatory agenda seems certain to be a subject of future negotiations.

Northern Ireland might be a particular issue, as current UK government officials have been openly talking of expecting the territory not to have to follow CBAM despite being in the EU goods single market.

Deforestation regulations have caused diplomatic row with a number of countries in South East Asia and raise alarm in Africa and Latin America.

Future EU relationships  with third countries henceforth the about future of the net-zero transition and the World Trade Organization, as well as EU industry and economic security.

Finding the right ‘compromises’ with specific countries will mean understanding the EU’s own relative priorities. These will need agreement back home through policy structures that go wider than those just set up for trade.

Finding a new set of compromises with third countries will remain an ongoing challenge for the EU for some time to come.

 

 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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