3. EU trade policy: dare for more flexibility and collaboration
Frederik Stender and Tim Vogel
in: Hackenesch, C., Keijzer, N., & Koch, S. (Eds., 2024). The European Union’s global role in a changing world: Challenges and opportunities for the new leadership (IDOS Discussion Paper 11/2024). IDOS.
State of play
Trade liberalisation, traditionally seen as a means to promote economic growth and prosperity, has increasingly come under scrutiny for its adverse socio-economic and environmental impacts. Increased trade is now also held responsible for the rise in global CO2 emissions and the loss of biodiversity. It is also associated with growing inequality, both between high-income countries and developing countries and within the latter. Human rights issues such as child labour as well as safe working conditions remain significant and unresolved, further highlighting the complex challenges associated with global trade practices.
Global trade policymaking is not blind to these problems. Many countries are making efforts to “green” their production and trade patterns to address the climate crisis and transform their economies sustainably. At the same time, however, little of this is happening in a coordinated way under the umbrella of the World Trade Organization (WTO). Indeed, multilateral solutions are increasingly a distant dream rather than a reality, amid rising geopolitical tensions and the renaissance of industrial policy – and with it the scramble to assert key national interests.
The evolving trade policy landscape has also led the European Union (EU) to steer its trade policy in a more “open, sustainable and assertive” direction, as outlined in the 2021 Trade Policy Review. In its wake, the EU introduced a range of “autonomous” policy instruments. Notable among these are provisions on foreign subsidies, anti-coercion, public procurement, and mandatory prior screening of foreign investment, but the regulations on deforestation-free products, corporate sustainability due diligence (CSDD), and the Carbon Border Adjustment Mechanism (CBAM) have attracted the most public attention.
Although they were introduced with good intentions and arguably in line with WTO rules, the EU has not received universal applause for the latter measures in particular. On the one hand, both the deforestation regulation and the CBAM are important foreign policy instruments for the EU’s goal of becoming climate-neutral by 2050. By implementing these measures, the EU also intends to serve as a role model for others in pursuing more sustainable production and consumption patterns. On the other hand, a common fear is that the EU’s strict standards create unfair barriers for developing countries and could potentially restrict, or otherwise negatively affect, their access to the EU market. Beyond doubts about the effectiveness and enforcement of these measures, there is also uneasiness in the so-called Global South about the lack of voice partner countries have in setting the standards. This underscores suspicions that the CBAM, for example, was introduced not only to tackle the climate crisis (especially by preventing carbon leakage) but also to maintain the competitiveness of EU-based production (Brandi, 2021). Similar concerns apply to deforestation regulations, which are perceived in many places also as a de facto ban on the expansion of industrial production.
The EU’s approach to mainstreaming sustainability in trade is reflected not only in its autonomous measures, but also in its trade agreements: These agreements now routinely contain chapters on Trade and Sustainable Development (TSD), featuring provisions on environmental protection and strengthening workers’ rights. While the EU is committed to not overburdening partner countries with additional regulations, its trade agreements clearly take an assertive stance on these issues, for example, by reinforcing existing International Labour Organization (ILO) conventions with stronger legal means of enforcement.
In addition to the uncertainty over whether and how the EU’s autonomous measures play out in the context of trade agreements, pushing forward the TSD agenda for trade agreements has made negotiations ever more challenging. While an agreement with Kenya was signed in December 2023, negotiations with Indonesia and India are proving extremely difficult. The EU-Mercosur agreement meanwhile appears to have little chance of success. This is partly because some EU members repeatedly call for mirror clauses on issues such as environmental protection, and partly because the EU insists on permanently opening up public procurement in Brazil to bids from large EU companies, which contradicts a central pillar of the current government’s political agenda in Brazil.
The EU is aware of the need to enhance acceptance of its TSD chapters in trade agreements and its autonomous measures. In her speech on “Trade Policy in a Changing World” in May of this year, the Director-General for Trade, Sabine Weyand, emphasised the existing support for raising awareness and implementation in partner countries, but at the same time acknowledged that further efforts are needed (Weyand, 2024).
Internal and external influences
Improving external policy coherence – integrating trade, investment, and development cooperation – remains a challenge, however. Despite numerous support programmes in partner countries, the lack of coordination between actions of DG Trade and DG INTPA (Directorate-General for International Partnerships) has long been flagged, also internally. While trade-related development cooperation by the EU and the 27 member states seems to continue to pursue different objectives (Hoekman & Shingal, 2024), another construction site is the effective combination and coordination of measures at EU- and member state-level, known as the “Team Europe” approach.
The changing political priorities of the EU (and its member states), global shocks including climate change and Covid-19, and geopolitical shifts are putting the crucial elements of external policy coherence to reconcile EU trade policy with EU development policy under further stress. With the budgetary situation already strained following the Covid-19 pandemic, the grim reality of the Russian aggression in Ukraine creates a need to both support Ukraine with financial, military and humanitarian aid, and increase own security spending. This shift in budgetary focus makes it unlikely that funding for trade-related measures in partner countries will be able to keep pace with the increasing demands for compliance with EU regulations.
Russia’s aggression against Ukraine has also accelerated national solo runs by EU member states to secure access to critical raw materials. As a result, EU member states are increasingly prioritising partnerships with third countries that mainly serve their national interests. Germany, for example, is forming specific hydrogen partnerships with strategic export and import partners (see Section 13) such as Namibia. EU member states could thus allegedly “invest” more in these individual relationships than on coordinated efforts to support EU trade policy in partner countries.
The trend of diminishing external policy coherence between EU-level actions and those of member states is further exacerbated by the shift towards more proactive industrial policies at national levels aimed at transitioning to net-zero economies while protecting commercial interests in an increasingly rougher global environment.
Looking ahead
In parallel, developing countries have become much more self-assured in forming international partnerships in today’s multipolar world. New partner combinations are now feasible, demonstrated by increased South-South initiatives such as the expansion of the BRICS (Brazil, Russia, India, China, South Africa) group, but also influenced by offers from other major players in the global economy like China’s Belt and Road Initiative. To remain an attractive (trading) partner – and to secure both access to critical resources and partners for maintaining a functional multilateral system – the EU must present a compelling offer amidst the increasing geopolitical competition. Initial efforts have been made to promote this offer through the Global Gateway initiative, which promotes significant infrastructure investments in developing countries (see Section 1 in this publication). However, in view of the abovementioned pressure on the scope of financial support and geopolitical competition, the EU must also adapt its trade policy mindset. This could include:
Prioritisation
To attract countries as partners for sustainable trade, agreements with defined standards such as the Economic Partnership Agreement (EPA) between the EU and Kenya must deliver benefits for both sides. Due to the complexity of such agreements, technical and financial support during implementation is key. Given the potentially shrinking financial space, however, the more EU support is concentrated in one area, the less can be allocated to other areas such as infrastructure development in the short term. Technical and financial support is therefore not necessarily a sure-fire success. The EU should thus allocate its resources for accompanying measures in a more strategic and coherent manner. It is therefore crucial to identify policy priorities and institutional and technical capacity bottlenecks in trade policy implementation accurately and collaboratively, taking into account partner countries’ national development strategies. Without such improved fine-tuning in implementation support, the expanded scope of trade agreements and the associated need for implementation support is at risk of reducing the effectiveness of the funds provided (Stender & Vogel, 2023).
Flexibility
As initial conditions with regard to sustainability standards in partner countries may well differ, more flexibility in the design of EU trade agreements is also possible. If interests are not fully aligned on certain standards in comprehensive trade agreements, it could be an attractive way forward for the EU and its partners to pursue smaller or modular agreements that prioritise areas of high interest for each party – an approach that may ensure that the partnership materialises despite diverging priorities. Existing examples include the EU and US plans to establish a sector-specific agreement on green steel, as well as the broader Singapore-Australia Green Economy Agreement (GEA), which aims to promote trade in environmental goods and services. Alternatively, parts of more comprehensive agreements could be backed by joint target measures. Inspiration could come from the recently concluded agreement between India and the European Free Trade Association (EFTA, consisting of Iceland, Liechtenstein, Norway and Switzerland), which includes targets for employment and investment, making not only sustainability but also economic benefits traceable. The EU could also consider bundling parts of the agreements into offers in the areas of technology transfer and security cooperation.
Inclusive collaboration
Lastly, given the controversy that the EU’s autonomous regulatory measures such as CBAM are causing in developing countries, it is prudent for the EU to take a more collaborative approach in the development of its regulations in order to better align with its stated objective of promoting “balanced partnerships of equals”. More specifically, while the EU’s recent policy efforts are valuable within the wider context of achieving more sustainable trade, setting and applying standards should be based on mutual consultations or, ideally, adopted from international standardisation bodies. Despite current obstacles, the WTO should remain a crucial platform for cooperation on trade-related standards and for discussions on comprehensive, multilateral solutions beyond those implemented unilaterally by the EU. In addition, reinvesting CBAM revenues from the decarbonisation of exports from low- and middle-income countries – and more generally transparency on how the EU puts these revenues to use – can increase credibility and counter accusations that the EU is exploiting power asymmetries in its trade policy.
References
Brandi, C. (2021). Priorities for a development-friendly EU Carbon Border Adjustment Mechanism (CBAM) (DIE Briefing Paper 20/2021). German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE). https://doi.org/10.23661/bp20.2021
Hoekman, B., & Shingal, A. (2024). Development goals, commercial interest and EU aid-for-trade. World Development 173, 106389.
Stender, F., & Vogel, T. (2023). What role for aid for trade in (deep) PTA relations? Empirical evidence from gravity model estimations (IDOS Discussion Paper 13/2023). IDOS. https://doi.org/10.23661/idp13.2023
Weyand, S. (2024). Trade policy in a changing world. Speech given at the ECIPE and Europe Unlocked conference. Brussels, 14 May. https://policy.trade.ec.europa.eu/news/speech-director-general-sabine-weyand-trade-policy-changing-world-2024-05-14_en
