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Hello all, Brussels calling. This is the week that the UK finally leaves the EU and we can put all that debate about trade and Brexit behind us. HA HA FOOLED YOU. It’s never going to end. Just ask the Swiss. The EU is still formulating its mandate for the talks, which it will adopt in a month’s time. We’ll keep you posted about how the EU answers some of the tricky puzzles it has set itself. Today’s main piece riffs off a book review we have in today’s FT about how Brussels thinks it can turn its trade and regulatory power to foreign policy ends.
Our Tit for Tat expert is Ignacio Garcia-Bercero, principal adviser at the European Commission’s Directorate-General for Trade and currently a visiting fellow at Oxford university’s St Anthony’s College. Our chart of the day looks at the slump in US clothing imports from China thanks to List 4A tariffs.
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The EU: regulating its way to world domination
We’ve got a review running in today’s Financial Times of The Brussels Effect, a book on a criminally under-appreciated subject by Anu Bradford, the academic who coined the term. Some Trade Secrets readers will no doubt already be familiar with the concept. EU regulations of sectors from cars and chemicals to data protection are exported around the world, often via companies first complying with them as the price of access to the European market and then adopting them across their global operations.
This is something that UK prime minister Boris Johnson’s government will learn after Brexit, if it hasn’t twigged it already. British companies will often simply ignore alternative regulations he brings in and stay aligned to EU rules.
So far, so incontrovertible. Here we’re going to tease out a thread of the argument (not one we are attributing to Professor Bradford, by the way.) Somewhere that needs little reminding of the Brussels effect is Brussels itself. Officials here are continually preening themselves about EU trade policy and regulation acting as the basis for a foreign policy, exporting not just European rules but European values.
European Commission president Ursula von der Leyen’s regime calls itself the “geopolitical commission”: it’s always going on about being muscular and assertive and strategic and what have you. But the EU doesn’t have most of the things you’d traditionally need for an active foreign policy. It doesn’t have armed forces, nor a shedload of military or political aid, nor a centralised intelligence function, nor a vote on the UN Security Council. Trade (including sanctions) is one of the few tools it has.
Can a potent foreign policy be hung from the peg of regulatory and trade superpower-dom? We’re sceptical. For one, soft power is all very well, but it works best as a complement to rather than a substitute for hard power. Sure, the US faced down Soviet communism during the cold war partly because of the attraction of American culture (McDonald’s, Bruce Springsteen, the best democracy rich donors could buy and so on). But it also had hundreds of thousands of troops in western Europe and billions of dollars to arm the mujahideen in Afghanistan.
Pro-EU protesters in Kyiv in 2013. Brussels has in recent decades pulled Ukraine closer into its orbit © Yury Kirnichny/AFP/Getty
By contrast, the EU in recent decades pulled Ukraine closer into its orbit as per the soft power handbook by using the power of its huge consumer market and its liberal image. Brussels gave Ukraine special trade access, an association agreement, some EU flags to wave and so on. But then Russia de facto invaded and that was pretty much that.
Second, exactly what values are being exported? The EU believes it has high environmental and consumer protection standards and acts on logic and principle. But Brussels does rather too much ignoring science and listening to hyperventilating campaigners, often cynically in league with protectionist domestic producers. It then takes knee-jerk negative positions on technologies such as genetically modified organisms, which hurts developing country exporters. As Prof Bradford points out, the term “imperialism” gets used quite a lot about the EU’s influence on the developing world. And let’s not start on how a union with Viktor Orban as a head of government looks when it talks about exporting liberal values.
Third, you would hope that a foreign policy driven by regulation and trade would create a virtuous circle by strengthening the European economy. It’s not really clear it does. The General Data Protection Regulation (GDPR) sets a data privacy benchmark for much of the world, but it hasn’t done much for Europe’s sadly undersized tech sector.
If we were 23-year-old European graduates, we’d rather have lucrative jobs in a tech start-up than the warm glow of satisfaction from knowing that Tuvalu or wherever was writing its data protection law based on GDPR. It was the English Football Association which first codified the rules of football (soccer) in 1863, after all, but it hasn’t helped England much in the World Cup since.
There’s a slight element of cargo cult about the idea that geopolitical strength follows necessarily from even a cleverly designed trade and regulatory policy. We wish the EU luck: a strategic counterbalance to Donald Trump’s US or Xi Jinping’s China would be helpful. But powerful though the Brussels effect is, we don’t really think it’s enough to get the EU there.
Charted waters
Results season is upon us, so expect another round of comments from companies on how Donald Trump’s tariffs have affected their bottom line. US clothing and footwear imports from China were significantly lower in the three months to the end of November, for example.
Tit-for-tat
Ignacio Garcia-Bercero, principal adviser at the European Commission’s DG Trade and a visiting fellow at St Anthony’s College, Oxford, joins us to answer three blunt questions.
What needs to change at the World Trade Organization to resolve the current crisis with a lack of an appellate body? Will new leadership help?
The crisis of the WTO is much broader than its dispute settlement function. The root cause is that the current framework of rules and commitments does not adequately reflect the fact that China has become the largest trading nation and that some of its policies limit market access and have a distortive impact in global markets.
The best response would be two-fold. On the one hand, the US should stop blocking the appointment of appellate body members on the basis of the adoption of a General Council decision along the lines of what has been proposed by Ambassador Walker of New Zealand. On the other, WTO members should agree to launch focused negotiations on subsidies and possibly on other areas where members feel that existing jurisprudence should be corrected. These negotiations should be completed before the expiry of the four-year term of the appellate body.
Unfortunately, it looks unlikely that an agreement to proceed on this basis can be reached between now and Nur-Sultan [in Kazakhstan in June, when the WTO convenes for its ministerial conference].
Are EU members right to stand up to the US over digital tax tensions?
It is perfectly legitimate for EU member states to adapt corporate taxation to the realities of the digital economy. Indeed, the fact that digital companies are not paying a fair share of taxes is a concern for countries around the world. If the US considers that there is an element of de facto discrimination, it should launch WTO dispute settlement proceedings. Threatening or applying tariffs is against the basic principles of the WTO system.
What is the best way to ensure that an EU carbon border tax is compatible with WTO rules, and how far away are we from this being a reality?
The jurisprudence of the appellate body provides very useful guidance as to how a border carbon measure can be designed so as to be compatible with WTO rules. The key requirement is to ensure even-handedness: importers should not be subject to a higher burden than domestic producers. The devil is of course in the details. It is therefore very important that the measure be preceded by an impact assessment and that there is the opportunity to undertake broad consultations. The commission has also made clear that a border carbon measure should be an alternative to the free allocation of emission allowances.
Don’t miss
- The EU’s plans for a carbon tax have emerged as a potential new flashpoint in transatlantic trade ties, after the Trump administration warned that it would “react” with possible punitive measures against Brussels.
Read more - The downturn in global trade dragged on at the end of last year, marking the longest period of contraction since the end of the financial crisis.
Read more - When Steven Mnuchin told an audience in Davos this week the US could impose tariffs on UK cars in retaliation for a British tech tax, the US Treasury secretary revealed the difficult path London would face in securing a post-Brexit trade deal with Washington.
Read more
Tokyo talk
The best trade stories from the Nikkei Asian Review
- Two Chinese state-owned chemical companies, Sinochem Group and ChemChina, are taking steps towards forming a single, more competitive company with more than $150bn in annual sales.
Read more - apanese companies involved in critical infrastructure are strengthening cyber-security measures ahead of the Tokyo Olympics, such as Tokyo Gas partnering with the battle-tested Israel Electric Corporation.
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Source: Economy - ft.com
