Greetings from Brussels, where the Russian invasion of Ukraine has accelerated the move towards a “geopolitical commission”, and I am filling in for Alan.
The Australian trade minister is in town to try to clinch a deal within weeks, while ambassadors discuss the latest sanctions measures against Moscow, which could include hitting Chinese companies for the first time for supporting the Russian war machine.
But is this muscular posturing the false bravado of an ageing fighter fending off younger rivals by hugging the corner and throwing a few jabs? Today’s Charted waters looks at the EU use of “classic” trade defence instruments.
An economic superpower struggling to get its way
Two of the most sacred tenets of European Unionism are that the bloc derives its power from its single market and its common trade policy.
An economic superpower of 450mn consumers with a gross domestic product almost as big as the US. A single market that gives an incentive to domestic producers to scale up and exporters to play by the EU rules, set in Brussels for 27 member states.
Such is the rosy picture painted by commissioners and bureaucrats. Talk to businesses and you hear a different story.
My colleague Ian Johnston last month pointed out that the internal market was starting to seize up. National politicians have failed to carry out routine maintenance, allowing national burdens to clog up the system. Brussels has in effect turned a blind eye and favours the thrill of a new directive more than the monotonous work of policing the ones it already has.
And what of trade? Businesses have been waiting years for new trade deals with Mercosur and Mexico, agreed in principle, to be signed. The EU can flirt with partners offering access to its markets but no longer deliver on its promises.
The Australia deal should be done within weeks and one with New Zealand was concluded last year. But these are small, if important, actors with similar standards. The EU has trouble concluding deals with developing countries that account for an ever growing share of world trade.
The Mexico deal is bogged down in legal devices to ensure the trade parts can take effect without national parliaments having to approve them. Brussels wants additional commitments from Brazil and others to protect the rainforest before signing the Mercosur deal. Even that may not be enough for Austria and the Netherlands, whose parliaments have already voted against it. France also has doubts.
Yet if newly elected Brazilian president Luiz Inácio Lula da Silva saves the rainforest it will be because he wishes to, not because the EU has told him so. As one EU legislator observes, Brazil is bigger than any single member state and considers it has more influence in the world than any of them. It does not take kindly to lectures.
The so-called Brussels effect, which holds that other countries have to adopt EU standards because they wish to sell to its market, has surely been overhyped. Anu Bradford, who coined the term, said in 2021 that the EU “really is a global hegemon”.
Bradford defines the Brussels effect as the “EU’s unilateral ability to regulate global markets by setting the standards in competition policy, environmental protection, food safety, the protection of privacy, or the regulation of hate speech in social media. Interestingly, the EU doesn’t need to impose its standards coercively on anyone — market forces alone are sufficient.” The EU market is big and companies want to sell to it. Multinationals tend to want to operate to a single standard for efficiency so the EU one becomes global.
But things are changing. Europe’s market is becoming less attractive. It accounted for 24 per cent of global GDP when the Single Act laid the foundation for the single market in 1987 to 16 per cent in 2023 — even though EU membership expanded. Average annual growth in labour productivity — measured as real GDP per hour worked — has continuously declined from about 7 per cent in the 1960s to just 1 per cent since the early 2000s, according to the European Central Bank.
And the EU can no longer expect other countries to adopt its standards de facto. To protect domestic companies facing tougher regulation it has recently become coercive, extending new standards to trading partners.
Malaysia and Indonesia have paused talks because of the impact of the EU’s deforestation law. This bans products made from cattle, cocoa, coffee, palm oil, soya, wood and rubber being sold in the EU unless they are certified as coming from sustainably managed land. Countries will be labelled as low, standard or high risk, with the two big palm oil producers fearing a “high risk” rating that would impose an effective export ban on many SMEs that cannot comply with the standards.
It is the first evidence that a battery of new climate-based measures could damage EU trading relationships. The carbon border adjustment mechanism, which will put a tariff on imports from countries without a carbon price, is another.
Several countries including China are expected to challenge it at the World Trade Organization. Trade talks with India could hit similar barriers, given its fondness for coal.
Charges of “green protectionism” and “regulatory imperialism” need to be addressed, according to a report by the Europe Jacques Delors think-tank.
“The EU should acknowledge that greening its trade is affecting, and will disproportionately affect, some of its most vulnerable trading partners and reintegrate more of the development dimension in the conduct of its green trade policy,” the authors, who include former trade commissioner Pascal Lamy, say.
“Some countries have the resources to change or can find alternative markets, others will struggle and lose part of the EU’s market which they may depend on,” they add. Those countries should be helped to comply. They also point out the irony of the EU — whose wealth was powered by fossil fuels and environmental destruction — damaging the economies of countries most affected by climate change.
David Kleimann, of the Bruegel think-tank, believes a partnership approach could avoid a breakdown in relations. “It is undeniable that the EU’s environmental trade conditions are being advanced in good faith and in a technically sound manner. The EU must now pull out all stops to convince foreign stakeholders of the measures’ legitimacy and advise on compliance,” he says.
Meanwhile, Spain’s six months in the rotating presidency from July could “showcase the union’s continued commitment to trade openness and economic engagement with the rest of the world. The ratification of trade agreements negotiated with Mercosur, Chile and Mexico would send the necessary signal.”
Josep Borrell, the EU’s foreign policy chief, agrees. A paper prepared by his European External Action Service with the European Commission being published on Wednesday, and seen by the FT, says clinching Mercosur would create a “step change” in the relationship. But while it contains plenty of ideas of how to improve relations with what he calls “natural partners” there is a lot more “what” than “how”. Talking is fine, but frequently it is at cross purposes, as Lula’s recent pronouncements on China and the Russian invasion of Ukraine show.
Borrell also urges ratification of the post-Cotonou deal with the Organisation of African, Caribbean and Pacific States, 79 mostly former colonies that are exactly the kind of country courted so assiduously by China and Russia. The post-Cotonou agreement would allow the European Investment Bank to keep lending there and is a framework for economic and development co-operation. It would also improve tensions over migration. Members would agree to take rejected asylum seekers back while the EU would discuss opening legal pathways for people to come to work in the bloc rather than risk their lives in small boats.
The EU’s fractured trade policy is at the root of the problem here too. For months Hungary blocked the treaty because it contained language on gender equality, which offended Prime Minister Viktor Orbán’s sensibilities. But when he dropped his objections, Poland raised its own.
They stem from an extraordinary dispute over imported Ukrainian grain and other food stuffs. Four member states — Poland, Hungary, Slovakia and Bulgaria — imposed a unilateral ban on imports after grain began piling up in warehouses, reducing prices for farmers locally, who launched widespread protests.
The grain arrived after Brussels dropped all tariffs and quotas to support the Ukrainian economy and get food to the developing world. But the prohibitive cost of transport — and the unlikely success of a deal with Russia and Turkey to get grain out through the Black Sea — has left the grain stuck in the region. The commission was forced to implement its own restrictions instead, allowing four types of grain to enter those countries, and Romania, only if they were transiting to somewhere else.
Poland has linked the two issues — Russia’s war has “had a negative impact on food security” in many developing countries, its EU ambassador Andrzej Sadoś told the FT. And yet many have not voted to condemn Moscow at the UN or implemented any sanctions.
Trade experts are looking through the history books to discover whether a trade defence measure has ever been applied to only some EU countries. One for all, all for one, is the power of EU trade policy, as we saw when China launched a de facto blockade of imports from Lithuania. Indeed, the EU measure expires today — though it is likely the commission will extend it. Yet Hungary refused to drop its unilateral ban. The Brussels effect is fading even a few hundred kilometres away.
Charted waters
The EU has several “classic” trade defence instruments — antidumping, antisubsidy and safeguard measures (the latter are very rarely used).
Brussels usually opens about a dozen antidumping and antisubsidy cases a year but in 2022 that dropped to just five. And there have only been two so far this year.
Member states will increasingly take matters into their own hands unless the commission uses them more frequently, say some lawyers who work for heavy industry and agricultural interests.
The unilateral move from certain EU member states also echoes the widespread feeling of ‘unease’ among the bloc’s economic operators who see a lot of EU regulations being adopted that “may severely affect their activities”, Marie-Sophie Dibling, trade partner at King & Spalding, told Trade Secrets.
While EU companies and farmers face higher costs from rising energy prices and regulation, and the impact of war, cheap imports continue unabated, with China and India able to use cheap Russian crude.
“Because there is an inaction from the commission, the EU member states fill the gap by such unilateral actions. I am not saying that what these eastern countries are doing is the right thing to do, but if the commission does not listen to the EU operators, we will see more and more national unilateral actions which will directly jeopardise EU power and EU integration.”
Trade links
China’s service sector notched a fifth month of expansion in May, according to a closely watched gauge, offering a bright spot in the country’s faltering economic recovery as manufacturing has slowed.
China will soon account for less than half of the US’s low-cost imports from Asia for the first time in more than a decade, according to data, but the US and China remain each other’s largest respective trading partners.
Negotiations have begun between about 170 countries to agree how to reduce plastic pollution, but divisions remain over various issues.
Trade Secrets is edited by Jonathan Moules
Source: Economy - ft.com
