The EU’s free trade agreement strategy in Asia

March 22, 2007

Today I attended a seminar on services liberalisation in Asia. We had the privilege of hearing the Deputy Director of the WTO, the Director of the Services Division in the WTO and the Director in charge of bilateral negotiations in the Directorate-General for Trade of the EU Commission, among others.

I am not going to cover the conference, just reflect on what has been said by the representative of EU Commission. Mr Ignacio Garcia Bercero outlined the Commission’s new strategy of venturing into free trade agreements with such important economies as South Korea (which is about to finalise an agreement with the US), ASEAN as a group and, yes, India. The aims for the EU are the following:

  • seek deeper ties than the WTO allows with markets that are of important size, growing quickly, which present many obstacles to trade (tariffs, regulation, etc.), and who are in discussing bilateral agreements with “competitors” (quote. This means mainly the US, Australia, and to a certain extent China);
  • develop an economic diplomacy that goes beyond the Neighbourhood Policy which motivated most EU bilateral agreements so far, mainly in the Mediterranean basin;
  • insure Europe against a (highly probable) failure of the currenct Doha round of trade negotiations.

The audience was told that the priority, however, remains the Doha Round – that sounded a bit ritualistic. (Please watch the ICTSD’s Bridges Weekly for a regular update on where the state of play is in the negotiations)

The EU’s negotiating strategy is the following:

  • the free trade agreements should be WTO-compatible (sounds very ritualistic too)
  • the agreements should be “comprehensive” and include many of Europe’s favourite topics that no longer form part of the Doha round due to developing-country resistance: rules on investment, government procurement, competition and other regulatory issues. 90% of tariff lines (or: products) at least should be covered.
  • those agreements should be adopted as a single package (no cherry-picking on the clauses), or “single undertaking“.

Ideal time-frame: 2 years of negotiations.

Mr Garcia Bercero admits: the EU is being “ambitious”…

What the EU wants is opportunities to invest in the fast-growing regions of the world. A few Asian countries have many restrictions to investment, and those targeted by the EU are among them. As reflected by the fact of the conference and the delegates and other speakers (banks, insurers, lawyers, telecoms representatives), Europe’s services sector has a lot of interest in these issues. Whilst the WTO’s GATS (General Agreement on Trade in Services) is of very modest scope and not advancing well right now in the battered Doha Round, well, governments supported by businesses try the bilateral way. But there are other sectors that are of interest. These include the industrial sector, namely in India, where the sector is highly protected and where many protectionist barriers remain which discourage investment and close markets for foreigners. Naturally, very polite but very important questions were raised by the audience and I am sure Mr Garcia Bercero as representative of the Commission is having a lot of courage facing this polite criticism…

A few quick thoughts:

1) Why, in a sense, the EU’s strategy makes sense.

Is is likely to interest strongly many partners. As bilateral agreements are reciprocal by nature, Koreans and Indians are very interested in opportunities to invest in Europe. Their companies are becoming global players (Samsung, Tata, Mittal are only a few names), and there is still resistance in Europe to those investments. Regarding services in particular, India has now an offensive negotiating approach. It wants to attract more outsourcing business, it wants its IT professionals to be able to come and work in Europe, it wants to develop its higher education and research capacity.

There is a lot to be gained for Europe. Retailers from Europe can’t wait for India’s retail market to be opened. Wal-Mart is making first steps. But Tesco, Carrefour and co. all would love to tap into India’s lucrative retail market and not miss out on the soon-to-come transition from a mum-and-pop shop system to modern retailing to cater for the country’s growing middle class. Banks still have difficulties operating and investing in many Asian countries. Infrastructure, real estate, all have a lot of potential in Asia. These are only a samples of the Eldorado for European businesses Asia represents. The WTO-path not delivering the coveted fruits, a bilateral strategy seems a good way to move forward.

2) Why it is flawed and likely to fail

  • To think that if it is easier to negotiate for bilateral deals than for an improved multilateral GATT and GATS deal is utopian:

India. For the EU, India, with its clout, self-assurance and leadership in the world trading system will not be easier to deal with than within the WTO. It might be even more difficult. Want to impose your technical standards to Indians, your rules on government procurement? You do not want to go down the in theory easier path of an MRA (mutual recognition agreement), as you as EU would never accept Indian standards? Worse, are you as EU envisaging human rights or labour right issues to calm the trade unions, NGOs and supporting governments that will start crying out very soon? Haggling a little on temporary workers from India who could come over to Europe? Worse still: you persist in not wanting to open your agricultural markets? You might want to put some conditions on Indians investing in some of your industrial companies? You still want a comprehensive, clean FTA with no major carve-outs? This in… 18 months ideally? Well, I think you can forget it. India is not Tunisia.

Korea: the EU Commission wants above all to deal with Korea on regulatory issues, as there are not many traditional market-opening issues or easily politicised labour issues at stakes with a country that is almost at the same economic level. Also, agriculture, where Korea and the EU alike are very protectionist, can be included in the 10% of tariff lines that the EU accepts leaving out of a bilateral deal. It would save the EU’s face it that you can tell to free traders that 90% of the business is covered. But in the 10% remaining you can include very important carve-outs, among which, very often agriculture. Ben Muse can surely tell you a lot on the US-Korea negotiations at the moment. But as, especially on regulatory issues, the EU and the US compete globally to have their technical or accounting standards adopted, I see that it will be a difficult task for the EU to come in after the US.

ASEAN. Asean includes a variety of countries ranging from Singapore (very rich) to Cambodia, Laos and Burma (very very poor), with very diverging interests, many internal difficulties in creating their own single market. How does the EU want to achieve a deal – within 2 years ideally – with such a heterogeneous group? Do you imagine say, Thailand, accepting EU government procurement and competition rules?

  • It damages the WTO and messes up even more the multilateral system

The WTO representatives in the conference highlighted that bilateral free trade agreements are currently distracting countries from making commitments in the current negotiations. They want to keep bargaining chips for their bilateral deals. Trade and investment diversion and confusion in a world of a spaghetti-bowl of very non-comprehensive, mutually incompatible or restrictive (see EU-US competition on regulation) bilateral and regional agreements will make matters too complicated to benefit anybody.

You can’t stop the EU from rushing into the general bilateral race as it has very good reasons to fear that it they might be left out of the rush for business opportunities taken by those countries, chiefly among them the US, that already reached deals with the interesting target countries. But the EU contributes thus to deepening the whole FTA problem. Also, expecting it to be easier to reach deals bilaterally with countries that depend less on you than, say Morocco, and especially when yourself as EU are not a very good market opener is utopian.

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