Europe’s free trade agreement strategy: the road to nowhere?

November 14, 2007

In November 2006, the EU launched a new project entitled “Global Europe” which aims at linking external trade policy with the so-called Lisbon Agenda, a programme designed to turn Europe into “the world’s most competitive economy” by 2010. Fundamentally Global Europe announces a shift towards negotiating more bilateral free trade agreements – FTAs – directly with partners in Asia: South Korea, ASEAN, India. It is also about getting more hands-on with China, now the EU’s second trading partner in goods after the US, and integrating other ongoing bilateral trade negotiations with, say the Gulf countries and Mercosur into the broader picture of a shining new Europe in an Era of Globalisation. [Or rather: “as a protector, a life-enhancer, as a magnifier of strength, and as a shining cultural and political example”, as Mr Sarkozy put it?.]

In fact Europe’s practice of signing bilateral agreements is not new, by far. But so far it has concentrated on: countries in the European periphery with potential prospect of joining the EU (Neighbourhood Policy – today enlargement is in crisis, however); or countries with special interests in linking up economically with the EU and where the EU has big political stakes (Mediterranean, or “Euromed” countries). So-called EPAs with African, Pacific and Caribbean countries are trade-and-aid agreements that need to become reciprocal on trade issues to be compatible with WTO requirements: let’s call them post-colonial political beasts. What is new in Global Europe is the official hands-on commercial rationale behind the new agreements with Asian countries. Again, the commercial drive itself is not new: the EU has quite comprehensive free trade agreements with Mexico, Chile and South Africa, signed back in the 1990s, which are mainly commercial in nature. These are emerging markets of special interest to the EU. Yet the economic impact of Asia on the European economy runs deeper than Chile’s. And having hands-on commercial arguments written down in an overarching economic strategy is new.

The politics of this strategy are easy to understand. The Doha Round in the World Trade Organization is in the doldrums. The Commission in the meantime needs to deliver on opening markets for European business. Europe fears losing out in market share in countries that are difficult to operate in and which sign agreements with other major competitors (United States in Korea, China is building a hub-and-spoke system in Asia, Australia is signing bilateral agreements all over Asia, Malaysia and Thailand had been negotiating a free trade agreement with the United States until recently). For a non-initiated public and the mercantilist instincts of decision-makers, such a strategy sounds efficient and hands-on, therefore positive.

Now to the flaws. The economics of bilateral agreements is one of second-best options. For those who are not well acquainted with the issue, please look HERE and HERE. The real complications for the EU in Asia however run deep: it’s stepping into a complicated pattern of free trade agreements (see noodlebowl-asia.jpg) and just add to them.

The politics are almost impossible. It’s about deep political problems: though commercial on paper, the FTAs planned include various human rights, labour, social and environmental provisions. I do not see ASEAN countries or India accepting to haggle on human rights provisions against market opening. I do not see the EU opening “mode 4” (temporary migration of workers) to Indians, for example. Talks with ASEAN are stalled already. The group is not united, the EU does not want to include the very poor countries, nor Myanmar. Recently at a conference in Brussels a Commission official said the EU is “very disappointed” about the negotiations. Negotiations with India haven’t really started yet. The Indian government is currently paralysed and cannot move forward on anything, from economic reforms to ratifying a nuclear deal with the US. So how can it negotiate, and later ratify a comprehensive agreement with the EU? Whoever is in power in a coalition in India, be it the Communists with the Congress, or maybe in the future the nationalist BJP again – can anybody see this happening? The only deal that is likely to be concluded is EU-Korea – Korea really wants it and means business. There are fewer matters that can be politicised – Korea is a relatively wealthy OECD member and a functioning democracy.

Practice shows that it is easier to get FTAs signed when the countries involved have unequal bargaining power: Mexico facing the US, Central America facing the US, Tunisia, Morocco facing the EU, aspiring EU members accepting the EU’s conditions. Generally one country imposes a legal template on others, with a few concessions and modifications here and there. It gets complicated when economic size and political clout of the partner grows. It gets even more complicated when you start dealing with groups that have diverging interests and are not able to unite: ASEAN, Gulf countries, all the African groupings. Yet this is precisely what the EU is doing. Is this masochism?

The reality is: the EU’s bilateral strategy is bound to fail if it continues on to pursue FTAs all over. EPAs with Africa: in crisis. Negotiations are due to be concluded by the end of this year: it’s not happening. In the meantime Africa is getting business opportunities and aid from China. Negotiations with the GCC are in the doldrums. ASEAN and India are not on a good track. With Russia it’s the same. Negotiations to renew the Partnership and Cooperation Agreement that expires this December are in deep freeze. A veto from Poland is the immediate reason. But even if the new Polish government lifts the veto, the EU is not likely to get anywhere, be it on better investment opportunities in Russia’s strategic sectors, reform of the trading system, judicial reform; not even mentioning human rights, or civil liberties.

It is easy to criticize. What are the alternatives? There are three routes: do it yourself, set yourself priorities, and try something else.

Do it yourself: to raise EU competitiveness, the only effective method is domestic reforms. The Lisbon Agenda has a menu there of tasks that need to be undertaken: labour market reforms, developing research capacities, reform of the educational system. Internal EU market reforms need to be undertaken as well: services markets in particular are still not unified. The EU will need to find ways of actually implementing those reforms on a large scale. The Lisbon Agenda as it is designed is really not on the right track. In the face of Russia, energy markets in Europe need to be unified, made more competitive and competition of other sources of energy be fostered. Do you need to wait for Russia to open its own markets before that? If you do, it is at your own risk.
 

Priorities: In Asia, the real priority is not so much Korea, India or ASEAN, but China. Boosting economic ties would really raise competitiveness of both economies. But it is a political hot potato. Both Razeen Sally and Patrick Messerlin ( see: acer_messerlinwang_nv6final.pdf) have recently proposed routes to tackle sensitive issues with China. But this is only the beginning.

Try something else: The proposed free trade agreements, especially when they tackle non trade issues ranging from human rights to climate change, are economically unsound and politically not feasible; nor would they really be effective in achieving more competitiveness, improving working conditions or stopping climate change. If the Doha Round fails as well, what is left? “Do it yourself” is already a very different approach to the very mercantilistic vision behind negotiations in the WTO and in bilateral deals. Sound economics starts at home. If the EU makes it economy more competitive, which means it really opens its markets further, its partners all over the world will be more easily persuaded to open their markets to the EU. For the rest, pick the key issues you have with the key players, find out what are the other’s priority interests and focus on tackling what really hurts directly, outside formal trade talks, at the right political level, with the partner in question. This will need to be done with China, and with Russia. Call that “constructive unilateralism”. All this is probably more easily said than done. But given the high probability of everything failing, from Lisbon to Beijing, start thinking outside the mercantilist box is already the first step.

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