The overarching question shaping European trade policy outcomes this year will be: what role for international trade and investment law for global business and the work of trade diplomats? This issue will be central in the four major files with which European trade policy will grapple: the future of the World Trade Organization, the expected surge in populism in European elections next May, Brexit and investor protection courts.
Saving the WTO
The European Union has made a revamp of the WTO and salvaging its judicial dispute settlement mechanism one of its top trade policy priorities. “Promoting European commercial interests through both the consolidation of multilateralism and the modernisation of the multilateral trade system” is the top priority of the Romanian government, which took over the rotating EU presidency a few days ago.
The rise of new global powers and the outward and export-orientation of its economy mean that, for the EU, relying on a rules-based international trade order is an existential matter.
The EU proposed reforms to the WTO as an institution and to the Appellate Body. The 2018 move came in response to the United States veto of the appointments of Appellate Body members whose terms expire and to Washington’s decision to impose duties on steel and aluminium outside the WTO framework by invoking national security.
If nothing changes by year-end, there will be no more appellate function in the WTO’s dispute settlement mechanism. The authority of judicial disputes will be weakened. Incentives by WTO members to flout the rules will increase over time. If new negotiations on trade liberalisation and trade rules – which the EU wants – fail to materialise, the WTO as an institution will lose relevance for good. Trade policy will go back to its default mode in history: it’s going to be tied to pure power politics.
Can the EU make the system reverse course? It can certainly not do it alone.
The key challenge will be to bring the big boys in global trade to the table, namely China, India and Brazil, and to sign on the African Group. It needs to keep the US involved, of course. The bloc achieved small ‘wins’ in this area last year by signing on Beijing and New Delhi to its Appellate Body reform ideas and by actively engaging with Washington and Tokyo on plans to revamp the WTO rulebook to deal with Chinese-style state capitalism. But there’s a long way to go. More on the WTO’s key challenges this year by Jennifer here.
The return of pure power politics in EU relations with the US will most likely overshadow transatlantic relations in the year ahead.
Messy – and likely unsuccessful – tariff and trade agreement talks, pressure and resistance to pressure to make ‘concessions’ to US export interests, divide-and-rule, and potential new duties on autos on ‘national security’ grounds are most likely to define the coming months in Brussels. It might well be that the whole transatlantic trade file just peters out and both sides end up being content with at least doing no further harm to business. Real US frictions will continue with Germany on energy and geopolitics, and with all big EU member states on Iran.
Many in Europe might think protectionism is a new US fashion and a malady of emerging markets. But Europe is faced with exactly the same type of populist uprising that brought a Donald Trump to the White House across the Atlantic and Brexit to Westminster.
Elections to the European Parliament next May are expected to confirm recent trends: populist parties will probably make significant gains, traditional centre-right and centre-left parties major losses. Greens and liberals might capture some of the centrist votes. The parliament’s party landscape would then be more fragmented than it is now. This would have a major impact on EU politics.
One of the immediate challenges for the Brussels bubble will be the choice of European Commission leaders later in 2019. What will be the priorities and policy orientation of a new commission president and the institution’s relationships with a more fractious parliament? And what does this mean for EU trade policy? It’s all up in the air. All we can say is that the EU cannot be expected to become more free trading as a result of its domestic politics in the coming years.
Echoing to some extent the US, it is likely to become more ‘mercantilist’ in pushing its exports and more demanding on its partners on issues such as labour and environmental guarantees to be able to pass new trade deals (think ongoing FTA talks with Chile, Mercosur, Australia, New Zealand), or trade policy legislation.
What is more, it could become easier for the EU to ignore WTO rules as the Geneva institution weakens. No, let’s not expect Trumpian style unilateral tariffs coming out of Brussels. But flouting basic non-discrimination rules, say, in the design of environmental legislation (let’s watch the palm oil file), is not a scenario one can exclude. A more freewheeling trade defence policy that gives the steel and other industries what they want is also one possible scenario.
In Brussels, Brexit has not been policymakers’ No. 1 priority so far; relations with Trump and internal wrangling with Poland and Italy clearly took precedence. But a chaotic ‘no deal’ Brexit remains a possibility – we will find out in January if the UK’s political system can pass the Withdrawal Agreement that offers a two-year status quo transition period painstakingly agreed last year.
If there is a deal, the UK and the EU should be expected to start negotiations on the future relationship between Britain and the EU27 soon thereafter. Yet little of substance can be agreed in 2019. ‘Scoping’ exercises and technical meetings are most likely to dominate the picture. For substantive talks to begin, both the UK government and the EU will need new political mandates from parliament and member states respectively. These will be slow in coming.
‘No deal’ would leave the EU and Britain to roll out contingency plans on issues such as transport and trade in vital goods such as medicines. It goes without saying that a ‘no deal’ Brexit would leave the UK quite ‘unhinged’ in matters related to international law, especially humanitarian and immigration law. Virtually all international agreements in which Britain is a part via its EU membership would fall through – bar, perhaps, a couple of deals it might manage to salvage with third countries in the coming weeks.
In trade, the UK would be bound by WTO rules only, and we know how shaky and incomplete these rules currently are. A ‘no deal’ Brexit would also poison political relationships between London and EU capitals, and hence not be conducive to constructive negotiations on a future partnership, on whose outline the two sides have already started working.
If reason prevails, all this won’t happen. Yet reason hasn’t been the defining feature of Brexit politics in Britain so far.
International investment courts vs EU law
The national-populist uprising in the West has also involved a backlash against international law and treaties more broadly. Though many won’t like what I am writing here, I contend that the backlash against bilateral investment agreements and investment arbitration courts as witnessed during the now-defunct transatlantic TTIP negotiations in 2013-2015, though not driven by right-wing bigots, is part of this wider story of rejection of all things supra-national. The fact that a national-populist government in the US wholeheartedly embraced the demise of ISDS in what used to be NAFTA – and is now USMCA – tends to confirm this fact.
We will see if in the EU, the European Court of Justice will do its bit in bringing down investment tribunals. The Court of Justice is not known for giving in to nationalist and anticapitalist sentiments. But it is concerned with losing its monopoly over interpretation of EU law – this is why it stopped the EU from joining the European Court of Human Rights. Will it reject the EU’s plans for new investment courts devised to replace ISDS?
Later this month, Advocate General Yves Bot will release his Opinion in case 1/17, which deals with whether the international investment court concocted by the commission and the government of Canada in CETA is compatible with EU law. This opinion will be followed by a proper decision by the full court in mid-2019.
The Luxembourg court will seal the fate of pending investment protection agreements negotiated by the EU with Singapore and Vietnam – and which the parliament is expected to ratify in the coming weeks and months. A negative view by the court would also mean trouble for CETA.
The accord with Canada has been in effect provisionally since September 2017. But its investment protection provisions are not in force, as CETA awaits ratification by all EU member states. No big EU government has yet ratified the deal. An ECJ blow to the commission would also likely kill the EU’s bid to help create a multilateral investment court within UNCITRAL.
All in all in 2019, the EU’s trade and investment policy will be about managing disruption. Let’s not expect many brand new trade deals nor much decisive leadership in an election year. At least businesses will be in a position to benefit from the EU-Japan Economic Partnership Agreement, the largest EU trade deal clinched last year: it’s due to come into force in three weeks.