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Comment: The new European Commission’s key trade challenges ahead

Trade policy will be an instrument of choice to achieve the goals of the European Commission’s new president’s ‘geopolitical’ ambitions. Ursula von der Leyen. Credit: EP.

Trade policy will be an instrument of choice for the new European Commission’s ambitious foreign and climate policy. But the von der Leyen programme also reveals many blind spots – not least on how to succeed in overhauling the World Treade Organization and in the EU’s immediate neighbourhood, opines Iana Dreyer.

Rarely has the task of governing the European Union appeared so daunting. A continent that had opened up and unified after the end of the Cold War is facing new political fractures and geopolitical rifts.

Trade policy an instrument of choice for an ambitious Commission

The European Union wants to be a leader in the fight against climate change as public opinion calls for real action.  Though in a much better shape than one decade ago at the onset of the Eurozone crisis, Europe’s economy is facing headwinds and growth generally remains subpar.

The political landscape is fracturing. Traditional parties are declining, insurgent parties are growing but not breaking through, making countries and potentially the EU much more difficult to govern. The multilateral WTO-centered web of global rules for trade –  is unravelling.

Most importantly, the EU as an institutional body is not tooled to face many of these challenges: it has no powers to tax, it cannot use force. Like many a European Commission that is taking office every five years, it is good in creating expectations and setting itself lofty goals – without always having real means or giving clarity on how it will actually deliver.

Ursula von der Leyen announced hers would be a ‘geopolitical’ Commission’. She would also deliver on a ‘green deal’ and make Europe fit for the digital age. The fact that she and her team were approved by a very solid majority in the European Parliament on Wednesday indicates that at least she has a strong mandate but the task ahead is daunting.

The whole range of EU ‘instruments’ will be used to achieve the above goals. Trade policy, as the principal instrument of the EU’s ‘external action’ is clearly slated to be one of the tools of choice.

To-do list for Phil Hogan

New EU trade commissioner Phil Hogan

Phil Hogan, the new EU trade commissioner was given the following missions from von der Leyen: “to lead the reform of the World Trade Organization, notably on the issues of subsidies, forced transfer of technologies and dispute settlement.” The aim should be “to launch a broad initiative by the end of 2020, following the next WTO Ministerial Conference, with a view to reaching a comprehensive agreement by 2022.”

Hogan’s mission is also to keep relations with the United States afloat and to finalise a potentially major investment agreement with China by next year.

The EU has a slew of new bilateral trade agreements to manage with Canada, Japan, Singapore, in Africa, perhaps soon with South America. Making sure they work and keeping them alive will be a fundamental task. The EU wants to work more on trade with Africa.

There are a few stretigically important agreements to ratify – and none of them will be easy, i.e. those with Vietnam and Mercosur. These will be a test for the EU’s ability to prioritise its competing ambitions on geo-economy and trade, human rights and climate in regions that are increasingly brought into the Chinese orbit.

The coming ‘Chief Enforcement Officer’ – who will work directly with Sabine Weyand, the new director-general for trade – will coordinate and step up all activities within DG Trade aiming at securing compliance with trade agreements.

Hogan will also be in charge of designing a new EU carbon border tax.  “I would like you to contribute to the design and introduction of the Carbon Border Tax, working closely with the Commissioner for the Economy,” von der Leyen said. And: “the Carbon Border Tax should be fully compliant with WTO rules.”

WTO leadership: overcoming weak coalition-building

The EU will have to reckon with one reality: it hasn’t been good at convincing a sufficient number of sufficiently influential members that it can step into the void left by the United States in turning around the institution and stop predatory behaviour – both of China, but most distressingly of the United States.

‘Predatory’ is the only word that comes to mind in the latest US move which involves blocking the next two-year budget of the WTO institution and then partially and conditionally lifting it, forcing a drastic pay cut on Appellate Body members, whose nomination to replace terms of outgoing predecessors it is blocking anyway. It might be a good sign: the US might well be signalling it will be ready to unblock nominations. It might be just something more cynical and sinister.

The EU has not been able as yet to convince China and Russia to go with its alternative ‘interim’ appeals mechanisms. It has not been able to turn around the US on the Appellate Body issue. Yet the ball is squarely in the EU’s camp, as the Untied States sees it mainly as a fight with the EU over the role of judicial dispute settlement in international institutions.

The other reality is that the EU (as is the United States) is self-centred and self-absorbed in calling for reform of the WTO. The reforms requested are only asks on China – and few other emerging markets. But what are they ready to offer in return?

There is no sign of genuine engagement with China – yet it takes two to tango. As noted by Xiankun Lu from the China Institute for WTO Studies, “China wants a “WTO reform”, not a “China reform”. Lu adds: “China asks for negotiations on agriculture subsidies and trade remedies to counter-balance proposed reforms which it views as specifically China-focused.”

In this type of situation it doesn’t matter who is right or wrong on substance. What matters is that one needs to engage, negotiate and find compromises if one wants to drive change. Phil Hogan needs to start thinking in that way – and bring both member states and the European Parliament on board such a process.

It’s vital for the EU and the Brussels bubble to break their self-centeredness – the alternative is failure and the very “law of the jungle” in trade that they are trying to avert.

Climate and security –  stepping into a minefield

The EU’s trade and investment policy is gradually being ‘securitised’.

The EU is in some ways only playing catch-up with great powers. The new investment screening regulation is the first serious inroad of the EU’s common commercial policy – based on Article 207 of the Treaty of the Functioning of the EU – into security policy. Article 4 of the Treaty on the European Union is clear: national security is an exclusive member state competence.

This odd move or ‘mission creep’ happened because of the exceptionally challenging geopolitical circumstances warranted by China’s rise on the global scene. It also could happen because suddenly big member states – France, Germany, Italy – asked for it.

But the reality of the EU treaties is still there. A really professional, capable investment screening system with real bite needs much more than the collaborative system run by a European Commission’s DG Trade – or any other directorate.

Here the ball is in the camp of the EU’s member states. Perhaps the currently – furious – debate about the future of NATO and the need for greater Europe-driven European security will help change things. But all this ultimately means opening up the treaties. It looks like this could happen if the new French-German idea of a new European Convention gains traction.

It will be interesting to see where else the EU will put trade policy at the service of its ‘security’ interests. These interests were originally and vaguely defined as ‘strategic autonomy’ in a 2016 ‘Global Strategy’ paper by the European External Action Service.

The climate-and-trade nexus is another explosive political minefiled. It starts with the planned border adjustment ‘tax’. We published two articles highlighting the pitfals – but potentially also ways out – of such a move and the difficulty of making such a measure compatible with the WTO’s rule-book. It’s clear that it cannot be a ‘tax’ levied by the EU – unless it is classed as an import duty under the Common Commercial Policy. In which case it will probably get bogged down as it will divide member states and raise trouble with key with trading partners.

The EU will likely move into a policy of forcing trade agreement partners to implement commitments on climate and environment included in the accords before ratification can be envisaged. ‘Pre-ratificaiton conditionality’ will be tricky diplomatically: will the perception of EU paternalism fly with a big country like Brazil? What will the counterparts ask the EU in return?

The EU’s neighbourhood – a blind spot

Most EU trade – except that with the United States or China – is with its neighbours, especially Switzerland and Turkey. Also with Russia and Norway; although these relationships are strongly dominated by energy issues.

Let us not forget that the biggest security threats for the EU are in its wider neighbourhood.

If all goes according to plan, the EU will suddenly have a big new neighbour on 1 February next year: Great Britain. The UK economy is about 15% of EU output and will have to be reckoned with.

No genuine thinking has gone into how to handle trade policy with all these important neighbours and how to build long-term working relationships with any of them. It’s time to get thinking again about how to work with Turkey and not let the current customs union wilt away.

With both the UK and Switzerland, I have seen no vision on what broader goals the EU is pursuing with them, apart from trying to impose its model and its institutional preferences on them. Finger wagging is not enough. The EU’s obsession with the ‘Level Playing Field’ with the United Kingdom is a genuine obstacle in thinking about a more constructive long-term relationship with Britain.

Von der Leyen’s brief to Phil Hogan is totally silent on the neighbourhood. And this speaks volumes.

Perhaps it’s time to pick up a few interesting think tank papers and get down to work? Two recommendations: a brief by the Stiftung Wissenschaft und Politik on the need for a new approach to its Eastern Neighbours, and that 2016 Bruegel paper proposing a ‘continental partnership’ with the United Kingdom which irked EU officials so much at the time it came out.

All this said, we can only wish the new team in the Commission to succeed in these critical times.

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