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Brussels trade policy preview 2020: a bumpy ride ahead

Photo credit: WTO. EU Commissioner Phil Hogan, who met WTO DG Roberto Azevedo, a few days before taking office as trade commissioner in November oast year, will be in charge of devising a new EU strategy to revive the WTO and put the Appellate Body mechanism back to work. A tall order.To most of our readers, the trade agenda of the EU in 2020 is already well known. But what are the challenges for the year ahead in EU trade policy? There will be much more – very absorbing – Brexit issues to handle than many in Brussels might want and more political headaches around the fate of existing or new trade agreements than EU leaders would like to. Could, for example, this year be the one where CETA, the flagship trade deal with Canada, faces a new existential crisis?

Transatlantic and China in focus

The EU will be bound to focus first and foremost on its transatlantic trade agenda.

What the EU will try to do is to defuse tensions with the United States as much as possible while reducing its vulnerability and exposure to US trade barriers. Note that this whole conversation goes well beyond ‘trade policy’ as done by the ‘trade’ directorate in the Commission. It covers the whole issue of security and sanctions – Venezuela, Cuba, Iran – the new US sanctions on companies involved in Nord Stream 2, and defence procurement. Throw digital regulation and taxation into the mix too.

On trade policy – e.g. import duties  – the EU approach has been to keep alive the its own threat of trade retaliation in case of unilateral US Section 232 or 301 duties or other trade restrictions, whilst trying to cajole the US into political dialogue, trade negotiations, using the WTO’s dispute settlement and working together on joint ‘China issues’. Results have been mixed so far.

It will also be busy managing the fallout from its losing the case against the US on subsidies to Airbus. Washington threatened the EU with more duties last month, aggrieved farmers in the EU are calling for financial support to help them cope with business losses in the United States.

Clues as to where the US will be headed in its trade relationship with the EU this year will come this week already, following today’s hearing in Washington on France’s digital tax. “We regard the [Section 301] investigation as a European matter and, as in all trade-related matters, the EU will act and react as one. The place for trade disputes is the WTO,” said EU trade chief Phil Hogan while visiting French officials in Paris today. The US for its part said it would act quickly after the hearing.

Second, there is the relationship with China, which DG Trade is currently prioritising. The formal aim stated by Beijing and Brussels last March is to finalise their long-standing negotiations towards an investment agreement that covers market access, investment protection and potentially other regulatory areas in 2020. The hope is to announce a deal at a summit to be held in September in Leipzig, under Germany’s coming EU Council presidency. After a 25th round of talks just before Christmas, DG Trade and MOFCOM are meeting again mid-January (16-21)to discuss the second set of market access offers they exchanged just a few weeks ago. Getting to an agreement will be extremely challenging.

FTAs – finishing a negotiating agenda, digesting existing deals

Then there is the free trade agreement agenda.

We will soon find out whether the trade and investment agreements with Vietnam will be approved in the European Parliament – in principle in February. This vote will set the tone for the other FTAs under negotiation or awaiting ratification.

The EU will continue negotiations with Australia and New Zealand. The latter could come to a conclusion this year if all goes well. The other negotiations with Chile (FTA upgrade) or Indonesia will probably not be finalised before long. Talks with Thailand could resume this year.

The much-discussed EU Mercosur agreement will not be ratifiedin 2020. It might be renegotiated in one way or the other. It is also not clear it would be ratified by the other side – after all there is a new Peronist government in Argentina and it’s not clear how much public humiliation and shaming from over-excited European environmentalists the Brazilian government will want to put up with (see here).

CETA

CETA, the flagship trade agreement with Canada, is currently in force provisionally. Being a ‘mixed agreement’ it still needs to be ratified by about half the EU’s member states (that includes national and some regional capitals). Only then would the new bilateral ‘investment court’ agreed between the two sides come into existence.

Whereas 2019 has been quiet and not very uneventful, with even the French national assembly saying yes to CETA last summer– 2020 could bring some drama. Germany is awaiting a definitive ruling by its constitutional court in Karlsruhe on the agreement following a complaint by the political party Die Linke filed back in 2016. While the risk is low that Karlsruhe would reject the pact, it is only after the ruling that Berlin will be in a position to formally start ratification procedures. It is not clear whether the new much more left-leaning leadership of the social-democratic party or any potential new coalition party for Angela Merkel’s enfeebled CDU ruling party such as the green party Die Gruenen would endorse the pact.

But there is also Italy, which has not put the deal to a vote because of fear of rejection mainly among the populist parties. There is Belgium and Wallonia. And now we have the Netherlands. The Dutch social-democrats, who initially supported the pact when they were part of the governing coalition in 2016, are now no longer in favour. The upper house in the Parliament, where the current government has no majority, will formally start examining the deal next February.

The policy grind in Brussels will also focus on the IPI – procurement legislation – file, export controls, the beginning of the revision of the EU’s General System of Preferences, and on maximising the possibilities offered by trade defence and anti-dumping legislation to hit Chinese exports.

Africa and the developing world

The EU regularly cites Africa as the next continent for its trade play. Nothing spectacular is to be expected in 2020 on this front, however. DCFTA negotiations with Tunisia and Morocco are going nowehere. The EU is in disputes with South Africa over poultry and textiles imports. Though limited in terms of business, the most interesting development will be the renegotiation of an EPA agreement with the East African states – ESA i.e. essentially with Mauritius – to include services and labour and environment provisions. That negotiation will gear up in 2020.

EU trade relationships with developing countries are changing. Amidst the populist wave, there is a growing backlash against imports from competitive developing countries. There was a new rice safeguard on imports from Myanmar and Cambodia last year. The EU is also more ready to disadvantage poor countries if they do not abide by certain labour and human rights norms. This year we could see for the first time the suspension of duty-free-quota free treatment of imports from said Cambodia, on the basis of human rights concerns.

Going slow on controversial ‘trade and environment’ issues?

Are you expecting a lot of EU movement on the ‘trade and environment’ issue? The border adjustment tax or measure announced by Ursula von der Leyen doesn’t appear to be around the corner just yet. The Commission has already stated that proposals would come in 2021. Sspeaking in Paris today, Phil Hogan said: “The Commission will work to complete our efforts to manage CO2 emissions in the EU and avoid carbon leakages. We will not accept that our efforts to fight climate change will lead to losing competitiveness. That is why we are determined to set up border carbon adjustments if the need arises.” The “if the need arises” is an interesting statement.

Whether the EU will move to making labour and environment subject to the normal dispute settlement mechanism of an FTA seems a matter of time but will that time be in 2020 already? That remains to be seen. One will suspect that the EU will try to focus on ensuring that countries deliver more through political pressure – which will come via the trade ‘enforcement officer’ at DG Trade.

Trade negotiations with the UK move centre stage

But perhaps most importantly, and much more than the Commission would want to: the EU will start free trade agreement negotiation talks with the United Kingdom on 1 February. In fact, the term free trade agreement is misleading. What is awaiting us is a massive trade relationship downgrade,  and ‘agreed-less-free-trade pact’.

Michel Barnier’s task force in charge of the talks was reinforced this week by a former member of the cabinet of Jean-Claude Juncker, Clara Martinez Alberola. The lady will serve as the Barnier’s new deputy. The team is putting together a negotiating mandate at breakneck speed.

Meetings with member state envoys in Brussels will be held almost every working day between Thursday this week and 20 January to flesh out the ‘bare bones’ announced by the Commission for a trade agreement. One of the first decisions the EU will is aiming to take is whether to press ahead with a regulatory ‘adequacy’ decision for financial services and data flows.

The EU sees an FTA that includes goods but also services, investment, intellectual property and public procurement. Other side-discussions will include a fisheries agreement and ‘level playing field’ provisions. The Commission aims for meetings at Ambassador’s level after the 21 January. The aim is to have a formal mandate endorsed by heads of government in time for 1 February. The European Commission’s leadership will be in London tomorrow to try to reason Boris Johnson into agreeing to be more flexible on the self-imposed 31 December 2020 deadline to finalise negotiations.

It is interesting to see that it is the Commission that is looking after Britain’s best interests. At the proposed negotiating rate and speed the UK would only get an unimaginative take-it-or leave it trade agreement deal, based on existing EU precedents and focused on some key mercantilist EU trade interests e.g. in agriculture. And let’s not forget ‘rules of origin’ based on the EU’s pre-existing PanEuroMed system that would essentially kill swathes of UK manufacturing. That would backfire and kill off any deal.

Fractured relations with key neighbours – and the WTO

Relations with the EU’s new neighbour will remain difficult for a long period of time. This will only add to other troubled relationships with other key neighbours, least Turkey and Switzerland. We have yet to see from the new director in charge of relations with neighbours Rupert Schlegelmilch – what the strategy is on Turkey. There is Russia with which the EU wants to be able to finalise WTO litigations but won’t be in a position to do so due to the demise of the Appellate Body. With sanctions against Russia still in force, nothing else can truly happen with Russia.

Talks to improve the customs union with Turkey – timidly initiated in 2014 – are basically stuck – not least due to territorial disputes with Cyprus. EU and Turkish businesses want the flailing customs union to be upgraded. On of the first official meetings held just before Christmas by Phil Hogan was with Rushar Pekshan, Turkey’s trade minister.

Relations with Switzerland – the EU’s third largest trading partner – are also suck on the issue of upgrading their bilateral arrangements around a formal institutionalised dispute settlement mechansim. Let’s see if there will be movement.

The WTO membership will be preparing for the next ministerial meeting to be held in Kazkahstan in June. Deliverables could include minor deals on investment facilitation or services domestic regulation. Pluritlateral E-commerce negotiations will move ahead – but we won’t get near a deal in 2020.

Commissioner Hogan will be in charge of devising a new strategy to revive the WTO and put the Appellate Body mechanism back to work. A tall order.

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