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How will EU trade policy respond to new challenges in the coming decade?

Written by Dirk Willem te Velde

The European Union’s communication on trade, growth and development, launched on 27 January, sets the framework for its actions on trade and development in the coming decade. 

Now is the right time to be launching this communication, with development taking place in a rapidly changing world. There has been rapid growth in several emerging powers and much of Africa is also continuing to grow, with openness to trade and investment playing a supporting role. But some countries have been left behind: the majority of least developed countries (LDCs) have not been able to transform their economies structurally. In addition, there are new challenges to be faced, such as threats to the climate and natural resource base.

So how will the EU’s trade policy respond to this growing differentiation amongst countries and the growing list of global challenges?

The EU’s trade policy achievements in the last decade

Over the last decade the EU has put in place the Everything but Arms (EBA) initiative (duty free quota free access for LDCs), a new Generalised System of Preference (GSP) and reformed its rules of origin, as well as stepping up Aid for Trade (AfT). It was much less successful in its approach to Economic Partnership Agreements, other free trade agreements (FTAs) and the World Trade Organization (WTO), where progress has been slow or deadlocked.

The EU, BRICs and LDCs

The new communication is trying to frame the EU’s response to a growing differentiation amongst developing countries (e.g. LDCs vs the BRICs – Brazil, Russia, India and China). A previous communication has already rightly argued for focussing aid on the poorest countries. It is a moral hazard to use developed country aid to overcome the failings of large and resilient middle-income countries (MICs) to distribute wealth equitably.  Other instruments may however be useful.

But how does the growing differentiation affect beyond-aid policies? Previous research by ODI’s International Economic Development Group has shown how the trade interests of LDCs and BRICs can differ, but also that BRICs can boost growth in the poorest countries. In our paper on the new landscape of economic governance, we have shown how the rise of emerging powers has affected global negotiations at the WTO, G20, international financial institutions (IFIs) and the UN Framework Convention on Climate Change (UNFCCC). The EU took an ambitious path at the UNFCCC’s most recent Conference of the Parties in Durban, forcing an alliance with the poorest and most vulnerable countries and putting the BRICs on the spot to agree a deal with legal force. Is this latest communication trying to do the same in the area of trade?

The proposed directions

The communication lists a series of actions for the next decade. The EU will focus its preferences towards LDCs, target Aid for Trade to LDCs, put in place complementary investment instruments, deal with FTAs (conclude EPAs, and agree a package for the Arab countries), put sustainable development measures at the forefront of  the GSP +  and FTAs, support impact assessments, acknowledge private sector schemes  and corporate responsibility, and build resilience against shocks.

It then argues that domestic actions and good governance are key to trade and growth, and that trade agreements can lock in domestic reforms. On the multilateral front, the EU proposes to support the development dimension at the Doha round of WTO negotiations (the LDC package), address emerging issues (e.g. trade and food security, achieving reliable energy supply, threats to natural resource base), and calls for emerging powers to provide more concessions to LDCs.

Of course there are many commendable actions outlined in the communication. For example, targeted AfT to existing regional integration can be good for growth. The EU’s EBA is yet to be emulated by many other G20 countries. And, as we have argued previously, the proposed extension of the V-FLEX would be very helpful to enable pooled contributions from Member States, and to deliver a scaled up response to global crises at great speed. The EU’s planned use of blending instruments is also good, although so far there has been too little attention to leveraging in the private sector. In fact, we argue that development finance institutions such as the EIB could be used to help respond the big global challenges such as economic crises and climate change.

But what is lacking?

In other areas the communication lacks concrete actions, with missed opportunities and certain moves that may yet turn out to be dangerous. One can question whether it is really on top of the new trade agenda as expressed in a previous blog. Moreover there are big challenges for the agenda on Policy Coherence for Development.

There are few new solutions for the conclusion of EPAs or the Doha round. As we said in early 2009, the trade agenda has moved on. To acknowledge new development, the EU could encourage a set of WTO working groups to tackle binding constraints in particular new 21st-Century issues: achieving food security, addressing natural resource scarcity, climate change, as well as trade facilitation and services rules.

Ahead of the Rio+20 conference, it is good that the EU identifies sustainable development and natural resources as key challenges for the future. However, the green economy  – as proposed in the Rio+20 zero draft and interpreted by poor countries – does not allow for new protectionist trade measures. The proposal in the EU communication to improve access to green technology is therefore commendable, but the proposed new barriers in GSP and FTA schemes will be problematic. The EU should promote trade in virtual natural resources instead.

The proposed reform of the GSP is plainly protectionist – raising barriers to BRICs whilst LDCs are expected to gain little from this (nor the EU for that matter!). It also paints the wrong picture in times of crises. Fostering the benefits for LDCs from the rise of BRICs would be a more positive agenda.

With increased attention to policy coherence at the EU, why is there so little mention of the harmful effects of the Common Agricultural Policy (CAP) (and scrapping it in a changing global context could free up resources for the EU to deal with global public goods, development and food rather than farmer security); or the EU’s restrictiveness towards mobility and migration (the staff background paper cites ODI’s services work, which also raises the importance of temporary migration for development); or the importance of European growth and stability for developing country welfare?

The EU is right to be thinking about its trade policy in the coming decade. There are good ideas in this timely communication, but some proposed actions could turn out to be protectionist and harm development, whilst further concrete actions are needed to promote policy coherence for development (even though it is a good sign that the communication was launched by both the Trade and Development Commissioner) and stand ready to confront the challenges ahead.