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The EU’s Trade Policy Review – and the five debates it triggers

Written by Jodie Keane, Maximiliano Mendez-Parra, Dirk Willem te Velde

Hero image description: European Commission flags. Photo: Liber Europe, CC BY 2.0.

The European Commission has just issued its Trade Policy Review - An Open, Sustainable and Assertive Trade Policy (PDF). It does not aim to make specific policy suggestions but intends to provide a strategic framework for the European Union’s (EU) trade policy in the coming five years. We argue it raises five questions for future EU trade policy.

What is in the communication on trade?

The communication paints a picture which is rapidly changing, with globalisation and technological innovation disrupting development paths, with China rising (it is now the largest trading partner of the EU). The communication has also been issued against the backdrop of the climate emergency, digital transformation, a health pandemic presenting new challenges, and with the stark observation that 85% of global growth in the next decade will take place outside of Europe.

The trade policy lists three medium-term objectives centred around:

  • green and digital transformation (and some actions are already pursued, such as the European Green Deal or the Digital Decade)
  • shaping global rules for a more sustainable and fairer globalisation
  • stricter enforcement of its own rights and interests.

In order to achieve these objectives, the trade policy review considers six broad policy measures:

  1. Reform the World Trade Organization (WTO)
  2. Promote responsible and sustainable value chains (climate change will need to be part of future trade agreements)
  3. Support the digital transition and trade in services (e.g. by agreeing global standards)
  4. Strengthen the EU’s regulatory impact
  5. Strengthen the EU’s partnership with its neighbourhood and Africa
  6. Focus on the implementation and enforcement of EU trade agreements

The EU’s new trade policy is based on a new approach called “Open Strategic Autonomy”. ‘Open’, because it follows global rules, ‘strategic’ because it links better with the objectives of climate and digital transformation, and ‘autonomous’ by making its own decisions and following its own interests and rights. This includes greater enforcement of the EU’s trade policy objectives. The EU is speaking softly, but it is certainly carrying some big sticks.

While there is much to like in the new strategy, it also triggers five questions and debates around EU trade policy in the coming five years.

1. How will the EU engage around WTO reform?

The pursuit of bilateralism – including by the EU – has contributed, in part, to the current crisis of the WTO. A renewed interest in multilateralism will require a significant change in the EU’s approach to trade policy. The EU, which together with the US shaped the WTO initially, will have to engage with other actors in its reform, such as China and the low-income economies. The EU’s ambitions are increasingly clashing with ambitions of other WTO member states in areas such as state aid, competition policy, government procurement, investment policy, e-commerce and climate change. This requires careful analysis of the pros and cons of various negotiation options. It will also involve trade-offs among the specific interests of WTO member states as well the changing interest within the EU itself.

2. What is the EU approach to imports?

Surprisingly, this communication on trade mentions imports only in the context of increasing standards, and not in the context of how imports benefit EU consumers and processors. A strategic approach to importing is absent from the current review. Previous approaches to EU trade policy and free trade agreements (FTAs) recognised the importance of imports. The current review does not incorporate the EU’s Raw Materials Initiative which aimed to secure access to critical raw materials to support the EU’s industry. A key question for the next five years is how the EU can establish strong partnerships involving trade, investment, financial support and other elements of cooperation with countries where many key raw materials and other critical products are located, including in Africa.

3. How would the EU align trade and climate change policy?

Aligning trade and climate is a priority in this trade review, reflecting the interests of many of the EU’s citizens. The review focuses on creating the conditions for cooperation on sustainable development and implementation of the Paris Agreement, and seeks to strengthen the enforcement of commitments around special and differential treatment. However, the emphasis on punitive rather than enabling measures could risk disengaging the EU’s trade partners.

A key question is how trade and climate actions, such as border carbon adjustments, can be implemented in an effective and fair way, considering the priorities of its partners, which often include industrial development, and considering the knock-on effects on supply chains involving low-income countries (LICs). Another question is how the EU can work with the WTO to ensure all climate response measures that affect trade are included in trade policy review mechanisms. Also, how the EU can ensure adequate support for LICs to develop common monitoring, reporting and verification frameworks to support the reduction of carbon in trade.

4. How will the EU promote a global digital economy?

The EU is digitalising at a rapid speed, but some regions and countries and firms within them are not digitalising at the same pace. The EU will need to support efforts that address this global digital divide. The digital divide includes a wide range of issues such as differences in the presence of critical infrastructure; in appropriate regulation related to data privacy and localisation, cyber security and data flows; in underlying capabilities (e.g. basic education) to adapt, adopt and use new technologies; and in other non-digital elements (e.g. consumer protection for digital transactions). Without aiming for a global inclusive digital trade approach, the EU digital transition may soon find serious international obstacles.

5. How will the EU work with and step up support to Africa?

Increased attention to Africa is welcome. This should be based around mutual interest among equal partners. The EU is no longer the dominant trade partner of the continent, albeit still very important. It should find ways to respond to and support the African Continental Free Trade Area, launched at the start of the year. The new EU-Africa framework should recognise African perspectives on the aims to transform African economies around manufacturing and the digital economy.

The EU increasingly adds non-trade elements to its trade agreements, but this may find little immediate interest in African countries. It may be more fruitful to collaborate around mutual interests in trade, investment, and the digital economy with the aim of building a stronger economic and political basis for cooperation in other areas. In addition, the EU is a leader in providing Aid for Trade which can increasingly be used to support African regional integration.